Earnings Call Transcript - CERT Q1 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Certara First Quarter 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler, Investor Relations. Please go ahead.

David Deuchler, Investor Relations

Good afternoon, everyone. Thank you all for participating in today’s conference call. On the call from Certara, we have William Feehery, Chief Executive Officer; and John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2023. A copy of the press release is available on the Company’s website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements, and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to slide 2 in the accompanying materials for additional information, which you can find on the Company’s Investor Relations site. In their remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings release available on the Company’s website. For additional information, please refer to the reconciliation tables in the accompanying materials. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 8, 2023. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to William.

William Feehery, CEO

Thank you, David. Good afternoon, everyone. Thank you for joining Certara’s First Quarter 2023 Earnings Call. John and I will start with prepared remarks, and then we will take your questions. We are pleased with our start to 2023, which positions us well for the remainder of this year and beyond. Our team is focused on executing Certara’s mission to accelerate medicines to patients using biosimulation, software and services. We continue to see expanded interest from customers looking to safely accelerate the drug development process through the use of biosimulation. We deliver information and analysis that informs critical decision-making that will lower the cost of development and increase the probability of success in clinical trials, ultimately improving the health and well-being of millions of people globally. Before discussing our first quarter results, I’d like to formally welcome John Gallagher as Certara’s new CFO. John joined Certara a little over a month ago and has already been a valuable addition to the leadership team. John will play an important role in Certara’s future growth and financial success, and I’m thrilled to have him on board. There’s a lot to be excited about at Certara as the pace of adoption and awareness of Certara’s biosimulation platform continues to expand around the world. Just a few weeks ago, we announced that Certara’s Simcyp PBPK Simulator has now been used to inform more than 300 drug label claims for over 100 novel drugs in lieu of conducting clinical studies. In addition, in 2022 and for the ninth consecutive year, we’re proud to say that 90% of U.S. FDA new drug approvals were received by Certara’s customers who use our biosimulation software and technology-driven services. Shifting to our first quarter performance. We are pleased with our financial results, which met our revenue and profitability expectations for the quarter. Certara’s total revenue of $90.3 million grew by 11% year-over-year on a reported basis and 13% on a constant currency basis. Revenue growth was driven by software and biosimulation services as we continue to see strong demand across all customer categories. First quarter software revenue of $33 million represented 13% year-over-year growth on a reported basis and 16% on a constant currency basis. We continue to see strong performance from our core biosimulation software, Simcyp and Phoenix as well as Pinnacle 21. These three software platforms represent the majority of our software revenues. In early March, we announced our annual update of Simcyp now on version 22. This year, we added the ability to model more diverse populations, expanded our library of therapeutic compounds and unveiled Simcyp Designer, a tool that will help users develop their own pharmacodynamic and QSP models. Our continued investment and commitment to innovating our core software platforms with new features to support and expand use cases is what continues to strengthen our relationships with our pharmaceutical and biotech customers. Following the close of the Vyasa transaction, our team has worked hard to integrate their cutting-edge deep learning AI technology throughout the Certara platform. We recently announced the rollout of our updated D360 software, which incorporates AI and enables the development of predictive models that are trained on both public and proprietary data. These enhanced D360 capabilities include automated property prediction, novel chemical structure generation and analysis of unstructured data. We are excited by the speed at which our software team was able to make these upgrades, and we’re encouraged by the early traction with customers. Throughout the year, our team will continue to find new applications for this deep learning technology across our software product offerings. Certara’s first quarter technology-driven services revenue was $57.3 million, which grew 9% on a reported basis and 11% on a constant currency basis compared with the first quarter of 2022. Biosimulation services growth remained an area of strength, growing at comparable levels experienced throughout 2022. And we expect continued strength throughout 2023 due to an encouraging bookings trend throughout the past 12 months. We continue to see strong demand for biosimulation services as our clients expand its use across biologics, cell and gene therapies and small molecules. Our regulatory businesses continue to be a headwind to services growth, but they are performing within the range of our expectations as we navigate a challenging market environment. The pace of recovery in regulatory is moving slower than initially anticipated, and growth is expected to be weighted more towards the second half of the year. Our regulatory team is focused on strengthening the pipeline, and we remain encouraged by the progress made so far. To close, we’re pleased with our first quarter results. We believe that our team is well positioned to continue our success throughout 2023 and over the long term as we support and catalyze the adoption of biosimulation for drug research and development. I would like to close my remarks by extending my deepest appreciation to the entire organization of Certara for their dedication and hard work. I will now turn it over to our CFO, John Gallagher, to discuss our first quarter financial results in more detail.

