Greetings, and welcome to the Simulations Plus First Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tamara Gonzalez from Financial Profiles. Thank you. Ms. Gonzalez, you may begin.

Welcome to the Simulations Plus first quarter fiscal 2024 financial results conference call. With me today are Shawn O'Connor, Chief Executive Officer, and Will Frederick, Chief Financial Officer and Chief Operating Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at www.simulations-plus.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect, and anticipate refer to our best estimates as of this call. There can be no assurances that these will actually take place. So, our actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the Securities and Exchange Commission. With that said, I'll turn the call over to Shawn O'Connor. Shawn?

Thank you, Tamara. Good afternoon, everyone, and thank you for joining our first quarter fiscal 2024 conference call. Results for the first quarter of fiscal 2024 played out as anticipated. We delivered solid revenue growth of 21% and diluted earnings per share of $0.10, in-line with our guidance for the full year. Our team performed very well in what is still a softer environment for our biotech and pharmaceutical clients. A few notes on the background behind the results. As our clients closed out their fiscal years, we saw the usual spend before you lose in 2023 activity, a rush to use allocated budgets before the year-end. Even though the spend fell short of previous year-end highs, we were encouraged that it was greater than what we saw last year. We also gained insight into our clients' budgets for fiscal 2024. Some have more aggressive budgets, while others are more cautious as the industry's portfolio of drugs that are going off patent looms on their horizon, causing them to be more conservative on spending. Funding for biotech continued to show signs of life, but again, was still well below the funding levels of two to three years ago. Importantly, our leadership in AI and predictive analytics continues to accelerate discovery efforts and improve clinical outcomes for our clients. For context, we have been utilizing AI techniques and approaches in our solutions since our beginning. As AI technologies have evolved, we have enhanced our AI solutions and experienced the benefits that can be harnessed with better data access, algorithm training, and predictive accuracy. Our tenure in serving the drug development industry has provided significant access to private and public data necessary to perfect and refine predictive algorithms. Our partnerships and collaborations with industry leaders and regulatory agencies is unmatched and provides us with ongoing means to continue this into the future. Moving to our Software segment's performance, Software revenues increased 25% for the quarter, reflecting good renewal activity and converting an active and strong pipeline. Our Physiologically Based Pharmacokinetics or PBPK, business unit had a strong quarter. Revenues increased 27% for the quarter, reflecting some spillover from the fiscal fourth quarter 2023 and a diminishing impact from small biotech client renewals that previously weighed on results. GastroPlus was referenced in 21 peer-reviewed journal articles, and the PBPK business unit added six new customers. The team also booked nine commercial client upsells. In our Clinical Pharmacology and Pharmacometrics or CPP business unit, revenues declined 1%. Biotech churn still exists in CPP, where we lost eight customers whose total revenue was only $120,000. In total, CPP added nine new customers and had 10 customer upsells in the quarter, with one renewal shifted to the second fiscal quarter. Our Cheminformatics business unit saw revenues increase 3% in the first quarter. There were two non-renewals, one from a small biotech and one renewal that was delayed for renewal later in calendar 2024. The team booked five upsells during the quarter and added two new customers. In our Quantitative Systems Pharmacology