Earnings Call Transcript - SLP Q1 2026

Operator, Operator

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 William 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 simulationsplus.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 in 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 organizational 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 clearer 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-informed 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 drug 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 from discovery through clinical development and commercialization. Taken together, these trends reinforce the long-term demand for our solutions and our leadership in the field.

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 Monolix Suite, were 77% and clinical ops products primarily proficiency 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. Monolix Suite grew 3% for the quarter compared to the prior year, and grew 14% for the fiscal year. Our QSP solutions grew 22% for the quarter compared to the prior year, and grew 26% for the fiscal year. Proficiency declined 63% for the quarter and grew 206% for the fiscal year, with the prior year reflecting January 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 MedCom 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 twelve 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 MedCom business.

Shawn O'Connor, CEO

As we look ahead to fiscal 2026, our thirtieth 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

Thank you. We will now be conducting a question and answer session. Before pressing the star keys, our first question comes from Jeff Garro with Stephens Incorporated. You may proceed with your question.

Jeff Garro, Analyst

Afternoon. 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 SLPs win rate? Thanks.

Shawn O'Connor, CEO

Yeah, 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 announcement today, up modestly from where it's been over the last six to twelve months. Continued funding in that sector would support that element of our business, which is about 25% of our client base or revenue drive. As for the large pharma side, it's a mixed bag, mostly positive, but sporadic challenges from some of the large pharma in encountering program success or failure. But certainly, an uptick there. We've 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 there last year, and no 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. It looks pretty good. So we enter our fiscal year '26 here on good footing, being cautious and watching for an evolving marketplace where announcements often cause pause in the activity of our clients, but mostly bright lights.

Jeff Garro, Analyst

Great. I appreciate all those comments. And then the follow-up, know, 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 macro details. We'd love to hear about how the innovation plan is starting to impact your client discussions even at an early state.

Shawn O'Connor, CEO

Yeah. It is early stage. The announcement of GastroPlus was followed by 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 its activity. The responses have been positive. They're digesting it. We're seeing a lot of evolution in terms of our clients and their internal IT infrastructure, and many of the cloud and AI capabilities 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 processes. 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 we provide them, and so there's great excitement in terms of our platforms staying ahead of the curve in terms of functionality they are looking to deploy in the coming months and years.

Jeff Garro, Analyst

Sounds good. Thanks for taking the questions.

Shawn O'Connor, CEO

Sure. Thanks, Jeff.

Operator, Operator

Our next question comes from Matthew Hewitt with Craig Hallum. You may proceed with your question.

Matthew Hewitt, Analyst

Good afternoon. Thanks for taking the questions. Maybe first up, you know, 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 we start to see kind of the increase in spend?

Shawn O'Connor, CEO

Yeah. There are a number of factors here, and it's anecdotal with each client in their specific context in terms of their drug programs and top-line patent expirations. Each entity has their own guidepost that they've got to manage and strategize around, and they'll respond. Generally, it's an industry that responds to its budgeting cycle. Budgeting for the calendar year '25 is in place, not changing, and now they're looking at '26 and putting budgets in place there. So there's more positivity there. It doesn't necessarily translate to discord, but they're budgeting into next year. I think we all check our phones periodically to see if there has been a tweet today or not. So there's still that cautiousness and foreboding of what may happen tomorrow. But generally, I think the outlook is positive. Momentum into the budget preparation for '26 is positive, and I think if we get a few quarters in a row without any surprises that tend to put a shockwave into the system, if we see a few quarters without that, then I think that confidence grows, and spending gets more firmly committed.

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 reductions over the past two years? Thank you.

Shawn O'Connor, CEO

You know, the software side of the business is leverageable in terms of immediate needs created by business upticks. If it upticks, there's not an immediate need in terms of personnel. It's certainly a fair question on the service side of our business. We feel very comfortable with the capacity we have now and the utilization supporting the guidance we've given for '26. If that side of the business accelerates more quickly than we're planning for, our ability to grow that capacity is much better today than it was in the past when resources were a little scarcer in terms of the scientific profile that did this type of work. We made our reduction in force last year with a little bit more confidence that if we need to step up our team there, we can do so relatively timely and support business volumes increasing. So I think we're well positioned today for our business in '26 as anticipated. If it accelerates, our ability to meet that demand is what we should be capable of doing.

Matthew Hewitt, Analyst

Got it. Thank you.

Operator, Operator

Thanks, Matt. Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets. You may proceed with your question.

Scott Schoenhaus, Analyst

Hey, team. Thanks for taking my question. Shawn, I wanted to ask about the guidance. It's reiterated, obviously. Maybe parse through if anything has changed underneath that guidance. I believe there was some caution around the services side. Software has some headwinds in the first half, partly related to proficiency growth comps, but that eases in the second half. Maybe just walk us through if anything has changed in the background of the guidance and maybe parse through the first quarter guidance that you just spoke about in the prepared remarks? Thanks.

