Certara Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Satara First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, David Deichler.

Speaker 1

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have William Furey, Chief Executive Officer and Sean Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company's website.

Speaker 1

Before we begin, I would like to remind you that management will make statements during this call that include forward looking statements, and actual results may differ materially from those expressed or implied in the forward looking statements. Please refer to Slide 2 in the company materials for additional information, which you can find on the company's Investor Relations website. In their remarks and responses to questions, management may mention some non GAAP financial measures. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on

Speaker 2

the company's website. Please refer

Speaker 1

to the reconciliation tables in the company materials for additional information. This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 7, 2024. Shujaar disclaims any obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to William.

Speaker 3

Thank you, David. Good afternoon, everyone. Thank you for joining Certara's Q1 earnings call. John and I will start with prepared remarks and then we will take your questions. Throughout the Q1, Certara built upon the solid business momentum observed in the Q4 of 2023.

Speaker 3

We're pleased with our start to the year, delivering total revenue of $96,700,000 representing reported growth of 7% and constant currency growth of 6%. Customer demand for our biosimulation software and services has remained strong, while interest in our AI enhanced products continues to grow following the acquisition of Viasa just over a year ago. As drug developers look for new and exciting ways to increase pipeline efficiency and accelerate project timelines, Natara's products and services remain top of mind. We have been encouraged by positive trends in clinical trial activity and biotech funding so far this year. Sentiment around the industry is becoming more optimistic as capital raising has allowed smaller companies to shift their spending back towards R and D initiatives.

Speaker 3

Conversations around pipeline priorities and project timelines have become more constructive across all three of our customer tiers. Considering recent developments, we are cautiously optimistic that our end markets will continue to recover throughout 2024. However, it will take time for funding to translate into bookings and sales at Certara and we have not yet seen an inflection point in activity through the 1st several months of the year. Internally, our focus remains on several key initiatives that will drive Certara's next stage of growth. On our last earnings call, we highlighted the investments we are targeting in 2024, including improving our commercial infrastructure and expanding the reach of our biosimulation software capabilities.

Speaker 3

We are dedicated to unifying our organization both internally and externally, which will drive commercial success alongside strong product improvements. Last month, we launched Certara Cloud, the unifying platform that integrates access to our entire software suite of applications. Certara Cloud will make our software solutions easier to navigate across each user's organization and with external parties, enabling collaboration across different workflows. Zatarra Cloud already has 1500 client specific portals and it's currently used by 15 of the top 30 biopharmaceutical companies. Investments like Sitara Cloud and other initiatives underway are designed to ease access to the Sitara platform, improve data and information security and deliver enhanced capabilities to customers.

Speaker 2

I am proud of the

Speaker 3

work we have accomplished so far and look forward to updating you further on our progress throughout the year. Now turning to the performance of the business. In the Q1, we delivered software revenue $39,300,000 representing 19% reported growth and 18% constant currency growth. Growth in the quarter was driven by our industry leading SimSid, Phoenix and Pinnacle 21 platforms, which make up the majority of our software revenues. One area of focus during the quarter was converting customers from Phoenix licenses to Phoenix Hosted, which is a cloud based version of the product.

Speaker 3

With cloud computing integrated into Pfenex, customers will have immediate access to upgrades, remote workflow processing and improved performance and we are pleased by the feedback we have received to date. Throughout the quarter, our software team also began to accelerate the development of Co Author, a regulatory writing tool that uses AI and machine learning to draft regulatory submissions. The next version of Co Author will be officially launched at the end of the Q2 and early versions are in use by our internal regulatory writing team on customer projects. Over time, co author will drive efficiencies across different regulatory writing processes and we have received significant interest from customers. Our Technology Driven Services segment delivered revenue of $57,300,000 in the first quarter, which was flat year over year on a reported basis and on a constant currency basis.

Speaker 3

Our services business continues to recover following a period of cautious customer spending in 2023. In the 1st few months of the year, we have been encouraged by customer discussions across our services group. Zatar's ability to identify and close new deals has been enhanced by the organizational changes we made last August. Customer activity has remained stable and we continue to have constructive conversations with prospective customers for both biosimulation and regulatory services projects. We believe that recent strength in biotech capital markets could be a leading indicator of improvement, but we remain patient as we approach new engagements.

