Certara, Inc. ($CERT)

Good day, and thank you for standing by. Welcome to the Certara First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler of Certara. Please go ahead.

Good morning, everyone. Thank you all for participating in today's conference call. On [indiscernible], we have Jon Resnick, Chief Executive Officer; and John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2026. 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 and 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 in the recent earnings press release available on the company's website. Please refer to the reconciliation tables in the [ accompanying ] materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 11, 2026. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of information, future events or otherwise. And with that, I will turn the call over to Jon.

Good morning. Thank you all for joining today's call. Since we last spoke, I have crossed over the 100-day mark at Certara, and I continue to be incredibly impressed by many things within the company. We are differentiated by our world-leading scientists, institutional knowledge, regulatory leadership and our fit-for-purpose technology that is embedded in customer and regulators workflows. Our clinical intelligence capability is the logic built into our technology, [indiscernible] science and join on what our experts know our interactions with regulators over decades, and with thousands of drug development successes and failures have taught us. Certara products and services are integral to the drug development process and increasingly scalable to the use of AI technologies. Having exited the listening and learning phase, my attention is transitioned to helping Certara reach its full potential. First quarter performance was in line with our expectations but does not reflect the company's potential. I am focused on driving long-term durable growth across the organization by reshaping our business and portfolio strategy, while instilling increased organizational and operational rigor. Today, we will discuss our markets and outline the steps we are taking to position the company for long-term success before wrapping up with our first quarter performance. Let me start by updating you on our end markets. Across the board, customers are increasing investment in AI and tech-enabled drug discovery capabilities. Today, there are over 200 AI design molecules in clinical development, up from just a few 10 years ago. [ Eli Lilly ] has partnered with NVIDIA to build a dedicated AI lab, and Roche [indiscernible] is launching a hybrid cloud AI factory to scale their discovery and development efforts. Amazon has also announced the [ BioDiscovery ] product through AWS. Additionally, OpenAI and [indiscernible] have announced LLM for life science. Expansion of the use case in AI is consistent with Certara's approach using analytical techniques, embedded in customers' workflow to accelerate the drug discovery and development processes, while reducing the reliance on living subjects. As AI-driven drug development helps the industry deliver more molecules and innovation, demand will increase for Certara's core business, model [ inform ] drug development or [indiscernible], as customers race to turn drug candidates into approved treatments for patients. Accelerating data analytics processes becomes more important than ever, as the decades-long goal of reducing drug application time line comes within reach. In February, the ICH released [ ICH M15 ], providing guidance of the general principles for model-informed drug development, which establishes an overarching set of principles for the acceptance of MIDD applications by regulators globally. In March, the FDA published guidance on the general consideration for the use of new approach methodologies, or [ NAMS ] and drug development. And more recently, in April, the FDA announced a major initiative to implement real-time clinical trials. A shift to eliminate the delays that have historically slowed regulatory decisions. As FDA leadership is set, the agency has been conducting clinical trials the same way for decades, where key data signals and lag time have delayed regulatory decisions unnecessarily, which has slowed down drug development time lines. These tailwinds present a clear opportunity for Certara to tackle historically arduous drug development processes. Certara has an incredible legacy. We believe we are unrivaled in MIDD today because of what was required to build it. We have more than 2 decades of published scientific literature, 2,600 customers around the world have run over 10,000 projects, and have more than 160,000 users, our technology, including the FDA and Japan's Pharmaceutical and Medical Devices Agency. Pinnacle 21 has been used to validate more than 36 trillion data points in support of over 500 approved treatments. And we are a team of world-class scientists and are proud to have 10 scientists recognized in [indiscernible] top 2% of the world's most cited scientists. This is not a position that can be replicated overnight. It is the product of decades of scientific rigor, regulatory trust and deep customer partnership that many underestimate. For example, the qualification of our Simcyp software for the prediction of drug-to-drug interactions and the EMA required 2 years of engagement with participants representing all 27 member states. Our most experienced [indiscernible] worked directly with EMA reviewers to evaluate 25 years with data, code and process documentation to gain approval from the EMA. To our knowledge, Simcyp is the only mechanistic modeling software qualified in Europe at this critical level. Building on this legacy, we have developed and continue to invest in category-leading products that are truly distinguished in the market. Maximum Simcyp, Pinnacle 21 and Phoenix are purpose built, validated and deeply embedded in the workflows of the world's leading drug developers and regulators. What makes these valuable to our customers is the cutting-edge science, proprietary data, intellectual property, thousands of validated biological parameters, unmatched computational precision and auditable transparency that regulated science demands. As we move the company forward, there is a window of opportunity for us to drive value from connectivity across our clinical intelligence capabilities. We are building an AI integrated platform that sits on top of and complements our existing portfolio. This next-generation platform will give researchers the ability to interrogate Certara's full body of knowledge across products, data sets and scientific expertise to get accurate, trusted answers to increasingly complex questions. We have created an AI-native team, allocated the investment resources needed for this effort and are engaging [indiscernible] customers. Our annual Certainty Conference in Boston illustrate our scientific and technological leadership and provide clear evidence that our customers are looking for us to innovate. In front of more than 400 attendees, we showcased the latest in MIDD and AI-enabled technology capabilities for more than a dozen products, leveraging demos and user groups to collect valuable feedback. Moving to delivery. Let me share a few highlights from the quarter. Our technology and scientific experts supported numerous drug approvals. One notable example was a complex generic of [ tazarotene ], a dermal product used