Earnings Call Transcript - CERT Q2 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Certara Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. 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. Please go ahead.

David Deuchler, IR

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 June 30, 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 website. In the remarks and responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to most directly comparable GAAP measures are available in the recent earnings press release available on the company's website. For additional information, please refer to the reconciliation tables in the company materials. This conference call contains time-sensitive information and is accurate only as of the live broadcast date, today, August 9, 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, and thank you for joining Certara's second quarter 2023 earnings call. John and I will start with prepared remarks, and then we will take your questions. In the second quarter, we delivered software revenue of $33.7 million, growing 17% versus last year, and services revenue of $56.7 million, representing 5% growth versus last year. Total company revenue results were $90.5 million, representing 9% growth compared with the second quarter last year. Second quarter software bookings were $35.7 million and services bookings were $50.2 million. The results this quarter were disappointing and primarily resulted from cautious spending among smaller biotech customers who primarily buy our services, as well as a slow recovery in our regulatory business. While we are not satisfied with this quarter's results and they have led us to restate our outlook for 2023 based on current market dynamics, we believe the fundamental health of the pharmaceutical development market and the increasing acceptance of biosimulation technology provide an excellent opportunity for us to continue to invest in the growth of Certara. During the second quarter, our software business continued to perform well as we expand our deep relationships with customers and drove new product introductions. Our customer base continues to renew at a high rate with an ARR of 93% and a net retention rate of 112%. On top of the strong renewals, we are generating demand with our newer products, which include Simcyp Discovery, SEND Explorer, and new Pinnacle 21 modules. Customer interest in biosimulation software remains strong. And during the quarter, we passed a milestone of 300 approved drugs with label claims that directly referenced Simcyp. During Q1, we acquired Vyasa, an artificial intelligence software company, which has given us the opportunity to extend AI capabilities across several of our existing products. We call it certara.ai. We have rapidly enhanced the development plan for many of our software products with this new AI capability, and certara.ai is already beginning to generate customer traction. The situation during the quarter in our services business was very different. Challenges in growing our regulatory business have persisted longer than we anticipated. And during the quarter, we saw an unexpected slowdown in services bookings primarily from our smaller biotech clients, but also including a handful of large pharma customers who are reevaluating their portfolios. As biotech companies expanded over the last several years, we successfully supported many of them with biosimulation services, but their funding situation has become much tighter. Although services bookings slowed rapidly, our services revenue continued to grow during the quarter based on the strength of our backlog. Keep in mind that we are typically actively working on 800 to 1,000 services projects in any given month, so we have a broad footprint across the drug development market. We have seen recent month-over-month improvements in services bookings, but we remain cautious in our near-term outlook based on these market disruptions. We are not satisfied with our performance in services during the quarter. I believe the long-term health of the pharma industry and interest in Certara's biosimulation technology indicates that we can do better. Following an internal review of our performance and the current market situation, we are making some changes to help Certara grow to the next level. The first major change is that we are combining our services groups, including both our regulatory group and our integrated drug development groups into one unified services business with one management team led by Dr. Patrick Smith. By doing this, we can take advantage of operational synergies and scale benefits of having a single services organization with over 700 people, and we can more effectively offer the full array of Certara capabilities to our customers' projects. The second major change we are announcing is that we are creating a single integrated sales force that will combine the several specialized sales groups we currently have in Certara. I asked Leif Pedersen to become the Chief Commercial Officer, and all sales resources across Certara, including both software and services, will report to him. This change will enable Certara to bring the right offering at the right time to the right customers, to offer combined software and services projects, to become more efficient in our deployment of resources, and to provide strategic focus on key accounts. Because our confidence in the long-term health of our market and the underlying demand for biosimulation remains very high, we are continuing with our investments in new products, which can further benefit this market. The addition of AI technology into our portfolio has led to a transformation of many of our product plans as we race to incorporate the technology into our existing products. The first product that we enhanced was D360, which now has AI models for analysis and prediction of new drug discovery targets. This product is already in the hands of customers who have provided positive feedback. Another early example is our CODEx clinical trial outcomes database, which now includes a state-of-the-art AI-powered interface for performing meta-analysis and comparison on new drugs. We are moving very quickly with generative AI technology and have conducted a full review of our existing product plans to incorporate transformational features and upgrades across Certara's platform. More to come as we launch new versions and upgrades. As we proceed to the remainder of the year, our focus is on three priorities. We are actively assessing our existing backlog of projects to accelerate projects that were previously delayed and to identify further opportunities to serve those customers. We are uniting our sales force into one organization and investing in marketing to increase our new bookings. And we are making important investments in new products that will continue to accelerate the impact of biosimulation as the pharma industry continues to invest in development. Certara has an excellent position in an important technology that will continue to be adopted by the pharmaceutical industry and an impressive team of people who are committed to invest and grow our company. Unpredictable market dynamics have led to some softness this quarter, and we have evaluated the situation and are reacting accordingly. But we also continue to see a very bright future with the opportunity to make biosimulation even more important to drug development than it is today. I'm confident in our ability to execute on our revised plan and excited about our long-term commitment to expand the use of biosimulation worldwide. With that, I will now turn the call over to John Gallagher to go over our financial results.

