Earnings Call Transcript - SLP Q4 2025

Operator, Operator

Greetings and welcome to the Simulations Plus Fourth Quarter and Full Fiscal 2025 Financial Results Conference Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Lisa Fortuna from Financial Profiles. Ms. Fortuna, please go ahead.

Lisa Fortuna, Financial Profiles

Good afternoon, everyone. Welcome to the Simulations Plus Fourth Quarter Fiscal Year 2025 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial 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 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, and 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. In the remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to those most directly comparable GAAP measures are available in the most recent earnings release available on the company's website. Please refer to the reconciliation tables and the accompanying materials for additional information. With that, I'll turn the call over to Shawn O'Connor. Please go ahead.

Shawn O'Connor, CEO

Thank you, Lisa, and welcome, everyone. We closed fiscal 2025 with strong execution across the business, delivering on the full-year guidance we set in June. Revenue grew 13%, adjusted EBITDA grew 8%, and adjusted EPS grew 8%, demonstrating resilience and operational discipline in a year marked by significant market volatility. Importantly, 2025 was also a strategic reset for Simulations Plus. We completed our transition to a unified operating model, aligning product and technology, scientific R&D, strategic consulting services, and business development into a single client-focused, functionally-oriented organization structure. This shift is already improving how we prioritize, build and deliver for our customers and positions us to move faster for the opportunities ahead. The external environment remained challenging throughout the year. Client budgets were pressured by broader pharmaceutical headwinds, including the threat of tariffs and most favored nation pricing implementation, which created real disruption starting midyear. As we move toward calendar 2026, we're seeing early signs of stabilization. Large pharma has clear visibility into pricing frameworks, biotech funding has improved modestly, and our clients have entered their budgeting cycles with more confidence. Proposal activity and conference engagement have both strengthened. That said, we believe uncertainty will persist in the overall environment in the near term. Despite these challenges, the momentum behind biosimulation continues to accelerate. Our biopharma and regulatory partners are scaling their internal model and form development capabilities, investing in data curation and digital infrastructure, and increasingly incorporating AI into modeling workflows. The convergence of cloud computing, AI, and model-informed direct development is reshaping how the R&D teams within our biopharma clients operate, and our validated science puts us at the center of that shift. We started laying the groundwork for this future with the release of GastroPlus 10.2 earlier this year, and we'll continue with portfolio-wide updates in fiscal 2026. As our customers expand their internal biosimulation capabilities, they are turning to partners who can deliver scientific rigor, integrated workflows, and AI-assisted efficiency, all grounded in regulatory-grade and scientifically-validated models. Our product vision directly aligns with these needs, connecting advanced science, cloud-scale computation, and AI-driven services into a unified ecosystem that supports teams through discovery, clinical development, and commercialization. Taken together, these trends reinforce the long-term demand for our solutions and our leadership in the field. What we are hearing consistently from clients is that biosimulation is no longer a set of point-solution tools. It's becoming the backbone of how R&D organizations operate. Teams want faster cycle times, stronger interoperability, and AI-assisted workflows that reduce manual effort while preserving scientific rigor. They want systems that help them organize their data, standardize their modeling approaches, and deliver reproducible results for regulatory submission. This is exactly where our strategy is headed. Over the past year, we have been building toward an integrated product ecosystem that combines 3 strengths Simulations Plus can offer: validated science; cloud-scale performance; and AI that is grounded in regulatory-grade modeling. In fiscal 2026, that strategy comes into focus. Across GastroPlus, MonolixSuite, ADMET Predictor, our QSP platforms, and Pro-ficiency, we are enabling advanced science, continuous investment in the scientific engines trusted by global regulators and leading R&D teams, a connected ecosystem, interoperability across products, powered by the Simulations Plus cloud to support end-to-end modeling workflows from discovery through clinical development. AI-driven services, tools that enhance data curation, accelerate simulation, interpretation, and streamline regulatory compliant reporting, AI and human collaboration copilots, and reusable modules that improve efficiency, consistency, and delivery times for scientists and consultants alike. These enhancements are not abstract concepts. They are tied directly to customer pain points and to the direction the industry is moving. And importantly, they position us to bring new capabilities to market with greater speed and cohesion than at any point in our history. We look forward to sharing much more detail about this integrated product strategy at our virtual Investor Day in January, including the roadmap that unifies our scientific engines, cloud infrastructure, and AI capabilities into a modern, interoperable biosimulation ecosystem. With that, I'll turn the call over to Will.

