Certara, Inc. (CERT) Earnings Call Transcript & Summary

Thanks for joining us for this next session. My name is Mike Ryskin. I'm on the BofA life science tools and diagnostics team with the other senior analyst, Derik De Bruin. Joining us for the next session is Certara. We've got John Gallagher and Andrew Schemick joining us. The format of the chat is going to be a fireside chat, and we'll take questions from the audience as they come in. But first of all, gentlemen, thank you for joining us.

Thanks for having us, Mike. Glad to be here.

Yes. And then maybe you guys reported 1Q very recently. I don't know if you have some opening remarks you'd like to make to kick things off.

Yes. I mean, look, we were pleased with the performance on the quarter, maybe a couple of metrics to think about on it. One is around the bookings. So we did get some questions come in on the bookings when you look specifically at the quarter because we were impacted by timing. And then we did also mention that our reg services business is recovering a little more slowly than we originally anticipated, so it's going to be more weighted to the back half of this year. But I think what's important to point out is that when you think about the bookings and the pipeline of what's to come for us, and it's important to look at the trailing 12-month bookings. And if you do that and you look at software, trailing 12 months on software is a 24% growth. And then biosim services, the trailing 12-month bookings there is 25%. Those two things together combined to be 3/4 of the business. So we've got 3/4 of the business on a trailing 12-month bookings basis is growing in the mid-20s. So we're actually really pleased with where bookings are coming out. And as far as the quarter, where we were about 4% growth there, we, as a company, have said before that as you look at quarterly bookings, they're going to be swings quarter-to-quarter, and there's going to be some movement. So again, I'd just encourage everybody to look at the trailing 12 months. On the revenue side, also very strong on the revenue side, 13% constant currency growth in revenue, and that's despite a few different headwinds. So there were 3 different headwinds I'd point out where -- despite them, we're still growing 13% on a constant currency basis. So that's pretty strong and right in line with our annual guidance. We -- a couple of those headwinds were in software. As I mentioned, we had some timing slip out of Q1 and into Q2. Then also the reg business, as I mentioned, a little slower recovery than we originally thought they are more back half weighted, and so that was a growth headwind in the quarter as well as the proportion. So when you look at our software business, the proportion that's ratable or subscription based, that proportion has increased to 59%, up from 54% last year. And so that also is a headwind to growth. So when you take those into account, we're growing 13%. It's a pretty good place to be.

Yes. Andrew, anything to add or...

I think that was well put. I think the other metric that we'd point to is the kind of the company's overall book-to-bill, which is stable at about 1.2%, which is also supportive of our outlook going forward.

Yes. Great. No, I mean, that's a question we've often gotten is the quarterly cadence versus the fiscal year versus the trailing 12 months, how to think about backlog, how to think about orders. I think that's the debate we often have is sort of like what's the right way to do the forward model. But like you said, I think you've seen in the past a number of quarters where something slip forward, some things slip back. But then when you do come back and look it on a trailing 12 months or on a fiscal year basis, it ends up being fine. So it's a little bit of volatility quarter-to-quarter trends. I think, it's just the nature of the business, the nature of the financial model.

Yes. I think the other point to focus on is the fourth quarter, our bookings are 12-month bookings. We do have multiyear contracts, but we only book the expected next 12 months revenue in terms of the metric that we put out. And we came off a fourth quarter that was, by far, a company record for bookings, and that's also support for our performance in 2023.

Great. So I think you also -- you touched on some headwinds in the regulatory business. So I just want to dig into that first to get that out of the way. Just give us a little more background on what you're seeing there, and why is that taking longer to work through the system?

Yes. So on regulatory -- it's important to note we didn't come off our full year outlook. So we had said when we guided the year that full year, we expected regulatory to be in low single digits. We still think it will be. We just think it's going to be more back half weighted. When you look at the growth there, it was about flat on the quarter. And clinical trial disruptions, a little bit of delays from a regulatory basis is sort of elongating the cycle to some extent. And that's one aspect. And the other aspect, of course, is we're very focused internally on executing commercially, and we believe we can do that. That market has grown high single digits. We think this year is low single digits. But over a longer period of time, we can get there, and we're focused on execution for the remainder of the year.