or QSP business unit, revenues increased 219%, reflecting a new license to an existing customer for the QSP oncology modeling platform. No new customers were added during the quarter, and the team booked one upsell. We were pleased with this quarter's results, but given the large per license dollar amount and smaller client volume associated with this business, quarterly outcomes can be lumpy. Looking at our Services segment, revenues grew 17% during the first quarter. Services had a good start to the fiscal year as the momentum out of fiscal 2023 continues. Overall, services saw more choppiness than usual in project flow due to data and other client-related delays that impacted project deliveries. Services revenues in our CPP business unit were up 12% in the first quarter, a good outcome. CPP completed 67 projects in the quarter and continued its momentum from the end of the fourth quarter with excellent bookings. In our QSP business unit, Services revenue grew 100% for the first quarter, including the benefit from the Immunetrics acquisition. The team completed 27 projects during the quarter, with one cancellation from a large client that negatively impacted overall backlog. Services revenue in our PBPK business unit declined 12% in the quarter as revenues were negatively impacted by client-related data delays and affected project deliveries and milestones. During the quarter, the team completed 63 projects. Given the pipeline, the outlook for PBPK looks solid for the year. The Immunetrics integration continues to go well. Immunetrics has an active pipeline, reflecting inherited leads and new leads sourced in the SLP client base post-acquisition. Overall, the QSP team is executing very well and is collaborating on projects. Before turning the call over to Will, I'd like to call your attention to a separate release that we issued simultaneously today announcing four key leadership appointments, each effective today. First, Will Frederick is assuming the additional role of Chief Operating Officer. Will has been with Simulations Plus since 2020 and has demonstrated excellent operational leadership during this time. In his new role, Will now oversees operations for all of our business units. Second, we're pleased to welcome Dan Szot to the Simulations Plus team in the new role of Chief Revenue Officer. Dan has over 20 years of enterprise sales experience across all phases of drug development in large organizations. In this key role, Dan oversees the sales and marketing teams to identify collaborative cross-selling opportunities and enhance productivity. Third, Josh Fohey is transitioning to Senior Vice President of Operations and will leverage his customer insights to provide client-focused leadership across all business units. And finally, Dr. Sandra Suarez-Sharp has been promoted to President, Regulatory Strategies. Sandra is responsible for expanding our Regulatory Strategies business unit, a critical fast-growing component of our overall services offer. These appointments recognize the experience and proven contributions of each of these leaders. Importantly, we share a common vision of always putting our clients first as the best possible way to ensure long-term sustainable growth. I'd also like to take a minute to thank those of you who attended our first Investor Day in November. We had a great turnout, and the feedback has been positive. In addition to a deep dive into our business, we also outlined our new organizational structure. With this new structure, we reorganized the companies we acquired over the years into five business units that correspond to the scientific domains in the drug development process in which we have expertise. This structure aligns with how our clients do business with us and encourages cross-selling and collaboration. Our team continues to deliver tremendous value to our clients, providing customized services and easy-to-use software offerings, each of which is at the core of our business model. And with that, I'll turn the call over to Will.