John Gallagher, CFO

Thank you, William. Hello, everyone. Before reviewing our financial results, I would like to thank William and the entire team at Certara for the opportunity to join such an exciting and innovative company. Andy has been helpful to me as we work our way through an orderly transition of responsibilities, which is expected to be completed later this quarter. Moving to our financial results. Total revenue for the three months ended March 31, 2023, was $90.3 million, representing year-over-year growth of 11% on a reported basis and 13% on a constant currency basis. As discussed, overall demand for biosimulation remains strong and thus insulated from concerns in the industry around funding. Specifically, we recently performed an analysis of our accounts receivables for 2022 and found that less than 1% of our total revenues were transferred through banks typically associated with venture or early-stage companies. Software revenue was $33 million in the first quarter, which increased 13% over the prior year period on a reported basis and 16% on a constant currency basis. Growth in the quarter was driven by biosimulation software and Pinnacle 21. Ratable and subscription revenue accounted for 59% of first quarter software revenues. Software bookings were $30.7 million in the first quarter, which increased 4% from the prior year period. We experienced timing-related delays that pushed some first quarter deals into the second quarter. There has been no impact to our annual plan due to this timing. The overall health of our software bookings remains strong, and trailing 12-month software bookings were $126.1 million, up 24% year-over-year. The software aggregate renewal rate was 90% in the first quarter, which is in line with our plan. Services revenue was $57.3 million in the first quarter, which increased 9% over the prior year period on a reported basis and 11% on a constant currency basis. Biosimulation services continued to perform well, growing in the mid to high teens range, while regulatory services remains a headwind to the overall growth rate. Technology-driven services bookings for the first quarter were $82 million, which increased 4% from the prior year period. Trailing 12-month services bookings were $287 million, which increased 8% as compared to the prior year. Biosimulation services bookings momentum continued to be robust and an encouraging indicator for the adoption of biosimulation. In addition, we are focused on improving our regulatory services performance against a difficult market backdrop. Regulatory remains a high priority for our commercial team, and we are focused on strengthening our business pipeline in 2023. Total cost of revenue for the first quarter of 2023 was $34.9 million, an increase from $32.8 million in the first quarter of 2022, primarily due to employee costs related to billable headcount growth as well as software licenses. Total operating expenses for the first quarter of 2023 were $48 million, an increase from $42.6 million in the first quarter of 2022. The components of operating expenses are as follows. Sales and marketing expenses were $8 million compared to $6.1 million for the first quarter of 2022. This increase is primarily due to employee costs related to expanding the sales and marketing team. R&D expenses were $9.3 million compared to $7.5 million for the first quarter of 2022. R&D expenses were up primarily due to employee-related costs for software development. G&A expenses were $19.8 million compared to $18.3 million for the first quarter of 2022. Excluding the impact of acquisition expenses, including a change in fair value estimate for contingent consideration, G&A was flat year-over-year. Intangible asset amortization was $10.5 million compared to $10.1 million in the first quarter of 2022. Depreciation and amortization expense was $0.4 million compared to $0.5 million in the first quarter of 2022. Continuing down the P&L, interest expense was $5.5 million compared to $3.2 million for the first quarter of 2022 due to higher interest expense relating to our floating rate term loan. As a reminder, we have about 78% of our debt fixed at 6.38% and roughly 22% floating at LIBOR plus 350, which is about 8.5% at today’s rate. Miscellaneous income was $0.5 million compared to $0.8 million in the first quarter of 2022 due to higher interest income, offset by foreign currency expenses. Income tax expense was $1.1 million compared to $1.5 million for the first quarter of 2022. Net income for the first quarter of 2023 was $1.4 million compared to $2.2 million for the first quarter of 2022. Reported adjusted EBITDA for the first quarter of 2023 was $32.3 million compared to $27.7 million for the first quarter of 2022, representing 17% growth. Adjusted EBITDA margin was 36% in the first quarter of 2023. Reported adjusted net income for the first quarter of 2023 was $19.3 million compared to $16.9 million for the first quarter of 2022. Diluted earnings per share was $0.01 in the first quarter of both 2023 and 2022. Adjusted diluted earnings per share for the first quarter of 2023 was $0.12 compared to $0.11 for the first quarter of 2022. Now moving to the balance sheet. We ended the quarter with $244.1 million of cash and cash equivalents. As of March 31, 2023, we had $296.7 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Turning to the guidance for full year 2023. We are reiterating our previously issued guidance of total revenue in the range of $370 million to $385 million, representing growth of 10% to 15% compared with 2022. Our revenue guidance assumes continued strength in software and biosimulation services, where we have good visibility given our trailing 12-month bookings. The guidance also assumes regulatory services growth in the low single digits as compared to 2022, which is expected to be more second half weighted than originally anticipated, and software subscription revenue continues to increase as a percentage of total software revenues. We expect adjusted EBITDA in the range of $131 million to $137 million, adjusted EPS in the range of $0.50 to $0.55 per share, fully diluted shares in the range of 159 million to 162 million and the tax rate in the range of 25% to 30%. I will now turn the call back over to our CEO, William Feehery, for closing remarks.