And that back half ramp, same thing. Do you have visibility there in terms of conversations with customers? Do you have any trends you can point to in terms of bookings or...

Well, one thing that I think is important to point out is sometimes the regulatory business can be lumpy and sometimes contingent on larger transactions. Our low single digits does not contemplate the necessity for a handful of large deals. Instead, it's really just some of the smaller transactions if we can execute on those and get the pipeline done and maybe get a little favorability from just the broader regulatory environment, and we think we can get there.

Okay. And then maybe just taking a step back across the entire business. Could you talk a little bit about end market strength, conversations with pharma and biotech for the rest of our coverage, which is outside of biosimulation, obviously, but there's been a lot of worries in the last 3 to 6 months, both on large pharma with impact of IRA but also emerging biotech funding environment. So just what are you seeing from those types of conversations?

Yes. I mean, probably the best way to describe how we see it from our business perspective is looking at some of the customer metrics. We have a renewal rate at 90%. Our net retention rate, a software metric that we look at, is 110%. When you look at the software growth on the quarter, the reported software growth on the quarter 13%. So if you unpack that, 10% of it is from existing customers and expanding customers, and 3% of it is from new logos. So we're continuing to build new business there. And new logo additions are really consistent with what we've seen on sort of an annualized basis. So we're adding new customers. Our existing customers are expanding -- that's another note, too. So customer account -- with account values greater than $1 million and greater than $100,000, those are a couple of metrics we look at. Both of them are growing. So we reported what those numbers were at year-end. And in Q1, both of those metrics grew. So really across customer categories, we're seeing growth. So sort of in contrast actually to what you hear around biotech funding, we're actually seeing really good growth at Certara.

So what do you think makes you impervious to that choppiness in the end market? Why have you been so resilient?

Well, we're focused on the clinical phase of drug development. In the clinical phase, once you get to that phase, then I think funding is more robust and consistent. And I think our results sort of speak to the fact that once you're at a clinical phase of drug development, then there's enough momentum there that there's going to continue to be investment, particularly by some of the larger players, which make up about 50% of our business.

And maybe you can talk -- maybe that's a good place to transition into sort of the overall investment thesis or business rationale for Certara, right, is you exist to improve efficiency of clinical trials to make it easier and more productive from pharma to get drugs through the clinic. So in a sense, you're a solution to the problem if they are facing some funding constraints, and they need to be a little bit more efficient in how they ought to capital. So could you talk about that component of the strategy?

Yes. Yes. You said it well. I'll touch on it and then maybe I'll let Andy chime in a little bit on that as well. But Mike, you sort of set it up nicely. It's -- we are positioned, especially as I was just mentioning, in the clinical phase of drug development, we're positioned with -- we have the largest players in biopharma mixed with some Tier 2s and Tier 3s. We're seeing growth in both of those customer categories. And our business model is effectively very symbiotic with these biopharma companies in the sense that we can shorten the length of clinical studies, we can reduce cost in the clinical studies, and that improves the overall health care environment. Anything you want to add to that?

I think the only other piece to add to that is just in terms of the flywheel effect of the regulators are also encouraging increased adoption of our solutions, and we're seeing that from the FDA in terms of taking additional licenses of some of our newer technologies and kind of collaborating with us on our road map for biosimulation. But also what we've seen recently is from the perspective of the ICH, which is where the regulators come together to harmonize standards, they put together a working group and publish out kind of a 3-year road map about how they can kind of make some consistency around the application of biosimulation and regulatory submissions on a global basis. Right now, there's varying levels of use when you look, for example, from the FDA to the EMA, et cetera. So that's another kind of tailwind that we have and a piece of the kind of value proposition. It's seen as regulators as a way to do more efficient review and to make the overall industry more productive.

How do regulators like the FDA interact with Certara? How do they use your services? Are they more on the software side? Or are they more on the service side? Are they running sort of like checks of the data that pharma submitting or...

