Certara, Inc. ($CERT)

Good afternoon, everybody. I'm Luke Sergott. I cover life science tools and diagnostics. With me today, I have John Gallagher, CFO of Certara. Thanks again for making it.

Hi, Luke. Thank you for having me.

Under the bright lights here. So I guess to start off, can you just recap how the quarter from 4Q shook out versus what you guys were expecting? And this is more of just thinking about a jump-off point from kind of the lumpiness and the softer demand that we saw through '25. And how the first quarter as you guys are looking at it within your assumption there throughout '26 is going to progress, like puts and takes as you thought about it?

Yes, sure. Thanks, Luke. Glad to be here today. We finished the year in 2025 strong from a revenue and EBITDA perspective. I'll get into bookings in a second. But if you look at revenue, then organic software revenue, which was something that we were watching during the course of the year landed at 7% on a full year basis. That was right in the middle of our original guidance range of 6% to 8%. So that came in line with expectations. EBITDA, we had guided 30% to 32% adjusted EBITDA margin on the year, we came in at 32%. So we exceeded our own expectations as far as ability to invest in the business because you saw that, you saw R&D expense tick up during the quarters of 2025, yet we still hit the high end of the guidance, and that means we were disciplined about looking in other pockets of the P&L and making sure we could offset some of the investment that was coming in. On bookings. Bookings were mixed in the fourth quarter. And to your point, there were some dynamics during the year where we saw spots of weakness and volatility in general. For example, in services, we saw weakness in Q3, we called that out on the November earnings call. And unexpectedly, to us in Q4, we saw a very, very strong month of December. So the month of December for services bookings came in at 17%. We think that there is an element of seasonality, some budget flush that came in. The over achievement there was broad-based. It was across customer tiers and it was across both biosim services as well as in regulatory. So that played out a little differently than we thought. But as you look at services on a whole, though, it has been lumpy. Q3 was low. Q4 was high, some of that seasonality. And although we think that, that surge in discretionary spending in the fourth quarter is a good element as we look at stability in 2026, we still think and we've seen historically that services can be lumpy. On the software side, our trailing 12-month organic software bookings were 1% on the year. They were down a decline year-on-year in the fourth quarter. So we did see some deceleration in software bookings and that all sets up the guidance as we look at 2026, where we said that the organization would be flat to up 4%.

Yes. And on that software, the booking side, is it -- are we even looking at the right metrics from that perspective, just when you're looking at the overall bookings? Because Is it like -- is there an ARR benefit? Or how do you guys view that internally? And does -- as you're thinking -- I understand it informed how you're thinking about the year. But just walk us through kind of what caused that step down as that only metric that we're looking at right now?

Yes. Yes. So good question. When you annualize it, it's not as acute as what you see in the fourth quarter on the TTM, which is probably the right way to think about 2025. But the fourth quarter did pull down that TTM number to only 1% on growth on the full year. So as we looked at 2026, then that's what's informing low single-digit growth across both software and services. Now why did that happen in the fourth quarter? We called out a couple of customer dynamics that we're influencing the fourth quarter bookings, not necessarily the full year, but in the fourth quarter, we saw that there was some reduction in seat licenses in Phoenix that was associated with customer reprioritization, some of big pharma reducing headcounts which invariably will hit some volume of our seat licenses in Phoenix, not totally unusual and a product of some of the headcount reductions in the Tier 1 because this softness was centered in Tier 1 customers. But then on top of that too, we said that study counts. So our Pinnacle 21 platform is tied to study count, less so than annual seat license. And if you look back at clinical trial starts 18, 24 months ago, then there was some weakness there. By the time that gets all the way to submission, given the penetration that Pinnacle has, so Pinnacle is a broadly used software product, which is great and it provides a very sticky business for us with a very high renewal rate. But it will be impacted by study count increases and decreases over time on a time lag. So that was one of the other components that we saw impacting.

All right. And then on the Tier 1 customer base, you talked about like the lower seats there on the software side. But I feel like you earned through a lot of restructuring, the pipeline rationalization over the past like 4 or 5 years within pharma. So is this just kind of a catch-up from what we saw? Like I'm just trying to think out of the durability of like the snapback here or how you guys are thinking about that business recovery?

