Good day, and thank you for standing by. Welcome to the Certara Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler. Please go ahead.

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 Gallagher Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended June 30, 2023. A copy of the press release is available on the company's website. 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 accompanying materials for additional information. which you can find on the company's Investor Relations website. In the remarks and responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to most directly comparable GAAP measures are available in the recent earnings press release available on the company's website. For additional information, please refer to the reconciliation tables in the company materials. This conference call contains time-sensitive information and is accurate only as of the live broadcast date, today, August 9, 2023. Satara 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.

Thank you, David. Good afternoon, everyone, and thank you for joining Certara second quarter 2023 earnings call. John and I will start with prepared remarks, and then we will take your questions. In the second quarter, we delivered software revenue of $33.7 million, growing 17% versus last year and services revenue of $56.7 million, representing 5% growth versus last year. Total company revenue results were $90.5 million, representing 9% growth compared with the second quarter last year. Second quarter software bookings were $35.7 million and services bookings were $50.2 million. The results this quarter were disappointing and primarily resulted from cautious spending among smaller biotech customers who primarily buy our services as well as a slow recovery in our regulatory business. While we are not satisfied with this quarter's results and they have led us to restate our outlook for 2023 based on current market dynamics, we believe the fundamental health of the pharmaceutical development market and the increasing acceptance of biosimulation technology provide an excellent opportunity for us to continue to invest in the growth of Certara. During the second quarter, our software business continued to perform well as we expand our deep relationships with customers and drove new product introductions. Our customer base continues to renew at a high rate with an ARR of 93% and a net retention rate, 112%. On top of the strong renewals, we are generating demand with our newer products, which include Simcyp Discovery, SEND Explorer and new Pinnacle 21 modules. Customer interest in biosimulation software remains strong. And during the quarter, we passed a milestone of 300 approved drugs with label claims that directly referenced Simcyp. During Q1, we acquired Vyasa, an artificial intelligence software company which has given us the opportunity to extend AI capabilities across several of our existing products.…

Thank you, William. Hello, everyone. Total revenue for the 3 months ended June 30, 2023, was $90.5 million, representing year-over-year growth of 9% on a reported basis and 10% on a constant currency basis. Software revenue was $33.7 million in the second quarter, which increased 17% over the prior year period on a reported basis and 18% on a constant currency basis. Growth in the quarter was driven biosimulation software and Pinnacle 21. Ratable and subscription revenue accounted for 57% of second quarter software revenues. We are pleased with the year-to-date performance in software, which is growing as expected. Software bookings were $35.7 million in the second quarter, which increased 17% from the prior year period. Trailing 12-month software bookings were $131.3 million, which increased 16% as compared to the prior year. As William mentioned earlier, Certara total bookings in the quarter were challenged by evolving dynamics surrounding customer spending. With that said, software bookings have maintained strength and grown at or ahead of historical levels. The software aggregate renewal rate was 93% in the second quarter, which is in line with our plan. Services revenue was $56.7 million in the second quarter, which increased 5% versus the prior year period on a reported basis and on a constant currency basis. Services bookings in the second quarter were $50.2 million, which decreased 28% from the prior year period. Trailing 12-month services bookings were $267.5 million, which decreased 5% as compared to the prior year. Our service is looking for significantly impacted by the dynamic William described earlier. In reviewing the underlying drivers of services performance, we see continued weakness in regulatory as the primary source of our lower full year outlook. We had previously anticipated a low single-digit revenue growth outlook, and we are now looking at a decline in…

Thank you, John. To summarize our message today, we are operating in a challenging environment that has evolved throughout 2023. We believe this experience to be transitory and are taking a more balanced view of the second half of the year. I'm encouraged by the continued high level of performance from our team and the innovation that is coming out of Certara. We have reasons to be optimistic about the changes we are making in the commercial organization. But timing with such changes is a little tricky to forecast. Our medium and long-term view on the biosimulation industry and the value of Certara's end-to-end products and services to our customers remains as compelling as ever. We're confident that Satara is well positioned for growth and profitability over time as a global leader in biosimulation. We will now open the line for questions. Operator, can you please open the line?

