Certara Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 5, 2025
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Operator

Good day and thank you for standing by. Welcome to the Certara First Quarter twenty twenty five 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. To ask a question during the session, you will need to press 11 on your telephone.

Operator

You will then hear an automated message advising your hand is raised. To withdraw your question, Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Dykler, Investor Relations. Please go ahead.

David Deuchler
David Deuchler
IR at Certara

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have William Ferry, Chief Executive Officer and John Gadler, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended 03/31/2025. A copy of the press release is available on the company's website.

David Deuchler
David Deuchler
IR at Certara

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 two in the accompanying materials for additional information which you can find on the company's Investor Relations website. In the remarks or responses to questions management may mention some non GAAP financial measures. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures are available in the recent earnings press release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information.

David Deuchler
David Deuchler
IR at Certara

This conference call contains time sensitive information and is accurate only as of the live broadcast today, 05/05/2025. Stratara 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 will turn the call over to William.

William Feehery
William Feehery
CEO at Certara

Thank you, David. Good afternoon, everyone. Thank you for joining Certara's first quarter earnings call. John and I will begin with prepared remarks and then we will take your questions. We are pleased with our start to the year delivering financial results consistent with our expectations driven by strong commercial execution across both software and services.

William Feehery
William Feehery
CEO at Certara

We finished the first quarter with revenue of 106,000,000 representing 10% reported growth versus the first quarter of twenty twenty four. Citar's first quarter bookings of $118,200,000 represented 12% reported growth versus the prior year period driven by software bookings growth of 23% and services bookings growth of 7%. Additionally, we continue to see good performance from Chemaxon, which contributed $5,900,000 of revenue and $4,900,000 of bookings in the quarter. The current market has both continued headwinds that we've been managing over the past couple of years, as well as some new and exciting tailwinds for Certara. Continued headwinds include the downstream effects of IRA price controls and erratic capital raising environment for biotechs and the potential for new trade and healthcare policies from the current administration.

William Feehery
William Feehery
CEO at Certara

Tailwinds include the recent FDA announcement about phasing out animal testing, a general willingness to expand the use of modeling in pharmaceutical development, and the increasing spending on artificial intelligence solutions among our customers. In the long run, we expect most of the headwinds to resolve while the tailwinds are likely to remain in Certara's favor. With that in mind, we will continue to execute our strategic investment plan focusing on the integration of AI into our software solutions, building a more integrated software platform, increasing our investment in bio simulation model development and expanding our solutions into the earlier stages of drug development. So, Charles value proposition is multifaceted. We accelerate decision making to drive more cost effective development by making better use of scientific modeling and data analysis.

William Feehery
William Feehery
CEO at Certara

Over the past several years, we've invested to build Certar into the leading partner in bio simulation by creating new software products and features, building a robust commercial infrastructure capable of selling to the large number of customers in our industry and executing strategic M and A to expand our capabilities. The FDA's recent announcement of a plan to phase out animal testing requirements for monoclonal antibodies and other drugs increases the relevance of CTARA's capabilities. This new direction follows a framework outlined by Congress and the FDA Modernization Act two point zero that was passed in late twenty twenty two and aims to develop a clear regulatory pathway to streamline the drug development process, including leveraging computer modeling and artificial intelligence to predict a drug's behavior. Centaurus created a bio simulation solution called non animal navigator for preclinical monoclonal antibody development, which uses our sim sim simulator and our QSP modeling group. The solution also leverages the extensive experiences of our services team in creating first in human study designs.

William Feehery
William Feehery
CEO at Certara

In the weeks following the announcement, we have seen significant inbound interest from customers who would like to understand the role of Surtara can play in their preclinical development. Just last week, we hosted an online webinar with over 400 attendees outlining our approach to helping customers navigate alternatives to animal testing. We believe new regulatory initiatives at the FDA, including phasing out animal testing, are long term tailwinds for the adoption of modeling and simulation tools across drug development phases. Now turning to our commercial performance in the quarter. In software, we continue to see healthy bookings performance from our Tier one and Tier three customers with higher renewal rates and a modest upsell contributing to growth.

William Feehery
William Feehery
CEO at Certara

We've also begun to realize some cross selling benefits as we integrate ChemAxon into our broader commercial organization, leading to another strong quarter with $5,900,000 of revenue. In services, we observed stable demand across both biosimulation services and regulatory services. In biosimulation services, we continue to see some softness in the tier one customer base, which was offset by solid growth across Tiers two and three. In regulatory services, we saw revenue bookings growth on a year over year basis with strong contribution across all three customer tiers. Heading into the second quarter, we are encouraged by the underlying demand from customers and are confident in our ability to meet our commercial goals at this point in the year.