Yes. So yes. So as far as -- and you had asked to like what's the cadence of 2026. We had said on the call that we expect that Q1 will be on the lower end of that guidance range. So we do anticipate some trickle-through of the dynamics that we saw in Q4, but it's also related to a tough comparison. So Q1 is on a dollar revenue basis is our toughest compare of the year. So that's also a component of it. But we do think that there's opportunity to accelerate software revenue growth during the course of the year. We launched 3 new software products in Q4 that we're very excited about with Certara IQ for QSP, we'll get into this. Certara IQ for QSP, the Phoenix cloud version and a Pinnacle product enhancement, all of which are going to -- are taking some traction to and will grow into the year. So we do see sequential increases during the course of 2026. So what you saw in Q4, we don't view that as permanent, but we did see it as a bit of a dislocation as we exited 2025.

All right. And on those launches, let's just dig in and start walking through some of them here, 3 big launches coming up. I guess from leveraging your existing sales force, are these new markets? Or are these just additional module add-ons -- modular add-ons to exactly what you have now, like break down where this -- the holes in your workflow that these are filling as you progress through the pipeline?

Well, a couple that we're really excited about that I'll talk to you about our Certara IQ, which is software for QSP and Phoenix Cloud, which is a cloud version of our Phoenix platform to get customers off the desktop and into the cloud. So the first of which Certara IQ is AI-enabled software for the QSP space. So that's quantitative systems pharmacology, which today is entirely a services practice. This is one of the fastest-growing areas, not only of Certara. It is the fastest-growing area of Certara, but it is also one of the more emerging and faster-growing areas of biosimulation in general. And so we're very excited about having launched Certara IQ in the fourth quarter. The basis of Certara IQ is the Vyasa AI technology that we acquired back in 2022. We've been working to implement Vyasa technology throughout our software platforms. This is the first sort of [Technical Difficulty] would sort of add on. This is the first all new. This would be the first software offering in the QSP space. So we're very excited about that. And QSP, of course, is growing fast, as I mentioned, all services. So as we have that practice area at capacity, the Certara IQ software will not only help our own internal teams with the throughput and volume of projects that we can handle, but we can sell it to our customers as a software product as well. So that's one we're very excited about. The other one I would mention is a cloud version of Phoenix. So we learned from prior versions and have added features and functionality to the cloud version of Phoenix that's out there now that includes also, again, putting in AI enhancements to induce our customers to shift from the on-premise or the desktop version and into the cloud. We launched it in Q4. We've seen very good receptivity from even our largest Tier 1 customers. So we're looking at 2026, as a year of starting to really pick up the conversion from desktop into cloud, mainly because of the features that we've added into Phoenix. So that falls more in the category of enhancement, one that we're very excited about given the conversion and the excitement that we're hearing from our customers about moving over. Now you mentioned earlier, what's the right way to think about that software achievement. Interestingly, shifting from desktop to the cloud, there is a revenue recognition difference there, too, going from all at once revenue recognition on the desktop to ratable in the cloud version. So you'll hear us talk about the bookings and perhaps introduce ARR as a metric to start to look at how you look at the annualized progress we've made in Phoenix because a lot of the conversion that we would make this year from a revenue growth perspective will tend to show up more in 2027 than it will in [indiscernible].

Yes. I just have to ask kind of the timing there when you do these launches, you have, like you said, like the modular update on Phoenix Cloud versus the totally new market. Like how do you -- I guess from an investment standpoint on sales and marketing, how are you guys measuring the contribution here. I feel like the modular or the cloud opportunity is probably a little bit more near term where you have to actually with QSP, it's fast growing, but it's still going to take some market development time. Is that the right way to think about it?

It absolutely is. Yes. I mean, look, the Certara IQ QSP software is all new in its space. So it's going to -- it is going to take some market development, even though it's a high demand, fast-growing area of biosimulation, we still need to create the market and push adoption there, which we think is completely feasible. Like I said, we're super excited about Certara IQ software. But the cloud version of Phoenix is a little more straightforward as far as when a renewal comes due, we're in with the customer. We're having the discussion, we're showing the features and functionality, and we're already finding some early success in converting them.