[Operator Instructions] Your first question comes from David Windley of Jefferies. Please go ahead.

I wanted to first start on kind of the bookings revenue cycle. Could you talk about your typical cycle time from booking to revenue just thinking about how should -- I mean you're giving us updated guidance admittedly, but how should we think about the lower bookings tethering to revenue over the next maybe two or even [indiscernible]

David, it's John. As far as -- as you mentioned, we've reguided here and the way that we look at our bookings coming in as we're looking at the pipeline, and then conversion of the pipeline into bookings and then ultimately the bookings conversion into revenue. And what you've seen here is some slowness in our Tier 3 customers, as you'd expect, and you'd kind of expect that to be the case given the biotech funding environment that we're in at the moment. And so what that's doing is that's slowing both the pipeline as well as the bookings conversion to revenue. But compounding that is with our Tier 1 customers, we're seeing some slow, so that's i.e., that the large pharmas. We're seeing some slowness not -- and mind you, not cancellations of projects, but some slowness on the services side as they've taking more time, delayed projects, even administrative tax like getting a contract to sign have taken longer in this environment. And so our updated guidance reflects what we've seen both in Q2 and what we forecast going forward related to the slowness there. The -- as it relates to what the visibility is and the timing of that then for software, and you saw the strength of our software business both bookings and revenue, growing 17%. So we're very pleased with the strength in that business. And that's a key proof point in the biosimulation adoption and use case as it continues. The visibility for software is good with both SaaS ratable revenue in addition to annual renewal licenses, then the visibility is good. As it relates to the services side of the business, then the cycle time is a bit shorter there, which I think is where your question was going. All that being said, we do have a strong backlog from previous bookings, and we're very focused on converting that backlog to revenues in the second half of this year.

John, so maybe to try to pin you down just a little bit more in thinking about the implied guidance for the second half of the year. Do you expect that to be fairly level third quarter to fourth quarter or third quarter is still a little higher because it is still living for bookings from last year and then fourth quarter drops off more. Just try to tabulate on cadence.

Yes. So if you look at the second half of the year, then the primary driver for having the second half decelerate is really the regulatory business, where we've seen weakness there in the bookings in the Tier 3 and on large deals that historically have come in that we haven't seen as many this year. As it relates to the second half and sort of the cadence of it, it's really 2 different stories on bookings. We expect Q3 bookings, here we are, it's August. Q3 bookings, we're expecting to be sort of in line with what we saw at Q2. As it -- as we look at on to Q4, we are expecting an uptick in Q4. And we've seen that historically. There's -- we see the software business continuing strength. We see biosim services being able to make some improvements from what we saw in Q2. And then importantly, in the reg business, historically, we have seen larger deals come in during Q4. And so for that reason, we see bookings sort of about the same in Q3 and then an uptick in Q4. As it relates to revenue, we expect the quarters of revenue to be similar in the back half of the year.

More on the pricing environment, I'm wondering kind of pricing vis-a-vis for inflation really. And wondering if demand is a little more cautious at the moment, if that puts some pressure on passing through normal price increases? And then on the flip side, from a -- maybe you're not hiring that much, but from a labor environment later cost environment standpoint, has that settled down to the point where you don't need to put through as much inflationary price increase?

Yes. On pricing, we are seeking to be competitive here. We do have -- as it relates to services, we have large deals that we have visibility to in the pipeline. And obviously, we have a very keen focus on converting those to bookings and ultimately to revenue. And we seek to be competitive and want to win those deals. So I think that goes to price a bit on that question.

Your next question comes from Luke Sergott of Barclays. Please go ahead.

This is [Solim] on for Luke. So just to start us off, what's your level of communication with customers? And what's kind of giving you that confidence that these are pushouts versus lost business to the macro, so to speak? And then how long is that process between speaking to the customer and then eventually having them come on with a booking? And then lastly, the biotech funding environment has obviously been talked about for the past few quarters. In fact, some other companies are starting to see green shoots within that customer base. I'm just wondering now why this is coming up for you guys and what you're kind of thinking about why this is coming up now versus a few quarters ago with the rest of the industry.