in the treatment of acne and [ psoriasis ]. Certara's PBPK in silico modeling data was accepted in lieu of a clinical endpoint bioequivalent study. This is only the second time ever that PBBK modeling has been used to enable approval of a generic drug in lieu of running clinical trials. In another example, Certara also demonstrated the real-world impact of MIDD and regulatory success for the leukemia therapy, [ asciminib ]. Simcyp supported the evidence generation journey and approval with the FDA accepting the PBPK modeling results in lieu of clinical studies for at least 10 human trials, significantly reducing development time and cost. Certara scientists published nearly 100 peer-reviewed papers this year, spanning dose optimization, pediatric development, virtual bioequivalence and next-generation MIDD frameworks, which align with the recently published [ ICM M15 ] guidance focused on the multidisciplinary principles of MIDD. [indiscernible], a publication co-authored with the FDA and [ MHRA ] scientists highlighted the expanding role of MIDD in pediatric drug development, showing PBPK as potential to reduce time lines and costs for pediatric trials by informing dosing, study design, extrapolation and label extension while reducing unnecessary studies in children. In addition, one of Certara's leading scientists, or as the Editor and Chief, Clinical Pharmacology and Therapeutics Journal, a position she took over from another leading Certara scientist. We had several technology advancements in the quarter with AI increasing the productivity of our developers and the value of our technology. There were multiple new releases of our software, including a new version of D360 to help discovery scientists accelerate therapeutic peptide design and optimization, new functionality in Pinnacle 21 to accelerate clinical study start-up, and extended reporting functionality in Phoenix Cloud, and the release of Simcyp with expanded simulation and virtual bioequivalence capabilities. To capitalize on these opportunities and prepare to scale we are taking several decisive actions. First, we're focusing our business and accelerating long-term growth by exiting medical rating. Second, we're reorganizing and aligning the company around two distinct growth areas. MIDD and discovery, which we call [ MID 3 ] and accelerated clinical evidence, which we call [ ACE ]. Third, we're creating a stronger center of gravity for AI across the company. formalizing leadership with a Chief AI Officer and increasing investment in our next-generation Certara platform. Fourth, we're extending our capabilities and reach with strategic collaborations and partnerships highlighted by NVIDIA and [indiscernible] Sciences. Fifth, we're reviewing opportunities to leverage our existing clinical intelligence capabilities into new use cases. And six, improving execution and efficiency. Focusing on the first action. On Friday, we closed the divestiture of the regulatory writing and medical writing business to Veristat. This transaction allows us to sharpen our focus in areas we have defined competitive and scientific advantage, results in a nearly [indiscernible] alignment between our expert services and our technology, where our value proposition is the strongest, improves the predictability of our revenue and unlocks approximately 150 basis points of incremental growth in 2027 and beyond. Second, we are reorganizing the company into two groups to accelerate growth and better service our customers. [ MID 3 ] and [ ACE ]. Within MID 3, we have merged our technology and expert services into one organization, creating a flywheel for technology, innovation and customer engagement. ACE's mission is to reduce data time lines doing the full life cycle from design through and beyond submission, while maintaining or improving quality at every step in the process. Both groups will be supported by a Chief Product Officer reporting to me, who will oversee product development across the organization. We are engaged in an active search for this position. Third, we have appointed Dr. [ Chris Button ] as our Chief AI Officer, further evidence of our commitment to drive innovative solutions that turn decades of cross-program scientific and regulatory intelligence, in the market-leading AI integrated capabilities. Chris also serves as our Chief Technology Officer and led Certara's AI implementation efforts. In his expanded role, Chris will drive the acceleration of Certara's next-generation platform. Fourth, we are taking [indiscernible] approach to partnerships. In April, we entered into a strategic collaboration with NVIDIA to apply accelerated computing and AI to Certara's next-generation platform. This partnership will reduce manual, time-intensive steps and ship biosimulation from sequential processes to parallel iterative workflows. This is particularly important for Certara's computationally intensive applications. We've been hard at work at this collaboration and we'll communicate more details soon. We've also expanded our commercial collaborations, most notably through a new relationship with [ Alta Sciences ] of forward-thinking integrated [ CRO/CDMO ]. Together, we are advancing it model first fully integrated and resource-efficient approach to early drug development that accelerates the path to proof of concept for biotech innovators, investors and pharmaceutical companies across the globe. These collaborations will strengthen Certara's underlying technology and enable us to bring value to new customers. Fifth, after completing a review of our portfolio and market opportunities, we've identified several new potential use cases that build up our clinical intelligence capabilities. For example, clinical trial simulation and asset evaluation to name just two. We are actively evaluating investment opportunities in these areas. There is excitement across the organization about these opportunities. Finally, we are taking decisive steps on the operational side of the business to drive efficiency, accountability and growth. We have deployed focused SWAT teams to address needed cultural shifts, simplify processes, accelerate technology development and improve execution. We are aligning sales and marketing to our new structure to clarify accountability and drive customer centricity. We are taking a data-driven approach to leveraging AI to better target and identify opportunities. Multiple efforts are underway to both review and optimize pricing, but also to explore more structural changes to how clients consume our solutions. We are also updating incentives to drive the right behaviors and encourage cross-functional collaboration. And we're also rationalizing internal spend to shore up our cost base and maximize investment efficiency. Let me turn to the first quarter results. The team's focus on technology resulted in improved performance over the second half of 2025, particularly in MIDD. This is a good start for the year, but we need to see consistent performance. Services performance in the quarter was mixed, after an extremely strong Q4. The operational and commercial changes I outlined earlier are designed to address these gaps. It will take time to achieve our long-term operating goals and it's important that we make the right decision for Certara's long-term growth and success now. With that, I will turn the call over to John Gallagher to walk you through our first quarter results and guidance.