Thank you, Shawn. We had another strong quarter, with total revenue increasing 21% to $14.5 million, with Software revenue up 25% and Services revenue up 17%. Software revenue represented 52% of total revenue for the quarter. On a trailing 12-month basis, Software revenue increased 21% and Services revenue increased 9%. As we've mentioned in the past, our first quarter tends to be our lowest revenue quarter due to seasonality, and this year is no different. We are anticipating that we will see seasonally higher revenues in the remaining quarters of fiscal 2024 as we have had in the past, resulting in higher profitability in the remaining quarters of our fiscal year. Total gross margin for the quarter was 68%, reflecting higher cost of revenues in the Services segment as a result of updated reporting changes. Software gross margin increased to 87% from 85% last year, while Services margin decreased to 47% from 70% last year, primarily due to a shift from previously reporting multiple cost items in SG&A expense before the reorganization and now separately reflecting them in cost of revenues for Services. Gross margin for the trailing 12 months through this quarter were approximately in line with the trailing 12 months ending in the first quarter of fiscal 2022. I'll go into more detail on how our reorganization impacts our expense reporting in just a few minutes. Turning to Software revenue by business unit for the quarter, PBPK represented 52% of Software revenue, CPP was 20%, Cheminformatics was 15%, and QSP was 13%. For the trailing 12 months, PBPK represented 57% of Software revenue, CPP was 18%, Cheminformatics was 18%, and QSP was 7%. For the quarter, our customer renewal rate increased to 100% based on fees and increased to 84% based on accounts. For the quarter, average revenue per customer increased to $79,000 from $68,000. For the trailing 12 months, our customer renewal rate remained at 93% based on fees and decreased to 83% based on accounts. For the trailing 12 months, average revenue per customer increased to $93,000. The lower account renewal rates are still primarily driven by non-renewals from smaller biotech customers, but we've been able to maintain our fee renewal rate consistently above 90%, even with this headwind. Shifting to our Services revenue by business unit for the quarter, CPP represented 46% of Services revenue, QSP was 30%, PBPK was 19%, and Regulatory Strategies was 5%. For the trailing 12 months, CPP represented 45% of Services revenue, QSP was 28%, PBPK was 22%, and Regulatory Strategies was 5%. Total Services projects worked on during the quarter was 179, the same as last year, and quarter-end backlog increased to $18.9 million compared to $15.8 million at the end of the first quarter last year. Anticipated revenue from backlog within 12 months increased to slightly over 80%. As we previously discussed, the addition of Immunetrics has led to a healthy pipeline of activity, including new accounts sourced from our client base, helping to increase our overall Services backlog. Turning to our consolidated income statement for the quarter, total R&D costs remained relatively consistent at $2.1 million, with R&D expenses flat at $1.2 million and capitalized R&D at $0.9 million. With our recently announced transition to business units to improve our focus on customers, we also took the opportunity to evaluate our departmental structure with a focus on continuing to improve operational performance and profitability while providing our investors improved visibility to our progress. In performing this process, we looked at personnel in the following departments: services, R&D, sales and marketing, and G&A. This was done during Q1 to support the recently announced leadership changes and consolidation of company-wide operations. To better measure and report our operational performance, we made the following changes: We moved all services personnel into cost of revenues departments. We moved all R&D personnel into research and development expense departments. We moved all sales and marketing personnel into selling and marketing expense departments. And we moved all G&A personnel and all company-wide overhead and administrative costs into general and administrative expense departments. This still allows us to leverage the broad skill sets of our employees to perform activities in other departments and accordingly move their expense to those departments. For example, a services employee who spends time working on sales and marketing activities would have their expense related to this activity reflected in selling and marketing expense in our financial statements. If the same person also spends time working on R&D activities, their expense related to this would be reflected in research and development expense in our financial statements. These movements completed the final step toward standardizing reporting for the various acquired companies, including Immunetrics in the last quarter, to a company-wide business unit structure reporting. We believe investors will now have even greater insight into our cost structure and can compare future performance trends when they review our financial statements. We will continue our objective to reduce G&A expense as a percentage of revenue over time while maintaining our investments in R&D and sales and marketing. And as we've always done, we plan to continue driving increases in both our Software and Services gross margins. Selling and marketing expense for the quarter was $2 million, up from $1.5 million last year. G&A expense for the quarter decreased to $5.7 million from $5.8 million last year. Combined selling and marketing and G&A expenses accounted for 53% of total revenue compared to 60% of total revenue last year. This comparison reflects the shift this quarter for expenses that were previously bundled together in SG&A and are now separately reflected in the cost of revenues for services personnel. Expenses generally grow each quarter with additional headcount added throughout the fiscal year. Income from operations remained consistent at 7% of revenue, and income before income taxes increased to 17% of revenue. Other income was $1.4 million this quarter versus $0.7 million last year, primarily due to increased interest income of $0.5 million driven by rising interest rates. Net income for the quarter was $1.9 million, or 13% of revenue, up from $1.2 million, or 10% of revenue. Diluted earnings per share increased to $0.10 from $0.06 last year. Adjusted EBITDA increased to $3.4 million, or 23% of revenue, compared to $3 million or 25% adjusted EBITDA margin last year. We calculate adjusted EBITDA by adding back interest, taxes, depreciation, and amortization, stock-based compensation, gain or loss on currency exchange, any acquisition or financial transaction-related expenses, any asset impairment charges, and any tax provisions or benefits related to these items. We provide a reconciliation of this non-GAAP metric to net income, the relevant GAAP metric, in our earnings release and on our website. Income tax expense for the quarter was $0.5 million, up slightly compared to last year, and our effective tax rate decreased to 19% from 23% last year. Now, turning to our balance sheet. We ended the quarter with $113.9 million in cash and short-term investments and we continue to be well-capitalized, have strong free cash flow, and seek opportunities for strategic acquisitions, investments, and partnerships. I'll now turn the call back to Shawn.

