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

All right. I think we're going to get started. Welcome back to the 42nd Annual TD Cowen Healthcare Conference. I'm Brendan Smith, one of the tools DX analyst here. And I am joined today on stage by management team from Certara. So to my left is the CEO, Jon Resnick. Jon.

Welcome. Thank you, Brendan.

And to my left is CFO, John Gallagher.

Hi, Brendan.

Good to see you guys. Thanks for joining us. So as with all of our other fireside chat sessions today, if you've got a question or anything, do feel free to kind of flag me or you can send me an e-mail at [email protected] and we'll try to weave it into the conversation here, but obviously no shortage of topics to discuss today. So Jon, maybe I'll just kind of hand it to you upfront to kind of give you a chance to introduce yourself to folks from your seat, I know you stepped into the seat January 1 of this year. So you all reported last week as well. So maybe give us 10,000-foot view of how it's been so far and maybe kind of honing in the conversation, feedback to the print last week.

Yes. Sure. Thanks for inviting us here today. I appreciate it. And I'd also reiterate if there are questions, I'm happy to take them and make this dynamic. I'm on day, I think it's 61 or 62. So still new, but I think we're moving from the fact finding and asking question standpoint much more into the solutioning and how do we move this business forward. So I think March 1 is a transition in terms of the way we're approaching it. We got through the print. And I'd say, overall, the team has been incredibly accommodating. They've been incredibly thoughtful in terms of working with me and helping me to get to understand the business in very quick speed. What I hear from them is not only great pride around what they do day in and day out, but also an appetite to do things differently and appetite to kind of what I refer to as kind of stepping up the bar internally on our operations and our execution. And I have a team who's highly engaged and ready for the journey. We -- I think my kind of initial observation from looking on the business was what a phenomenal set of tools and gems and people kind of knew that in a sense coming in that there were all these kind of market-leading products. But as you kind of sift through the organization, you have one-off conversations. There's just so many great nuggets of expertise and potential and capability. So I come in extremely kind of optimistic and clear eyed in terms of what where the business sits, the opportunity in front of it and what it's going to take to help move us to the next step.

Great. So maybe we can kind of start with the platform itself, right? So I think looking at all the different kind of product offerings, Certara has really put together over the past few years. What would you kind of say and point us to as kind of a couple of the ones that are the most important growth drivers for the software business, really maybe over kind of the next 2- to 3-year time horizon. And help us understand what's some of the thinking that goes behind your selection there?

Sure. So I'd point to -- there's a handful of things. Like there's a world-class team. We've got a handful of market-leading products that are well established in market with both growth potential and great capability. We have a ton of opportunity to connect assets in a different way and to really to drive a lot of innovation through it. And when I kind of step back and look at the business, we kind of contort ourselves externally to report what's the software and what's the service. What I really see is a business that performs extraordinarily well against the key thesis that I think most people are most interested in, which is that intersect between technology and expert service-based pull-through, particularly on the MIDD side, so the MIDD side of the business and the biosim side, somewhere around 2/3 of the business is in very, very good kind of financial shape has a great runway in terms of market capability, thrilled with not only the quality of the products, the quality of innovation, but also the experts that wrap around that capability. I kind of intentionally said the service first stack, because I think this is reinforcing in execution. And I think as you think about businesses moving forward, suddenly, no one wants to be in a pure software business anymore. I don't think this has definitely a SaaS profile to it, and we're happy to sell the SaaS pieces, but what makes this business very distinct is the intersect between market-leading products and world's leading teams in terms of scientific expertise.

So I mean you mentioned earlier, as you've kind of been meeting the team broadly, you kind of felt it like probable energy to innovate here and to kind of keep things moving forward. And so I guess now stepping into the seat, really, what are your really key strategic priorities as kind of a new CEO here? And how are you planning to kind of do things differently to really maximize the opportunity for Certara?

Yes. So look, I think companies go through a cycle and Certara has done very well historically, I think getting to this point. I think one of the reasons where I was brought in is because my expertise and where I've led business in the past is probably at a different level of scale. So what I've been focused on is how can I take the different pieces and I intentionally use that word of this company with a great legacy and really start to think about it as a platform for growth on an ongoing basis. So how can I bring kind of management, scale, expertise, how can I bring a bar for operations, which is very high to the next level to help drive this company into that next phase of rapid growth. I think, what I called out in the initial call, and I'll reemphasize here, probably 3 areas: one, strategic clarity in terms of where we're going to be investing in on an ongoing basis. We've got a robust platform of existing products and products in development. Lining up resources against those investments and where they're going to go more on the MIDD side of the business, helping to build out a more disciplined product management culture, injecting customer centricity, helping to bring that common footprint to partner, not only with the power users on the client side who are the key users, but to bring those capabilities more broadly to fit into clients need to disrupt the $260 billion of spend and 96% failure rate, some clinical trial execution, how do we bring those capabilities more centrally. And an operating cadence and an operating management that will allow us to pull that through in a consistent measured basis.