John Gallagher, CFO

Thank you, William. Hello, everyone. Total revenue for the three months ended June 30, 2023, was $90.5 million, representing year-over-year growth of 9% on a reported basis and 10% on a constant currency basis. Software revenue was $33.7 million in the second quarter, which increased 17% over the prior year period on a reported basis and 18% on a constant currency basis. Growth in the quarter was driven by biosimulation software and Pinnacle 21. Ratable and subscription revenue accounted for 57% of second quarter software revenues. We are pleased with the year-to-date performance in software, which is growing as expected. Software bookings were $35.7 million in the second quarter, which increased 17% from the prior year period. Trailing 12-month software bookings were $131.3 million, which increased 16% as compared to the prior year. As William mentioned earlier, Certara's total bookings in the quarter were challenged by evolving dynamics surrounding customer spending. With that said, software bookings have maintained strength and grown at or ahead of historical levels. The software aggregate renewal rate was 93% in the second quarter, which is in line with our plan. Services revenue was $56.7 million in the second quarter, which increased 5% versus the prior year period on a reported basis and on a constant currency basis. Services bookings in the second quarter were $50.2 million, which decreased 28% from the prior year period. Trailing 12-month services bookings were $267.5 million, which decreased 5% as compared to the prior year. Our services were significantly impacted by the dynamic William described earlier. In reviewing the underlying drivers of services performance, we see continued weakness in regulatory as the primary source of our lower full-year outlook. We had previously anticipated a low single-digit revenue growth outlook, and we are now looking at a decline in the regulatory business. Bookings conversion to revenue has also elongated versus historical trends as customers delayed execution on previously booked projects. Regulatory has been a headwind to our revenue and bookings growth so far in 2023, which we expect to continue for the remainder of the year. The pipeline of opportunities in regulatory remains active, but the timing of revenue and bookings has been very hard to predict. Outside of regulatory, weak service bookings were seen among Tier 3 customers, which we define as having up to $100 million in revenue and includes non-revenue-generating companies. Bookings acquisition this year has been more challenging as a result of macro-related concerns and could potentially be related to temporary cash conservation efforts. Our Tier 1 services bookings, which are bookings from those customers with revenue above $5 billion have not been immune from macroeconomic uncertainty as well, and their spend appears conservative and less urgent. Our commercial team remains highly engaged with our customers, and our customers remain highly engaged with Certara as well. Total cost of revenue for the second quarter of 2023 was $36.2 million, an increase from $35.2 million in the second quarter of 2022. The primarily due to employee costs related to biosimulation services billable head count growth. Total operating expenses for the second quarter of '23 were $41.2 million, a decrease from $43.4 million in the second quarter of '22. The components of operating expenses are as follows: Sales and marketing expenses were $8.1 million compared to $7.1 million in the second quarter of '22. This increase is primarily due to employee costs related to expanding the sales and marketing teams. R&D expenses were $7.9 million compared to $7.7 million for the second quarter of 2022. The R&D expenses were up primarily due to employee-related costs for software development. G&A expenses were $14.2 million compared to $17.8 million for the second quarter of 2022. The decrease was primarily due to lower stock-based compensation. Intangible asset amortization was up to $10.6 million compared to $10.4 million in the second quarter of 2022. Depreciation and amortization expense was $400,000, which is flat to the prior year. Continuing down the P&L. Interest expense was $5.7 million compared to interest expense of $3.9 million for the second 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. Miscellaneous income was $1 million compared to $2.5 million for the second quarter of 2022. Income tax expense was $3.7 million compared to $3.4 million for the second quarter of 2022. Net income for the second quarter of '23 was $4.7 million compared to a loss of $600,000 in the second quarter of '22. Reported adjusted EBITDA was $32.4 million compared to $28 million in the second quarter of 2022, representing 16% growth. Adjusted EBITDA margin was 35.8% in the second quarter of 2023. Reported adjusted net income for the second quarter of 2023 was $18.4 million, compared to $14.6 million for the second quarter of 2022. Diluted earnings per share for the second quarter was $0.03 as compared to $0.00 in the second quarter of 2022. Adjusted diluted earnings per share for the second quarter of 2023 was $0.12 compared to $0.09 in the second quarter of last year. Now moving to the balance sheet. We ended the quarter with $245.2 million in cash and cash equivalents. As of June 30, 2023, we had $289.1 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Turning to guidance for the full year. We are adjusting our 2023 guidance to reflect the evolving booking acquisitions so far this year. We now expect total revenues between $345 million to $360 million, representing year-over-year growth of 3% to 7%. We expect software revenue to grow at the rate of our historical targets. Biosimulation services revenue is expected to grow in the low double digits for the year, while regulatory services revenue is expected to decline from 2022. We are committed to maintaining our mid-30s adjusted EBITDA margin performance despite lower expectations for revenue. We now expect adjusted EBITDA in the range of $120 million to $128 million. We expect adjusted EPS in the range of $0.44 to $0.48 per share. Fully diluted shares in the range of 159 million to 162 million and a tax rate in the range of 25% to 30%. We also wanted some context on our expectations for bookings performance for the remainder of 2023. We now expect 2023 bookings to be down low single digits as compared to 2022. As William highlighted, our conversations with customers about biosimulation continue at a strong pace, and implementing Certara's biosimulation remains a priority for customers as we work to execute on a more integrated commercial strategy and focus on pipeline conversion with our customers. We will look to improve our revenue and bookings performance. I will now turn the call back over to William Feehery for closing remarks.