William Feehery, CEO

Thank you, John. To summarize our message today, we’re pleased with our first quarter results. And we believe that Certara is well positioned for growth this year and in the future as we continue as a global leader in biosimulation. We will now open the line for questions. Operator, can you open the line?

Operator, Operator

Thank you. Our first question comes from the line of David Windley of Jefferies.

David Windley, Analyst

I wanted to start by asking about the customer additions. I appreciate the comments regarding the payment transfers from banks that John mentioned. Could you discuss the trends in new customer additions and whether they are mainly small companies? I assume they typically are, and I'm interested in how that has progressed in a more challenging funding environment for those small companies.

John Gallagher, CFO

Yes. Hi David, this is John. Yes, look, as we look at the new customers that we’re adding, we’re seeing good contribution actually across all the categories. As I mentioned in the remarks, we had a 90% renewal rate that’s in line with plan. The net retention rate is also in line with historical averages. In fact, when you look at the software growth of 13%, and you take that apart, then it’s about 10% growth in existing and expanding customers and about 3% from new logos. So new logos are growing, and they’re about in line with what we’ve seen on annual historical averages. And given that we do have the top biopharma companies as our customers already, you got a mix of sort of Tier 2 and Tier 3 in there for sure.

David Windley, Analyst

Got it. Okay. Regarding the comment about 90% of approvals coming from your customers for the seventh consecutive year, can you quantify or qualify how those customers are using more simulation in their programs as they move toward approval? How can we assess the growing importance of biosimulation in those approval processes?

William Feehery, CEO

Yes, David, thank you for your question. I have a few points to share. We provided some statistics regarding the use of Simcyp. It has recently been utilized for over 100 drugs, according to public records. That serves as one measure of its impact. Additionally, there have been more than 300 documented label claims, which indicate instances where biosimulation helped minimize the need for certain clinical trials during the drug approval process. Furthermore, the demand for our services has remained robust not only recently but also over the past several years. This trend reflects the growing acceptance of biosimulation, and we are increasingly involved in the approval of drugs.

Operator, Operator

Our next question comes from the line of Vikram Purohit of Morgan Stanley.

Vikram Purohit, Analyst

Our first one is on the regulatory services side of the business. I believe you mentioned that the recovery there has been a bit slower than you expected earlier. Could you just unpack for us in a bit more detail what has unfolded differently versus your prior expectations? And what factors do you think could lead to an uptick in the second half of the year? Thanks.

William Feehery, CEO

Yes. Thanks, Vikram. So, regulatory services is a bit behind what we had planned for the first quarter. It was roughly flat with last year's first quarter, and we’re expecting single-digit growth for the year. So, we are building up our pipeline and seeing increased interest for it. So, we do believe that we will catch up as we move through the year. As you know, we made some changes last year to the management and the sales organization there. And so, it’s taken us a little bit of time to rebuild the pipeline. But we still think that it’s a good business for us. It’s quite profitable. And it fits nicely in with a lot of the biosimulation software and services that we have in Certara.