Thank you, Jon, and hello, everyone. Total revenue for the 3 months ended March 31, 2026, was $106.9 million, representing year-over-year growth of 1% on a reported basis. Total bookings in the first quarter were $115.3 million, which declined 2% from the prior year period. Trailing 12-month bookings were $479.2 million, increasing 5%. Software revenue was $49.7 million in the first quarter, which increased 7% over the prior year period on a reported basis. Growth in the quarter was driven by Simcyp, Phoenix and Chemaxon. Ratable and subscription revenue accounted for 57% of first quarter software revenues consistent with the prior year period. Software bookings were $48.7 million in the first quarter which increased 20% from the prior year period. Trailing 12-month software bookings were $192.2 million, up 8% year-on-year. The software net retention rate was 106 in the quarter. Looking at our software bookings performance by tier, we saw performance at or above plan across all 3 customer tiers, which was nice to see following a mixed fourth quarter performance. Now turning to services revenue, which was $57.2 million in the first quarter, down 4% versus the prior year period on a reported basis. We saw mixed results in our MIDD services business in the quarter, reflecting the operational dynamics Jon mentioned earlier, which was compounded by softness in regulatory services. Services bookings in the first quarter were $66.6 million, which declined 14% from the prior year period. TTM services bookings were $286.9 million, up 2% compared to the prior year. After a strong fourth quarter, we saw softer performance from Tier 1 customers in MIDD services during the first quarter. Total cost of revenue for the first quarter of 2026 was $41.6 million, a slight increase from $41.5 million in the first quarter of 2025. Total operating expenses for the first quarter of 2026 were $111.2 million, an increase from $98.4 million in the first quarter of 2025, primarily due to a $7.4 million increase in the change in fair value of the contingent consideration related to the [indiscernible] acquisition. Adjusted EBITDA for the first quarter of 2026 was $31.7 million, a decrease from $34.8 million in the first quarter of 2025. Adjusted EBITDA margin in the quarter was 30%. Wrapping up the income statement. Note that GAAP net income and EPS are both impacted by nonrecurring items. Net loss for the first quarter of 2026 was $8.8 million, compared to net income of $4.7 million in the first quarter of 2025. Reported adjusted net income for the first quarter of 2026 was $14.5 million, compared to $22.2 million for the first quarter of 2025. Diluted loss per share for the first quarter of 2026 was $0.06, compared to earnings of $0.03 per share in the first quarter of 2025. Adjusted diluted earnings per share for the first quarter of 2026 were $0.09 compared to $0.14 per share in the first quarter of last year. Moving to the balance sheet. We finished the quarter with $149.5 million in cash and cash equivalents. As of March 31, 2026, we had $294.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Last year, our Board authorized a $100 million share repurchase program. We have repurchased approximately $82.6 million of stock since that authorization, including $40 million during the first quarter of 2026. Today, we announced the closing of the regulatory writing and Medical Writing Services divestiture. As a reminder, in 2025, these businesses generated $50 million of revenue and approximately $17 million of adjusted EBITDA, excluding unallocated overhead expenses. During the first quarter of 2026, they contributed approximately $13 million in revenue, and we expect to recognize approximately $5 million from them in the second quarter. Going forward, we anticipate our revenue mix to be approximately 50% software and 50% services. With that in mind, we are updating our full year 2026 guidance to reflect the divestiture as follows. We now expect 2026 reported full year revenue to be in the range of $395 million to $405 million, including the $18 million I just referenced related to the divested business. This outlook reflects full year growth of 0% to 4%, excluding the divested business in both periods, and is consistent with our prior growth expectations from the call in February. We expect first half revenue growth to be closer to the low end of the 0% to 4% range, while the second half is expected to be at or above the high end of the range. We anticipate full year software growth to be at or above the high end of the 0% to 4% range for the year, with first half closer to the midpoint and second half above the high end of the range. The software outlook contemplates higher visibility compared with last year, and we are optimistic about opportunities for newly introduced products. In Services, we expect full year growth to be towards the low end of the 0% to 4% range with first half at or below the low end of the range, improving to the high end during the second half of the year. We see the Tier 2 and 3 end markets improving through the course of the year following a strong capital raising environment through April. Generally, compared to the guidance provided in late February, this more detailed revenue outlook reflects modestly improved software performance and modestly lower services outlook, which we attribute to some of the execution dynamics Jon referenced in his remarks. We anticipate full year 2026 adjusted EBITDA margin to continue to be 30% to 32% range, including contribution from the regulatory writing and medical writing business. First half margins will be modestly below this range, and second half margins will be closer to the higher end of the range. Margin performance through the year reflect higher revenue growth in the second half of the year, as well as improved operating discipline across the organization following the divestiture. We expect adjusted EPS in the range of $0.35 to $0.41 per share for the full year. Fully diluted shares are expected to be in the range of $157 million to $159 million, and we are modeling effective tax rate of about 30%. With that, we will open up the call for Q&A. Operator, can you please open the line?