Speaker 3

In conclusion, Vitara is in a strong position to grow in 2024, headlined by continued strength in software and a recovery in our services business. We are investing to expand our commercial footprint and uncover new capabilities for bio stimulation, while also making our products easier to use. I'm confident in our ability to meet our 2024 goals and I look forward to updating you as we progress throughout the year. I will now turn things over to John to discuss our financial performance.

Speaker 4

Thank you, William. Hello, everyone. Total revenue for the 3 months ended March 31, 2024 was $96,700,000 representing year over year growth of 7% on a reported basis and 6% on a constant currency basis. Software revenue was $39,300,000 in the 1st quarter, which increased 19% over the prior year period on a reported basis and 18% on a constant currency basis. The growth in the quarter was driven by biosimulation software and Pinnacle 21.

Speaker 4

Ratable and subscription revenue accounted for 61% of 1st quarter software revenues, up from 56% in the prior year period. Software bookings were $33,100,000 in the 1st quarter, which increased 8% from the prior year period. Trailing 12 month software bookings were $139,500,000 up 11 percent year over year. In the Q1, the software net retention rate was 114%, which is consistent with our long term growth profile. Now turning to services revenue, which was $57,300,000 in the first quarter, flat versus the prior year period and on a constant currency basis.

Speaker 4

Our services business continues to recover following a period of cautious spending among our customers. Technology Driven Services bookings for the Q1 were $72,700,000 which decreased 11% from the prior year period. Trailing 12 month services bookings were $256,000,000 also down 11 percent as compared to the prior year. Total cost of revenue for the Q1 of 2024 was $39,300,000 an increase from $34,900,000 in the Q1 of 2023, primarily due to a 1,900,000 9 and a $800,000 increase in software amortization. Total operating for the Q1 of 2024 were $58,700,000 an increase from $48,000,000 in the Q1 of 2023.

Speaker 4

The components of operating expenses are as follows. Sales and marketing expenses were $10,700,000 compared to $8,000,000 in Q1 of 2023. This increase is primarily due to a $1,700,000 increase in employee related expenses due to the expansion of the sales force. R and D expenses were $12,000,000 compared to $9,300,000 for the 1st quarter of 2023. R and D expenses were up primarily due to a $3,000,000 increase in employee related costs as we grew our team of software developers.

Speaker 4

G and A expenses were $23,000,000 compared to $19,800,000 for the Q1 of 2023. The increase was due to a $1,600,000 change in contingent consideration, primarily related to the acquisition of Viasa and a $1,100,000 increase in employee related expenses, partially offset by a $900,000 decrease in stock based compensation. Intangible asset amortization was $12,600,000 compared to $10,500,000 in the Q1 of 2023. Depreciation and amortization expense was $400,000 flat with last year. Continuing down the P and L, interest expense was $5,800,000 compared to $5,500,000 for the Q1 of 20 23 due to higher interest on the floating rate portion of our term loan.

Speaker 4

Miscellaneous income was $1,600,000 compared to $500,000 in the Q1 of 2023, primarily related to the return on our cash invested. Income tax was a benefit of $800,000 compared to an expense of $1,100,000 for the first quarter of 2023. Net loss for the Q1 of 2024 was $4,700,000 compared to net income of $1,400,000 in the Q1 of 2023. Reported adjusted EBITDA for the Q1 of 2024 was $29,100,000 compared to $32,300,000 for the Q1 of 2023. Adjusted EBITDA margin was 30% for the Q1 of 2024.

Speaker 4

Reported adjusted net income for the 1st quarter of 2024 was $16,500,000 compared to $19,300,000 for the Q1 of 2023. Diluted loss per share for the Q1 of 2024 was 0 point 0 $3 compared to earnings per share of $0.01 in the Q1 of 2023. Adjusted diluted earnings per share for the Q1 of 2024 was $0.10 compared to $0.12 for the Q1 of last year. Now moving to the balance sheet. We ended the quarter with $224,800,000 of cash and cash equivalents.