Yes. So the regulators are primarily on the software side. We do -- many attend -- we do training as well in terms of -- on the services side, workshops and training for the regulators. They're the largest users in terms of user count of our core software. It's heavily adopted, and they're using it to ask questions in terms of data that's submitted and accelerate the review process. And we also have a software called Pinnacle 21, which is a data validation software essentially and the regulators were dealing with a problem of receiving data from various data sources and how do you make sense of what you're receiving. So they've adopted the -- FDA led the way adopting the CDISC standard and selected Pinnacle 21 as the tool to ensure that all data submitted to the FDA is in a kind of acceptable format for their review, and that's been a good partnership for us as well.

Yes. I mean maybe this is a good sign to talk about some of the specific software, Simcyp, Pinnacle 21, Phoenix. Where are you seeing some of the strongest growth? Is it those major sort of like anchor platforms? Is it some of the newer offerings?

So you -- Mike, you touched on what we sort of consider our core software programs with Simcyp, with Phoenix and with Pinnacle 21. And altogether, they're growing sort of mid-teens, which is a strong growth rate. Pinnacle 21 continues to grow strong. It's adding -- we're not -- we've annualized it now, so we're not continuing to break it out individually, but it is certainly accretive to our overall growth rate. Simcyp, also similarly and despite currency headwinds because Simcyp business is based in the U.K., a little currency volatility on a year-over-year basis. So they're still growing in the teens even despite some of the currency pressure there. And then Phoenix is a core product that's been on the market for a long time, all of our -- a lot of key players there. That's an annual license kind of business, as Andy was saying before. Sometimes it's multiyear. Most often, it's a single year. And that business is growing strongly as well.

And when we think about new additions to the platform, you've got the R&D internal approach, both sort of like iterative, but also completely new solutions. And then you've also got M&A like you did with Pinnacle 21. Could you just talk us through where the investments are going and where you see the opportunities?

Yes. I mean -- and we also -- we did a transaction earlier this year on an AI company called by Vyasa that we're excited about. And -- to your question, where is that going? It shows up in the P&L, an organization like Vyasa, mainly in R&D and then -- and that's helping us continue to develop our products and how AI can interact with our whole portfolio of products. On a go-forward basis, I'd say that as we look to deploy capital, we would certainly look to M&A. We don't have to do a transaction, which is a luxurious spot to be in. We don't need to do a transaction. But we do have a very strong track record of executing on accretive M&A for the organization, and Pinnacle 21 is certainly a good example of that. So we'll continue to screen for those kinds of opportunities. We're very disciplined on price and will continue to be -- as I mentioned, we don't have to do a transaction. There are plenty of organic opportunities inside the company where we focus a lot of our attention. And having -- just to sort of conclude on capital allocation, while we're talking about it, too, is the cash. We have $244 million of cash and equivalents on the balance sheet. We think it's important to -- and we're generating cash. So that's -- it's additive every quarter. We think it's important to have that cash in this macroeconomic climate that we're in. And having that cash and the strength of our balance sheet is a key differentiator for us to be able to take advantage of strategic opportunities.

Okay. Are there any particular areas? I'm not asking in terms of specific targets, but in terms of technologies. You mentioned the AI, you did earlier and again, you did Pinnacle 21. But are there -- as you look at the portfolio today, are there either therapeutic areas or technology solutions, where you're looking at it and you say, you know what, we have a bigger opportunity here, this is where we need to invest again, either organic or M&A?

Yes. Yes, I'll start and maybe have Andy add in a little bit here, too, with his strong base of knowledge. But at least from my start, it seems like opportunities for us, you can look at opportunities in software or services. And I think that we do have sort of a certain proclivity toward software at the moment. And as you're saying, Mike, kind of building out the software portfolio, whether it's adjacencies and biosimulation or adding some new spots like we did with Vyasa. But -- what else would you add to that Andy?

Just building on your point earlier in terms of the majority of our business is in the clinical phase, we do see some opportunity in the earlier phases in discovery in terms of extending the platform back so we can attach earlier and continue -- we've made a lot of investments in sales and marketing in terms of a land and expand strategy. So kind of filling out some of the spaces where we're primarily -- actually 70% on the clinical phase. So as both ends there, we see some target opportunities. And there's both tuck-ins -- a lot of tuck-in opportunities for us kind of within our core and on those edges. And then strategically, we're looking more towards software.

Interesting. Would that be still sort of like PK/PD modeling side of things? Or could that go as far as actual drug design and molecule design.