Maybe I'll take the last one first. So as far as why are we seeing Tier 3 pressure? I think the way to think about that is the Tier 3 customer weakness is not surprising to your point. I mean 1 way that we look at it is the funding of some of those biotechs and the pressure they have on them has increased certainly over time. And we generally work with them on later-stage drug development projects, and therefore, it might hit us a little bit later. I think more importantly, though, I think what's happening is it's the compounding effect of some weakness in Tier 3 compounded by some of the weakness that I talked about in Tier 1. And when you take those 2 things together, there's no offset there, and that's really what you saw in the results at Q2. The conversations with customers, as I mentioned before, our visibility into the pipeline is actually really good for some large transactions in both biosim services as well as in the reg business. but we need to convert those. And what is the time? I think the time varies quite a bit based on whether it's a big or a small contract, but I can tell you that sort of the total cycle time for projects and services is shorter than the sales cycle in software.

And I'd say, Luke, Bill, but it's an interesting question about why it has later than some other others have reported, but the fact is that based on published data, the funding that's gone into not public biotechs, not just early stage once the later stages down 20%, 30% year-over-year, and we saw that come through in the behavior of that segment of our customers this quarter.

Awesome. That's helpful. And then 1 last one. What is your guide right now contemplating at the low end? Is this a scenario where things kind of worsen? Or just any other color around that would be helpful.

Yes. The low end of the guide is, to your point, it is -- a couple of things would have to happen that worsen and that would be if we saw the regulatory business, which as we said in the remarks, we do expect to contract on a year-over-year basis. But that business was to decline more. And also if biosim services saw additional weakness that would put you at the lower end. So that's the way to think about it.

Your next question comes from Vikram Purohit of Morgan Stanley. Please go ahead.

So we had 2, 1, on the services business, you talked quite a bit about the impact of Tier 3 clients and Tier 1 clients being impacted as well. But any color you can provide on the relative impact contribution from those two client sets and your expectations on how likely each category of clients are end of either canceling projects or simply just pushing out projects into 2024 that they would have wanted to do in 2023? So that's question one. And then secondly, just wanted to see if you could talk a bit more about sales force consolidation and how you think that might help the business overall kind of on a point-of-sale basis.

Yes, sure. So on the services side and how we're looking at that, I -- as you said, I mentioned the Tier 3 which is not totally surprising. I think in the Tier 1 space, that's really what was creeping in and compounding that during Q2. As far as the size of it, Tier 1s are representative of more than half of our revenue. So I guess the way to think about that is, a small delay or some small timing can have a larger dollar impact than what you would expect in Tier 3 because the Tier 3 business is from a sizing perspective, Tier 1s, like I said, are more than 50%, Tier 3s are maybe about 30% of the business. And so we could aggregate more of those to have a similar impact. As far as timing on projects, the timing -- we don't see timing flipping into 2024. That's not really the issue here. I think what we're finding is that deals in the pipeline that we want to get signed and have to become bookings, seeing some delays even just administrative delays and getting them upside. Once say our bookings, especially on the services side, turning them into revenue is typically a 1- to 2-quarter kind of exercise. So we are not at this moment suggesting or thinking that project timing of flipping into 2024.

Yes. And Vik, I'll take the second question. This is Bill. You asked about salesforce consolidation. So Certara, from its beginning, it's a software and a service company. And they are, in fact, tied together. We believe that we can basically gain both operational synergies and also price our package, our offerings better, I bring with salesforce together. I mean, in a lot of cases, our services involve our software or a lot of our software clients could become service customers. We don't feel like we're fully taken advantage of that in the past. I think there's more to go there. So we think that by bringing this together and having a company-wide sales force, we'll have better ability to serve those customers and just better efficiency in terms of how we treat like for example, our key accounts.

Our next question comes from Jeff Garro of Stephens Inc. Please go ahead.

Yes. I want to ask about the work you referenced on analyzing the health of the backlog you've given several comments on kind of cancellations versus delays. But just curious what assessment that you've come to after looking into that a little bit more and your ability to influence client behavior where you see a clear ROI on projects that are under contract, but not underway generating revenue yet.

