Good day and thank you for standing by. Welcome to the Certara Second 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Deuchler, Head of Investor Relations. Go ahead.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have William Feehery, Chief Executive Officer; John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended June 30, 2024. 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 their 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 measures are available on the recent earnings press release available on the company's website. Please refer 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, August 6, 2024.Certara 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. With that, I'll turn the call over to William.

Thank you, David, and good afternoon, everyone. Thank you for joining Certara's second quarter earnings call. John and I will begin with prepared remarks, and then we will take your questions. Certara's second quarter performance reflects continued strength in software and made a more challenging environment in services. We have found that the pace of recovery in the market demand has been relatively mixed. There are positive signs among some biotechs, especially those in the clinical stage, but we see continued caution in the spending patterns of some Tier 1 clients. This has affected our business segments in different ways. Our software business is growing with new products, new seats and new clients as customers see the potential for our products to reduce cost and improve development outcomes. However, our services business is more dependent upon the overall progress of projects in the global development pipeline where there has been reduced spending across the industry and which has impacted our near-term commercial opportunities. That said, our conversations with customers indicate high interest in biosimulation over the long term and specifically in Certara's software and services. Second quarter total revenue grew 3% to $93.3 million which was slightly below our internal expectations. Underlying this was 13% growth in our Software segment and negative 3% growth in our Services. During the quarter, Certara made efforts to optimize the allocation of resources across the business, including cost reduction actions to better position ourselves for balance of 2024 and beyond. As we look to the future, we were encouraged to see our total bookings in the second quarter were $98.9 million, which grew 15% year-over-year. Throughout the quarter, the pace of commercial activity in our services business progressed towards the lower end of our expectations with Tier 3 customers outperforming and Tier 1 customers…

Thank you, William. Hello, everyone. Total revenue for the three months ended June 30, 2024, was $93.3 million, representing year-over-year growth of 3% on a reported basis and 3% on a constant currency basis. Software revenue was $38.2 million in the second quarter, which increased 13% over the prior year period on a reported basis and on a constant currency basis. The growth in the quarter was driven by biosimulation software and Pinnacle 21. Ratable and subscription revenue accounted for 65% of second quarter software revenues, up from 57% in the prior year period. Software bookings were $41.8 million in the second quarter, which increased 17% from the prior year period. Trailing 12-month software bookings were $145.5 million, up 11% year-over-year. The software net retention rate was 108%, which is consistent with our long-term growth profile. Looking at our software bookings performance by tier, we saw very strong performance in both Tier 1 and Tier 3 customer segments, driven by continued adoption of our software. Now, turning to services revenue, which was $55.1 million in the second quarter down 3% versus the prior year period and on both a reported basis and a constant currency basis. Our services business continues to recover following a period of cautious spending among our customers. We were pleased to see improving performance in the Tier 3 customer base, which we anticipate will continue, while Tier 1 customers underperformed our internal expectations on cautious spending, as Bill mentioned earlier. Technology-driven services bookings in the second quarter were $57.1 million, which increased 14% from the prior year period. TTM services bookings were $262.9 million, down 2% as compared to the prior year. Total cost of revenue for the second quarter of 2024 was $39.8 million, an increase from $36.2 million in the second quarter of 2023,…

Thank you, John. To summarize our message today, we are pleased with the many exciting developments at Certara in the second quarter and we remain focused on executing our growth and profitability goals in 2024. There's a lot to be excited about at Certara as we advance biosimulation with our innovative technology. Operator, can you please open the line for questions.

[Operator Instructions] Our first question comes from Jeff Garro from Stephens. Your line is now open.

Yes, good afternoon. Thanks for taking the questions. Maybe start on the guidance and I appreciate the direction there that you're tracking towards lower half of the range on revenue. But maybe you could give some more comments on what gives you confidence that won't slip below the bottom end of that range.

