Inotiv, Inc. Q4 FY2025 Earnings Call

Hello, and welcome, everyone joining today's Inotiv Fourth Quarter and Full Year 2025 Earnings Call. Please note, this call is being recorded. We are standing by if you should need any assistance. And it is now my pleasure to turn the meeting over to Steve Halper of LifeSci Advisors. Please go ahead.

Thank you, Claudia, and good afternoon. Thank you for joining today's quarterly call with Inotiv's management team. Before we start, I want to remind everyone that some of the statements made by management during this call are forward-looking statements. These include comments about the company's future operations and financial results. These statements are subject to risks and uncertainties that may lead to actual outcomes differing significantly from what is projected. Any such statements reflect management's expectations as of today. You should not place undue reliance on these forward-looking statements, and the company does not have an obligation to update or revise them based on new information or future events. Please refer to the company's SEC filings for further details on risks and uncertainties that could impact results. Management will also talk about certain non-GAAP financial measures to provide additional information for investors. Definitions of these measures and reconciliations to the most comparable GAAP measures are included in the company's earnings release, which is available in the Investors section of the company's website and in the Form 8-K filed with the Securities and Exchange Commission. If you haven't yet obtained a copy of today's press release, you can do so by visiting the Investors section of Inotiv's website. Joining us this afternoon are Bob Leasure, President and Chief Executive Officer; and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will be available during the question-and-answer segment of the call. Bob will start with some opening remarks, followed by Beth, who will provide a summary of the company's financial results for the fourth quarter and the full fiscal year 2025, after which we'll open the call for questions. I would now like to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