William Feehery, CEO

Thank you, John. To summarize our message today, we are operating in a challenging environment that has evolved throughout 2023. We believe this experience to be transitory and are taking a more balanced view of the second half of the year. I'm encouraged by the continued high level of performance from our team and the innovation that is coming out of Certara. We have reasons to be optimistic about the changes we are making in the commercial organization. But timing with such changes is a little tricky to forecast. Our medium and long-term view on the biosimulation industry and the value of Certara's end-to-end products and services to our customers remains as compelling as ever. We're confident that Certara is well positioned for growth and profitability over time as a global leader in biosimulation. We will now open the line for questions. Operator, can you please open the line?

Operator, Operator

Your first question comes from David Windley of Jefferies. Please go ahead.

David Windley, Analyst

I wanted to start by discussing the bookings revenue cycle. Could you explain your typical cycle time from booking to revenue? With the updated guidance provided, how should we consider the impact of lower bookings on revenue over the next two quarters?

John Gallagher, CFO

David, it's John. As you mentioned, we've adjusted our guidance, and our approach to bookings involves examining the pipeline, converting that pipeline into bookings, and ultimately translating those bookings into revenue. We've observed some delays among our Tier 3 customers, which is expected given the current biotech funding climate. This is slowing both the pipeline and the conversion of bookings to revenue. Additionally, with our Tier 1 customers, we’re experiencing some delays—not cancellations of projects—but some slowdowns in services, as projects are taking longer and even administrative tasks like contract signing are delayed in this environment. Our updated guidance reflects these observations from Q2 and our forecasts for the future. Regarding the visibility and timing for software, we noted a solid performance from our software sector, with bookings and revenue increasing by 17%. We’re pleased with this strength, which reinforces the adoption and use cases for biosimulation. The visibility for software is strong, given both SaaS ratable revenue and annual renewal licenses. On the services side, the cycle time is shorter, which I believe relates to your question. Overall, we have a robust backlog from previous bookings, and we’re focused on converting that backlog into revenue in the latter half of this year.

David Windley, Analyst

John, so maybe to try to pin you down just a little bit more in thinking about the implied guidance for the second half of the year. Do you expect that to be fairly level third quarter to fourth quarter or third quarter is still a little higher because it is still living for bookings from last year and then fourth quarter drops off more? Just try to tabulate on cadence.