Yes, hi Jeff, this is John, I can take that one. So, as you pointed out, and we said in the remarks, we're tracking towards the lower half of the guidance range given the current environment, and that's primarily due to the performance that we've seen in Q2 on the Tier 1 services customers. So they are tracking below what our expectations were. But that being said, we do expect software to continue to do well. As we mentioned, we're seeing good signs in Tier 3 customers, both in software and in services. And then if you take those together with typical seasonality that we've seen, including last year. So last year was a tough end market environment, and we saw typical seasonality in Q4, then that's what gives us the confidence on maintaining the range.

Excellent. That hslps. And then maybe to hit the profitability side a little bit, I was hoping you could speak a little bit more to the cost reductions. Maybe help us by calling out which line items will see more of an impact? And then how we should think about the run rate those actions on annualized basis versus the impact we'll see in Q3? And then more strategically, why any cost reductions taken in recent weeks or months, what would impact the long-term growth opportunity for the company. Thanks.

Yes, right. So what we -- as we said, we were reallocating resources based on where we're seeing the biggest growth opportunity. So we're focusing the investment dollars on software and integrating AI and then we're taking some cost actions as it related to areas that were underutilized or underperforming parts of the business. As far as how you see that showing up. So that's what gives us confidence in the guide on EBITDA margin because those actions have already been taken and are showing up in the P&L net. So those will continue to flow through, not only in Q3, but also in Q4. And the way to think about it is you should think about it as about a 500 basis point benefit or impact on percent revenue costs. And you'd see about 300 of that come on the cost of sales line and about 200 coming on OpEx.

Maybe Will can take the last part around why the cost actions will impact the growth opportunity from here?

Yeah. Thanks, Jeff. Appreciate it. So I think we've just adjusted based on what we've seen as the current situation in market. We haven't cut our investments in new products or in the long-term vision and health of Certara. We've maintained our investments, as John said, in AI. We trimmed a little bit here and there based on what we saw in the market -- just market demand in the short run that I think were prudent to do, and some of it was just -- we just decided not to hire positions that we intended to hire and we're committed to get into our EBITDA margin guidance, and that's one of the actions we took to get there.

Great. Thanks for taking the question.

Our next question comes from David Windley from Jefferies. Your line is now open.

Hi. Thanks. Good afternoon. Thanks for taking my questions. I wanted to pick up on where Jeff left off. On I guess, on the magnitude, 500 basis points is pretty substantial. And guess if I zoomed out, you entered this year with your bookings trajectory having been a little bit challenging and making the decision to actually spend a little bit more and invest in some growth, I think, targeted at R&D and sales and marketing. I see in your deck, on your 2024 business update slide, you do talk about reduced spending in sales and marketing. And so I guess wanted to understand a little bit the bigger picture about -- Bill, I appreciate your comments on current environment, but maybe what's changed in the six months since decision to kind of double down on some investments as you entered 2024?

Yeah. Thanks, David. I'll start, and then John can chime in some of the numbers here. But I think what we saw as we went into 2024 is there's a tremendous opportunity for us to continue to invest in software and particularly in the AI investments that we started to make when we bought out the asset and into last year. We continue to do them, and they're starting to pay off. We've launched a product recently, which is just getting out there, but it's been very well received by customers. So we see those investments as worth continuing and paying off. What we saw during the first half of the year, was we've had some -- I think in the beginning part of the year, we had some softness in Tier 3 as they've picked up as we went through the year. There's still a little bit of softness in Tier 1s as we go through. So that's particularly in the services side. And so it's relatively easier for us to adjust our cost position and services relative to the longer-term investments in software. And so we took some necessary actions there. So John, if you want to chime in on that?