All right. Thank you, Steve. Good afternoon, everyone. During the fourth quarter of fiscal 2025, we saw the continuation of some positive trends for our business, including a strong year-over-year increase in demand for our Discovery & Safety Assessment business. We continue to execute on the core goals outlined in our May 2025 Investor Day, including improving our cash flow and margins and maintaining our focus on customer metrics. Two critical elements of our plan consist of improving DSA revenue and margins and continuing our RMS site consolidation efforts in order to further reduce costs. On today's call, I'll provide an update on the progress we are making on these objectives along with other general business updates for the fourth quarter. On that last point, on August 18, we filed an 8-K disclosing that we became aware of a cybersecurity incident which caused disruption to certain of our business operations. We worked to restore availability and access to our networks and systems during this fiscal fourth quarter. We were required to work through a number of challenges that were disruptive to the business, but we continued to execute requests for delivery of products and services. While this incident inevitably had some financial impact on the quarterly results, I'm very proud of how the team responded. And as you can see from the results of the quarter, the company maintained its momentum through this process. In September, we disclosed that we had engaged Perella Weinberg Partners to provide general financial advisory and investment banking services to assist the company in exploring potential debt refinancing alternatives. We later announced that a proposed settlement of our securities class action and an agreement in principle to settle the derivative lawsuits, each case pending court approval, and expect that the settlement payments will be fully covered by insurance. Now moving on to the quarterly results. We continue to see some very encouraging signs. For the fourth quarter of fiscal 2025, total revenue was $138.1 million, an increase of $7.7 million or 5.9% compared to the fourth quarter of fiscal 2024. The DSA business was the primary driver of this increase. Sequentially, revenue was up $7.4 million or 5.7%. For fiscal year 2025, total revenue was $513 million, an increase of $22.3 million or 4.5% compared to $490.7 million for fiscal 2024. Some key highlights of Q4 2025 included quarter-over-quarter and year-over-year increases in net DSA awards and revenue growth. DSA revenue growth was a goal that we outlined during our Investor Day in May of this year. Compared to the prior year fourth quarter, DSA quarterly revenue increased 15.7% and awards increased approximately 61%. These results were some of the strongest DSA quarterly results we have seen over the last two years. Since our May Investor Day, we have posted increases of 12.4% in DSA revenue and 41.1% in DSA awards for the last two fiscal quarters of 2025 as compared to the last two fiscal quarters of 2024. In the fourth quarter, Discovery business awards increased 55% over the same period a year ago, and we achieved even stronger growth rates in the new service lines that we started or expanded over the last couple of years, including biotherapeutics, medical devices and genetic toxicology. The DSA backlog conversion rate was 37.4% for the fourth quarter and was the highest quarterly conversion rate we have seen in three years. DSA margins also continued to improve, and while we believe there should be further opportunities in the future, we are pleased with the current momentum. RMS revenue for the fourth quarter was slightly ahead of last year by approximately 1%, and for fiscal year 2025, increased 4.7% over fiscal year 2024. Phase 2 of our RMS site consolidation project has remained on track. In early October, we closed one of the three planned RMS facilities, and now have two additional leased facilities remaining to close. As we stated last quarter, we anticipate future annual savings of $6 million to $7 million on a capital investment related to expanding an existing lease location of approximately $6.5 million. To date, we have spent approximately $1.8 million net of tenant allowances related to this capital investment. As with previous projects we have executed in the RMS segment, these additional investments are intended to help modernize our existing footprint while allowing us to close older facilities. The plan will reduce open capacity and should create operating efficiencies while continuing our efforts to support our animal welfare objectives. Additionally, we believe that this plan allows us to remain agile and to increase production capacity in the future as needed. When the site consolidation project is complete, we expect to have closed a total of 13 RMS facilities or approximately 60% of the RMS facilities over the last three years. During fiscal 2025, we sold two properties as a result of our site consolidation project. One property was sold in June, and the other property was sold in September, with the net proceeds used to repay principal on our term loans during July and October, respectively. Our efforts also saw additional achievements during the fourth quarter, including advancements in our RMS management operation system, which have been developed over the last 14 months and are now providing data and metrics that we believe will allow us to further improve RMS operations and efficiencies in the future. We continue to improve our North American transportation fleet and operations. In the second quarter of fiscal 2026, we expect to have achieved a 24% reduction in our fleet to yield cost savings since bringing the North American transportation in-house. This two-year project has been critical in helping improve our delivery and client satisfaction. In addition to other improvements made with order intake and accuracy, we have seen a 55% reduction in our RMS client complaints over the last two years. Subsequent to the end of the fiscal fourth quarter, in October 2025, we were able to transfer our commercial operations to one new CRM system, integrating multiple systems into one solution for our customer relationship management systems. In addition to cost savings, we anticipate this will provide operating efficiencies, improved data metrics, and enhanced ability to communicate internally between business segments and with customers. We have reduced the number of IT systems from 249 in early 2022 to 162 as of October 2, 2025. This reduction has been part of our planned efforts beginning in 2022 to streamline and enhance our technology environment. We look forward to continuing to focus our efforts on increasing revenue, improving margins, and improving our client experiences. While we faced some headwinds in the quarter, we were pleased with our results, which we believe further demonstrate our ability to identify opportunities, integrate businesses we acquired in startups, and implement action plans designed to improve revenue and margins. As for our balance sheet, we generated $14.3 million of cash from operations in the fourth quarter and increased our cash balance to $21.7 million compared to $6.2 million at June 30, 2025. Our first lien term debt matures in November of 2026, our second lien term loan in February of 2027, and our convertible debt in October of 2027. As we mentioned previously, we have retained Perella Weinberg to assist us in exploring potential debt refinancing alternatives with the goal of improving our balance sheet. We are actively having these discussions, and we'll provide more information at the appropriate time. Before I turn the call over to Beth, I want to recognize and acknowledge that it has been very nice to see this increase in DSA revenue and the DSA awards over the last three quarters and believe these trends are continuing through the first two months of the current quarter compared to the same period in the prior year. However, as a reminder, we are coming off some very weak numbers from a year ago, and the geopolitical and macroeconomic conditions, risks, and uncertainties are likely to remain with the industry for the foreseeable future. I'll now hand things over to Beth to provide the financial overview.