Vikram Purohit, Analyst

Got it. And as a follow-up on a different topic, we wanted to ask quickly about capital allocation, particularly given the recent CFO transition. Just wanted to see if there’s any changes in thinking or priorities when you think about this development or competencies you’d like to bring in house? Thanks.

William Feehery, CEO

Do you want me to start, John, and then you can chime in there?

John Gallagher, CFO

Yes. Yes, sure, Bill.

William Feehery, CEO

Yes, we’re not expecting significant changes. We have a healthy balance sheet that we’re managing conservatively, and we have a proven track record in mergers and acquisitions. We have demonstrated that we are careful in our acquisition choices and the prices we pay, as well as our ability to refrain from making moves when the timing isn’t right. However, in instances like Pinnacle 21, we have also shown that there are valuable opportunities in our market, and if we can act, it can greatly benefit our shareholders. Therefore, we believe our approach to capital allocation has been effective so far and remains strong. I’ll now hand it over to John to share his perspective on the organization and his goals.

John Gallagher, CFO

Yes. Thanks, Bill. So as Bill mentioned, we’re not seeing any strategic change from what you’ve seen here. Obviously, the Company has had a very good track record on the M&A front. And Bill mentioned, we continue to evaluate. We approach those from a position of strength because of the healthy balance sheet. We’re really pleased to have the cash on hand, so. And we mentioned, we have $244 million of cash and equivalents at a time when the macroeconomic climate is very uncertain. So, we think that it’s important to have that cash at our disposal, especially with the funding environment the way that it is. So, the strong balance sheet, the M&A acumen that exists, and then plus the internal opportunities that we have as an organization are sort of the key to capital allocation, as I see it coming in as well.

Operator, Operator

Our next question comes from Jeff Garro of Stephens Inc.

Jeff Garro, Analyst

Maybe start with a two-parter around regulatory services. Just curious to what extent are large projects needed to reach that low single-digit revenue growth expectation for the regulatory and market access piece of the business? And also on that front, curious what the impact of the regulatory services market that you described on the first quarter services bookings.

William Feehery, CEO

So thanks, Jeff. So let me just understand your question. The first part was around the bookings, is that what you’re saying?

Jeff Garro, Analyst

The first part, in the past, you’ve talked about some kind of outsized projects really at the end of the FDA submission process and those having a really positive impact when they’ve hit, but sometimes don’t have the same visibility as the longer duration parts of the regulatory business.

William Feehery, CEO

Yes. Our regulatory business has typically been more variable than our biosimulation business for the reasons you mentioned. Each year, we usually engage in a few larger projects, and the timing of these can cause fluctuations in the business within a quarter. Looking back over the last four or five years, we usually had a couple of those projects annually, so it's reasonable to expect we’ll likely have a couple this year. In the first quarter, the bookings were mostly from regular ongoing business, which is good and definitely covers our costs. However, we did not secure one of those large projects in the first quarter. I hope that clarifies your question.

John Gallagher, CFO

We don't build our expectations on the assumption that we'll secure a specific number of large transactions. If we do land some bigger deals, that would contribute positively to our low single-digit growth.

Jeff Garro, Analyst

Got it. Got it. That’s helpful. And a follow-up for me on software bookings. I was just hoping for any more color on the timing impact that was mentioned around software bookings and renewal rates. And maybe also how we should think about the cadence of software bookings for the rest of the year, just recognize the strong trailing 12 months number, but trying to think ahead a bit to the tough year-over-year comparison coming in Q4.

William Feehery, CEO

Yes. Go ahead, John.

John Gallagher, CFO

We experienced some timing issues with software bookings, primarily moving from Q1 into Q2 and Q3. The trailing 12-month figure remains strong at 24%. Considering this 24% along with our consistent book-to-bill ratio of about 1.2, we are confident that for the full year, we’ll meet our software revenue expectations.

William Feehery, CEO

Yes. We’ve noted that quarterly bookings can vary. Sometimes we have software customers who renewed in the first quarter of last year, and for various reasons, we didn’t sign them up until the second quarter this year. This timing won’t affect the revenues we generate this year. We believe looking at the trailing 12 months provides a more accurate estimate of our direction. In the first quarter, a few large customers took longer to renew than we anticipated, causing them to slip into the second quarter. However, we didn’t lose any significant clients, and we’ve signed them all since then. So, we’re not particularly concerned about that right now.