Yeah, yeah, Bill. Hi, David. I think what we did there is we were slowing some head count growth. So that's a piece of it. And we were really targeting, as Bill was just saying, we're targeting the underutilized areas of the business to take some costs out where it wasn't efficient. And so at the time that we did the guide on the fourth quarter call, we said that we had put together investments, and we had expected the plan to play out in a certain way. And some of the plan isn't playing out in the way that we expected at the time that we did that guide. And we said if that was the case, we would need to take actions to maintain the EBITDA and we've done that, and we've done that as you would expect us to, basically because of what we saw happening with Tier 1 services customers.

Okay. And if I could follow-up on that, good segue there. In thinking about Services, my intuition is that Services with your big customers would maybe lean a little bit more toward regulatory end market access and smaller customers would lean a little bit more toward biosim services, is that right such that like the services weakness that you're seeing in Tier 1 is in a different area than the weakness you maybe had seen in small and that's improving now in small? Or is it really in the same area, all in kind of biosim?

It's really both. So, it's -- the services weakness that we're seeing is both in regulatory and it's in Biosim services.

Okay. Great. Thanks. I’ll follow-up offline. Thank you.

Thank you. Our next question comes from Michael Cherny from Leerink Partners. Your line is now open. Q –Dan Clark: Great. Thank you. This is Dan Clark on for Mike. First from us, how are you guys thinking about pricing on the services side just with these elongated customer conversations on the Tier 1 side, like how do you kind of balance discipline in pricing or price increases and getting deals done? Thanks.

Yes, I'd say that the price increases are more modest, given the environment that we're in and the cautious spend and the slower decision-making, we are still increasing price, but we're increasing more modestly. Q –Dan Clark: And then just a quick modeling question. The customer summit you guys held in 2Q, how should we think about the expense in the sales and marketing lines as so you can kind of model the rest of the year there? Thank you.

Yes. So as we were just saying, the first half and the 2Q sales and marketing expenses is increasing based on the investment that we made and to some degree because of the M&A transactions that we brought in. We have taken actions as were just discussing that are going to slow head count growth and would slow the head count growth that we have on our line item also. Q –Dan Clark: Got it. Thank you.

Thank you. Our next question comes from Michael Ryskin from BofA. Your line is now open. Q – Unidentified Analyst: Hi. It’s Wolf on for Mike. Thanks for taking question, guys. I kind of want to pick back up on the guidance theme, but perhaps just take a step back to end markets overall. I think we all kind of saw Smith Biotech funding take a sequential step down in 2Q and thought that CRO or larger pharma spend with CROs and the like seemed fairly stable. Obviously, you're kind of pointing to an opposite dynamic from that. So I'm just wondering if you can talk to how the tenor of your conversations with those two customers evolved over the course of the quarter.

Yes. Thanks for your question. I think what we saw was there was a pickup in the small biotech funding the first quarter. And then I think we believe that we saw that start to flow through in the second quarter. So there's some lag between what happens in funding and obviously, when it reaches us. But the pickup was welcome because we had seen weakness in that segment for really quite some quarters now. So it was good to see them come back. I think on the larger customers, we saw just more caution around spending. It's certainly true in past years, we've seen pickups in the second half and particularly as you go into the very end of the year as customers want to spend their budget. So we're sort of cautiously watching what happens to that market. And obviously, we factored that into the guidance that we gave.

Got it. Thank you. And then just one more kind of strategic one. Could you talk to the rationale behind the Chemaxon deal? Just interested in your kind of intent in expanding more into the preclinical space and what opportunities that you see there?

Yes. Thanks for the question. So Chemaxon is an important acquisition for us. I think a lot of people have asked me for a while, what are some areas that we're interested in expanding in? And we've always talked about preclinical and the discovery space as being areas that are ripe for biosimulation to make a bigger impact. Most of the biosimulation help that we provide our clients in Certara has been sort of preclinical and then especially in the clinical phase, and we do really well there. But it's important to be able to help our clients make informed decisions on which drugs to take forward and which leads to optimize. We see an opportunity there to make a bigger impact on the overall success of drug development and Chemaxon has quite a number of tools that we believe that we can integrate into a wider suite of biosimulation tools going forward to enable that.