Shawn O'Connor, CEO

Sure. No. I mean, in a short interval since we delivered the guidance in October, nothing significant has changed underlying the assumptions. We entered fiscal year 26 having post our adjustment back in June, July time frame, bringing down our guidance for the back half of the 2025 time frame. We achieved that back end fiscal year 25 guidance, which reflected a little bit of stability in terms of the flow of revenues both on the software and service sides, albeit at a reduced level. We see some progress on an absolute dollar basis moving into the first part of the year. Normal seasonality patterns exist. The first quarter is not our most robust quarter for renewals. Most of those are timed in the second and third quarters or at least the peaks. In the first part of the year, we've got reduced levels of proficiency revenue contribution both in software with the proficiency platform and MedCom service revenues that their comparable time frame in '25, those were their most highest revenue contributions post acquisition. So some challenging comps there. As we indicated, three to 5% first quarter revenue below the comparable year in the first quarter. That fits into our 0% to 4% growth for the year. And so no change in the expectations or assumptions underlying the guidance we provided.

Scott Schoenhaus, Analyst

And does your guidance assume any biotech end market recovery? I know that there were some degree of cancellations baked into the guidance. It sounds like the biotech environment is still cautiously optimistic. What would it take for you to view the cancellation projection or caution for the full year? What would it take for you to moderate your expectations there?

Shawn O'Connor, CEO

Yeah. I mean, there are two components to your question in terms of biotech funding. If it continues, it certainly will prove positive in terms of contributing both on the software and consulting sides. There's not an immediate translation in terms of funding today and purchase orders issued tomorrow. It depends on the circumstance of the stage of that funded biotech's programs and where they are in the development timeline to drive what type of services I can support them. Obviously, if it continues in a positive way here, that will bring back that cycle that contributed a greater percentage of revenue on revenue growth back a year or two, three years ago when it was relatively robust. Funding environment by type contributed to our revenue flow, which was growing at a much steeper rate than it has of late during the funding trough. As we've projected into '26, we've projected a significant uptick in the biotech funding leading to an uptick in biotech revenue contribution in '26, so that would be a potential upside. Second part of your question in terms of cancellations. Certainly in the cancellations can be two different things. I'm not sure what you were pointing to, but we've had some consolidation in terms of our software renewals. Acquisitions that have led to one on one not equaling two in terms of two clients that have consolidated their renewal. That is an ongoing thing we've always experienced. It was a little bit higher in the back half of fiscal year '25. We're keeping an eye on our client base in that regard. We've got no known cancellations of any magnitude that are on the horizon in '26. Acquisitions that have been announced with an effective date, down the road. Nothing out there visible at this point in time. We have in the past always had those. I doubt though there will be some into the future. Cancellations will also occur on the service side in terms of the programs that are sometimes just delayed but sometimes canceled if the bad readout comes and the program is curtailed. We had a significant one in the back half of '25 that impacted us, relatively unusual in terms of its magnitude and size of contract. There are no standout risks of that nature in our backlog right now, but we have implemented discount factors in our forecasting process. We're metering out when that backlog revenue will be taken to revenue and have included a risk factor that we believe reflects the cautious estimate of that impact in our assumptions underlying our guidance going forward. Again, that will always be there. We're in the business of helping our clients curtail programs quicker if their predictive outcome is not high. So that’s something that will always occur in our business.

Scott Schoenhaus, Analyst

Thank you. Very helpful.

Operator, Operator

Our next question comes from Max Schmock with William Blair. You may proceed with your question.

Christine Rains, Analyst

Hi. It's Christine Rains on for Max Schmock. Good afternoon. Thanks for taking our questions. 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, and what factors are weighing on renewals and if and when we can expect renewals to return to the 90% ballpark.

Shawn O'Connor, CEO

Yeah. Good question. We encountered renewal on fees step down into the high 80s, mid 80s, really driven by a couple of impactful consolidations that hit us in the back half of the year, particularly in the third and fourth quarters. The other element in there is that while our clients generally are not reducing their staffing in modeling and simulation, they do take a very close look at configurations and, while, reducing the number of platforms that they're licensing from us, they also look at the modules that are associated with each seat and platform, and can they save some money there? 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 bit. I believe it'll drive back towards 90% as we see the absence of as many cancellations. 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. We've done that once, and we've filtered out things that they don't need as many of these modules or those modules. I think that will help improvement going forward as well. Additionally, the 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.

Christine Rains, Analyst

Got it. That makes a lot of sense. And 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 EBITDA 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?

Shawn O'Connor, CEO

Yeah. From an overall perspective, we come in and, as we're looking at quarter-to-quarter comparisons on the expense side, our reduction in force contributed a $4 million impact from the reduction in force starting in the fourth quarter. The '26 guidance anticipates that benefit when looking year over year there. Secondly, in a world where your top line growth is zero to 4%, 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 computations increases for your staff on board and medical benefits and things like that. Our guidance in terms of adjusted EBITDA is between 26% to 30%. It shows a little bit of improvement. To see some greater improvement than that, I think we need to see our top line growth get back to where we were at around 10% or above. Our expectation is still targeted at 35% EBITDA, and I think our ability to get there does exist. It will require time or some upside to the top line guidance we have provided this next year.