William Feehery
William Feehery
CEO at Certara

In addition to strong commercial performance, our R and D teams continue to make progress in the software development front. On April 1, announced the twenty fourth version of our SimShip simulator, which was the culmination of months of hard work from our team paired with valuable feedback and insights from over 30 consortium members. This year updates were focused on numerous new features including an expanded library for drug drug interactions, additions to our biopharmaceutical and virtual bioequivalence modules, enhancements to support module modeling of special populations, and an improved user interface. Today, SimsDip has supported over 120 FDA approved novel drug applications and over 300 label claims in addition to being granted numerous clinical trial waivers. As we expand the breadth and capability of our software platform, we look to stay active and in front of our customers.

William Feehery
William Feehery
CEO at Certara

We are excited to host the second annual CertainT Conference in Philadelphia beginning tomorrow. Last year's conference was a success and we're thrilled to host over 300 clients showcasing the advancements we've made in model informed drug development. Certainty has become an opportune time to showcase our capabilities in the preclinical area as our customers look for alternatives to animal testing. And there will be several presentations elaborating on how Sutara can help drug developers implement new approach methodologies such as PVPK and QSP. During the quarter, we also had the pleasure of welcoming new leadership to our services group.

William Feehery
William Feehery
CEO at Certara

We're pleased to welcome Doctor. Adrian McKemey as President of our Drug Development Solutions business. Adrian joins Sartaro with over twenty five years of industry experience having led business transformation, portfolio management and R and D initiatives for a wide variety of clients in the biopharma industry. As part of the plan leadership transition, Patrick Smith has moved into a new role as Senior Vice President of Translational Sciences. Patrick will continue to be a key member of our services group focusing on Cittara's scientific growth and innovation.

William Feehery
William Feehery
CEO at Certara

Before wrapping up, I wanted to provide an update on some recent announcements. On April 14, we announced a $100,000,000 share repurchase authorization and provided an update on the strategic review of our regulatory business. The Board's decision to authorize a shared repurchase allows us to have more flexibility with the management of our capital to drive value for shareholders. This authorization for the Board reflects their support and confidence in our investment in biosimulation including AI and in the strategic decisions we have made to drive long term growth for the company. However, our primary use of capital remains the same as it has been since we became public and we will continue to be active in looking at M and A opportunities and making organic strategic investments to drive long term sustainable growth.

William Feehery
William Feehery
CEO at Certara

Also, as we announced, we have been proceeding with our review of the regulatory business and have received interest from external parties, though we do not have more to announce at this time. To close, we are pleased with our first quarter results and we are excited by the evolving opportunities at the company. Our team is executing against our commercial plan, driving solid operational performance in light of more muted end markets. Our R and D initiatives are progressing nicely and we are on track to launch several new products later this year. The secular tailwinds for bio simulation continue to drive adoption and we are excited to play a role in the evolution of drug development towards new methods and approaches.

William Feehery
William Feehery
CEO at Certara

With that, I'd like now to hand things over to John Gallagher to discuss our financial results in more detail.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Thank you, William. Hello, everyone. Total revenue for the three months ended 03/31/2025 was $106,000,000 representing year over year growth of 10% on a reported basis and on a constant currency basis. Total bookings for the first quarter were $118,200,000 which increased 12% from the prior year period on a reported basis. Trailing twelve month bookings were $457,700,000 increasing 16% on a reported basis.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Excluding Chemaxon, total company organic bookings growth was 7% compared with the first quarter of last year. Software revenue was $46,400,000 in the first quarter, which increased 18% over the prior year period on a reported basis and 19% on a constant currency basis. Organic growth in the quarter was driven by Biosimulation Software and Pinnacle twenty one. Additionally, Chemaxon contributed $5,900,000 to our reported revenue, which came in ahead of our expectations. Ratable and subscription revenue accounted for 57% of first quarter software revenues or 62% when excluding Kymaxon, up from 61% in the prior year period.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Software bookings were $40,800,000 in the first quarter, which increased 23% from the prior year period. First quarter bookings include $4,900,000 of Chemaxon bookings. Trailing twelve month software bookings were $177,300,000 up 27% year over year. The software net retention ratio was 102% in the quarter. With organic software revenue growth at 4% in Q1, consistent with our plan, this NRR is below the historic average based on expected timing of software revenue achievement during 2025.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Looking at our software bookings performance by tier, we saw very strong performance in both Tier one and Tier three customers in the first quarter driven by continued adoption of our software. Now turning to services revenue, which was $59,600,000 in the first quarter, up 4% versus the prior year period on a reported basis and on a constant currency basis. We saw strong performance from our regulatory services business in the quarter, delivering a second consecutive quarter of year on year growth. Technology driven services bookings in the first quarter were $77,400,000 which increased 7% from the prior year period. TTM services bookings were $280,400,000 up 10% as compared to the prior year.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