Speaker 4

As of March 31, 2024, we had $287,800,000 of outstanding borrowings on our term loan and full availability under our revolving credit facility. We are reiterating our guidance for the full year 2024 as follows. We expect total revenue in the range of $385,000,000 to $400,000,000 representing growth of 9% to 13% compared with 2023. We expect to grow adjusted EBITDA on a dollar figure basis in 2024 and expect adjusted EBITDA margin in the range of 31% to 33%. We expect adjusted EPS in the range of $0.41 to $0.46 per share, fully diluted shares in the range of $160,000,000 to $162,000,000 and the tax rate in the range of 25% to 30%.

Speaker 4

I will now turn the call back over to our CEO, William Fery for closing remarks.

Speaker 3

Thank you, John. To summarize our message today, we are pleased with our Q1 results and we look forward to executing our 2024 goals. We have a lot to be excited about at Certara as we advance biosimulation forward with our innovative technology. We will now open the line for questions. Operator, can you open the line?

Operator

Thank Our first question comes from David Wenli at Jefferies.

Speaker 5

Hi, good evening. Thanks for taking my question. I wanted to start with a question on the cloud launch. Bill, I think you mentioned 1500 or something in that neighborhood client portals that you've already established in 15 of the top 30 biopharmas. I wondered if you could add a little more detail to that.

Speaker 5

And then maybe describe again, you mentioned those top biopharmas. So I'm wondering whether the uptake is more skewed to your larger clients or smaller or across the board? And just basically how that uptake is proceeding and how it matches with your expectations?

Speaker 6

Great. Thanks, David. Appreciate the question.

Speaker 7

So Sitara cloud is our 1st step well, it's our next step, I would say, towards making the suite of Sitara software products into a true platform. So what we're doing is we're setting this up so that our new launches of products, that is how you access them. And so you'll see, obviously, we have, as you pointed out, quite a number of customers who are starting to use it today and that will naturally increase as we go forward and as new releases of products come out where that's really the only way to access the software. We started out to answer your question directly, we started out with some smaller ones just to make sure that everything was operational and then we've been migrating to the larger ones. But it should accelerate as we go through the year.

Speaker 7

We're pretty excited about this because it has a couple of advantages to us. One is it's a way to promote reuse of certain software modules across our platform. So instead of writing them for every piece of our every product we have, we can write them once and we can use a best in class functionality across all of our products. We're also getting to unite the look and feel of our products and also this enables us to more easily share data between them. So, it's also probably has some good marketing advantages in terms of when companies log in, they see which products they have and which products they could have, and we can have a good conversation with them from that standpoint.

Speaker 7

So we're pretty excited about it. It's kind of the next evolution of our software. And as you pointed out, it's got a good uptake from our customers.

Speaker 5

As a follow-up to that, I believe you've regularly versioned SIM SIP every year. And I believe that that versioning and you probably do that on other products, but just calling out SIM SIP. I believe that versioning drives economics for you. You add capabilities and maybe get a little bit more, if nothing else, inflationary price. Are those types of economics going to be the same in the cloud hosted products or will that change?

Speaker 7

Yes. So SimSip, as you pointed out, we launched we have a new version every year. Some other ones, it's a little bit different. For example, Phoenix, we're moving to an every 6 month cycle. So there's certainly advantage to our economics in terms of each one has additional features and there's a reason to upgrade.

Speaker 7

Not everybody I think with the 6 month cycle, we'll see maybe people will people might not do every 6 months, but they'll sort of be in the increasing pressure to do that. In terms of the economics of this, I think a lot of this has to do with when we had desktop installations, a lot of our customers have to go through expensive software validation projects and those become less onerous as we move to the cloud, partly because we can do a lot of the work ourselves and we could share that with them. And so we hope also that we'll get that will also foster more frequent updates as well.

Speaker 5

Got it. And if I could just ask one more on your guidance, on the revenue. I believe at the midpoint, your guidance points to about 11% growth. And our modeling was that a little more than half of that was coming organically, little less than half inorganically. I wondered if you could confirm that that's still your thinking.

Speaker 5

And could you break out the organic versus inorganic contribution in the Q1? Thanks. That would be it

Speaker 8

for me.

Speaker 4

Yes. Hi, David. So, yes, on the quarter we put up 7% revenue growth. And as we said when we first put out the guidance and we're still confident in that guidance by the way. But when we first put that out we said that on the services side, there'd be a bit of a first half, second half story or ramp into the later part of the year related to that part of the business.