Okay. You guided -- sort of the AI piece coming in. I always call it Vyasa but it's Vyasa. I think that from an overall market perspective, AI is probably going to be used as the efficiency tool. And John's predecessor, he was talking about -- William would talk about how you guys are using it. So talk about what clients are -- pharma and biotech want from an AI perspective from you guys. And how durable it is where -- or how realistic is it to think that pharma is going to run their own AI internally and ultimately displace you guys?

Yes. Yes. So we view AI as a unique opportunity for Certara, given everything that I said about some of the new products and the acquisition of Vyasa back in 2022 and the development and integration work that's happened since that time to really put that technology into the various software platforms that we just talked through really creates a competitive advantage for Certara. It's not likely -- because remember, our customers are buying our software models today based on the viability and the longevity and the data associated with the models, and they're not creating them on their own. So as you think about moving forward into an AI area, then because of the regulatory acceptance as well as the scientific expertise, I think the scientists or human in the loop associated with AI. Then when you take the software products that have the AI built into them now as we've created the integration with Vyasa, when you take the subject matter expertise, remember, we have 400 PhD thought-leading scientists on our staff. That's the expert in the loop, if you will. And then you take the regulatory acceptance by regulatory agencies such as the FDA that have long been using Simcyp, Phoenix. They have a vast number of seat licenses. Now they're getting the new versions also, then that ecosystem is primed for our customers. It makes the ease of use with Certara rather than displacement.

Yes. Is there any part of your business that you feel like, okay, it's like that could totally be disrupted if somebody came in.

The only pocket that we've talked about that, that could see that kind of change would be in regulatory...

Regulatory...

Yes. Yes. So -- and I'm sure you're going to ask me what's the latest on that and I'll answer your question. But before we do, then -- that's one area of the business that's really right for generative AI to come in and create some secular change. Now we haven't seen that on a wholesale basis. I just got done mentioning that when you looked at services bookings performance in fourth quarter grew 17%. That was Reg, the reg business growing 17% and biosim services growing 17%. So I wouldn't say that secular change has really taken full grab quite yet. But at the same time, remember, we launched at the end of 2024, we launched CoAuthor which is generative AI for regulatory writing. And that product is continuing to ramp. And so we have offerings on both sides of it really when you look at it.

Okay. And then on the regulatory services piece, it's a great segue. So just talk about that have been under pressure for some time, and you're not the only one that had the issues there, but give us an update on how that's been progressing and what you guys have done or seeing from a demand side?

Yes. So of course, we had our new CEO, Jon Resnick, joined recently. He naturally, I think, wants to take an opportunity to evaluate what's the status is of the Reg business. And look, there are pros and cons to selling that business, we're moving that business from the portfolio. There's pros and cons to keeping that business. And I think that most importantly, he's taken the time as he should to evaluate what the best -- what the best shareholder value creation opportunity is given the pros and cons on both sides.

What are the pros to owning it?

The pros to owning it is very profit. It's a highly profitable business. So -- although we've seen revenue decline, strong bookings in Q4, we have seen revenue declines on a year-on-year basis. That's the con side. The pro side is we have shared publicly before that the regulatory writing business has a 20% to 30% profit margin. So that's a pretty rich profit margin for a Reg writing type business. And so it generates cash that's important for us to be able to invest in the organization.

Got you. Yes, that is...

As well as I just got on talking through CoAuthor too, you can envision partnerships that take place between an existing AI product that we have associated with the business and start to find synergies within the organization. So that would be the other pro to it.

Yes. And I think on -- it just kind of goes into the overall, as Jon is coming on, I talked about some of the investments that need to be made. I kind of took a little bit by surprise. I thought the bigger picture vision here was like you have all these Simcyp, you have like simulation software, some regulatory side, the writing, a lot of the onesies and twosies here of software across the clinical development pipeline, but like different markets that don't talk to each other. And I thought that bringing all this under one roof with some type of backbone was a pretty compelling story or vision over the long term. Like as Jon comes in and you guys are thinking about your portfolio, talk about ultimately, what the portfolio vision looks like and how you guys are going to either sell some stuff off or get leaner and meaner? Like just talk about what you guys think about what this should look like?