David Larsen, Analyst

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

Shawn O'Connor, CEO

Yeah. It was 63% in terms of the proficiency platform on the software side. Services were commercial MedCom services from the proficiency acquisition were up 70% for the quarter. So the two contributions of revenue from the acquisition: on the software side, as we've indicated, there has been a slowdown in the back half of fiscal year '25 for clinical trial starts and other factors. Medical communications has been impacted somewhat, but still growing quite nicely year over year. It was much higher in terms of fourth quarter first quarter contribution last year versus this year.

David Larsen, Analyst

Okay. And can you just remind me what percentage of proficiency revenue is software?

William Frederick, CFO

Generally, it's about 40% software, 60% service or something of that nature.

David Larsen, Analyst

Okay. And then for the Q1 revenue guide, I think that's through November. So you probably have very good visibility into that. Still a year-over-year decline. Is it? I mean, in order to meet your full year guide for fiscal '26, I would need to see some ramp-up in bookings. Do you have any sense of how much visibility you have into that? Are those deals booked? Any sense for what percentage of the software or service revenue is under contract?

Shawn O'Connor, CEO

Yeah. Like any period, obviously, our earnings release on December 1 is timing later given the change in reporting status. It gives us an ability to reaffirm our guidance for the year with good visibility into the first quarter here. So that is all tracking to those numbers. I think the dynamics of the quarter by quarter contribution fiscal year '26 here shows better year-over-year growth percentages, but the absolute dollar revenue uptick on a quarterly basis is pretty consistent given our seasonality. The first and fourth quarters have lower-end software and whatnot. The percentage growth is significantly impacted by the strong first and second quarters we had in '25 and the weak third and fourth quarters we had in '25. That revenue growth dynamic will show a big step up in the back half of the year. However, 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.

David Larsen, Analyst

Okay. Thanks very much. I'll hop back in the queue.

Operator, Operator

Our next question comes from Constantine Davides with Citizens. You may proceed with your question.

Constantine Davides, Analyst

Thanks. Sorry, 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, you know, it does in the sense of the consolidations, that sort of activity. As I mentioned earlier, we have implemented a more aggressive price increase this year. That contributes to the renewal rates and our revenue guidance being baked in.

Constantine Davides, Analyst

Got it. And then Shawn, you guys talked about the strength of the balance sheet as well as cash flow. And I guess two questions on that. One is what's a good way to think about cash flow in fiscal '26? And then I know you kind of always talk about being on the hunt for interesting assets. Just wondering if you can talk about your level of interest in terms of assets in your core markets, a newer market like clinical ops and the potential for transactions outside of those markets. Thanks.

Shawn O'Connor, CEO

Cash flow runs the seasonality pattern of our revenue, driven by that seasonality of when our clients renew, and that drives the revenue into the core quarter buckets. Our outlook there is robust as it has been even in our challenging times. Cash flow is very positive. Turning to the acquisition side of your question, our scoping of opportunities out there has not changed in expectation that we will, as we have in the past, continue to grow through both organic contribution and acquisitions. Future opportunities exist in the two landscapes that we operate in primarily. '25 would be characterized as a year of integration of our large proficiency acquisition. '26 should provide us the opportunity to take a look at how we can get to the next acquisition in our history.

Operator, Operator

Our next question comes from Brendan Smith with TD Cowen. You may proceed with your question.

Brendan Smith, Analyst

Great. Thanks for taking the questions, guys. Maybe just quickly expanding on some of the earlier questions here, can you speak to how we should be thinking about pricing flexibility that you have? 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? I'm trying to understand a little bit of the extent the '26 guiding includes any of those pricing assumptions versus new customer ads and expansions of existing customer licenses, and what kind of levers we should think about that could drive us closer to flat versus 4% or even more within that framework next year.

Shawn O'Connor, CEO

Yeah, Brendan. Good question. Yes, our pricing is a little bit more aggressive this year, certainly in line with upgrades and new platform AI and cloud capabilities 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 technology integrated into the base platforms, which supports a more substantial price increase this year. The stickiness of the product has been such that we have the ability to raise prices annually, and when we deliver significant improvements to the platform, we've sought to share the benefits of those upgrades with clients. Much of the AI, particularly the automation components will provide clients greater efficiency, making their organizations more productive in modeling and simulation, and therefore, a price increase is justified. So while much of that is baked into our guidance, it is noted that there’s a yield to a price increase, meaning we don’t receive full price increases from all customers. It is filtered through the course of the year when licenses are renewed. Price increase on the service side might be competitive in this environment where fewer projects are offered up. In the fiscal year '26, I wouldn’t say that any of what we normally account for on a pricing basis for the service side has a step-up baked into the guidance.

Brendan Smith, Analyst

Okay. Got it. It makes a lot of sense. Thanks for that color. Thanks, guys.

Shawn O'Connor, CEO

Cheers. Take care.

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

Thank you again for joining our call and your interest in Simulation 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. Hope to see many of you at either of these on the calendar coming up in the near term here. Other than that, 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.