All right. Great. So I guess while we're on the topic of kind of maximizing the platform opportunity here, let me kind of just get this out of the way and ask you about the regulatory services business. Give us a sense. Okay, so where are you at kind of in the process of understanding the future of that business? And how should we kind of think about the cadence of updates for this moving forward?

Yes. So you're not the first person to ask me that question. This is, as I understand it, day 512 since the process was announced. Look, I've been at it for 60 days. I think I came in and took a fresh look at the opportunity. And I've kind of been careful the way first of all, I'd say every banker called me when they -- December 15 when they saw the press release and said, you have to sell this business, you have to sell this business. That was the clearer refrain from everybody in the space. The entire market, all your investors want to do it. So as I said to a couple of people today, my immediate instinct is, well, they're all telling me to sell it. I'm going to keep it because that's -- everyone like to be a little bit contrary in the way that we think and the way that we challenge people. But like, I came with fresh eye. On the pro side of the business, it is a business that delivers high profit to us despite the commoditization pressures that exist in the generative AI side of the world and some of the revenue compression, it continues to perform. We had a 1.5 book-to-bill in December in that business. So for a business that everyone says this, disappearing, it faired, I'd say, reasonably well in the quarter. The flip side is -- look, it's on the wrong side of AI-generated trend, although we're not seeing that evidence quite in clients. I think it's more moving with cycles in the market. And as a compressor over the last couple of years, it's held back our top line growth rates, which I also know a lot of investors are looking for, I'd also echo kind of point 3, that there seems to be a message out there that it would help prove the point of strategic focus. I don't know if you need to do it to prove strategic focus, you can redeploy the resources in a different way. All that said, at the right -- what I need to ensure and what I've been working through over the last couple of weeks is to make sure that the economic value received through any strategic review process would be commensurate with the value, I think that it provides to our business. And we hope to wind down that process in the next couple of weeks. So I said nothing in 2 minutes.

No. But, I mean, I think a lot of the running commentary around this, obviously, last year was just tough for the sector overall, right? It's not exactly an ideal seller's market in many, many capacities, right? So it feels like -- is it fair to kind of say that as some of the biotech pharma funding environment starts to at least equilibrate, stabilize a little bit this year that you have a little bit more leveraging power in some of those negotiations and conversations you're having?

I think it's coming off a 1.5 book-to-bill. I think it's subject to some of the broader rebalancing components that happened in broader pharma. I also think that it's proven itself to be more resilient to the generative AI thesis, which is dominating so much of the narrative out there than one I would have anticipated. So I do think, and it produces a fair amount of gross profit. So all those things considered, yes, we will be judicious in what we do, and I do believe it is worth a fair amount.

Okay. So maybe now pivoting to kind of the remaining core aspects of the actual software platform itself. You guys put out a press release this morning, talking about essentially Assembly, right? So maybe talk us through, first of all, what the real kind of impetus behind putting that out this morning was and what -- how we should think about that as representative of the value add that you see for the platform itself for the customers?

Yes. I've been here all morning. It was the Simcyp press release that went out today. Thank you. I'm glad you can break the news to me. So look, Simcyp continues to be a core component of our strategy. It's core to the MIDD component, working hand and fist with our PBPK services capabilities continues to, we believe, to be the market-leading product in that space. Release cycle is periodic. This was one of the major releases, the functionality in here is very consistent with what our consortium members are asking for. So we believe it adds incremental value, incremental investment, again, in the area, which I see higher growth and higher potential, which is that core kind of biosim MIDD space. And I think what you'll see from us in terms of communication over the next weeks and months is us explaining a lot more about our portfolio, explaining a lot more about our ability to kind of scale, not only AI, but the broader biosim MIDD thesis. So I think you're seeing a little bit of the beginning of a pattern of us getting clear messaging around the growth engines that we have within the business.