John Gallagher, CFO

If we consider the second half of the year, the main factor contributing to the deceleration is the regulatory business. We have noticed a decline in bookings for Tier 3 and larger deals that are typically consistent but are not as prevalent this year. When focusing on the second half, we can see two distinct trends in bookings. For Q3, which we are currently in, we anticipate bookings to align with what we observed in Q2. However, for Q4, we expect an increase, as has been the case historically. The software business continues to show strength, and we believe biosimulation services will improve from Q2 levels. Notably, the regulatory business often sees larger deals in Q4. Therefore, we forecast bookings to remain steady in Q3, with an increase in Q4. In terms of revenue, we expect the revenue for the latter half of the year to be comparable across the quarters.

David Windley, Analyst

I'm curious about the pricing environment in relation to inflation. Is demand currently more cautious, and does that affect the ability to implement regular price increases? Additionally, in terms of the labor and cost environment, has it stabilized to the extent that you don't need to implement as many inflation-related price increases?

John Gallagher, CFO

Yes. We are looking to remain competitive with our pricing. In terms of services, we have large deals in our pipeline that we can see. We are focused on turning those into bookings and ultimately revenue. Our goal is to be competitive and secure those deals, which relates to the pricing aspect of your question.

Operator, Operator

Your next question comes from Luke Sergott of Barclays. Please go ahead.

Unidentified Analyst, Analyst

This is Solim filling in for Luke. To start off, how would you describe your communication level with customers? What gives you confidence that these are merely delays rather than lost business due to broader market conditions? Also, what is the typical time frame from the initial conversation with a customer to securing a booking? Lastly, the biotechnology funding situation has been a topic of discussion for several quarters. Some companies are starting to see positive signs within this customer segment. I’m curious why this is a point of discussion for you now, and what your thoughts are regarding this timing compared to a few quarters ago in relation to the rest of the industry.

John Gallagher, CFO

Maybe I'll take the last one first. So as far as why are we seeing Tier 3 pressure? I think the way to think about that is the Tier 3 customer weakness is not surprising to your point. I mean one way that we look at it is the funding of some of those biotechs and the pressure they have on them has increased certainly over time. And we generally work with them on later-stage drug development projects, and therefore, it might hit us a little bit later. I think more importantly, though, I think what's happening is it's the compounding effect of some weakness in Tier 3 compounded by some of the weakness that I talked about in Tier 1. And when you take those two things together, there's no offset there, and that's really what you saw in the results at Q2. The conversations with customers, as I mentioned before, our visibility into the pipeline is actually really good for some large transactions in both biosim services as well as in the regulatory business. But we need to convert those. And what is the time? I think the time varies quite a bit based on whether it's a big or a small contract, but I can tell you that sort of the total cycle time for projects and services is shorter than the sales cycle in software.

William Feehery, CEO

And I'd say, Luke, Bill, but it's an interesting question about why it has later than some others have reported, but the fact is that based on published data, the funding that's gone into not-public biotechs, not just early stage, once the later stages down 20%, 30% year-over-year, and we saw that come through in the behavior of that segment of our customers this quarter.

Unidentified Analyst, Analyst

Awesome. That's helpful. And then one last one. What is your guide right now contemplating at the low end? Is this a scenario where things kind of worsen or just any other color around that would be helpful.

John Gallagher, CFO

Yes. The low end of the guide is, to your point, a couple of things would have to happen that worsen and that would be if we saw the regulatory business, which as we said in the remarks, we do expect to contract on a year-over-year basis. But that business was to decline more. And also if biosim services saw additional weakness that would put you at the lower end. So that's the way to think about it.

Operator, Operator

Your next question comes from Vikram Purohit of Morgan Stanley. Please go ahead.

Vikram Purohit, Analyst

So we had two, one, on the services business, you talked quite a bit about the impact of Tier 3 clients and Tier 1 clients being impacted as well. But any color you can provide on the relative impact contribution from those two client sets and your expectations on how likely each category of clients are end of either canceling projects or simply just pushing out projects into 2024 that they would have wanted to do in 2023? So that's question one. And then secondly, just wanted to see if you could talk a bit more about sales force consolidation and how you think that might help the business overall kind of on a point-of-sale basis.