Yes, Jeff. Yes, as far as the reference to the backlog, then what we've seen with the services piece of the business is we had put up significant bookings over previous quarters. And our conversion of the backlog historically has been quite good. And so although we see the bookings weakness here, and we've spent a lot of time discussing what that looks like. The backlog for biosim services, in particular, more so than regulatory is large and that's something that's actionable for by us, especially looking at our utilization as something that it's going to help us achieve the guidance that we just laid out. So we do -- the reason why we brought that up is that we wanted to make sure we noted that previous bookings are still something that is something that we're able to work through as an organization. It's something that we're focused on, in addition to generating the pipeline and the bookings.

And then another question maybe to dive a little bit deeper on the regulatory business and some of the pressures there. You described regulatory as kind of a category, but I think there are a few different product lines within that. So the extent that you could distinguish between some of the larger projects versus more regular course of business, regulatory work and might be closer to your biosimulation work versus more generic medical writing as well as the market access piece would be helpful. And if you could comment on your ability to compete with CROs for regulatory work in an environment where demand seems to be a little bit softer?

Yes, Jeff, I mean, it's a competitive space, as you know, in a large market. And one of the challenges that we're seeing in that business is historically we have been able to get, I'll call it, several large deals or bookings done in any given year by large, we're saying basically more than $1 million. This year, we haven't seen that. Although as I mentioned earlier, we do have visibility in the pipeline to some of those. So that gives us encouragement that we've got a focus, we've got to be competitive. And historically, we have turned terms of some of those into bookings in Q4, which historically has been our heaviest quarter for some of those larger deals in the reg business.

Yes. And I would say also the reason we have this business is not to be competitive or CROs on medical writing. So we have a high-end onshore tech-enabled business that appeals to a certain segment. We believe we can price competitively when we need to. But point of the business that's been to go after work that we get because of our biosimulation business. And that is one of the key reasons why we want to combine the Salesforce here so that we're or taking advantage of all those opportunities to their full extent.

Your next question comes from Kyle Crews of Credit Suisse Financial Services. Please go ahead.

Looking specifically at software bookings growth. When you look at the 16% trailing 12-month bookings growth within software, it appears that the prior year trailing 12-month bookings would have 1 quarter without Pinnacle 21 bookings in them as compared to the current year, which would have the full year worth of acquisition bookings like full year bookings from that acquisition. Could you please explain the impact of how having 1 additional quarter of Pinnacle 21 bookings impacts the 16% year-over-year trailing 12-month bookings growth? And maybe provide some broader color on how to look at software bookings growth going forward?

Yes. Thanks for your question. So, yes, we've been very pleased with the strength of the software business. We've talked a lot about services here for good reason. But as you pointed out, both trailing 12-month bookings for software. And then also for the quarter, we grew 16% and 17%, respectively, and then revenue grew 17% also. So that's really -- if you look at it, that's ahead of our expectations, and we're pleased with the strength there. The Pinnacle 21 business, you mentioned that was an acquisition we did back in 2021, and it -- and has continued to perform well. It's been a good transaction and a great business to add to the portfolio and its growth has continued. As far as impact on the growth rate, we annualized Pinnacle 21. So I think what I'd point you toward is looking at both the current trailing 12 months, as well as the current performance in the quarter on both bookings and revenue as a key indicator on software. And as we look forward, I think the last part of your question was how do we think about software going forward? And we expect the strength in software to continue. And for the remainder of the year, and we've got good line of sight there both on a ratable or SaaS type business as well as annual license renewals. And again, we think that's a key indicator that the value proposition around biosimulation remains firmly intact. So despite the fact that we do have some what we would consider to be sort of transitory near-term disruptions in the business mainly centered in reg and services, software is a good indicator that biosimulation as both our products and the services that go with it remain a key item for our customers to look at in lowering the cost and shortening the time frame for drug development.

Your next question comes from Max Smock of William Blair. Please go ahead.

Just following up on bookings here in the back half of the year. You mentioned on a consolidated basis, bookings expected to be down low single digits this year. Can you just help us think through what that incorporates for bookings within each segment? And then more importantly, I know it may be a little early for next year, but what does bookings being down low single digits this year important for revenue growth next year? Should we expect kind of more low single digits or could you actually see that maybe step back up to the low teens range that you've outlined as the target moving forward?