In the quarter, we saw stable demand for our biosimulation services with softness in Tier one offset by strong bookings growth in Tiers two and three. Regulatory Writing bookings grew double digits versus the first quarter of twenty twenty four. Total cost of revenue for the first quarter of twenty twenty five was $41,500,000 an increase from $39,300,000 in the first quarter of twenty twenty four, primarily due to higher software amortization expense. Total operating expenses for the first quarter of twenty twenty five were $56,900,000 a slight decrease from $58,700,000 in the first quarter of twenty twenty four, primarily due to a $3,100,000 decrease in the change in fair value of a contingent consideration, which was offset by higher sales and marketing expense and intangible asset amortization. Adjusted EBITDA for the first quarter of twenty twenty five was $34,800,000 an increase from $29,100,000 in the first quarter of twenty twenty four.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Adjusted EBITDA margin in the quarter was 33%, which came in ahead of our expectations. As I discussed last quarter, we plan to continue investing in R and D in 2025 to drive new product development and further integrate our software. In the first quarter, we saw some benefit to EBITDA from slower than expected hiring, which contributed about 200 basis points to our EBITDA margin. We expect hiring to pick up through the middle of the year, which will align margins more closely with our guidance expectations over the next several quarters. Wrapping up the income statement, net income for the first quarter of twenty twenty five was $4,700,000 compared to a net loss of $4,700,000 in the first quarter of twenty twenty four.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Reported adjusted net income for the first quarter of twenty twenty five was $22,400,000 compared to $16,500,000 for the first quarter of twenty twenty four. Diluted earnings per share for the first quarter of twenty twenty five was $0.03 compared to a loss of $03 per share in the first quarter of twenty twenty four. Adjusted diluted earnings per share for the first quarter of twenty twenty five was $0.14 compared to $0.10 for the first quarter of last year. Moving to the balance sheet, we finished the quarter with $179,100,000 in cash and cash equivalents. As of 03/31/2025, we had $294,800,000 of outstanding borrowings on our term loan and full availability under our revolving credit facility.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

As William mentioned earlier, the Board authorized a $100,000,000 repurchase program in mid April. Following the announcement, we have repurchased approximately $25,000,000 of that authorization to date. We are reiterating our guidance today as follows. We expect total revenue in the range of $415,000,000 to $425,000,000 representing growth of 8% to 10 compared with 2024. We expect Chemexon to contribute software revenue of 23,000,000 to $25,000,000 We expect adjusted EBITDA margins between 30% to 32%.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Similar to our guidance last year, we anticipate a higher EBITDA margin at the lower end of the revenue guidance and a lower EBITDA margin at the higher end of our revenue guidance. This will be driven by discretionary investments in research and development, which will be managed based on our commercial performance as we progress through the year. We expect adjusted EPS in the range of $0.42 to $0.46 per share, fully diluted shares in the range of 162,000,000 to $164,000,000 and a tax rate in the range of 25% to 30%. I will now turn the call back over to our CEO, William Feary, for closing remarks.

William Feehery
William Feehery
CEO at Certara

Thank you, John. To summarize our message today, we are pleased with many exciting developments at Tatara in the first quarter and remain focused on executing our growth and profitability goals in 2025. We are working hard to capitalize on our commercial opportunities, including the recently announced phase out of animal testing for monoclonal antibodies. And we have begun to repurchase shares under the new share purchase authorization. I am proud of the work of our team and I look forward to providing additional color as the year progresses.

William Feehery
William Feehery
CEO at Certara

Operator, can you please open the line for questions?

Operator

Thank please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q and A roster. And our first question comes from Michael Cherny of Leerink Partners. Your line is open.