Thank you, Will. Our first quarter results provided a successful start to the year. We saw good performance from both our Software and Services segments. That said, the underlying assumptions regarding our outlook remain the same as client funding and budget cycles remain softer than historical levels. Following our fiscal 2023 revenue growth of 11%, we set fiscal 2024 revenue guidance with a range of 10% to 15%. Given our first quarter results, we're cautiously optimistic that the market for model-informed drug development could improve and return towards mid-teens growth, but it's too early to change our outlook. With that context, we are well positioned to meet our stated fiscal 2024 guidance targets, which include total revenue between $66 million and $69 million, year-over-year revenue growth in the range of 10% to 15%, Software mix between 55% and 60%, Services mix 40% to 45%, and diluted earnings per share of $0.66 to $0.68. The atmosphere of collaboration is strong here at Simulations Plus, as is the drive to innovate and serve our clients to help develop safer and more effective drug solutions. We have a long history of innovation in biosimulation that is transforming drug development in R&D and a rich future for growth opportunities. We continue to grow revenues, deliver profitable growth, and generate cash. Thank you for your time today. And with that, I'll now turn the call over to the operator for your questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Please proceed with your question.

Good afternoon, and congratulations on the good start to the year. Maybe first one, I'm hoping we could get a little bit more color on what you're hearing from clients and customers. It sounds like the very small end of the spectrum continues to have some budgetary or balance sheet issues. But what are you hearing from the larger customers? Are they starting to feel a little bit more comfortable with the environment and maybe they're coming in and buying more and setting up more services?

Yeah, Matt, I want to be more positive than I can be. We've seen some good discussions in terms of some of our larger clients engaged, very good renewal rates this quarter, very good uptake in terms of this year's price increase, and very positive signs in terms of some of those accounts in their budget setting for the 2024 calendar year. At the same time, you've got the Pfizers of the world announcing 2024 cutbacks in this environment in terms of patent fallout, in terms of some of their revenue producers. There are a good segment of those large pharma that are being relatively cautious as they enter their 2024 fiscal year. So, a little bit of a mixed bag, Matt. We certainly see some very positive signs. But I'd say compared to a year ago today, better. Compared to years past, not quite there yet.

Well, we're on the right path at least. Maybe another question regarding the Services gross margin and some of the reporting changes that have occurred. So, if I'm hearing you correctly the Services gross margins will stay kind of in the upper 40s. They're not going to bounce back into the 60s here in Q2. Is that correct?

Yeah, the reorganization and the resulting accounting reclassification of certain people and expenses will carry forward as we proceed into the next year. Our margins are good in the Software business. We sort of reset them with this reclassification of expenses. I'm not going to go back to where it was before, but should maintain in the ballpark where it's at. And with these changes, the reorganizations, I anticipate seeing improvements, efficiencies that come as a result of that moving forward into the future. Our profitability overall is unchanged in terms of the model, but there has been a reallocation of some of those expenses that showed up previously, primarily in the G&A part of SG&A, now appearing in the gross margin line, and that'll continue going forward.

That makes sense. All right. And maybe one last question, and then I'll return to the queue. It seems like the integration of the Immunetrics acquisition is going well. You mentioned several times about the potential for cross-selling synergies. Could you provide a bit more insight into how this new addition has opened up new opportunities and sparked discussions? Thank you.