William Frederick, CFO

Thank you, Shawn. To recap our fourth quarter performance, total revenue decreased 6% to $17.5 million. Software revenue decreased 9%, representing 52% of total revenue, and services revenue decreased 3%, representing 48% of total revenue. Fiscal year total revenue increased 13% to $79.2 million. Software revenue increased 12%, representing 58% of total revenue, and services revenue increased 15%, representing 42% of total revenue. Turning to the software revenue contribution from our products for the quarter, Discovery products, primarily ADMET Predictor, were 18%. Development products, primarily GastroPlus and MonolixSuite, were 77%, and clinical ops products, primarily Pro-ficiency, were 5%. For the fiscal year, Discovery products were 17%, Development products were 75%, and Clinical Ops products were 8%. We ended the quarter and fiscal year with 311 commercial clients, achieving an average revenue per client of $94,000 and an 83% renewal rate for the quarter. For the fiscal year, we achieved an average revenue per client of $143,000, and our renewal rate was 88%. During the quarter, software revenue and renewal rates continued to be impacted by market conditions and client consolidations. Specifically, ADMET Predictor declined 10% for the quarter compared to the prior year and grew 5% for the fiscal year. GastroPlus declined 3% for the quarter compared to the prior year and grew 1% for the fiscal year. MonolixSuite grew 3% for the quarter compared to the prior year and grew 14% for the fiscal year. Our QSP/QST solutions grew 22% for the quarter compared to the prior year and grew 26% for the fiscal year. Pro-ficiency declined 63% for the quarter and grew 206% for the fiscal year, with the prior year reflecting a substantial fourth-quarter revenue following the June 2024 acquisition. Shifting to our services revenue contribution by solution for the quarter, development, which includes our biosimulation solutions, represented 77% of services revenue, and commercialization, which includes our Med Comm services, represented 23%. The revenue contributions for the fiscal year were 76% and 24%, respectively. Total services projects worked on during the quarter were 191, and ending backlog increased 28% to $18 million from $14.1 million last year. Overall, we have a healthy pipeline of services projects, and we continue to expect at least 90% of the backlog to convert to revenue within the next 12 months. Services revenue for the quarter declined compared to the prior year as expected and grew 15% for the full year, primarily due to the addition of the Med Comm business. Specifically, PBPK services declined 10% for the quarter compared to the prior year and 14% for the fiscal year. QSP services declined 50% for the quarter compared to the prior year and 26% for the fiscal year. PK/PD services grew 18% for the quarter compared to the prior year and 5% for the fiscal year. Med Comm services grew 70% for the quarter and 622% for the fiscal year, with the prior year reflecting only fourth quarter revenue following the June 2024 acquisition. Total gross margin for the fiscal year was 58%, with software gross margin of 79% and services gross margin of 30%. On a comparative basis, total gross margin for the prior year was 62%, with software gross margin of 84% and services gross margin of 30%. The decrease in software gross margin was primarily due to an increase in the amortization of developed technology with the acquisition of Pro-ficiency and higher amortization expense for capitalized software development costs related to the release of GastroPlus in May 2024. Turning to our consolidated income statement for the fiscal year, R&D expense was 9% of revenue compared to 8% last year, reflecting our continued investment in product innovation. Sales and marketing expense was 15% of revenue compared to 13% last year, deliberately supporting initiatives to drive growth across our expanded portfolio and increased market awareness. G&A expense, excluding nonrecurring items, was 25% of revenue, down from 28% last year. Total operating expenses, including a noncash impairment charge of $77.2 million, were 148% of revenue compared to 53% last year. Other income was $1.4 million for the fiscal year compared to $6.3 million last year, primarily due to a decrease in interest income and a decrease in the fair value of the Immunetrics earnout liability. Income tax benefit for the fiscal year was $4.7 million compared to income tax expense of $2.5 million last year, and our effective tax rate was 7% compared to 20% last year. We expect our effective tax rate for fiscal 2026 to be in the range of 12% to 14%. Net loss and diluted loss per share for the fiscal year, including the $77.2 million noncash impairment charge, were $64.7 million and $3.22 compared to net income of $10 million and diluted EPS of $0.49 last year. Adjusted diluted EPS was $1.03 this fiscal year compared to $0.95 last year. Fiscal year adjusted EBITDA was $22 million compared to $20.3 million last year at 28% and 29% of revenue, respectively. Moving to our balance sheet, we ended the year with $32.4 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow to continue to execute our growth and innovation strategy. Our guidance for fiscal year 2026 remains the same as we provided in October: total revenue between $79 million to $82 million, year-over-year revenue growth between 0% to 4%, software mix between 57% to 62%, adjusted EBITDA margin between 26% to 30%, and adjusted diluted earnings per share between $1.03 to $1.10. We also anticipate first quarter revenue to be approximately 3% to 5% lower than the same period last year. Our fiscal year and first quarter guidance assumes a stable operating environment, with market conditions in FY '26 expected to resemble those at the close of FY '25. Should market conditions improve and our clients increase spending in FY '26, we will be poised to respond. I'll now turn the call back to Shawn.