Daniel Clark
VP - Equity Research at Leerink Partners

Great, thank you. This is Dan Clark on for Mike. First one from us, just on the inbound interest you've received for your non animal navigator thus far, are there any common themes for companies or tiers of customers that are particularly interested? And then as second question, what do you kind of think the right NRR is for Certara in this business environment? Thank you.

William Feehery
William Feehery
CEO at Certara

Yeah, thanks. I'll take the first one. We've had a tremendous amount of interest of customers coming to our webinar or calling about it. I think a lot of the market is trying to understand what the FDA wants and what the possibilities are and how fast this is going to happen. I think in general, companies have been interested and excited about potential change in the way drugs are developed and using fewer animals trying to figure out how far is the FDA long in their thinking and when would they make a switch in drug development?

William Feehery
William Feehery
CEO at Certara

So those are the kind of questions we're getting right now. And also, I'd say also just sort of how far along is the technology what can be replaced with animals, which animal usage can be replaced today. And then for the second question, I'll turn it over to John.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Yeah. Thanks, Bill. So on the NRR, this quarter at 102% is lower than what you've typically seen for us. And that's driven by a couple of things. One is the organic software growth at 4% is lower than our implied guidance range at six to 8%, but it was on our expectations.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

So there was some expected timing related to the achievement of organic software revenues that we would expect to play out and increase over the remaining course of 2025. In addition to that, the portion of ratable software is increasing. In fact, in Q4, excluding Chemexon, we had 70% ratable. That tends to be our high point in a Q4. Here in Q1, we had 62% ratable, which was growth year on year.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

And so the more ratable that we achieve, the more that the software growth is going to roll out during the quarters of 2025. So I think in relation to what you should expect, I think it's important to look at a measure like NRR over a multi quarter basis. So last year we had an average of about 110. This year, what we're saying is the 102 came in on plan, and we'd expect it to increase as software revenue increases.

Operator

Thank you. And our next question comes from Joe Vruwink of Baird. Your line is open.

Joe Vruwink
Senior Research Analyst at Baird

Great. Thanks for taking my questions. Similar, I want to follow-up on just those reaching out to you. What is the scope? Yeah.

Joe Vruwink
Senior Research Analyst at Baird

Bill, you just talked about kind of the questions being asked, but what is the scope of the commercial engagement look like? Are customers wanting to get more scientists under a license agreement? Is there talk about equipping users with stuff they don't use right now? I think one of the things that's maybe coming up a bit more often is that QSP modeling could really inflect higher. I guess what's kind of the initial feel on commercially how your business might evolve?

William Feehery
William Feehery
CEO at Certara

Yeah, thanks Joe. Everybody's questions are around what can we replace today and what's more aspirational. I think that it would be very difficult to replace all animal models today, given what's used, but a good deal of the usage could be replaced. So we've launched a product called Non Animal Navigator, which combines both our QSP capabilities and our drug development capabilities, with the idea that we can use QSP models to inform dosing on things like monoclonal antibodies and eliminate a lot of the preclinical use of animal models. In the longer run, well, I'd say the other piece of this is around toxicology.

William Feehery
William Feehery
CEO at Certara

We have QSP and some of our toxicology models can inform the decisions that need to be made there in preclinical. As you get into longer run studies, those could be hard to eliminate right away, but those are not really the focus of everybody right now. So hopefully that gives you a little bit of color there.

Joe Vruwink
Senior Research Analyst at Baird

Yeah, that's great. And then obviously the question that's coming up is how big of a dollar opportunity could this ultimately be for the biosimulation space? It might just be too soon to say, but maybe I'll ask, I think about how Jotaro has traditionally framed the growth in their business and kind of the parameters of 10% to 15% over time. Would you kind of view the recent roadmap as increasing the confidence on sustaining 10% to 15%? Or do you really think this could be a shift up entirely, and so it results in a number above the 10% to 15% range?

William Feehery
William Feehery
CEO at Certara

Yeah, I think it's probably a little bit too early to make that call. The FDA made an announcement that it's very encouraging, and I think very complementary in terms of the value that Certara can bring to something like this. But it's going to take some time to implement it and want to see how fast that goes. I think that's the key variable there. As I said, we're already getting we got a lot of early interest.

William Feehery
William Feehery
CEO at Certara

But we're talking about a significant change in a regulatory process, in a drug development process that can take years. So those will have to roll out as we go forward. I would say overall, it will be helpful to our growth rate, but I think it's probably too early to kind of give you a number right now.

Joe Vruwink
Senior Research Analyst at Baird

Okay, all right, great. I'll leave it there. Thank you.