Operator, Operator

Our next question comes from the line of Luke Sergott of Barclays.

Luke Sergott, Analyst

I just want to follow up on the regulatory services and get an update there. All the commentary has been helpful. But if you could help size the business and then what piece is actually being impacted? And then in your guide, if you’re pushing it out to the second half recovery, give us a sense of how that step-up looks.

William Feehery, CEO

Do you want me to start, John?

John Gallagher, CFO

Sure. The regulatory services segment represents about 20% of our overall business. As Bill mentioned earlier, it remained flat for the quarter. We anticipate a recovery and growth in the second half of the year, although we are maintaining our outlook of low single-digit growth for the full year. This suggests that we expect to start seeing this growth in Q3.

Luke Sergott, Analyst

Okay. I understand the delay is mainly due to the FDA. Can you share what insights you have from your discussions with them regarding when they plan to update their regulations?

William Feehery, CEO

Yes. We are very interested like the rest of the industry, but I don’t believe we have any new information to share that we have not already heard from them. So we are waiting.

Luke Sergott, Analyst

We all are.

William Feehery, CEO

Right. Thank you.

Operator, Operator

Our next question comes from the line of Max Smock of William Blair.

Max Smock, Analyst

I have a quick question regarding your accounts receivable. Last quarter, you mentioned an increase in your bad debt reserve. I'm curious if that trend has continued into the first quarter, particularly how it may have affected some of your smaller customers. Additionally, is there anything else you can share from your review of accounts receivable in the first quarter?

John Gallagher, CFO

Sure. To provide some context, we have around $80 million in accounts receivable, and our bad debt reserve has decreased to $700,000 in recent quarters. While we did increase it slightly in later periods, it's still relatively minor. We examined our accounts receivable considering the situation with regional banks and those associated with emerging biotechs. Based on our findings, we determined that any exposure we have is quite small, as less than 1% of our receivables are linked to banks with any involvement in venture or early-stage biotech funding.

Max Smock, Analyst

Okay. It makes sense.

William Feehery, CEO

The other thing I’d add is that we weren’t surprised by this. Given the way Certara’s business is structured, we focus on acquiring new customers, but small early-stage companies don’t typically make significant purchases from us. We usually gain over 70% of our revenues during the clinical phase, which indicates that the drugs have strong potential and substantial investment behind them.

Max Smock, Analyst

Okay. Makes sense. On the headcount additions over the last couple of years here, why are we not seeing the rate at which the services bookings convert to revenue? Why have we seen that slowdown or at least not pick up at all? Is that just due to some cash conscious decision-making from customers on regulatory services? And moving forward, do you think you have an opportunity to step up productivity and drive a higher burn with the net existing services backlog moving forward kind of more in line with what we saw in 2021? Or do you expect that to be kind of depressed here given the slowdown in demand on regulatory services in particular?

William Feehery, CEO

Well, a couple of comments on headcount. First, we are seeing growth in headcount, both on a year-over-year basis and since the last headcount number that we disclosed in the 10-K. So sequentially, we’re seeing growth in headcount. And the people that we’re adding are billable consultants for biosimulation services as well as software developers. So, that obviously is going to help us meet the strong demand that we’ve been talking about as it relates to both the revenue growth and the bookings in that space. To address the second part of your question, a portion of our backlog consists of delayed projects related to regulatory matters. In some cases, customers are awaiting responses from the FDA before we can proceed to the next phase of work or are waiting for clinical trial data to be returned. This unpredictability has increased over the past couple of years. However, there is a chance that these projects will eventually resume. Most of these customers remain engaged and have already committed to the work. The main issue is determining when we can start, but I prefer not to speculate on the exact timing of when everything will unfold.

Operator, Operator

Our next question comes from Mike Ryskin of BofA.

Wolf Chanoff, Analyst

This is Wolf Chanoff on for Mike. Thanks for taking questions. So I kind of want to start with a bit of a bigger picture one. I think there’s been a lot of notable M&A in the biotech space primarily from larger acquirers. And given your presence among larger pharmas, I was wondering if you could walk us through the dynamics that you typically see as a result of this. Do the acquirers broadly roll out Certara’s offerings to their targets? Is this something that takes a multiyear process? Just any color here would be great. Thanks.