Speaker 4

So we still anticipate that to be the case. And so Q1 came in line with our expectations. On an organic basis, the deals contributed a few 100 basis points to the growth on the quarter.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Jeff Garro at Stephens.

Speaker 6

Hi, good afternoon. Thanks for taking the questions. Maybe a couple from me on the services bookings results and other trends there. You had cited some timing impact on services bookings in the quarter. So I want to ask if you had any comments on how visibility into services bookings has trended since the quarter closed to start?

Speaker 4

Yes. On services bookings, we did experience some timing on bookings, but it was actually on the software side more so than it was on the services side. So software bookings had some timing that on some large Pinnacle deals that were scheduled for March ended up coming in April and those have come in and we don't have any concerns about it. On the services side though to your question, the story there is on the Tier 1s, it's more of a tough compare. So if you look back at services bookings, then we have a very large Q1 of 2023 on the services side, and so there's a tough compare there.

Speaker 4

As you look at the other tiers though, then the business is still recovering. So our recovery is still in place. So when you look at Tier 2 and Tier 3 bookings, then what we're seeing is sort of stability from where we were in the second half of last year. So if you look at Q3 and then look at Q4 and now Q1 services bookings are kind of in line on a dollar basis with what we were expecting to be the case there. So a little bit of a tough comp is 1 on pressuring the growth rate, but then from a dollars perspective and achievement, it's playing out as we expected with Tier 1s or the Tier 2 and Tier 3s still not back to their historic levels.

Speaker 6

I appreciate the granularity there on customer segmentation. And maybe to probe a little bit deeper on your earlier comment on kind of a first half versus second half story on services revenue growth. How should we think about services bookings or backlog converting to revenue for the fiscal year? It looked like nice execution on that front here in the Q1. Should we expect more sequential improvement from here?

Speaker 6

Or does the Q1 represent kind of the right velocity of conversion for looking at things from say a trailing 12 month services bookings to revenue conversion perspective?

Speaker 4

Right. Yes. So I mean, look, as far as conversion, then we're pleased with the conversion. It's on our expectations. So backlog, I'd say there's not an unusual amount of backlog conversion, but it is playing out as we thought it would, meaning we have some bookings left over from last year.

Speaker 4

We're converting those and the revenue plan played out as we anticipated. As you look forward on bookings, then we are excited about what we're seeing. And as Bill mentioned in the prepared remarks, we're excited about the biotech funding environment and the fact that some of our customers or potential customers are getting funded. But it's really important to note that we haven't reached the inflection point. We don't see that in the bookings in Q1.

Speaker 4

We don't see it in the bookings to date in Q2. And so if that's going to play out for us, it's definitely going to be more in the back half of the year and we haven't seen it yet.

Speaker 6

Fair enough. I'll stop there and jump back in the queue.

Operator

Our next question comes from Luke Sergott at Barclays.

Speaker 9

Great, thanks. I just want to follow-up on that M and A and kind of get a little bit more specific there and what the contribution was to each segment in the quarter? And then as David talked about what's embedded in guidance, any changes to those to what you're expecting for the year?

Speaker 4

No. The guidance, no changes there. We're confident in the range that we have and Q1 played out in line with our expectations. The M and A contribution, when you look at bookings, it's less than 2% of bookings was related to M and A. So it's really not a material amount.

Speaker 4

And then as I mentioned earlier, when you look at our 7% reported revenue growth, then there was a contribution of a few 100 basis points, but we haven't split that out on a software services basis.

Speaker 9

Okay. Thanks. And then I guess as we're thinking about the guide, I understand the first half, second half catch up. But on the services piece, we've seen the regulatory business be softer for quite a while. And then you're talking about you had a little softer bookings here in the Q1.

Speaker 9

I'm just trying to figure out when that what kind of visibility you have on the services side? Is that to bake in that kind of second half ramp recovery?

Speaker 4

Well, I mean, a key aspect of that is we put together the guidance with the notion of stability, which is what we saw play out on the quarter and it was what we saw in the bookings results for the second half of last year. To get to the higher end of the range, then we would need to see that inflection point due to any biotech funding that might be out there. And by the way, we are targeting those companies that are gaining funding in those capital markets. We are targeting them from a commercial basis. But again, any activities are really going to be in the second half of the year.