Operator

Thank you. Our next question comes from Scott Schoenhaus of KeyBanc. Your line is open.

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

Hey team, thanks for taking my question. My first question relates to the potential pharma tariffs. Are you having conversations with your customers on this? Is it are they saying it's going to be impacting or they're being more cautious with their budgets going forward? Any color around this potential headwind or tailwind in your view?

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

And then secondly, as a follow-up to the FDA phase out of animal models, is it more centered around smaller biotechs that are coming to you around monoclonal antibody preclinical studies? Or is it larger in terms of your larger more sorry, broader in terms of your larger customer base? Thanks.

William Feehery
William Feehery
CEO at Certara

So let me take the second. We'll stick on the animal models first. I'll take the second question first. So we had a webinar last week. We had, I think, over 800 people responded.

William Feehery
William Feehery
CEO at Certara

The mixture was, as we tracked it, was everything from biotechs to large pharma companies to even people at government agencies as well. So the interest has been quite broad in using the technology to eliminate animal models.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

On the tariffs, yeah, for tier one customer tariffs, we had already seen slowness in decision making as it relates to Q1 performance, and you'd see that show up in our tier one biosim services. But I wouldn't say that we'd call out any specific difference in customer behavior than what we've seen to date, at

William Feehery
William Feehery
CEO at Certara

least not yet. Yeah, so Certara is isolated directly from the tariffs, so nothing we sell would be subject to a tariff. We're selling generally into an R and D market, so tariffs don't directly affect that. So not saying there won't be an effect across the broader markets, but it'll some indirect if it happens and our customers haven't really been talking about that with us. Okay, that's helpful.

William Feehery
William Feehery
CEO at Certara

Yeah, it was more

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

of the derivative impact on the R and D budgets and what it could mean. That's really helpful. I appreciate

William Feehery
William Feehery
CEO at Certara

guys. Thank you.

Operator

Thank you. And our next question comes from David Windley of Jefferies. Your line is open.

David Windley
Managing Director at Jefferies LLC

Hi, thanks for taking my questions. Good afternoon. Bill, you talked a fair amount in the past about kind of the inertia in pharma drug development and in the way they do things. It sounds like the FDA announcement both I guess the initial Padama two approval and then this more recent announcement or a nice shot in the arm to try to break some of that inertia. My understanding is that maybe the FDA is reaching out to a I'm not sure how long the list, a pilot list of drug developers to try to engage around this new thinking.

David Windley
Managing Director at Jefferies LLC

So I have several questions. One, I guess, is thinking about what do you think is the key to kind of move pharma off its perch and get confident and comfortable in the regulators willingness to truly accept this stuff? It take an approval of a drug that has gone through a no animal or an animal light drug development cycle? Two, in terms of kind of the evolution or the replacement of an IND enabling package. Like, what do you think that looks like in the future and And where does Certara's software, like what parts of that package can you insert yourself into and replace what is currently answered through animal data?

David Windley
Managing Director at Jefferies LLC

Thanks.

William Feehery
William Feehery
CEO at Certara

Okay. Alright, so several parts to that question. So the first one I heard was what's key to move pharma off its current perch? And I think that there are two things. One is the FDA is continuing to expound upon their original announcement.

William Feehery
William Feehery
CEO at Certara

And they've talked about how they would both encourage the use of alternative technologies and potentially discourage people who didn't move. So I think the industry is looking for some more information about how that will play out. I think that practically speaking, it does take an approval, but the FDA specifically called out monoclonal antibodies and other drugs. I think monoclonal antibodies are one area in which the use of animal models has been highly questioned, and the technology is fairly advanced in using alternatives. So that's a good thing.

William Feehery
William Feehery
CEO at Certara

There are drugs that have gone to the FDA that effectively have not used animals, not monoclonal antibodies, but things like you take a gene therapy into an IND right now, it doesn't make a lot of sense to use an animal model a technology like that. And so there are examples where the FDA has effectively used modeling in lieu of animals because it just didn't make any sense to use So I think that's some early signs of which way things may go as this expands. In terms of the evolution of the IND package, my thinking on this is that broadly speaking, animal models are used in in three ways as the IND goes through. So one is in the basic first in human dosing. In that case, the models today are better than in many cases than what you can do with animals anyway, or at least they are in monoclonal antibodies.