Thank you, Bob, and good afternoon, everyone. For the fourth quarter of fiscal 2025, total revenue was $138.1 million compared to $130.4 million in the fourth quarter of fiscal 2024. This was a $7.7 million or 5.9% increase in revenue from the prior year quarter, primarily driven by increased revenue of $7.1 million within our DSA segment. For fiscal 2025, total revenue was $513 million compared to $490.7 million in fiscal 2024. This was a $22.3 million or 4.5% increase in revenue from the prior year due to a $14.5 million or 4.7% increase in RMS revenue primarily driven by higher NHP product and service revenue and a $7.8 million or 4.3% increase in DSA revenue. DSA revenue in the fiscal 2025 fourth quarter was $51.6 million compared to $44.6 million in Q4 of fiscal 2024. The year-over-year 15.7% increase in DSA revenue was primarily driven by an increase in discovery and translational science services, biotherapeutics, general toxicology services, and surgical services. DSA revenue for fiscal 2025 was $187.9 million compared to $180.1 million for fiscal year 2024. The year-over-year 4.3% increase in DSA revenue was primarily driven by an increase in safety assessment services, including biotherapeutic services, surgical services, general toxicology, and an increase in discovery and translational science services. Additionally, the year-over-year increase in DSA revenue was driven by our improved performance over the last six months of the fiscal year. The book-to-bill ratio for DSA for the fourth quarter of fiscal 2025 was 1.08:1, and our trailing 12-month book-to-bill was 1.05:1. DSA backlog was $138.2 million at September 30, 2025, compared to $129.9 million at September 30, 2024, and $134.3 million at June 30, 2025. Overall, net new DSA awards this quarter were $54.2 million, a 61% increase over Q4 of fiscal 2024 and a trailing three-quarter increase of 37% year-over-year. We continue to see strong quoting and awards for the months of October and November. The backlog conversion rate in the fourth quarter of fiscal 2025 was 37.4%, up from approximately 33% in the prior year period. The DSA cancellations and negative change orders in the fourth quarter of fiscal 2025 were approximately 29% lower compared to the prior year fourth quarter. Cancellations in the trailing 12-month period were approximately 7% more than the prior trailing 12-month period. RMS revenue for the fourth quarter of fiscal 2025 was $86.5 million, an increase of $700,000 or 0.8% compared to Q4 of fiscal year 2024. RMS revenue for fiscal 2025 of $325.1 million increased $14.5 million or 4.7% compared to fiscal 2024. The increase in RMS revenue was primarily due to higher NHP products and services revenue. The overall operating loss for the fourth quarter of fiscal 2025 decreased $6.4 million from $13.2 million in the fourth quarter of fiscal 2024 to $6.8 million in Q4 of fiscal 2025, primarily due to increases in RMS operating income of $2.9 million and in DSA operating income of $2.3 million as well as a reduction in unallocated corporate expenses of $1.1 million. The increase in RMS operating income was driven by a reduction in cost of revenue, which predominantly related to reductions in costs related to NHP's operating expenses and depreciation and amortization of intangible assets. The increase in DSA operating income was driven by the increase in revenue discussed above, partially offset by an increase in cost of revenue primarily driven by increased research model expenses, compensation and benefits expense, professional fees, and facility-related expenses. The overall operating loss for fiscal 2025 decreased $55.5 million from $86.4 million in fiscal 2024 to $30.9 million in fiscal 2025, primarily due to RMS operating results. The change in RMS operating results was primarily related to decreased operating expenses, a $14.5 million increase in revenue previously mentioned and partially offset by increased cost of revenue. The $38.2 million decrease in operating expenses was primarily driven by the $28.5 million charge incurred during fiscal year 2024 related to the Resolution Agreement and Plea Agreement, which did not repeat during fiscal year 2025, and a legal settlement of $7.6 million that we received during fiscal year 2025. Increase in RMS costs of revenue primarily related to increased costs associated with the increased NHP-related products and service revenue. Non-GAAP operating income for our DSA