Wonderful. Thanks for the answers guys.

Thank you. Our next question comes from Luke Sergott from Barclays. Your line is now open.

This is [indiscernible] on for Luke. Thanks for the question. Piggybacking off of Wolf's question on biotech and biotech funding, what's the expectation for the rest of the year? I know you're suspecting that you're seeing sort of the 1Q pickup flowing through this quarter. But what's kind of embedded in the guide for the rest of year on how those biotechs are going to perform?

Yes. Thanks for the question, John, do you want to take that one?

Yes, I got it, Bill. The way to think through the customer tiering on the biotech for the remainder of the year is we are not planning an uplift on Tier 3. We were pleased to see a bit of an uptick in Q2, but we have the guide really contemplates a continuation of just sort of stability on the Tier 3 customer base. But that being said, I mentioned earlier, we do anticipate typical seasonality. So turning to Tier 1 customers, the guide does contemplate a pickup in Tier 1 customer activity Q4, which is what we've seen historically. And importantly, we saw last year during that time also that had a difficult end market environment. So that's the only piece of seasonality or uptick that we really have planned into the guidance. Q – Unidentified Analyst: Got you. That’s really helpful. And then a follow-up on just software bookings. You mentioned maybe some strength was driven by expansion of biosimulation to new customers. Is this mostly driven by new offerings? And I'm kind of curious if CoAuthor was a significant portion bookings due to the new unveil or is this more of a side effect of the commercial reorg? And could you just give us an update on the progress there and how it's trending versus your expectations on synergies? Thanks.

Yes. Thanks. And maybe I'll start with that one, John. So we saw a nice growth in our core software products, and particularly Simcyp and Pinnacle 21 so that was good to see. CoAuthor was just sort of fully launched at the end of June so it's a bit too early for that to be a significant impact on our bookings. But we did have a pretty big launch, and we've received quite a bit of interest for that product. So let's watch as we go forward, but it didn't play a significant effect to the numbers that we reported for the quarter. I'd say across the board, we saw a lot of interest in AI. There's been basically steady stream of feature launches and product extensions in our Simcyp family, which has contributed a lot to the growth. So those are the kind of -- I would say it's kind of in the core software areas that we saw the best growth. Q – Unidentified Analyst: Awesome. Appreciate it.

Thank you. Our next question comes from Joe Vruwink from Baird. Your line is now open.

Great. Hi, everyone. If the smaller customers are buying biosimulation software and starting to become more visible in the services pipeline, is there any history for you to say that your large customers tend to follow the small customers within a matter of some quarters or is just current regulatory environment, the large customers are dealing with so different that it kind of muddies any historical comparisons you might make?

Yes. Thanks, Joe. It’s a good question. I think we see them as the market is operating a little bit differently. We think that what we've seen was the large customers have gone through a period of a number of them of rethinking their large portfolios of drugs, which ones they're going to continue to take forward and which ones they're not. Obviously, that's not really the question for the smaller ones who are trying to -- most of them are trying to get funded for one drug or one platform. So I'm not sure that we tend to see, what do you want to call it, a causal link like you're talking about. Now obviously, biotechs often go through M&A with larger customers at some point. So maybe somewhere down the line, that will be an effect, but it's not kind of -- it's not really in our thinking for the rest of year.

Okay. Thank you. And then just a tougher backdrop specifically for regulatory services, any risk that that carries over to your regulatory focused software offerings or you mentioned at the start of the call, just large customers very focused on cost reductions and efficiencies. Is a tougher environment you're seeing on the services side actually beneficial in bringing up things like Pinnacle or maybe it creates an even more favorable launch environment or something like CoAuthor?