Shawn O'Connor, CEO

Thank you, Will. As we look ahead to fiscal 2026, our 30th year as a company, we're energized by the opportunity in front of us. Simulations Plus is evolving from a set of pioneering modeling tools into a unified ecosystem supporting discovery, development, clinical operations, and commercialization. Our acquisitions, our investment in science, and our integrated operating model have expanded both our reach and our impact. What remains unchanged is our core purpose: helping our partners bring safer, more effective therapies to patients through science-driven innovation. What is changing and accelerating is how we deliver on that mission. With validated scientific engines, expanding cloud capabilities, AI-assisted workflows, and a coordinated roadmap, we're positioned to support our clients with more speed, consistency, and interoperability than ever before. We look forward to sharing more about this strategy, our product roadmap, and the next phase of our evolution at our virtual Investor Day on January 21. We're excited to give you a deeper look at how our ecosystem comes together and how it will create value for clients, investors, and patients worldwide. Thank you for joining us today. And with that, we'll open the call for questions.

Operator, Operator

Our first question comes from Jeff Garro with Stephens Inc. Please go ahead with your question.

Jeffrey Garro, Analyst

Maybe start by asking about the demand environment. I was hoping you could give us an update on recent trends and some of the underlying factors that can translate to bookings and revenue, like RFP volumes, pipeline development, and SLP's win rate?

Shawn O'Connor, CEO

Yes, Jeff, thanks for the question. I can give global metrics that have been cited often; certainly, an uptick in biotech funding is a positive. So, another funding announced today, up modestly from where it's been over the last 6 to 12 months. Continued funding in that sector would support that element of our business, which is about 25% of our client base or revenue drivers is out of the biotech sector. On the large pharma side, it's a mixed bag, mostly positive, but sporadic challenges from some of the large pharma and their encountering of program success or failure, but certainly, an uptick there. We come out of our heavy conference window of time with our clients, and budgeting activity for next year seems to have some momentum. I'm cautious about that. There was momentum last year, and new surprises came after the first of the year. So I feel very positive in terms of the discussions we're having with customers, setting up proposals. And budgeting activity for next year looks pretty good. And so we enter our fiscal year '26 here on good footing, being cautious, watching for an evolving marketplace where certainly, announcements often cause pause in the activity of our clients, but mostly great lines.

Jeffrey Garro, Analyst

Great. I appreciate all those comments. And then to follow up, I don't want to get too far ahead of ourselves in front of the Investor Day, but I am curious about the feedback for the GastroPlus release that's been infused with some AI capabilities. What that might mean for that key product as well as demand for AI infusions and other products? You hit the kind of macro details, I would love to hear about how the innovation plan is starting to impact your client discussions even at an early stage.