Can I ask about also because we had a pharma R&D investments panel just yesterday afternoon. And I think this conversation around kind of buy-in from FDA from regulators overall to a lot of these software platforms is increasingly kind of boiling up to the top of the conversation too, right? Just as more biotech and pharma companies in general are leaning into some of these frankly, with their own, I'd say, limited experience in many capacities, it feels that kind of buy-in from regulators is pretty critical point of differentiation that not many folks in the space actually have. So can you maybe just speak a little bit to kind of the relationship with the FDA that you have through some of your offerings? And how -- first of all, does that come up in conversations with customers? But how you're planning to kind of leverage that moving forward as a whole new kind of cadre of folks come into the space?

So, first of all, I think if you look at the environment and the general secular tailwinds in the space, I think they're very positive overall. I think if we look at the FDA Commissioners' comments over the -- both in the week of JPM and New England Journal of Medicine and NAM discussion from last year, all are very positive to what we knew. One of the questions I get a lot is rate and pace on that side of things. Like if you're putting out these big proclamations, when do we see it burn through, and pull through the business. You got to remember that I'm sure the panel up here strategically interesting, but it takes a while for change. No one -- it's difficult to break. It's break the model in which people execute. So it takes time and energy. If I look at forward indicators like our QSP business and some of those businesses that would directly be on the innovative front. We're seeing a huge uptake on that side of the business, which to me is proof that some of this innovation is pulling through, and is kind of booming that segment of the business, which I discussed before. In terms of regulator assets and regulator relationship, we're, I think, very blessed and pleased to have relationships deep with more than 20 regulators around the world. I think having the fact that there's trust at all levels really helps facilitate the conversation, not only between ourselves, but between the biopharma customers and the regulators. It helps also make our products to be preferred products within the 4 walls of the biopharma customers. So I don't want to speculate against -- around others in market and others, I don't think it's appropriate. But I think we're very proud of the relationships we've built over time. We think that they're distinctive. We think that they're incredibly helpful in ensuring that our clients are successful and that the easy communication between our software assets and our people and that kind of virtuous cycle is very helpful in enabling the best science to carry the day.

Okay. So maybe let's now kind of pivot to the actual earnings print and outlook for 2026, right? So on the Q4 earnings call, you kind of highlighted expectations for roughly flat to 4% growth top line revenues for 2026. Help us kind of unpack what some of the assumptions are kind of underpinning that and really contextualize this as we come out of 2025, right? What are you kind of watching for to help guide some of those assumptions?

Yes, sure. Thanks, Brendan. So we were pleased with the way that the year ended when you looked at revenue and EBITDA, then we had good revenue growth came out at the high end of the EBITDA margin guidance at 32%. So those were all positive. As we looked ahead at the guide, one thing that was notable is we did -- we saw some deceleration in the software bookings. That was due to some customer dynamics with big pharma. We talked about some seat license reduction in Phoenix. There was some flatness in Pinnacle related to the study counts. Those were a couple of the key drivers. In addition to execution, we talked a little bit about execution, too, where we think there's opportunity to do more and do a bit better. So -- but we did see some deceleration in software. So that was one angle to look at how do we approach in 2026, TTM software booking is about 1%, that would lead you down a path that would get you to low single digits for 2026. Despite all of the good initiatives that we've got underway, and with Jon's presence here, there's some execution oriented topics that we're going to work through. On the services side, if you look back at the last several years, then it's basically been about a 3% grower in revenue growth on a year-over-year basis, we had very strong bookings exiting the year. So Q4 services bookings were 17%. That was across both biosim services and in REG. So we were pleased to see that acceleration that happened really in the month of December, and we think that it's a good signal of discretionary spend at our customers. And we also saw it come across customer tiers, including Tier 1, where we've had some challenges during the course of last year, but at the same time, it was a seasonal Q4, which is typical for the business. And so as we looked ahead, looking at low single digits for both software and services made the most sense.

Can I also ask, I know around this time-ish last year, the FDA puts out the conversation around NAMS. Brands is kind of left, right and center amongst you guys and a lot of your colleagues for a lot of last year. And I think there's -- to your point, it takes time to move the direction of the ship in many respects, right? But you had mentioned that you had started to feel a number of new inbounds from customers directly related to some of these NAMS initiatives. So help us understand like, first of all, what's kind of the status of a lot of those conversations? Are you still continuing to see a steady kind of cadence of new inbounds tied to that? And then how should we think about potential inflections in revenue tied specifically to some of those initiatives?