segment in the fourth quarter of fiscal 2025 was $9.3 million or 6.7% of total revenue compared to $7.4 million or 5.6% of total revenue in the fourth quarter of fiscal 2024. Non-GAAP operating income for our DSA segment for fiscal 2025 was $28.5 million or 5.6% of total revenue compared to $30.3 million or 6.2% of total revenue in fiscal 2024. As Bob mentioned, we continue to be focused on our DSA margins, and we expect to see improvement in future quarters, largely through operating leverage and assuming we continue to see a stable pricing environment. In our RMS segment, non-GAAP operating income in the fourth quarter of fiscal 2025 was $14.9 million or 10.8% of total revenue compared to $12.7 million or 9.7% of total revenue in the fourth quarter of fiscal 2024. Non-GAAP operating income for RMS segment in fiscal 2025 was $56.7 million or 11.1% of total revenue compared to $44.3 million or 9% of total revenue in fiscal 2024. Interest expense in Q4 of fiscal 2025 increased to $15.7 million from $12.3 million in the fourth quarter of fiscal 2024 primarily due to noncash interest incurred in relation to the second lien notes issued in September of 2024. Interest expense for fiscal year 2025 increased to $56.6 million from $46.9 million in fiscal year 2024, primarily due to noncash interest incurred in relation to the second lien notes issued in September of 2024, and periodic growth on our revolving credit facility. Consolidated net loss attributable to common shareholders in the fourth quarter of fiscal 2025 totaled $8.6 million or a $0.25 loss per diluted share. This is compared to consolidated net loss attributable to common shareholders of $18.9 million or a $0.73 loss per diluted share in the fourth quarter of fiscal 2024. Consolidated net loss attributable to common shareholders for fiscal 2025 totaled $68.6 million or a $2.11 loss per diluted share. This is compared to consolidated net loss attributable to common shareholders of $108.4 million or $4.19 loss per diluted share in the fourth quarter of fiscal 2024. For the fourth quarter of 2025, adjusted EBITDA was $11.8 million or 8.5% of total revenue compared to $5.4 million or 4.1% of total revenue for the fourth fiscal quarter of 2024. For fiscal year 2025, adjusted EBITDA was $34 million or 6.6% of total revenue compared to $18.2 million or 3.7% of total revenue for fiscal year 2024. Our balance sheet as of September 30, 2025, included $21.7 million in cash and cash equivalents as compared to $21.4 million on September 30, 2024, and $6.2 million on June 30, 2025. Net cash provided by operating activities in the fourth quarter of fiscal 2025 was $14.3 million. This was primarily driven by a change in operating assets and liabilities of $18 million, partially offset by consolidated net loss adjusted for noncash impact of $3.7 million. The change in operating assets and liabilities was largely attributable to NHP customer deposits received during the fourth quarter. Cash used in operating activities was $10.5 million for the 12 months ended September 30, 2025, compared to $6.8 million of cash used in operating activities for the 12 months ended September 30, 2024. The company has utilized and will continue to utilize its revolving credit facility during the normal course of business as needed. As of September 30, 2025, the company had access to the $15 million revolver and had an outstanding balance of $3 million. Total debt, net of debt issuance costs, as of September 30, 2025, was $402.1 million compared to $393.3 million on September 30, 2024, including our first lien term loans, our convertible notes, and our second lien notes. Capital expenditures in the fourth quarter of fiscal 2025 were $2.7 million or 1.9% of total revenue. The fourth quarter of fiscal 2024 capital expenditures were $5.3 million or 4.1% of revenue. Capital expenditures in the 12 months of fiscal 2025 were $16.6 million or 3.2% of total revenue. Fiscal 2024 capital expenditures were $22.3 million or 4.5% of revenue. While we continue to feel positive about the progress we have made in recent quarters, we are not providing formal fiscal 2026 guidance at this time. As we have stated previously, we hope to resume providing guidance once we have greater clarity on the market and client demand and clarity on any impact to our business once there is more information on tariffs. With that financial overview, we will turn the call over to our operator for questions.