Shawn O'Connor, CEO

Yes, it is early stage. The announcement of GastroPlus was followed with webinars and some training and visibility provided to clients, much visibility prior to its delivery as many of our clients participate in the development programs and provide input during the course of its activity. And the response has been positive. They're digesting it. We're seeing a lot of evolution in terms of clients and their internal IT infrastructure, and many of the cloud and AI capabilities that are being released now will fit into those new ecosystems that they're building internally. So, initial response is good as with most releases in our space; their adoption and installation in our clients fit into their timetables and process. But I think everyone is looking for ways to leverage AI capabilities. Our clients are very focused in terms of their data management internal to their organization that feeds the analytical tools that we provide them. And so great excitement in terms of they're saying that our platforms are staying ahead of the curve in terms of functionality that they're looking to deploy in the coming months and years.

Operator, Operator

Our next question comes from Matt Hewitt with Craig-Hallum.

Matthew Hewitt, Analyst

Maybe first up, and you've touched on this a little bit, but you had most favored nation pricing, you've had tariffs, you've had a soft funding environment. And it seems like we're getting either clarity or improvement in all three of those. Is there anything else that would result in large pharma being cautious? Or is it just more confirmation on those three buckets, and that's when you'll start to see kind of the increase in spend?

Shawn O'Connor, CEO

Yes, there are several factors to consider, and they vary for each client based on their specific drug programs and upcoming patent expirations. Each company has its own benchmarks to manage and strategize around, and we will adapt accordingly. Overall, the industry tends to operate according to its budgeting cycle. Budgets for the calendar year 2025 are set and unlikely to change, and they are currently preparing budgets for 2026. This signals a more optimistic outlook; while it may not affect this quarter, they are planning for next year. We continually monitor the situation to see if there are any unexpected developments. However, in general, I see a positive outlook; the momentum for budget preparations for 2026 appears strong. If we can go through several quarters without any surprises, that stability will likely boost confidence and lead to more committed spending.

Matthew Hewitt, Analyst

Got it. And then maybe the follow-up to that is if we do see the improvement and you see a ramp in bookings and backlog, do you feel like you've got the right headcount now to support a higher revenue base, at least over the near term? Or do you feel like depending upon how things shake out, you might be in a situation where you're having to backfill some roles that given the kind of reductions over the past 2 years.

Shawn O'Connor, CEO

The software aspect of the business is flexible in addressing immediate needs that facilitate business growth. If the growth occurs, there won't be an immediate requirement regarding personnel. It's a legitimate inquiry regarding the service part of our business, and we are quite confident in our current capacity. Our usage aligns with the guidance we've provided for 2026. Should this part of the business grow faster than we anticipate, we are more equipped to expand our capacity today than we were in the past when resources were more limited in terms of expertise required. We implemented our workforce reduction last year with greater confidence that, if necessary, we could quickly increase our team to support rising business volumes. Therefore, we believe we are well-prepared for our business in 2026 as planned. If growth accelerates, we have the capability to meet that demand.

Operator, Operator

Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets.

Scott Schoenhaus, Analyst

Shawn, I wanted to ask about the guidance you reiterated. Could you clarify if anything has changed regarding that guidance? I understand there were some concerns about the services segment. While software faced challenges in the first half, partly due to Pro-ficiency growth comparisons, things are expected to improve in the second half. Could you provide insights on any changes behind the guidance and discuss the first quarter guidance you mentioned in your prepared remarks?

Shawn O'Connor, CEO

Sure. Since we provided guidance in October, nothing significant has changed with our underlying assumptions. We entered fiscal year '26 after making adjustments in June and July, where we lowered our guidance for the latter half of 2025. We achieved our projected guidance for the end of fiscal year '25, which showed some stability in revenue flow from both the software and service sectors, although at a reduced level. We are seeing some progress in absolute dollar terms as we move into the early part of the year. Typical seasonal patterns apply, and the first quarter is not our strongest for renewals, which tend to peak in the second and third quarters. In the initial months of the year, we have lower contributions from Pro-ficiency revenue, both from the software platform and Med Communication services compared to the same time in '25, which had the highest revenue contributions after the acquisition. Therefore, we anticipate first-quarter revenue to be 3% to 5% below the same quarter in the previous year. This aligns with our annual growth expectation of 0% to 4%. There are no changes to our expectations or the assumptions behind the guidance we provided.