William Feehery, CEO

Yes, thank you for the question. Typically, the acquirers are larger companies that are already our customers. Therefore, we do not rely on mergers and acquisitions to gain access to them; we are already established. However, when we’ve been working on a drug for a company that gets acquired, we usually go along with the acquisition. The acquirer often seeks to expedite processes and invest more, and we are included in that. Generally, this situation tends to be beneficial for us since it involves an asset that someone is going to invest more in, and we are already involved. Consequently, we will be integrated as it moves towards approval. Is that helpful?

Wolf Chanoff, Analyst

That makes sense. And then just a slightly more technical question. Are there any changes to your thoughts about the EBITDA margin progression throughout the year? Just given where you came in 1Q and the fact that you’ve reiterated guidance, I’d love to hear how you’re thinking about the balance of the year.

John Gallagher, CFO

Thank you for the question. In Q1, our EBITDA margin was 36%. We have stated before that our target is in the mid-30s. Looking back at last year, we experienced some imbalance between the first and second halves due to certain investments, but you should not expect that to happen this year. As we move through the remaining quarters in 2023, we anticipate the EBITDA margin to align consistently with the mid-30s for each quarter.

Operator, Operator

Our next question comes from Joy Zhang of SVB Securities.

Joy Zhang, Analyst

I guess my first one, I think we’ve heard some CROs this earnings quarter calling out some higher calculation rates than we expected. Curious if you have seen any sort of downstream impact from that. And if it’s not an impact that you see, would it be a sort of potential negative impact on reg business or anything else that you would call out, if things get worse?

William Feehery, CEO

Thanks, Joy. Part of our business is there always are some degree of cancellations. It’s just the way the drug industry works. I would say for our business in biosimulation, there are so many projects that doesn’t generally affect us. In regulatory, it can move the numbers up or down a little bit, depending on how big the project is and what the exact circumstances are. I don’t think we saw this as a particular impact to us in the first quarter.

Joy Zhang, Analyst

That's very helpful. As a follow-up, I appreciate your earlier comment about new customers coming from both the small biotech side and the large pharma side. I'm curious if you can provide some insights into the length of sales cycles for these groups of customers and any trends, especially considering the cash conservation we're observing on the small biopharma side.

John Gallagher, CFO

Well, maybe the other thing I’d add on customers in addition to the comments already would be that amongst our larger customer account values, this is the accounts that are greater than $1 million and the accounts that are greater than $100,000, both of those categories, we were growing the number of customers since what we reported at year-end. So in Q1, we grew both of those categories. And given what we said about the revenue results, when you look at the biosim services in the mid- to high teens and the core software products of Simcyp, Phoenix and Pinnacle 21 growing in the mid-teens, and at this moment, we’re not seeing the impact. Fortunately, we’re continuing to see very strong results in adding customers and the growth rates on our revenue.

William Feehery, CEO

So, if I could add on to what John said there, Joy, I think there are really two effects going on in the market right now. So one is the time to close deals in software and services is probably lengthening a bit, and it’s what we’ve seen with some of the companies that have reported. And counterbalancing that has been the strong demand for biosimulation, which has been growing. So I think when you see our results, we don’t see resolving, but it’s probably because one’s kind of balancing out the other one right now.

Operator, Operator

Our next question comes from Gaurav Goparaju of Berenberg Capital Markets.

Gaurav Goparaju, Analyst

Just two quick ones for me. What would have to happen with the regulatory services to help you hit the higher end of guidance that you maintained? Is reaching the top end possible? For example, if regulatory doesn’t recover from levels in Q1 even if you see favorable expansion in existing customers in other segments. Just trying to see what would contribute to the top line here.

John Gallagher, CFO

So, what we said for reg was low single digits on the full year. And in order to get to the higher end of that or exceed it, based on what I was saying earlier, what we don’t have cooked in is a large number of the larger deals or transactions, which can occur in reg. So, if we get some alignment and we get a few of those in, that would have us at the higher end. And we were flattish on the quarter. So as we start to approach Q3, we would expect to start to see growth in the second half of the year.