William Feehery
William Feehery
CEO at Certara

So I think that we're pretty well positioned to make a good argument to our customers that we've got technology there, that continued use of animals, that the FDA is going to discourage that, is more than feasible, and you can go faster and everybody will be more efficient and lower cost. Second piece is on toxicology, so looking at things like liver tox, cardio tox, things like that. For those, the models exist. Probably they can be improved over time, now that people have gotten a lot more interest in this area. They can be tied into if you look at the FDA's announcement, they talk about organ on a chip technology, so we can tie into the companies that are working on that.

William Feehery
William Feehery
CEO at Certara

And so what I'd say on that is we have pretty good modeling capabilities in those areas, but tox is a big area, and we could probably make bigger investments and expand on that since this will be a big new area. And I'd say the third part, which is probably the longest part out, is the of the long term studies, things like you're looking for long term cancer or something like that. Those are the hardest to replace all the animals just because almost by definition, you're looking for something that nobody has modeled. But they're also not the largest use of the animal. So I don't know how the FDA is going to think about that, but my guess is they're going to probably put that part of it off as new technologies become available.

William Feehery
William Feehery
CEO at Certara

So we know they're looking for modeling, they're looking on, they specifically mentioned things like organ on a chip, and they're looking for new modeling, new technologies that can replace this, and they're generally favoring making a change in that way. So long answer, David. But hopefully, got a lot of parts to your question there.

David Windley
Managing Director at Jefferies LLC

Great. I really appreciate it. I'll yield. Thank you. That was helpful.

William Feehery
William Feehery
CEO at Certara

Thanks.

Operator

Thank you. And our next question comes from Dan Leonard of UBS. Your line is open.

Dan Leonard
Dan Leonard
Managing Director - Research Analyst at UBS Group

Thank you. First, a cleanup question on the services business. It sounds like regulatory is now a good guy in comparison to biosimulation services. And I'm wondering why that would be.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Well, a couple of things there. Most importantly, we've fully built out our commercial team. The commercial team is executing very well across the board, including in regulatory. So we've been very pleased with the performance there. And then when you look at last year, then it's important to keep in mind that we were hitting some low spots last year, and so the compares that we have are easier as well.

Dan Leonard
Dan Leonard
Managing Director - Research Analyst at UBS Group

Thank you for that. And then just to follow-up again on this FDA bit. Is it possible at all to compare and contrast your inbound activity and interest following the passage of the FDA Modernization Act two point zero a few years ago with what you're experiencing today following the most recent updated FDA discussion?

William Feehery
William Feehery
CEO at Certara

Yeah, what I would say

William Feehery
William Feehery
CEO at Certara

is the FDA Modernization Act was passed by Congress, but the industry didn't do very much because the FDA didn't say very much. So the difference now is that the FDA has sent a very clear signal about what they are really intending to do, and they're sending it to the market and I guess to their examiners, which isn't really the situation we had a couple of years ago. So I would say a couple of years ago, would have characterized as Congress said the FDA could do something, but they didn't move at that time to do it.

Dan Leonard
Dan Leonard
Managing Director - Research Analyst at UBS Group

Got it. Thank you.

Operator

Thank you. And our next question comes from Jeff Darrow of Stephens. Your line is open.

Jeff Garro
Managing Director at Stephens Inc

Yeah, good afternoon. Thanks for taking the question. Maybe one more on the non animal navigator product. I recognize it's very early and you have a big event this week, and that will be a key topic there, But wanted to ask further about how the pipeline has been building for that offering. And if you could put a timeline on potential financial impact, such as the first contract booking related to that product.

Jeff Garro
Managing Director at Stephens Inc

Thanks.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Yeah. Hi, Jeff. So I'll take the last part first, and Bill can fill in if there's something I missed there. But as far as when and how much, it's early for us to tell. The key areas of the products that we're focused on are obviously our QSP offerings and the SIMSIP offering.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

And we're getting a lot of inbound interest, as Bill had said earlier, but it's really too early to tell. And it feels like something that we'd look beyond Q2. But stay tuned, we need to see it in the performance, and then we'll be able to give you an update.

Jeff Garro
Managing Director at Stephens Inc

Makes sense. And then the prepared remarks, mentioned client AI spend as a tailwind. So I was hoping you could elaborate on your continued effort to infuse your products with AI and whether your investments there are being recognized as a differentiator in the market? Thanks.

William Feehery
William Feehery
CEO at Certara

Yeah, thanks for the question. Last year we launched a couple of AI products. One of the major ones was our co author product, which is used in basically writing regulatory reports, but will eventually write other reports as well across our software portfolio. And we have some other products we put out last year, and there's a couple coming out this year. The ones we launched last year have meaningful revenue, so we're pleased at the growth rate there.