Scott Schoenhaus, Analyst

Does your guidance factor in any recovery in the biotech end-market? I understand that some cancellations are included in the guidance, and it appears that the biotech environment remains cautiously optimistic. What would need to happen for you to reconsider the cancellation projection or the caution for the full year? What would it take for you to adjust your expectations in that regard?

Shawn O'Connor, CEO

Yes, there are two parts to your question regarding biotech funding. If funding continues, it will definitely have a positive impact on both our software and consulting services. However, there's not an immediate link between funding now and purchase orders tomorrow; it really depends on where the particular biotech company is in its development stage and what specific services can support them. If the funding environment remains positive, it could revitalize that segment which previously accounted for a larger percentage of our revenue and growth a few years back when funding was strong. However, as we look ahead to 2026, we don’t anticipate a significant increase in biotech funding that would boost its contribution to our revenue. As for cancellations, they can take different forms, and I’m not sure what you were referring to specifically. We've seen some consolidation in software renewals due to acquisitions, where two clients merged, affecting renewal rates. This kind of consolidation has been a recurring theme for us each quarter. The latter half of fiscal year '25 experienced a higher level of these consolidations, and we remain vigilant regarding our client base. We do not foresee any significant cancellations for 2026 and do not have any visible concerns at this time, though we know that acquisitions often come with future implications. Cancellations can also arise on the service side due to programs being delayed or sometimes canceled based on the outcomes of assessments. We had a notable cancellation in the latter half of '25, which was unusual in terms of its contract size. Currently, there are no standout risks in our backlog, but it’s inevitable that we will face some programs that experience delays or unfavorable outcomes going forward. Our forecasting anticipates a risk factor for these delays, and we believe our estimates are conservative. It's part of our business model to assist clients in discontinuing programs that do not show promising outcomes. We have successfully managed these challenges, as demonstrated in the fourth quarter when we dealt effectively with a significant cancellation. We successfully reallocated resources to other projects that were viable. Our sales team also performed well, closing business that could begin in the same quarter, which, coupled with solid booking flow, kept our backlog healthy and even led to a year-over-year increase. Yes, cancellations will persist into 2026 as that is a normal aspect of our operations. We’ve factored in potential discount effects in our forecasting based on experiences from the latter half of the year, which could result in potential upside if there is a slowdown.

Operator, Operator

Our next question comes from Max Smock with William Blair.

Christine Rains, Analyst

It's Christine Rains on for Max Smock. First one, I imagine it touches on the answer for the previous question a little bit just in terms of large pharma consolidation. But we noticed that the renewal rate in software remains below previous years, and last quarter on a fee basis. So hoping you can provide some context on what it was on an account basis in the fourth quarter? What factors are weighing on renewals, and just kind of if and when we can expect renewals to return to the 90% ballpark?

Shawn O'Connor, CEO

Yes. Good question. We encountered renewal on fee, step down into the high 80s, mid-80s really driven by a couple, three, maybe four impactful consolidations that hit us in the back half of the year, the third and fourth quarter, driving that down. The other element in there is that while our clients are generally not reducing their staffing and modeling its simulation and that ties to the amount of software, the number of seats, if you will, that they're licensing from us. They—in this constrained budget environment, they do take a very close look at configurations. While not reducing the number of platforms that they're licensing from us or generally the seats for them, they do look at the modules that are associated with each seat and platform. Can they save some money there? And so we saw a lot more scrutiny of that nature in the back half of '25, which also contributes to that renewal on fees number coming down a little bit. It will drive back towards 90% as we see the absence of as many consolidations. I think having gone through their scrutiny on a module-by-module basis last year, the potential for that impacting the renewal rate this year is less. They've done that once, and we'll have done that review and filtered out things that maybe they don't need as many of these modules or those modules. I think that will help improvement going forward as well. The other factor will be price increases; all things being equal, that renewal on fees percentage is also impacted by the uptake of our annual price increase, which has been a bit more aggressive this year than it was last year. That should have a positive effect on renewal on fee rates as well.