John Gallagher, CFO

Yes, certainly. Regarding the services side, I previously mentioned Tier 3, which isn't entirely surprising. The real concern was in the Tier 1 segment, and that was affecting our results in Q2. Tier 1 clients account for more than half of our revenue. This means that even a minor delay or timing issue can have a much greater financial impact compared to Tier 3, as Tier 1s represent over 50% of our business, while Tier 3s are around 30%. Therefore, we could aggregate more Tier 3 projects to achieve a similar effect. In terms of project timing, we do not anticipate any delays pushing into 2024. The issue lies in some deals in the pipeline meant to be signed and converted into bookings, which are experiencing administrative delays. Once we secure these bookings, especially in services, converting them into revenue typically takes about one to two quarters. At this time, we are not suggesting that project timelines will shift into 2024.

William Feehery, CEO

Yes. And Vik, I'll take the second question. This is Bill. You asked about salesforce consolidation. So Certara, from its beginning, it's a software and a service company. And they are, in fact, tied together. We believe that we can gain both operational synergies and also price our package offerings better by bringing the salesforce together. I mean, in a lot of cases, our services involve our software or a lot of our software clients could become service customers. We don't feel like we're fully taking advantage of that in the past. I think there's more to go there. So we think that by bringing this together and having a company-wide sales force, we'll have better ability to serve those customers and just better efficiency in terms of how we treat, for example, our key accounts.

Operator, Operator

Our next question comes from Jeff Garro of Stephens Inc. Please go ahead.

Jeff Garro, Analyst

Yes, I want to ask about the work you referenced on analyzing the health of the backlog. You've given several comments on cancellations versus delays. But just curious what assessment that you've come to after looking into that a little bit more and your ability to influence client behavior where you see a clear ROI on projects that are under contract, but not underway generating revenue yet.

John Gallagher, CFO

Yes, Jeff. Regarding the backlog, we've observed significant bookings in prior quarters within the services segment of our business, and historically, our conversion of that backlog has been quite effective. While we are noting some weakness in bookings currently, we’ve discussed what that entails at length. The backlog for biosim services, in particular, is substantial and actionable for us, especially concerning our utilization, which will assist us in meeting the guidance we've provided. The reason we highlighted this is to emphasize that previous bookings remain something we can manage as an organization. We are dedicated to this, alongside building our pipeline and securing new bookings.

Jeff Garro, Analyst

And then another question maybe to dive a little bit deeper on the regulatory business and some of the pressures there. You described regulatory as kind of a category, but I think there are a few different product lines within that. So to the extent that you could distinguish between some of the larger projects versus more regular course of business, regulatory work, and might be closer to your biosimulation work versus more generic medical writing as well as the market access piece would be helpful. And if you could comment on your ability to compete with CROs for regulatory work in an environment where demand seems to be a little bit softer?

John Gallagher, CFO

Yes, Jeff, I mean, it's a competitive space, as you know, in a large market. And one of the challenges that we're seeing in that business is historically we have been able to get, I'll call it, several large deals or bookings done in any given year by large, we're saying basically more than $1 million. This year, we haven't seen that. Although as I mentioned earlier, we do have visibility in the pipeline to some of those. So that gives us encouragement that we've got a focus, we've got to be competitive. And historically, we have turned some of those into bookings in Q4, which historically has been our heaviest quarter for some of those larger deals in the regulatory business.

William Feehery, CEO

Yes. And I would say also the reason we have this business is not to be competitive with CROs on medical writing. So we have a high-end onshore tech-enabled business that appeals to a certain segment. We believe we can price competitively when we need to. But the point of the business has been to go after work that we get because of our biosimulation business. And that is one of the key reasons why we want to combine the Salesforce here so that we're taking advantage of all those opportunities to their full extent.

Operator, Operator

Our next question comes from Kyle Crews of Credit Suisse Financial Services. Please go ahead.

Kyle Crews, Analyst

Looking specifically at software bookings growth. When you look at the 16% trailing 12-month bookings growth within software, it appears that the prior year trailing 12-month bookings would have one quarter without Pinnacle 21 bookings in them as compared to the current year, which would have the full year worth of acquisition bookings like full year bookings from that acquisition. Could you please explain the impact of how having one additional quarter of Pinnacle 21 bookings impacts the 16% year-over-year trailing 12-month bookings growth? And maybe provide some broader color on how to look at software bookings growth going forward?