Yeah, Matt, it's gone very well from an internal perspective. First, the teams, the QSP team pre-acquisition combined with our new team members from Immunetrics have come together and are working well. We're already seeing cross-pollination there in the sense of some of our team working on their projects. So, very good effort internally. Externally, the pipeline they brought to us upon the acquisition has continued to develop and it's been supplemented with our ability to put their models, their expertise, their therapeutic areas of expertise in front of more clients than they were able to do as a standalone entity, introducing them to the SLP client base, and that's generated a host of new opportunities and a very busy sales effort on that side. So, very pleased. The acquisition was closed not that long ago, in July. And I'd say as we hit the six-month mark here soon, the first half of the year has been very good in terms of the post-acquisition activity both internally and externally.

Thank you. Our next question comes from the line of David Larsen with BTIG. Please proceed with your question.

Hi. Congrats on the good start to the year. I was pleased with the revenue number that you reported. Can you maybe just talk a little bit about the Software side, the kinds of price increases you're able to realize heading into calendar '24 that will impact 2Q? I'm trying to get sort of the sequential progression in revenue for Software as we head into fiscal '24. And then, also I see, I think it was 100% fee retention, which seems to suggest to me that you can take price. So, thanks.

Yeah, Dave, a couple of questions embedded in your question there. In terms of anticipating sequential Software revenues, I'd point to the seasonality of our business coming out of fiscal year '23 last year. We operate with a Software revenue seasonality profile that is on an absolute dollar level. Our first quarter is the lowest quarter for Software revenue. And then, it steps up in the second, third, and fourth quarters to be more comparable in terms of the absolute dollar level. So, on a year-over-year basis, our growth now, if you recall, we had a harmonization process take place last year, which changed that seasonality. That process is done. And as we enter this year, our revenue growth Software-wise should be relatively consistent on a quarter-to-quarter basis. It doesn't say that there aren't going to be a renewal that slips from one quarter to the next. And in this quarter, we had some renewals that slipped out of the fourth quarter and came into the first quarter. With regard to price increase, our price increase we announced and we put that in effect in the fall timeframe. So, the price increase is already affecting this first quarter result to the extent that those renewals occur in the first quarter. But not necessarily a jump up from first to second quarter. It's a year-over-year jump up in terms of the price increase, anticipating your question there. Now, we were certainly more aggressive last year in fiscal year '23 versus '22 in the price increase that we implemented last year than we were this year. The economics have changed a little bit, macroeconomic environment. And so, our initiated price increase is not quite as large as it was last year, but it's a good contribution as we go into next year. 100% renewal on fee this year reflects a very good renewal rate in comparison to the renewal on accounts, which is and always is lower. The accounts that closed out and did not renew were all relatively small accounts, so their impact on fees was marginal. The price increase came in and basically offset those few accounts that did not renew. Hope that answers the aspects of your question there, Dave.

It does. Thanks very much. Can you just remind me, with regards to seasonality, what causes the uptick in Software revenue from fiscal 1Q to fiscal 2Q? Thanks.

The buying pattern plays a significant role in our Software revenues, which typically consist of 80% renewals, 10% upsells, and 10% new clients in any given quarter. When a client signs up, their revenue is fully recognized upfront within a 12-month license period, meaning that the revenue from their license falls into the quarter in which the business relationship began. In the first quarter, which usually ends in November, we don't see new licenses being added. However, December tends to see some licensing activity as clients close out licenses at the end of their calendar year. The months of January and February are more active as new budgets allow clients to explore and license additional products. This pattern leads to an increase in revenue from the first to the second quarter, followed by a more stable revenue stream for the rest of the fiscal year.

Okay, great. And then, just in terms of your own COGS and inflation, in terms of the price increases that you're providing to your own scientists, has that level of, I guess, inflation sort of moderated a bit, which would obviously be a benefit to margin?

Yeah, it's certainly in comparison to last year, the compensation profile in terms of the marketplace for our scientists has settled. It settled early in the last fiscal year. Really our big jump up in terms of compensation packages took place when you looked at our fiscal '23 versus fiscal '22, where we had a pretty significant step up that post-COVID timeframe, some remnants of the biotech flurry of funding that led to their hiring, which increased competition in the marketplace for this scarce resource. That's settled down relatively early in our last fiscal year. And so, as you roll forward from fiscal '23 to '24, yeah, no, there is wage inflation that takes place, but not nearly as dramatic as it was '23 versus '22.