Yes. So maybe I'll start. And the -- so what we said when that came out, a couple of the key areas to look at that we pointed to areas of Certara that we already had in place would be Simcyp, performance on Simcyp as well as the QSP business, or Quantitative Systems Pharmacology. Both of the -- both Simcyp and QSP had really strong years. So despite what I just said about some of the bookings exiting the year and how that leads us to a low single-digit growth led by a couple of other products, Simcyp and QSP really had great years. QSP is the fastest-growing area of our business right now. And so the undercurrent of what's happening related to NAMs, albeit we'll have a longer tail to it, I think, than anybody really wanted. We are seeing the areas of our business that are touched by NAMs are growing the fastest, including last year and expectations as we look ahead in '26.

And I'd also point out additionally, look, that's not the only area of regulatory expansion. By that, I mean, I think there's a lot of core use cases around things like lactation and pregnancy and organ impairment and pediatrics, which also create a lot of potential opportunities for us to do things differently as being the biopharma segment to do things differently and to drive evidence in different ways. So it's not just the NAM piece. So I'm equally as bullish on some of those opportunities.

Okay. So maybe kind of moving back just to my questions on guidance for this year, too. So you also guided to 30% to 32%, I think, adjusted EBITDA margin, right, which kind of does imply a potential step down a little bit from FY '25 margins of about 32% or roughly in that same vicinity. So how should we kind of think about the margin profile of the business over the near term? And is this something that there's potential inflection points as kind of the broader market starts to recover a little bit more in the back half of the year? Like how should we just kind of think about the evolution of that for the business.

Yes, yes, yes. Yes. So -- last year, we were pleased. We were 30% to 32% last year. That's also this year's guide. As you pointed out, it does imply a little bit of a step down since we ended the year at the high end of that range at 32%. We were pleased with the ability last year to be able to invest, yet also still manage through some of the cost structure and find efficiencies. You heard us in the prepared remarks last week, say that there was $10 million of cost avoidance outside of the 2026 plan that Jon and I are already looking at. So I guess what I'd say is this is another investment year, meaning we need to put more money into MIDD to catalyze the growth into the future, and those investments need to happen. If you just looked at it on the surface, that would imply a step down. But we have a track record of being able to manage to the higher end of that, and we're already looking at cost measures that in the form of the avoidance that we mentioned in the prepared remarks, to try to manage through both investing in the pockets of the business where we need to invest, but also recognizing that some of those investments hadn't paid off in the way that we would expect them to and look to get some of the cost out of the structure, too.

Got it. And I think maybe tied to this, I wanted to ask a little bit more about kind of the AI fold into a lot of the existing platform offerings, right? So how should we kind of think about the impact of some of the new AI-powered launches, whether that's Certara IQ, AIDD, Phoenix Cloud. On kind of near-term revenue opportunity there? And maybe what are some of the levers to really drive that kind of through pricing increases? Is it kind of through wider customer adoption maybe for folks who are looking for that to kind of get over the finish line? Like what's that kind of look like now over the next 12, 18 months?

The well -- so we can talk AI. But just in general, we think that there are a number of opportunities both on existing products and new products. AI being a core capability. So look, overall, there's a couple of things we're super excited about Phoenix Cloud, which really launched last year, saw a number of kind of Tier 1 clients go. We have a good healthy pipeline into this year. So I think extension, the Phoenix team has also been very innovative in terms of embedding AI into its core functionality. You mentioned Certara IQ, which is a QSP technology, which is an AI-based technology as well, which is going to help accelerate growth and whether that bleeds through on the tech side or the service side in the first full year, we'll see. My gut is that it's going to probably drive faster on the service side before it pulls through to technology in the next 12 months, but it will be embedded. Across the range of our other assets, there's large-scale AI investment. It's not something that we've talked about. And I'd say more Horizon 2, there's a range of integration platforms and broader capabilities, which I think you'll be hearing a lot more from us in the coming weeks and coming months about the role that those can play. Now impact on 2026 versus impact on the out years, a lot of what's already been in the hopper is going to influence 2026. So I'm thinking less about revenue and more about kind of AAR impact in net new sales in the second half of this year into '27 on that side of things. But I think we remain super positive thinking that this is a very big opportunity for us to accelerate growth.