John Gallagher, CFO

Yes, thank you for your question. We are very pleased with the performance of our software business. While we have emphasized our services for good reason, as you noted, our trailing 12-month bookings for software grew by 16% and for the quarter by 17%, with revenue also increasing by 17%. This performance exceeds our expectations, and we are happy with the results. The Pinnacle 21 business, an acquisition we made in 2021, has continued to perform well and has been a valuable addition to our portfolio. Its growth trajectory remains strong. To assess the growth rate impacts, we have annualized the Pinnacle 21 results. I recommend looking at both the current trailing 12 months and the quarter's performance in terms of bookings and revenue as vital indicators for our software segment. Regarding future software performance, we expect its strength to persist throughout the year, bolstered by solid visibility in our SaaS offerings and annual license renewals. We believe this reflects the enduring value proposition of biosimulation. Although we are experiencing some temporary disruptions mainly linked to regulatory issues and services, our software remains a crucial element for our customers, helping them reduce costs and shorten drug development timelines.

Operator, Operator

Your next question comes from Max Smock of William Blair. Please go ahead.

Max Smock, Analyst

Just following up on bookings here in the back half of the year. You mentioned on a consolidated basis, bookings expected to be down low single digits this year. Can you just help us think through what that incorporates for bookings within each segment? And then more importantly, I know it may be a little early for next year, but what does bookings being down low single digits this year mean for revenue growth next year? Should we expect kind of more low single digits, or could you actually see that maybe step back up to the low teens range that you've outlined as the target moving forward?

John Gallagher, CFO

Yes. Thank you, Max. For the second half, we anticipate a slowdown in bookings, primarily due to the regulatory business and lower bookings we are facing. However, we believe the software business will maintain its current momentum. We expect to see a recovery in biosim services performance moving into Q4, although we are experiencing some softness there that we foresee continuing into the latter half of the year. Regarding our outlook for 2024, we are unable to provide specific guidance. Nevertheless, we expect the strength in the software business to persist. To return to greater growth in 2024, we need support from the biotech funding environment and a resurgence in spending from Tier 3 companies. Additionally, we need the slowdown in R&D spending from Tier 1 companies to ease in order to achieve higher growth in that scenario. I would like to emphasize that we believe Certara can achieve mid-teens growth in the long term, driven by the adoption and potential of biosimulation. While this does not specifically pertain to 2024, we are confident that the market for biosimulation and our position as a leader within it will allow for continued growth.

Max Smock, Analyst

Maybe just a quick cleanup one before my final one. On the split between biosimulation and regulatory, I think in the past, you said about 70% biosimulation. I wonder if there's any update to just how to think about the mix from the services perspective, as well as the mix within each individual segment in terms of software versus services would be really helpful.

John Gallagher, CFO

We have historically indicated that the regulatory business constitutes about 20% to 25% of our overall business. In 2023, we still anticipate it to fall within that range, possibly at the lower end. Recently, the revenue breakdown between software and services has been approximately 65% to 35%, favoring services. However, this mix is expected to shift slightly based on our current guidance, roughly by about 200 basis points towards software.

Max Smock, Analyst

Could you provide some insights into the regulatory work that is currently on hold? We've noticed a trend this quarter towards later-stage trials, which seems relevant to your regulatory business. Can you clarify why these programs are not progressing? I'm trying to understand the reasoning for a small biotech delaying its regulatory approval filings and the thought process behind that decision.

John Gallagher, CFO

Yes, it is a competitive space. We have noted some larger deals in the pipeline and the management team is focused on converting those into bookings. While we have a history of securing larger deals, we have not seen that occur in 2023. Therefore, we are very attentive to the current pipeline. To your point, the business overall has slowed, but it is not a complete absence of business, and we are actively competing for opportunities.

Operator, Operator

Your next question comes from Gaurav Goparaju of Berenberg Capital Markets. Please go ahead.

Gaurav Goparaju, Analyst

Just two quick ones for me. How are new additions from larger biopharma software users looking year-over-year? And is software this quarter being driven largely by those Tier 1 customers expanding software use?

John Gallagher, CFO

It's not entirely driven by big pharma, although they are a part of it. I would highlight new logos as a key metric; we added 134 new logos this quarter, which is a good sequential result. Overall, we are seeing strong performance in Tier 1 for biosimulation software, although there's some slowness in Tier 3. However, much of our business remains focused on our top customers, as we have mentioned previously.

Gaurav Goparaju, Analyst

And then just one more for me. What software solutions have you seen larger existing customers typically expanding their software into? Are there any in particular that you're seeing trends in?