Yes. Thanks, Max. The way to think about bookings for the second half is you do see some deceleration there, and that is mainly centered on the regulatory business and the lower bookings that we're experiencing. So we do think, as I just mentioned, the software business should continue on pace. We would anticipate that biosim services, we begin to get some recovery moving to -- on the performance moving into Q4. And there business is where we've got some softness, and we're expecting that to continue into the back half. As far as what does that mean for 2024 we're not able to guide 2024. But the way to think about it is the strength in software business is we would anticipate will continue, and that's what we expect for that to continue. I think to get back to a spot where we want to be on higher growth in 2024, we need some help from the biotech funding environment. We need the Tier 3s to return to spending. And then what we mentioned on some of the slowness in R&D spend in the Tier 1s for that to alleviate and then you end up in a higher growth scenario there. One thing I'd mention is that we do believe that over the long term, Certara would return to a mid-teens grower and that -- and we believe that because of what we're saying earlier on the adoption and the runway for adoption for biosimulation and so that's certainly not a comment around 2024. But we think that the -- over the long term, that biosimulation of the process and the products and services associated with it, had the opportunity. The market is there. We are a leader in that market and our ability to grow within that market certainly remains intact.

Maybe just a quick cleanup 1 before my final 1. On the split between biosimulation and regulatory, I think in the past, you said about 70% biosimulation. I wonder if there's any update to just how to think about the mix from the services perspective as well as the mix within each individual segment in terms of software versus services would be really helpful.

Yes. So we've said that the reg business -- what we said historically is about 20%, 25% of the business. And actually, even in 2023, we still expect it to be in that range. It might be at the lower end of that range. And the mix between software and services, at least in recent history, has been 65%, 35% on a revenue achievement basis, services software and that mix shift a bit based on this current guidance. Think of it in the range of about 200 basis points or so towards software.

And then maybe just a quick 1 for me. Just anything you can provide around the type of work that's being held up in regulatory. We've heard a lot this quarter about a shift towards later-stage trials. And it seems like that would actually kind of play into your regulatory business. So I guess just anything you could help us -- you can provide to help us understand like why those programs are just not moving forward. I guess I'm just struggling to understand the rationale for a small biotech in particular, maybe hold off on filing for regulatory approval and understand again like the thought process behind that actual decision?

Yes. I mean, it's a competitive space, too. So what we're doing is -- and we mentioned the pipeline visibility for reg. We do see some larger-sized deals that are in the pipeline. And I think what the management team is focused on is converting those to bookings. But it is a competitive space. And whether it be small biotechs or some of the larger customers there. We have had a track record of being able to get some of those larger deals in, but we haven't seen that yet in 2023. So we're were very, very focused on the pipeline as we see it right now. So kind of to your point, it's not like the business, yes, has the business in as a whole slowed, yes, I think we do think that's the case. But it's not a complete lack of business, and I think that's to your point and we're competing for it.

Your next question comes from Gaurav Goparaju of Berenberg Capital Markets. Please go ahead.

Just two quick ones for me. How are new additions from larger biopharma software users looking year-over-year? And is software this quarter being driven largely by those Tier 1 customers expanding software use?

It's not entirely driven by -- I mean, big pharma is a piece of it, but not entirely, I'd point you to new logos. So that's a metric that we sometimes talk about in our new logos on the quarter were 134, which is sequentially is a good spot. But I think overall, the way to think about it is we're seeing strength in Tier 1 on software for biosimulation and we see a little bit of slowness in the Tier 3 there. But overall, a lot of that business is centered on our top customers, as we've said before.

And then just 1 more for me. What software solutions have you seen larger existing customers typically expanding their software into? Are there any in particular that you're seeing trends in?

Yes. We've seen expansion in Pinnacle 21, in particular. We're still having very good uptake in our Phoenix suite as well. And in the core biosimulation Simcyp, there's also been some additions as well. So it was pretty healthy in kind of the core offerings. Those are biggest product lines that we have as a company. And so we saw expansions in all 3 of them.