Speaker 4

Services, so the regulatory business in the meanwhile, as well as our BioSim services, especially in the Tier 2 and Tier 3 customer categories continue to be impacted by the same dynamics that we saw last year. Do we see stability? We do. We're happy about that. We don't see continued decline, but we also don't see acceleration and haven't hit that inflection point yet.

Speaker 9

Okay. That's helpful. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Michael Ryskin at BofA.

Speaker 4

Great. Thanks for taking the question.

Speaker 10

I want to go back to the bookings in the quarter. I know you called out a couple of times the strong or the elevated comp in services bookings. I mean, I think it's elevated on a dollars basis, but on a percent basis, it was only up 4% last year. So just trying to parse out a little bit on, is the seasonality on that expect to be a little bit different? Or put another way, if I look at services bookings last year, it's $82,000,000 in 1Q and then $50,000,000 $57,000,000 $75,000,000 the rest of the year.

Speaker 10

So sort of a big step down and then ramping through the rest of the year. Are you expecting a little bit of a more spread out seasonality there? I know it's tough to talk about bookings ahead of time, but just trying to reconcile that trailing 12 month bookings growth and the 1.1 book to bill with, like you said, some expectations for pretty steady revenue growth this year? Thanks.

Speaker 4

Yes. Hi, Mike. So what we typically see is we do typically see a Q2 that's lower than Q1. So to your point that seasonality and that typical seasonality, there's not especially given that the end market environment has really not changed, then there's no reason to think that that typical seasonality wouldn't continue to play out the way that it has. So that's probably the best indication that we can give.

Speaker 4

Sorry, go ahead.

Speaker 10

No, I was going to say, just to clarify, yes, there's usually a step down, but last year there was a very sharp step down from 82 to 50. I think this year, is it safe to say that you expect less of a step down? And then last year 1Q was just elevated in dollar terms.

Speaker 2

Just trying to think about

Speaker 10

service volumes.

Speaker 4

Yes. The answer to that is yes. The step down last year was unusual. And then from that point forward, we saw some recovery and stability. And

Speaker 7

so even

Speaker 4

though we do anticipate some level of seasonality at what I would say happened last year versus what you saw in other years was unusually large of a step down. And sitting here in May, we don't anticipate that we'd see that level because we once we step down there, then we've started to see recovery into Q3. We saw some acceleration into Q4. And now Q1 of 2024 has played out in line with our expectations.

Speaker 10

Okay. And then just sort of the

Speaker 4

Q4 The other thing to add to that, I guess, is really if you look at the years before 2023, if you look at 2021 or 2022, then that's what we would point to as more sort of typical seasonality.

Speaker 3

Okay. All right.

Speaker 10

Fair enough. And then I guess sort of the second part of that question would be on the book to bill using the trailing 12 month. I think it's 1.1 this quarter for most of the last year was in sort of like the 1.15 and then prior years it was more of 1.18, 1.2, so a little bit lower than it's been in prior years. Is that just sort of like catching up to the softer bookings you saw last year? I mean is it fair to say that you expect that to reaccelerate back into the 1.2% range as we exit the year?

Speaker 4

Yes. We do expect acceleration over time, but it's we need to see some of the customer end market behavior recover as well. We have keep in mind, we exited the year at 1.1 where and in Q3 of last year, we were at 1.1. So we continue to be at 1.1 as a spot that we haven't yet seen an inflection point in the end market customers. So Michael, I think you're talking about software a little bit.

Speaker 4

So in

Speaker 7

Q1, our software bookings were a little bit less than we expected because we had some bookings move into April. We did actually get those. So we're feeling pretty confident that the bookings are appropriate for what we're giving you in our outlook for the year.

Speaker 3

Okay. All right. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Max Schach at William Blair.

Speaker 2

Hey, good afternoon guys. Thanks for taking our questions. I wanted to follow-up on Luke's question earlier about inorganic bookings. I might have missed her, but I think you said in total, inorganic bookings are around 2% of total bookings, which implies something about $2,000,000 in total for the quarter here. Coming into this year, you talked about those 2 recently acquired businesses contributing mid single digits to growth, which I think implies based on our model around $18,000,000 in revenue in 2024 in total.