Gaurav Goparaju, Analyst

Got it. And then just a quick follow-up. Have new products like Simcyp Discovery driven interest more so from new customers not yet on the platform or more so from active users that are looking to expand their consumption of software? And again, this is for new modules and new products that you add to the platform.

William Feehery, CEO

Yes, thanks for the question. The answer is both. We’ve seen a set of new customers come in that are using Simcyp in other parts of the organization. Additionally, some of our existing customers are adopting it as well, not as a substitute for Simcyp, but to expand its use within different areas of the organization that hadn’t utilized it before.

Operator, Operator

Our next question comes from the line of Joe Vruwink of Baird.

Joe Vruwink, Analyst

Maybe I’ll start with a question just on market opportunity. I noticed in your investor materials today the size of the biosimulation software TAM had increased just relative to the sizing I think you’ve used in the past. Maybe you can walk through what this is a function of. You just mentioned a new product. Is it new products you’ve launched since the IPO? Is there maybe evidence that spend per account is greater, or are there some other factors at play?

John Gallagher, CFO

Yes. So listen, on the TAM piece of your question there, then what we’re seeing is you’re basically seeing an expansion because of the growth and the overall adoption of biosimulation. So, that’s the answer as to why you’d see growth in the TAM. It’s because we are experiencing mid-teens growth in the space.

Joe Vruwink, Analyst

Okay. So that’s just normal evolution of the market, no impact from new products or maybe going after early stage development or discovery a bit more?

John Gallagher, CFO

That’s correct. The vast majority of our revenue has been and continues to be in the clinical phase of drug discovery. There isn’t really a move into drug development; what you’re seeing is continued growth in the adoption of biosimulation in drug development and the clinical area.

Operator, Operator

Okay. Understood. And then just as a follow-up, I know there’s been this ongoing shift within the software revenue mix towards ratable and subscriptions. Has this been impacting bookings or revenue in maybe a bigger way relative to your expectations? Obviously, subscriptions are only good for customer lifetime value, but wondering if those create any more variability in kind of a quarterly disclosures.

John Gallagher, CFO

Yes, certainly. We reported a 13% revenue growth in software, which was affected by some timing issues between Q1 and Q2. Additionally, the transition to subscriptions is contributing to this headwind, impacting our revenue. This conversion represents a growth challenge. In Q1, our software revenues from subscriptions reached 59%, an increase from 54% the previous year. Is this a headwind? Yes, but it's not significant; it's more of a slight challenge to our overall growth.

Operator, Operator

Our next question comes from Kyle Cruz at Credit Suisse Financial Services.

Unidentified Analyst, Analyst

Could you maybe provide some more color on the organic trailing 12 months software bookings, excluding the Pinnacle 21 acquisition?

John Gallagher, CFO

Yes, sure. So, we’ve now annualized Pinnacle. We’re not going to continue to break it out and talk about ex Pinnacle. But what I did say before is, hey, look, the software trailing 12-month bookings are at 24%. That’s a strong number. Pinnacle continues to be a good addition to the portfolio and is a driver of the overall growth that we’re seeing in trailing 12-month bookings.

Unidentified Analyst, Analyst

And then maybe an unrelated follow-up. With 70% of your revenues from the clinical business, have you seen a distinction in the growth of the kind of clinical business and the other proportion of your revenues that are preclinical?

William Feehery, CEO

So, I’m sorry, have we seen a distinction?

Unidentified Analyst, Analyst

Yes. I guess to maybe clarify, like is your preclinical business, has it been kind of growing faster than the clinical part of the business, or have they been growing similarly?

William Feehery, CEO

I would say that the preclinical business is likely growing a bit faster than it used to due to the launch of a few products in that area, so we’re seeing the benefits of that. However, I don’t think we would change what we've reported regarding the overall mix of our revenue between the two at this time.

Operator, Operator

I would now like to turn the call back over to William Feehery, CEO of Certara, for closing remarks.

William Feehery, CEO

Well, thank you, everybody, for joining our first quarter conference call. I think that we would say at Certara, we had a good first quarter. We are very excited about the progress and the prospects for biosimulation as we go forward. There’s a lot of interest in what we’re doing, and we’re very pleased with that attention that we get from the industry. We feel good about our future, and we look forward to talking to you all next quarter. Thank you very much, and I think this will end the call.

Operator, Operator

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.

William Feehery, CEO

Thank you.