And on Simcyp Discovery, have you seen any upticks in Sens'it been relatively recently released? Or is that Tier 3 weakness kind of impacting that pickup?

Well, we have seen -- yes, it's relatively recent. We have seen some nice pickup in that probably it's also been affected by the Tier 3 weakness in terms of, I think we probably would have seen more, but it's hard to estimate that. But it's off to a good start. It expands the reach of Sens'it to a different audience, which is important. And I think there'll be more to see be more to come as we go forward to the next couple of quarters.

Your last question comes from Joe Vruwink of Baird. Please go ahead.

Just wanted to start on the topic of AI. And wondering on the opportunity, not just from an application standpoint, but also the integration of data and different data sources. It would seem like Certara, just given some of the foundational elements you have would maybe be in a unique position to commercialize a data model and a data offering of what the industry is going to need. I wonder how you think about kind of the product road map and what might be first out of the gates as you look to address the AI opportunity.

You're right. So like a lot of companies, we've been rapidly assessing what AI can do. But we were fortunate in that we acquired the asset exactly the right time. We got a good team we got it in their layer product. We have a very interesting opportunity for data integration exactly like what you're talking about. So just keep in mind, we've owned them for just a few months. And so we've had the opportunity to go through our product portfolio. First step was to look at what can we add in our existing product portfolio. And in a few months, we've added to a couple of our products, D360 and our codecs database. That's a good early indication, but certainly not our full ambition or really what we've got in the pipeline. As you look forward, though, it's exactly what you talked about, there's an opportunity to look across the best about it data that not only exist publicly, but that many of our clients have internally their proprietary databases and integrate them and either train the models or use that in AI products. So we're very much focused on that. It's really quite energized our software development team here is as we're at the forefront of figuring this out. And I think as you go forward, you'll see more and more of that in what we talk about and in our products.

And then just a question on kind of the connection between biosim services and software, and I guess this is more directed at some of the changes you saw in the Tier 1 customer segment. But is there ever a leading indicator between the two, where services utilization and seeing downward adjustments there is a precursor for changing in software demand or maybe a different spin on the question, can your software get to a point? And obviously, you've invested in user interface and making things more user-friendly can it ever get so self-serve that maybe the need for services is ultimately lesser?

Yes. Great question, but I think that the situation is that software is pretty complex. Obviously, we want to make it easier to use is there interfaces like you're talking about so we can expand the number of people. But what we see is that as the software expands its user base, we actually kick out many more services projects it gets used to answer a lot of different questions. People want to extend the software, they want to change the models a lot of times, it goes back the other way as well in terms of services projects give us good ideas for features that we extend the software. So there's sort of this interesting ecosystem between the two. It would be -- I mean, it would be great for pharma, and we wouldn't say no if our software got so good that we could just eliminate services altogether. But the reality is that pharma is working on so many drugs with just so much different complexities in terms of the sites that's going in, but there's always opportunities there to add on services. And I think our clients really value not just that we're software providers, but we've got a pretty impressive group of people who have numerous drug development -- successful drugs under their belt before they came to Certara and at Certara they're seeing hundreds of drug development projects every month. And so that's valuable to our clients as well as they bring our services in. So I think what we saw in the quarter is I would be more alarmed with the software drop because that would probably indicate more of a permanent shift in the amount of money going into pharma development. Services can go up and down a little bit based on how funding comes in and how cautious people are spending and how distracted they are, but as long as we have that software base there, we've got a good opportunity to continue to grow the Services Group as well.

Thank you. I would now like to turn it over to William Feehery for closing remarks.

Thank you very much, everybody. So we obviously are not happy with the performance we turned into the second quarter on bookings. We still feel with a lot of data that there's plenty more growth ahead for Certara to bring biosimulation to the pharmaceutical industry. We are investing heavily, not slowing down at all because of this in the further development of our software. We're very excited about the potential to incorporate AI in biosimulation and what that's going to do to expand. And we believe that as we come out over the next couple of quarters, the softness in service will reverse itself. So I look forward to talking to you in the next quarter and hopefully giving you a better update in terms of where we stand in terms of bookings. Thank you very much, and good evening.

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