William Feehery
William Feehery
CEO at Certara

They also, as I kind of referenced in my talk, attract a lot of attention from our customers. So everybody's trying to figure out what AI means, and they're really good for getting in to have conversations with customers who want to see the latest and the greatest. And then generally, we can often move on a more comprehensive discussion around our whole portfolio as well. So I think it's all good for Sutara. I think you always have to remember that a couple of years ago, none of us really were thinking nobody was really thinking about GPT based AI.

William Feehery
William Feehery
CEO at Certara

And then the world woke up very quickly. And So there's just a tremendous amount of experimentation and fairly large budgets being devoted to that. As that experimentation phase shapes out, there's going to be a set of companies and products that clearly generate money. And that's really what we're focused on doing. So we're not trying to be a general AI company, but we are intending to really enhance the growth of biosimulation by bringing AI to the technology we already have.

William Feehery
William Feehery
CEO at Certara

And we think if we do that, then there's plenty of value to be generated for our customers, and that'll be good for Sattar as well.

Jeff Garro
Managing Director at Stephens Inc

Understood. Thanks for taking the questions.

Operator

Thank you. And our next question comes from Max Schmock of William Blair. Your line is open.

Christine Rains
Healthcare Equity Research Associate at William Blair

Great, thank you. It's Christine Raines on for Max Schmock. So two for us. The first one, again, related to the preclinical animal testing space. Just hoping you can comment on what percentage of your current, both small and large pharma customers utilize your software and services for preclinical applications today?

Christine Rains
Healthcare Equity Research Associate at William Blair

Just trying to get an idea of where penetration is versus your clinical offerings and what you think is a reasonable trajectory over the coming few years.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

So we hadn't broken out the proportion of revenue by preclinical versus clinical, but we have said that historically, the majority of our revenue was coming in the clinical phases. So obviously with Kymaxon, we're expanding our footprint into discovery, and a portion of the legacy Certara business wasn't preclinical. All of this would expand that.

Christine Rains
Healthcare Equity Research Associate at William Blair

Great. Thanks. Then relatedly, can you talk about any additional planned investments that you're making or planning to make in building out your preclinical offerings and in what areas? Relatedly, how should we think about your newly launched non animal navigator solution? Is it more of a repackaging of your existing software and services that are mostly applicable to the preclinical space?

Christine Rains
Healthcare Equity Research Associate at William Blair

Or is there anything in the solution that you previously did not offer?

William Feehery
William Feehery
CEO at Certara

Well, we have been investing pretty aggressively in the development of our QSP group and technology and software. A lot of that is tied to preclinical and effectively directly falls into the category of what we're talking about in non animal usage there. Non animal navigator was intended to be a combination of that plus some of our drug development strategists who basically can explain to customers what does the new and also our regulatory experts too. We can explain to customers exactly what is the situation, how do you come up with a plan for your preclinical development leading it into IND under the new thinking with the FDA, and then how do you implement that using software like our QSP team? So I don't know.

William Feehery
William Feehery
CEO at Certara

I would say that we moved quickly to put several of the key pieces that you need for this that were already available in Sotara together. And I think that will be a winning combination.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

And one point I might add as well too is that the addition of Applied Biomass at the tail end of 2023 really gave so the combination of our existing QSP practice plus Applied Biomass and having been together for more than a year now, positions Certara with a market leading stance in QSP, which as Bill just said, is going to be a key component to capitalizing on the opportunity in front of us.

Christine Rains
Healthcare Equity Research Associate at William Blair

Great. That makes sense. Thanks for the color.

Operator

Thank you. And our next question comes from Constantine Devitas of Citizens. Your line is open.

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

Thanks. Just changing gears a little bit. Just wondering if you can give us a little bit of an update now on Certara Cloud. It's been a few quarters since you've rolled that out. And just give us some sense for how that's scaling and what kind of engagement or behavior you're starting to see that spur.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Yeah. Hi. So we're pleased with the take rate on cloud. In fact, it's really just a component of pushing the software update across. So when Phoenix customers are renewing their licenses, their new logins are accessing Certara Cloud, which is providing them obviously access to the software they've already purchased, but all of the software that we offer.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

And so the value proposition of Certara Cloud is giving the opportunity to see the breadth of the product portfolio. And given the many, many customers we have for a product like Phoenix that's turning over on an annual renewal basis, then we have a pretty strong presence in Certara cloud as we sit here now.