John Gallagher, CFO

Yes. We've seen expansion in Pinnacle 21, in particular. We're still having very good uptake in our Phoenix suite as well. And in the core biosimulation Simcyp, there's also been some additions as well. So it was pretty healthy in kind of the core offerings. Those are biggest product lines that we have as a company. And so we saw expansions in all three of them.

William Feehery, CEO

And on Simcyp Discovery, have you seen any upticks in Sens'it? It's been relatively recently released, or is that Tier 3 weakness kind of impacting that pickup? Well, we have seen some nice pickup in that probably it's also been affected by the Tier 3 weakness in terms of, I think we probably would have seen more, but it's hard to estimate that. But it's off to a good start. It expands the reach of Sens'it to a different audience, which is important. And I think there'll be more to see be more to come as we go forward to the next couple of quarters.

Operator, Operator

Your last question comes from Joe Vruwink of Baird. Please go ahead.

Joe Vruwink, Analyst

Just wanted to start on the topic of AI. And wondering on the opportunity, not just from an application standpoint, but also the integration of data and different data sources. It would seem like Certara, just given some of the foundational elements you have, would be in a unique position to commercialize a data model and a data offering of what the industry is going to need. I wonder how you think about kind of the product roadmap and what might be first out of the gates as you look to address the AI opportunity.

William Feehery, CEO

You're right. So like a lot of companies, we've been rapidly assessing what AI can do. But we were fortunate in that we acquired the asset exactly at the right time. We got a good team, and we got it in their layer product. We have a very interesting opportunity for data integration exactly like what you're talking about. So just keep in mind, we've owned them for just a few months. And so we've had the opportunity to go through our product portfolio. First step was to look at what we can add in our existing product portfolio. In a few months, we've added to a couple of our products, D360 and our codecs database. That's a good early indication, but certainly not our full ambition or really what we've got in the pipeline. As you look forward, though, it's exactly what you talked about, there's an opportunity to look across the best about it data that not only exist publicly, but that many of our clients have internally, their proprietary databases, and integrate them and either train the models or use that in AI products. So we're very much focused on that. It's really quite energized our software development team here is as we're at the forefront of figuring this out. And I think as you go forward, you'll see more and more of that in what we talk about and in our products.

Joe Vruwink, Analyst

And then just a question on kind of the connection between biosim services and software, and I guess this is more directed at some of the changes you saw in the Tier 1 customer segment. But is there ever a leading indicator between the two, where services utilization and seeing downward adjustments there is a precursor for changing in software demand or maybe a different spin on the question, can your software get to a point? And obviously, you've invested in user interface and making things more user-friendly can it ever get so self-serve that maybe the need for services is ultimately lesser?

William Feehery, CEO

Yes, that's a great question. The situation is that software can be quite complex. We aim to simplify it with user-friendly interfaces to attract a larger user base. However, as more people use the software, we often initiate additional services projects. Users have various questions and frequently want to modify the software. This also leads to insights for new features based on our services projects. There's an interesting interplay between software and services. While it would be beneficial for the pharmaceutical industry if our software became so advanced that we could eliminate services, the reality is that the industry is tackling numerous drugs with many complexities, creating ongoing opportunities for additional services. Our clients appreciate that we not only provide software but also have a skilled team with a wealth of experience in drug development. They are involved in many projects each month, which adds value to our services. In the recent quarter, a drop in software usage would be concerning, as it could suggest a long-term decline in pharmaceutical development funding. Service demand can fluctuate based on funding and spending trends, but our solid software foundation provides a good opportunity for continued growth in our Services Group.

Operator, Operator

Thank you. I would now like to turn it over to William Feehery for closing remarks.

William Feehery, CEO

Thank you very much, everybody. So we obviously are not happy with the performance we turned into the second quarter on bookings. We still feel with a lot of data that there's plenty more growth ahead for Certara to bring biosimulation to the pharmaceutical industry. We are investing heavily, not slowing down at all because of this in the further development of our software. We're very excited about the potential to incorporate AI in biosimulation and what that's going to do to expand. And we believe that as we come out over the next couple of quarters, the softness in service will reverse itself. So I look forward to talking to you in the next quarter and hopefully giving you a better update in terms of where we stand in terms of bookings. Thank you very much, and good evening.

Operator, Operator

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