Okay. And just one more from me. With regards to Immunetrics, if I heard you correctly, the revenue being generated from Immunetrics is expected to gain momentum and continue to increase, and the cross-selling and expansion to your existing books should only grow as we head through '24 and into fiscal '25, and that would obviously benefit, I think, the QSP/QST line item for Service. Is that right?

Yeah, absolutely. Good benefit here already in the first quarter where we saw 100% growth in QSP services revenue. That's indicative of the contribution of Immunetrics there already. They are working towards an earn-out. That earn-out is framed in calendar years, not our fiscal year. So, they just recently completed the window of their first earn-out. The calculations are being made as to where they fell out there, and we'll know that soon. Momentum is good, and they will contribute to our QSP business unit quite nicely, anticipated, through the end of this fiscal year and beyond.

Okay. And just one more for me. I'm sorry. China, up 51%. Anything to highlight there? And can you just remind me what percentage of revenue is coming from China?

Yeah, it's a small contributor. Our revenue is about 20% in terms of the Asian market to which we would include Russia in that bucket. So, it's good growth on a small number. The growth is entirely Software. We don't have consulting on the ground in that region. And so, we've been pleased. I think this has been a good sequence of two, three, four quarters in that region for us.

Okay. I'll hop back in the queue. Congrats on a good quarter.

Thanks, David.

Thank you. Our next question comes from the line of François Brisebois with Oppenheimer. Please proceed with your question.

Hi, thank you for the question. Congratulations on your quarter as well. Can you share what you consider an aggressive price increase percentage-wise, or what you have implemented, or provide any details on those percentages?

Yeah, I mean, we haven't gotten to specifics there, Frank, but from a ballpark point of view, 5% price increases have been sort of the norm in the industry this past year that could have doubled. And this year, we've turned to historical patterns.

Okay. When you mention hoping for mid-teens growth in the space, what do you believe the current growth rate is?

Where is the growth now? I mean, our guidance of 10% to 15% tells you that my outlook and the growth of the business is in that lower half of the teens as we remain pretty cautious given the sluggishness of the market. In terms of expected long-term growth out of this market segment, that would be in the 15% or above sort of range.

What I'm trying to understand is whether achieving market growth is feasible organically or if it necessitates mergers and acquisitions.

My view has always been that we can grow at or above market growth. And the basket of goods and services that are included in most of your computational biology research reports, we don't play in all of the markets under that umbrella. So, there are some differences in terms of how you slice the pie there. But generally, if you look back historically, we've been able to grow at or above the market and supplement that with acquisitions that then become part of our organic growth in the long run.

Great. That's it for me. Thank you.

Thank you. Our next question comes from the line of David Larsen with BTIG. Please proceed with your question.

Just a quick follow-up here. It seems like in the deck, some of the divisions maybe were renamed. I just wanted to make sure that that's the case, like PBPK is Gastro; CPP, Monolix; Cheminformatics, ADMET; QSP, other; and then, CPP would be PKPD; and reg is other. Is that correct or not?

Yeah, you've got two forms of presentation in there, Dave. The business units are the PBPK, the Cheminformatics, the CPP, Clinical Pharmacology Pharmacometrics, and the Regulatory Strategies of the business units. When we report the Software underlying details, GastroPlus is the primary software product in the PBPK business unit. Monolix is the primary software product in CPP, and ADMET Predictor is the primary product in Cheminformatics. So, we're presenting information that is summarized by business unit as well as summarized by product.

Okay. Fantastic. Thank you. Congrats again.

Sure.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Shawn O'Connor for closing comments.

Very good. Thank you, operator, and thank all of you for your attention today. Good start to the year by Simulations Plus, and I look forward to reporting continued results next quarter. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.