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

And I guess just a follow-up there on the Phoenix. I know you're trying to move a little bit more of that base to a hosted solution. Where does that kind of sit now? And how should we think about how that's going to trend over the next few years?

John Gallagher
John Gallagher
Chief Financial Officer at Certara

We're still in the earlier innings of the conversion. And so the good news there is part of the R and D investment that we're making in the software portfolio during this year is putting in enhancements and added functionality to the Phoenix hosted product that will be attractive to our customers. And so we're expecting that the take rate on shifting to hosted will increase, but it's still going to take some time.

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

Thank you.

Operator

Thank you. And our next question comes from Brendan Smith of TD Cowen. Your line is open.

Jacqueline Kisa
Equity Research Associate at TD Cowen

Hi, this is Jacqueline on for Brendan. Thanks for the question. Given the reiterated guidance, where specifically do you see the opportunity for potential upside within the software business in fiscal year twenty five, as well as within services?

John Gallagher
John Gallagher
Chief Financial Officer at Certara

Yeah, I mean, so the upside opportunity are all the good things that we've been talking about here related to shift away from animal testing. We just talked about some of the investments in the software product platforms that are going to drive additional adoption by customers. So there's a lot of optimism and excitement we need to see. One of the key questions here, of course, has been what's the timing that this will play out? And it's early, but we have a lot of inbound interest, and that's really what drives the upside.

John Gallagher
John Gallagher
Chief Financial Officer at Certara

But the counterbalance to that, which is important, is that we continue to operate in an end market environment that's significantly challenged. So while we're optimistic, we're executing very well, which we saw evidence of in the bookings in Q1. But the counterbalance to that is the end market environment. Think of biotech funding, think of tier one pharma slowness in decision making, all of which is a carryover from what we experienced in 2024, and was a component of our guidance as we moved into this year that we expected more of the same in the end markets from 2024 carrying over into 2025. And that's exactly what we've experienced so far.

Jacqueline Kisa
Equity Research Associate at TD Cowen

That's great. And I'll just hop on the bandwagon here for just a quick follow-up on the FDA announcement. Do you have any thoughts on how the FDA will select platforms to include in their upcoming pilot studies?

William Feehery
William Feehery
CEO at Certara

Well, I think it's too hard to talk for the FDA. Think that will be coming out. They're obviously very interested in this, and they're talking with a lot of companies. So let's see what they do.

Jacqueline Kisa
Equity Research Associate at TD Cowen

Excellent. Thank you.

Operator

Thank you. And our next question comes from Vikram Purohit of Morgan Stanley. Your line is open.

Parth Patel
Parth Patel
Equity Research Associate at Morgan Stanley

Hi guys, this is Parth on for Vikram. Thanks for taking our question. Just on the FDA announcement, do you guys contemplate on adding additional types of software programs as time goes on to help push out this non animal navigator product?

William Feehery
William Feehery
CEO at Certara

Yeah, thanks for the question. It's only a couple of weeks out, so we're thinking a lot about that. There's an opportunity here for Certara. There's an opportunity to make certain types of investments, but we haven't announced anything yet. So we'll let you know when we're ready.

Executives
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Key Takeaways

  • Strong Q1 results: Revenue of $106 million (+10% YoY) and bookings of $118.2 million (+12% YoY) were driven by 23% growth in software bookings and 7% in services, including a $5.9 million contribution from Chemaxon.
  • Market dynamics: Headwinds from IRA price controls, biotech capital constraints and policy uncertainty are balanced by tailwinds such as the FDA’s animal testing phase-out, broader modeling adoption and rising customer AI spending.
  • FDA animal testing phase-out: The FDA’s plan to phase out animal studies for monoclonal antibodies has generated significant inbound interest in Certara’s Non-Animal Navigator solution, evidenced by over 400 webinar attendees.
  • Strategic R&D investments: Certara is prioritizing AI integration, platform unification and biosimulation model development, underscored by the launch of Simcyp v24 with enhanced drug-drug interaction, virtual bioequivalence and special population modules.
  • Capital deployment: A $100 million share repurchase program was approved (with $25 million executed) alongside a strategic review of the regulatory business, while maintaining focus on M&A and organic growth investments.
A.I. generated. May contain errors.
Earnings Conference Call
Certara Q1 2025
00:00 / 00:00

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