Speaker 2

So I guess my follow-up would be, was it $2,000,000 in bookings from the recent acquisitions in line with your expectations? I think given that small bookings number, are you still as confident in that mid single digit organic contribution in 2024 as you were earlier this year?

Speaker 4

Hi, Max. Yes. Yes. So we are the Q1 to your question did play out as we expected it to. So not a huge contribution in bookings from the acquired companies from the Q4 closure of the deal.

Speaker 4

We'd expect that to accelerate as we move the year. So I'd say that Q1 played out as we thought and we're still confident in the guidance message that we gave with both the reported and then the

Speaker 2

last year you had some clients that came to you hadn't necessarily cut their budget, but hadn't spent their budget either. So you had some benefit there at the end of the year. Just wondering based on your conversations so far this year, it sounds like things are getting better, but not necessarily translating to orders. How do you think about the potential for that budget flush to occur at the very end of this year similar to what you saw last year? And what would that mean for your results relative to the 2024 guide that you've reiterated today?

Speaker 4

Well, in our guide, we did anticipate some seasonality. And I think that part of that seasonality is the budget flush dynamic, which typically makes our Q4s stronger on bookings than the other quarters of the year. I'd tell you that as we put together our plan, we did anticipate that that would be the case. We saw that be the case in Q4 of last year as we did in years prior as well. So what's cooked into the guidance range is the anticipation that we see somewhat typical finality that we've seen in the business in the past.

Speaker 2

Got it. Thank you both again for taking our questions.

Speaker 4

Thanks, Max.

Operator

Thank you. One moment for our next question. Our next question comes from Steve Decker at KeyBanc.

Speaker 6

Hey guys, thanks for taking our questions. With the nice increase in software revenues in the Q1, was there a certain reason you didn't see more of an expansion in your margins given software is your higher margin business? And then can you provide more color on the strength you're seeing in your software bookings and revenues? Thanks.

Speaker 4

Yes, sure. So we're pleased. Software growth on the quarter was 19%. The net retention ratio was 114%. So we're pleased with the continued execution by the software team.

Speaker 4

As we exited last year, we were in a good spot. We saw that continue and accelerate into Q1. As far as the margin is concerned on the quarter, we had a 30.2 percent adjusted EBITDA margin. And while that margin was below our full year guidance range of 31% to 33%, it was impacted about 200 basis points by the newly acquired companies that we just closed in Q4, including 1 in December. So as we work through that, then we're expecting some margin lift.

Speaker 4

But what I'd tell you is the software achievement during the quarter fell through with the typical margin. And then that would have been partially offset by some of the dynamics that I just described.

Operator

One moment for our next question. Our next question comes from Kyle Cruz at UBS.

Speaker 2

Hello. Thank you for taking the questions. Maybe if we could dive a little bit more into the margin. That sounded like a lot of the increase in cost was also associated with additional employee expenses. So maybe if you could provide more detail on how we should think about margins playing out throughout the rest of the year, keeping in mind the impact acquisitions and hiring?

Speaker 4

Right. So full year margin guidance is 31% to 33% on the quarter, as I just mentioned, is 30.2%. So it's below the full year range, primarily because well, 2 things. 1, you saw that expenses were up. I'll come to that in a moment.

Speaker 4

But 2 is, we're still integrating the deals that we disclosed in Q4. So that pressured the margin a bit in Q1 and we think that will resolve as we continue and finalize the integrations there. The other thing though is you're asking about investments or you're asking about cost increases, what they are is investments. So we laid out our plan around investing in the business during 2024, and of course, we're executing on that plan. As a reminder, that was centered in 2 areas.

Speaker 4

It was investments in sales and marketing, in expanding the sales force and it was investments in R and D, which was adding software developers to our team to continue to enhance our software programs, including embedding AI in all of our product offerings. So that is what you see playing out in the quarter and you'll continue to see those investments during the course of the year. You asked about margin progression. We do anticipate, as I mentioned earlier, some dynamic that will drive revenue to be higher in the second half than in the first half, which is typical for the company when you look back at prior year periods. And that will help margin acceleration and accretion to that margin as well as finalizing the integration on the deal.

Speaker 2

Thank you.

Operator

Well, Mani, One moment for our next question. Hasnatin Davidez at CitizensJMP.