Well, CoAuthor is a pretty interesting tool. We've -- in our internal testing, we've seen pretty substantial reductions in the amount of hours it takes to create regulatory documents. And so I think in any type of environment, a significant cost savings like that are a good pitch. And so that's why we're getting -- I think we're being well received there. I think it helps that we have a regulatory business, and so we've used that experience to inform the creation of that product. So it's kind of think of that as we have this product as almost designed by the users of the software. And so that's given us a pretty good sense on how to design something that's truly useful in that market. I would say, we still see continued spending across the board by customers on software, most of whom look at the software as once you're in there, they tend to look at it as continued investment in their infrastructure. So as long as they're going to continue to do R&D, they're going to need most of our software. And so the discussion is around how much renewal and what are we doing with new features and new extensions and things like that. So I think that's one reason why we've seen that as a stronger market right now, whereas the services have tended to be more project-based as people adjust their portfolios and they stop some drugs they start others, there's some disruption to the flow of projects that come through to us, and so that's going to factor this year.

Okay. I'll leave it there. Thank you very much.

[Operator Instructions] Our next question comes from Max Raines [ph] from William Blair. Your line is now open.

Hi. Good afternoon. Thanks for taking our questions. I wanted to ask you a question along the same line as Wolf's [ph] question earlier. So on the services side, given we've seen clinical CROs flowed out pretty well, is it fair to assume that at least a chunk of these programs in large pharma moving forward, but they're electing to do so maybe without your consulting services? Or do you really think it's more a function of the fact that you're missing now and on bidding and working on these clinical programs that are actually being paused and reevaluated. And therefore, maybe there's a potential for you all to still recognize revenue from these programs in the back half of the year or 2025 as it potentially move forward? : Yes. We do believe that, and in addition, we point to the fact that we did see an uptick in services bookings in the second quarter. So I would say too early to call a huge recovery in the market, but we are seeing improvement as -- in the overall environment as we move forward to the second half of the year. I don't know, John, if you want to comment on that?

Yes. I think we anticipate having when we did the guide, it said it would be a first half, second half story particularly on services. And we're seeing that in the way that this year is playing out, we'd anticipate to have 49% first half, 51%, 52% second half. And so we typically do see services pick up in the latter part of the year and namely in Q4. And so that's the typical seasonality that we've been referring to and that we saw last year. So we do think that, that will be a component of how this year plays out also.

Yes. That’s helpful. Thank you. And then maybe sticking on the services bookings side. I guess it sounds like, based on your commentary, they were relatively in line with your expectations, but any comment around what you're looking for in the quarter and then how services bookings in particular stacked up? I know when we talked last quarter you kind of pointed us to 2021 and 2022 from a seasonality perspective. It looks like the average step-down in those years was about 10% sequentially, and they were down about 20% sequentially here in the second quarter of this year. So any comment around just how services bookings kind of stacked up to your expectations here in the second quarter?

Yes. So the -- I mean, the services bookings did come in later than we had expected, given the Tier 1 performance of what we had seen. But that being said, services bookings did grow 14% year-on-year. And as we look forward to the second half then -- as I mentioned, I think probably the key component in the second half is the seasonality that we've seen, and we saw last year importantly. So we're not anticipating anything outsized in that seasonality compared to what we saw last year.

Okay. Thanks for taking our questions.

Thank you. Our next question comes from Steve Dechert from KeyBanc. Your line is now open. Q – Steve Dechert: Hi, guys. Just wondering if you think the launch of Certara Cloud had an impact on your second quarter bookings. Thanks.

It's still early days, Steve, for Certara Cloud to have a material impact on the bookings. So the answer to that. Although, as we said, our software bookings and our software revenue continues to be strong. We don't see any reason for that to change. And Certara Cloud is a key component of our strategy going forward, and we think that that's going to enable not just that product, but all of the products in our portfolio. But for Q2, that wouldn't have been a meaningful part of our booking.

Thank you. This concludes our question-and-answer session. Thank you for your participation in today's conference. This does conclude our program. You may now disconnect.