Yes. Yes. I mean the center and core to the focus is model-informed drug development or MIDD/biomulation. So we think that's the reason why people show up and are interested in Certara, and it's also the fastest-growing area of Certara. And it's -- and by the way, it's a blend of both software and services. it's both of those things, complementary to one another. And so the -- as we look forward and we think about investing, you painted a picture of various point solutions that are contracted separately. And one of the guiding principles that we have as we look forward in unifying the organization is how can we approach our customers in a manner in which they have the needs or the feedback that we receive from them. And most often than not, it's not a contract over here, a contract over there. But there, it's that theme of unification that you were thinking of. So some of the investment that we have on the horizon here is how do you bring point solutions together into an overall solution that also enables Certara to increase the call points within our customer organizations, and can get the attention at the top of the house on how you can save time, save money and drug development, which truly is the value proposition of what Certara offers.

Yes. And I said when you talked about some of the investments, is that what you guys referring to becoming more customer-centric in the investment there? So like dig into what kind of investment you guys need to make? I feel like that, that's you have a pretty sizable sales force right now. Is this more about just [indiscernible] maybe some overlap or overlay of like some enterprise sales guys? Like just walk through what do you mean by that?

Right. Yes, the customer centricity. I mean, Jon Resnick brings with him a strong background of customer centricity. he spent a lot of his first 60 or so days at the organization, speaking directly to our customers across all tier categories, across software and services and gaining pretty good insight on what the themes and the feedback are with customers. And I think one of the key takeaways is that no 2 are alike. So our approach and how we offer our software and services in the combination of those to our customers is one of the things that we're thinking through. Now what does that mean? And how does that translate? That we do not envision that is translating to an outsized amount of spend in sales and marketing. Remember, and we recognize we've made sizable investments in sales and marketing, it didn't catalyze the revenue growth. It's not showing up in the revenue growth yet. So we do look at that as an investment of how do we shift prioritization, how do we change incentives to align to the structure, as I described. How do we get better insights into discounting and make sure that our net pricing is working the way that we expect it to. Those are some of the operational nature of what we mentioned by investment.

Okay. And then as you think about tying that into the margin case, and you guys had pretty decent cash flow there. But from an investment standpoint, I agree [Technical Difficulty] going through this portfolio and thinking about where they should be, is the typical rule of 40 sticks with you guys? Or is that not is that not appropriate?

Yes. Yes, for sure, it is -- for sure, it is. And we view ourselves as a Rule of 40 organization. I think if you do the math and add it up, I think we're just short of that right now. And there's a reason for that, right? We've talked about investments that have brought the margin down from historic levels hovering in the low 30s rather than the mid-30s. And on top of that, we're talking about a year where we've got low single-digit growth versus where we really think the company should be in the high single digits and double-digit growth over the near to long term. So absolutely a Rule of 40 company. I think what you're seeing right now is a product of -- we've got a bit of a transition year. We've set guidance that we think is appropriately conservative and also aligned with the trends that we saw exiting 2025. And we're making some investments that and continuing to make investments in the company that we think are really going to catalyze that long-term growth.

And on the guide, it assumes roughly about 100 basis points of contraction. Is that from the investment side? Or is that from more of a mix?

No, it's -- that's more from investment again. I guess what I'd tell you, too, is that on the call, we mentioned that we've already found $10 million of cost avoidance in the plan. So what we're indicating is that we're thinking, although we guided 30% to 32%. Last year, we guided 30% to 32%. We came out on the high end of that. We'll exercise the same kind of discipline as we march through 2026. And we do think there's cost opportunity there. So we wanted to signal that on the call.

Okay. That's great. Appreciate it. We got 10 seconds here, mostly we end up...

Thanks a lot Luke.

That's great. Thank you.

Appreciate it.