And our first question comes from Frank Takkinen with Lake Street Capital Markets.

I was hoping I could start with one of your previous comments in the prepared remarks about some headwinds in the quarter. It looked like really nice top line, great bookings, maybe a little bit more expense in the model than expected. Can you maybe kind of parse out what some of those headwinds were and maybe what revenue would have been without those headwinds or what those incremental expenses were in the quarter to kind of give us a better feel for maybe what some of the extra expenses in the model were and kind of parse out what the quarter could have been maybe without some of the extra cybersecurity expenses in the model?

Yes. Well, Frank, you identified what the major headwind was for us in early August, finding out about the cybersecurity incident we reported. That was probably the major thing we faced. We can quantify some of those issues, including a lot of overtime, communication, third-party costs, and some studies and work that may have been redone. But it's the intangible cost that you can't really identify — the toll it takes on the operation or the customers or people may be holding back on issuing an award until you get through it. It's hard to quantify that. If you would have asked me if we could have increased our award by 63% during a quarter or come close to the $54 million in awards we had, I would have never expected that. So I think we did a great job, but it would also be naive for us to think that it didn't have some impact on our earnings, expenses, and some of our awards, which would be hard for me to quantify. If we could quantify it, I would. But it's really those intangible costs and the time it takes for our organization to focus on that. As you can see, we're very focused on client service, integration, and IT integration. That's a lot of diversion of time and effort when you have to go through something like that. But I was very pleased with how quickly we recovered. I was very pleased with our ability. We've had other times before when we've had other suppliers hit or that we've had to revert to manual processes. We try to be prepared, but no matter how prepared you are, there are always things you cannot anticipate. Overall, I was very pleased with how we responded. But yes, it would be naive to think that it had no impact that is not really quantifiable. But I think we're getting through it well. Looking at the last quarter and the first two months of this quarter, the quoting and the awards are moving forward nicely. So I think we've managed to get through that.

Got it. That's helpful. My second question was going to kind of follow up on your last sentence there. Just any quarter-to-date trends you're comfortable sharing would be great on ordering patterns, as well as a refresh around some seasonality. I think in the past, you called out the holiday season as having some seasonality for revenue recognition for the quarter. So anything you can help us understand as we think about the upcoming quarters would be great.

Yes. Thank you. Our quarter ended December 30 typically marks our weakest quarter during the holidays. We observe a slowdown in demand for a lot of research models and our diet between Thanksgiving and Christmas. There are probably fewer working days. Some universities in some places are down for the holidays, so we tend to see this as our weakest quarter. However, we are coming off six months — the last six months of 12.5% DSA revenue growth, which is very important. As we go back to Investor Day, there are really two things that we're focused on: reducing costs in the RMS business. We're not looking for a lot of major increases in sales, but reducing costs in RMS by identifying that $6 million to $7 million, and focusing on growing the DSA business and seeing incremental margins of 50-plus percent on that growth. Seeing that 12% revenue increase over the last six months is encouraging. We have also seen an increase in awards of over 37% over the last nine months. I think we mentioned last quarter that we experienced a 63% increase in awards, but that's coming off a very weak Q4 of last year. If we can maintain that awards increase of somewhere between 20% to 30% and maintain the revenue increase close to what we've experienced over the last two quarters, then we'll be pretty pleased with how things are going in the future. I'm not seeing anything right now that indicates we can't continue on this trajectory. Following these last two months, we are optimistic. It would be helpful to see other players in the industry exhibiting similar tailwinds. I think it's very encouraging that others are starting to indicate they're also seeing that. When the industry does well, it's a good signal for us as well. We've had a great nine months, no doubt about it. I'm pleased, probably more than we anticipated. Pricing is stabilizing, and I think we've noticed others in the industry are starting to discover these trends, which will be a huge help to us as well.

We'll take our next question from Matt Hewitt with Craig-Hallum Capital Group.

Maybe first up, and I'm sure you're sick of talking about this since April, but with the FDA now announcing formal guidance regarding new approach methodologies and trying to pare back on the use of large animal models in toxicology studies, I'm curious if you could remind us how you're positioned, maybe your exposure to monoclonal antibodies and anything along those lines.

Yes. Our revenue related to monoclonal antibodies is minimal, very small if any. So we're not really worried about that. With the amount of quoting activity we have going on, we don't believe it will have much impact. We sell a lot of research models and NHPs. I cannot tell you how all of our customers use those NHPs. I've seen some others that we've reached out and talked to, and I don't think they see any impact, either. The guidance they've provided is just that: guidance. Customers will still make their own decisions about what they want for safety assessment testing. So I don't foresee a big change in that. However, I thought it was positive that they were able to clarify their statements from April. But again, it remains guidance. It doesn't dictate what people will do or not do because they make their own decisions based on what they deem safe.