Christine Rains, Analyst

Got it. That makes a lot of sense. Then just one on margins for us, given the number of moving pieces on the cost side, hoping you can walk through what is baked into your EBIT margin guide for gross margin overall and in software versus services? And then just broadly, any color you can give us on your EBITDA margin cadence over the course of fiscal 2026 maybe similar to the revenue guide you gave in terms of down or up in Q1, I imagine down, but anything you give would be helpful.

Shawn O'Connor, CEO

Yes, from a kind of overall perspective, we come in and as we're looking at quarter-to-quarter on the expense side comparisons, a reduction in course contributes—we announced the $4 million impact from the reduction in course, $1 million quarter starting in the fourth quarter. So the first 3 quarters of our fiscal year '26 guidance anticipates that benefit when you're looking year-over-year there. Secondly, in a world in which your top line growth is 0% to 4% where we're at, that does not give a lot of leverage in terms of EBITDA in an environment where you've got other expenses that inevitably are going to rise in terms of the compensation increases for your staff on board and medical benefits and things like that. Our guidance in terms of adjusted EBITDA, 26% to 30% adjusted EBITDA shows a little bit of improvement to see some greater improvement than that. I think we need to see some—get back to where we were in terms of top line growth at 10% or above. Our expectation is still targeted at 35% EBITDA, and I think our ability to get there does exist. It will need some time or some upside to the top line guidance that we have provided this next year.

Operator, Operator

Our next question comes from David Larsen with BTIG.

David Larsen, Analyst

Can you talk a little bit about the Pro-ficiency asset? I think you said in the fourth quarter, revenue was down fairly substantially. I guess, can you maybe just talk about why that is? Is it the software business or the service business? And what's driving that? I think it was down, was it 63% year-over-year in the quarter? Is that right?

Shawn O'Connor, CEO

I would say 63% in terms of the Pro-ficiency platform on the software side. Services were — commercial Med Comm services from the Pro-ficiency acquisition were up 70% for the quarter. So the two contributions of revenue from the acquisition on the software side, as we've indicated, in the back half of fiscal year '25, clinical trial starts and other factors have shown a slowdown in that side of the business. Medical Communications has been impacted somewhat, but still growing quite nicely, and their year-over-year was much higher in terms of the fourth quarter, their first quarter contribution last year versus this year.

David Larsen, Analyst

Okay. And can you just remind me what percentage of Pro-ficiency revenue is software?

Shawn O'Connor, CEO

It's—I don't have the exact percentage. I don't know well if you've got it, but generally, it's about 40% software, 60% service or something of that nature.

William Frederick, CFO

Yes, we've definitely included in the investor deck, kind of the percentage of total software revenue and percentage of services revenue that the Pro-ficiency software contributes towards the Med Comm business, really integrating it as we sell the solution across the entire ecosystem.

David Larsen, Analyst

Okay. And then for the 1Q revenue guide, I think that's through November. So you probably have very good visibility into that. Still a year-over-year decline. I mean, in order to meet your full-year guide for fiscal '26, I would — I mean, you're going to have to see some ramp-up in bookings. I mean, do you have—how much visibility do you have into that? Is it — are those deals booked? Any sense for what percentage of the software or service revenue is under contract?

Shawn O'Connor, CEO

Yes, like any period, obviously, our earnings release here on December 1 is later given the change in reporting status and whatnot gives us an ability to reaffirm our guidance for the year with good visibility, obviously, into the first quarter here. So that is all tracking to those numbers. Yes, I think the dynamics of the quarter-by-quarter contribution for fiscal year '26 here show better year-over-year growth percentages. But the absolute dollar revenue uptick, if you will, on a quarter-to-quarter basis is pretty consistent. Given our seasonality, first and fourth quarter, well, we're on software and whatnot. And the percentage growth has really impacted significantly by the strong first and second quarters we had in '25 and the weak third and fourth quarters that we had in '25 presents a percentage growth dynamic that will show a big step up in the back half of the year. It isn't quite as big a step-up when you look at it on an absolute dollar basis from our starting point coming out of the back half of '25.