Speaker 8

Thanks. I just wanted to double quickly into the funding backdrop. We saw a pretty fairly significant spike in the Q1 funding activity. I'm just wondering, are you surprised you aren't seeing that inflection yet? Or is this, I guess, relative to prior cycles you've experienced, fairly normal in terms of what you think the timing will be between when funding picks up and when it might translate into bookings?

Speaker 7

Yes. Thanks for the question. Yes. No, we didn't expect to see an immediate increase in bookings from funding. It really started in a few years just from what we read kind of started in February and moved into March.

Speaker 7

We think it takes typically several months before that will typically start to get through to us, which is why we've indicated that we're a little bit more optimistic for the second half than the first half.

Speaker 4

But to be clear too, the any tailwinds related to the funding environment are not included in the guidance. We guided from a stability standpoint for the

Speaker 8

year. Got it. Thanks. And then I guess just a follow-up on the sort of some of the investments. And then I know you made some changes last year in terms of how you And then I know you made some changes last year in terms of how you structure and organize the sales force.

Speaker 8

I'm wondering what some of the early returns are with those measures, whether it's win rates or attach rates or anything else you'd like to call out? Thank you.

Speaker 7

So last year, we yes, we made some changes to our commercial organization so that we could sell products from across all of Certara to our customers who are typically buying more than 1. So it's a more efficient way of reaching them. And our belief was that we would see more cross effectively what you call cross sell it, but in terms of more customers buying a bigger range of products. And also that we would become more efficient over time as well because we were particularly in services, we still had a lot of the seller doer model, where we were taking fairly expensive technical people away from billable work and tasking them with the sales process. So I would say that we're very pleased with how far we've gotten on this, but there's still more to go.

Speaker 7

We're probably a bit farther ahead in terms of what we've done on the software side just because we started that earlier. And there's been an opportunity, I think, that we've taken into account over the last two quarters to really do some solid training of the sales force of the entire range of Certara's products. We've done a lot to professionalize just how we're covering the world in terms of sales territories and assigning key accounts to the appropriate salespeople. And we started to see some benefits of that in the Q1. But like I said, I don't think we're fully at full strength there.

Speaker 7

So we'll see some further benefits as we move through the year and kind of pull that team together even more than it is right now.

Operator

One moment for our next question. Our next question comes from Vikram Pearljit at Morgan Stanley.

Speaker 10

Hi, everyone. This is Gaspar on for Vikram. We have one question and so that is with the 1Q behind you now, what do you think drives the bookend of revenue and EPS guidance for 2024?

Speaker 4

So the guidance on the year remains the same. Q1 played out in line with our expectations and our plan. So the guidance that we had laid out before, which was reported revenue growth of 9% to 13% on an organic basis, mid single digit remains intact. The other piece of that, of course, we've talked about the margin a bit is that we're committed to growing EBITDA dollars on the year and the margin would land in the 31% to 33% range. So nothing has really changed that from this point.

Speaker 4

If we were I think what you're saying is what takes you to the higher, what takes you to the low end. To get to the lower end here, we would need some deterioration in the end markets, which we're not seeing, to be clear. So we talk about stability a lot in Q3, Q4 of last year and now through Q1 of 2024. We've continued to see that. So we're not really seeing that as playing out, but to get to the bottom end of the range, that's what would need to happen is we need to see some deterioration from the spot where we are now, meaning in Tier 2 and Tier 3s and Tier 1s for that matter as well.

Speaker 4

We're not seeing that. To get to the high end of the range then we would need to see some acceleration. As I mentioned, we have not baked into our guidance the notion that of any benefit related to the biotech funding environment, that's not in our guidance. So obviously, if we start to get some benefit there, it would start to take us to the higher end of our range. And if we continue to see acceleration, the software performance has been really solid.

Speaker 4

We've been very pleased with it. If we continue to see acceleration, thanks to the many new products that we're offering on the software side, that too would start to take us more to the higher end of the range.

Speaker 10

Thank you very much.

Operator

I am showing no further questions at this time. I would now like to turn it back the call over to Bill for closing remarks.

Speaker 7

Thank you everybody for joining us tonight. As we said, we remain very optimistic for the rest of the year. We had a lot of good things happened in the quarter and we'll look forward to reporting at the end of this quarter back same time, same place. Thanks.

Operator

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

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Earnings Conference Call
Certara Q1 2024
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