That's super helpful. And I realize it's early in the pharma budget cycle as they start to look at '26. But as you talk to some of your partners, some of your customers about those budgets for next year, what are you hearing? Is your sense that budgets are going to be flat or up next year? Any color on those lines would be helpful, too.

Well, right now, I think we are seeing, as we did last year, an increase in the quoting that is meaningful. I would say this quarter, we expect to see a substantial increase in both quoting and closing. When we look ahead to next year, we seem to be booking a little further out than we have for a while, which is encouraging. As we mature, again, we're a young company, and we're seeing more of a reoccurring customer base. Therefore, we have greater comfort in gaining our customers' confidence. We excel in our delivery, and I think we're witnessing an increasing amount of repeat customers, which is also very encouraging. Currently, we are on a strong trajectory over the last nine months. I don't see anything that will disrupt that growth, and I would be very encouraged to hear that others in the industry are observing similar trends. I cannot predict what they will do next year, but so far this year and in the last two months, we haven't seen anything to dampen our optimism and revenue growth for next year.

We'll move next to David Windley with Jefferies.

Bob, maybe another way to interrogate the DSA improvement in the environment would be to ask about your lead times. How quickly can you start studies for clients and maybe flipping the coin, how quickly do clients want to start studies? Are you seeing any movement on that measure?

David, some of that depends on the studies. We typically in the DSA business see our DSA business come in and start within weeks, not months. The larger animal safety assessment business tends to come in and operate with a lead time of around three to nine months. We can initiate studies faster than that. Currently, our large animal safety assessment capacity is operating at a very high level of usage at the moment. Generally, we can see that out over the next couple of quarters in terms of the large animal capacity and its usage. However, for discovery and smaller animals, we can typically start those much quicker.

Okay. Flipping to RMS, and Frank may have tried to get at this a little bit, but in your segment disclosures, margin was impacted sequentially. I wonder, was the cyber event cost differentially impactful in the RMS segment versus DSA? Or would that have been considered at the corporate level?

Well, the RMS margin for our small animals and diet business tends to be improving as we've reduced the number of sites we have by 60%. I believe this is becoming a bigger component of our margin strategies and will continue to improve this year as those costs are retained. However, in the NHP segment, sometimes costs can differ based on the pricing of the NHPs we procure and the related expenses. We may have had slightly higher costs than the previous quarter, which is influenced more by spot market pricing than anything else.

Okay. Maybe zooming out then, if I think about that RMS business, you've got a few different things going on. You just named a couple. But I'm wondering across various dimensions, how would you describe volume versus price in RMS, large animal versus small animal mix, models versus services? How is your animal services business in Texas developing?

Yes, volume versus price. The small animal business and diet business have improved margins due to our reduction of sites by 60%. This allows us to maintain our volume while reducing fixed costs, thus improving margins. As the volume increases, we can leverage those fixed costs for better profitability. Regarding the Alice, Texas facility, our services business continues to grow, including domestic breeding operations, boarding, and selling. The service aspect is gaining traction, as is our breeding operation. Other margins may fluctuate according to market demand and pricing structures. Fortunately, we are observing less volatility than in the last two or three years. There are multiple factors involved, such as tariffs and transportation, that could influence costs. Generally speaking, we've been able to pass along those tariffs, but extended quarantines or transportation changes can impact margins. Thankfully, we aren't facing any significant swings at the moment, but we must stay mindful of that, especially since it represents half of our RMS business; some margin fluctuations could arise from these dynamics.

At this time, there are no further questions in queue. I will now turn the meeting back to Bob Leasure for any additional or closing remarks.

All right. Well, thank you, everyone. We are encouraged with these results and the recent growth we've seen concerning our DSA quoting awards over the last two quarters. As this growth develops, we need to remain vigilant in delivering an exceptional experience, service, and product for our clients. We've made great strides on the financial goals we outlined during our Investor Day, and we are continuing to evaluate opportunities to further improve our balance sheet. As I have said in the past, we are a much better company today than we have ever been in the past, and we still feel we have a plan for much further improvement in the future. Thank you, and have a good day.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.