Operator, Operator

Our next question comes from Constantine Davides with Citizens.

Constantine Davides, Analyst

I just want to clear something up. Am I right to infer that your 2026 guidance contemplates an extension of recent renewal trends kind of in the low to mid-80s? I just want to be sure I heard that right.

Shawn O'Connor, CEO

It does. I would say it does in the sense of the consolidations, that sort of activity. As I mentioned earlier, we have implemented a higher price increase this year. And so that, on a year-to-year consistency basis, that contribution to the renewal rates and our revenue guidance is baked in there. Yes. Cash flow runs the seasonality pattern of our revenue, driven by that seasonality of when our clients renew, and that drives the revenue into quarter buckets. Our outlook there is robust, as it has been even in our challenging times, so cash flow is very positive. Turning to the acquisition side of your question. Yes, our scoping of opportunities out there is no change in expectation that we will, as we have in the past, continue to grow through both organic contribution as well as acquisitions into our future opportunities that exist in the two landscapes that we operate in, primarily biosimulation as well as clinical ops and lots of opportunities as we move forward into '26. '25, I'd say it was—would be characterized as a year of integration of our large Pro-ficiency acquisition; '26 should give us an opportunity to take a look at how we can get to the next acquisition, if you will, in our history.

Operator, Operator

Our next question comes from Brendan Smith with TD Cowen.

Brendan Smith, Analyst

Maybe just quickly expanding on some of the earlier questions here. But can you speak to—really how we should be thinking about pricing flexibility that you all have? And I guess, maybe any plans at this point to lean into some of that next year, especially as some of the AI capabilities roll out across the platform? Really just trying to understand a little bit to what extent the '26 guide includes any of those pricing assumptions kind of versus new customer add expansions of existing customer licenses? I mean, just really what kind of levers we should think about that could drive revenue versus 4% or even more within that framework next year?

Shawn O'Connor, CEO

Yes, Brendan. Good question. Yes, our pricing is a little bit more aggressive, and it is part and parcel with the upgrades and new platform, AI, and cloud capabilities that are planned to be delivered during the course of the year. The monetization of that functionality comes through a combination of separately priced modules and some of that technology integrated into the base platforms, which supports a more aggressive price increase this year. The stickiness of the product has been such that we have and do raise prices on an annual basis, and when we've delivered significant improvements to the platform, we've thought to share the benefits of that with our clients, if you will, in terms of more aggressive pricing. Much of the AI, certainly the automation components of it will provide them greater efficiency and make their organizations that much more productive in modeling and simulation, and therefore, a price increase is justified. So in terms of sharing the wealth there a bit with them, how much of that is baked into our guidance going forward, it's—keep in mind that it's—the answer is it's baked in, but discounted at a couple of different steps of the way. There's always a yield to a price increase. You don't get the full price increase from every single one of your customers out there, and as well, still through the course of the year when licenses are renewed. So it's paced and discounted, I guess, I think is that phraseology. Price increase on the service side is in an environment like this where there are fewer shots on goal, meaning there are fewer projects that are offered up in the marketplace, makes for a little bit more price competition in that space. So while there inevitably is some price increase in terms of the standard hourly rates of our staff and whatnot, we've anticipated a very competitive still market to remain in fiscal year '26. So I wouldn't say that any of what we normally do on a pricing basis on the service side, there's no step-up baked into the guidance from the service side.

Operator, Operator

This now concludes our question-and-answer session. I would like to turn the call back to Shawn O'Connor for closing comments.

Shawn O'Connor, CEO

Well, thank you again for joining our call and your interest in Simulations Plus. On December 11, we'll be attending the TD Cowen Third Annual Diagnosing Tomorrow Tools and Technologies For The Next Decade in New York. During the week of January 12, we'll be attending the JPMorgan conference in San Francisco. I hope to see many of you at either of these on the calendar coming up in the near term here. Other than that, I appreciate your interest and take care.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.