So maybe just in the last few minutes here. John, I'd love to kind of get your thoughts now, maybe zooming out just a little bit. We've talked a lot about kind of operational side of this and like growth drivers and guidance impact here. But again, we have this Pharma R&D panel discussion yesterday. And it's a type of the conversation we have quite a bit like pharma and biotech are deploying more and more money into their AI budgets. Realistically what that means can be a topic for another day, but ultimately, what the impact of that will be on their kind of willingness and interest to partner externally and to kind of leverage some of these licenses from folks such as yourself. So can you kind of speak to how you envision some of this playing out over the next couple of years as they start to feel some of the impact of their own internal investments and what that ultimately kind of means for stand-alone guys who have been here doing the work?

Yes. It's -- yes, it's a great question. So it's a slightly different spin than the question that's being asked over and over again around just AI disruption. The -- first of all, the first thing I did was not talk to the investor community. I kind of said this to you the other day as well. I literally spent time with as many clients as I possibly could. That's what I did in my first 2 months. I talked to demo and got deep into all of our products. I talked to our product team, I talked to our product teams, I talked to our operating teams, and I talked to our clients. And I asked this exact question. How do you anticipate us being used? How do you anticipate this changing in the future? The uniform example -- the uniform answer I got from clients was we are looking for you to help us innovate on top of your stack. That was the uniform answer. We're not looking for incremental pieces or bringing -- we're looking for you to help identify and help bring more capability into what you do. Now, that said, you can couple that comment with, okay, but Lilly just announced a massive deal with NVIDIA over the last couple of days that they're going to spend billions of dollars building out chips and do everything else. Now I can -- I'm not going to speak specifically about Lilly, but I can assure you that when those announcements are happening, there are phone calls -- when there are announcements like that, there are phone calls to Certara happening at the same time, which is how do we take advantage of the technology and the innovation that you have and all the know-how that you have and help plug it into our new investments. And if you think about kind of the continuum of where the majority of these investment dollars are going, it's really in the earlier-stage discovery components, which is not an area that we have a high amount of exposure to. It's a little bit more on the needle in the haystack, which we welcome, because we feel like we're really good at kind of optimizing those assets as it moves closer to preclinical and helping to ensure that it gets to human quicker and through the regulatory process faster. So we believe that we'll be an important stakeholder in those discussions as they make their own investments. I've also been around this market long enough. I'm now 30 years in this space to see enough in-sourcing and outsourcing trends and capabilities. It's great that they're building up their own capabilities. It doesn't make sense for the entire industry to build up their own distinctive capabilities. They still rely on external experts who can scale and know-how can look cross-sectionally, across it. We need to make some operational changes to be able to play both at the power user standpoint and to tap into those conversations at scale, but that's what we're prepared to do. .

All right. So maybe just in the last minute then. When you -- as you're kind of looking now ahead to '26 -- back half of '26 into 2027, how should we think about kind of the most important, lack of a better phrase, kind of catalyst for Certara, whether that's kind of new offering launches, new rollouts, updates in between earnings prints that we should be kind of paying attention to, to get a sense of like the trajectory of the business now.

Let's take first stab and post.

Yes, yes. Yes. So a couple of areas to focus on there. One would be, Jon mentioned it before, it's the cloud version of Phoenix. So we're excited about the conversion in front of us on taking our Tier 1 customers and then ultimately, our Tier 2 and Tier 3s also, but it's really being led by Tier 1 customers converting to the cloud version of Phoenix. And that is -- that's an area, where we've already seen good customer engagement. We get a few of our key customers on board, which we have, and we're expecting that during the year, we're going to see strong conversion there. The other area I'd highlight too would be QSP, so look for us to talk about developments in QSP, both in the services that we deliver, but then also the Certara IQ software, AI-enabled QSP software, and we expect both our consultants to be able to use that, but also be able to sell it to our customers. Those are a couple of the areas that we're expecting to be catalysts of growth during the year, and moving into next year as well.

So I agree with everything John said. The only thing I would say is that we're currently benchmarking KPIs and metrics that other companies print on and what they communicate. I don't think the service versus software, bookings and revenue number is the best indicator of what we do and how we're growing. So we're looking at a range of other metrics that will get us, I think, more clarity. So I think we'll be able to answer your question a little bit better. Our software business probably should be looking at ARR over time. We've kind of done discussion today around the growth in the Biosim and the MIDD business for some of the others. There's other ways to be thinking about this business, I think, which will box us -- will stop this kind of box into the service for software. There's a number of new more nuanced way. So we look forward to kind of socializing some of those over the next couple of months and finding new ways to communicate the value and growth.

Awesome. Okay. Well, with that, I think we are at time. So thank you all for listening in, and thank you guys for joining us. It's always a pleasure.

That's great. Thank you so much for having us.