[Operator Instructions] Our first question comes from Scott Schoenhaus with KeyBanc.

So Jon, you mentioned this next-generation AI platform that you guys are developing. Maybe walk us through the opportunity here, the monetization. Is it more a function of [indiscernible] drives engagement utilization on the software piece? Are you taking ASP up? Maybe walk us through the dynamics here to bridge us to this opportunity.

Thanks, Scott, for the question. Yes, we're extremely excited about what is ahead of us here. First of all, before I get into the detail on the platform itself, I mean, [ AM ] more broadly, we've taken a step change in terms of our readiness. We're focused on things like product development, which is the platform, scaling capabilities across the organization, people and talent, you saw the announcement about Chris, and overall kind of corporate governance of it. Obviously, we talked historically about the great position we believe we have. And my comments a few minutes ago, I think you heard that foundation, those capabilities that we have over the decades, it's created a real exciting position in terms of embeddedness in client workflow, codification of science validation, auditability, transparency. In essence, closing that kind of last mile in a regulatory sciences market, our view and our expectation is that there's a spot in a place where Certara's capabilities, know-how and expertise will fit in very well as a complement to what's out there today. So the platform -- and I don't want to go into too much detail on exactly what we're doing because I do know that there are others who are listening to this call as well. But it's, in essence, building on these exact capabilities, it is an effort for us to unify many of our products and our know-how under a single environment. It will allow us to take all the, kind of, independent know-how and the independent applications we have and answer questions across the life cycle. And it's going to create unique business models for us as we move forward. In terms of your question around kind of guidance and how should we think about it. I think for 2026, as we indicated, we're out talking to [indiscernible] clients we're out engaging in this. This is a thing that's now in active discussions. So I wouldn't think too much about near-term modeling. I think what we'll do is provide more guidance towards the end of this year about how you should think about this relative to our conventional software portfolios, we think more on platform into '27 and beyond.

And then my follow-up is the strong software bookings you had this quarter. You mentioned a lot of new product releases. Maybe help us parse out where you're seeing the strongest demand into that bookings strength this quarter on the software side?

So I think software was strong pretty much across the board this quarter. We obviously, [ off ] the soft trailing 12-month number that we saw at the end of last year, we put a lot of focus on it. Really got underneath it with our sales teams, but the incentives and products and plans and have done a lot of work in Q1 really to [indiscernible] together. But it's pretty consistent in Phoenix Cloud, had a good quarter as a very good pipeline. We're extremely excited about the transition there and the growth. Simcyp had a good quarter as well, core kind of PBPK offerings. Pinnacle, which is, as we said before, has ebbs and flows, a little bit when new trial starts, and it's going to be a little bit slower than it has been in the past years, actually slightly outperformed expectations in the quarter. So I think everything performs at or above expectations.

Our next question comes from Brendan Smith with TD Cowen.

Congrats on the progress. Maybe just a bit of a follow-up on one of the previous questions. But I guess can you speak a bit more specifically to the new customer mix you're seeing year-to-date? I know you mentioned pharma really leading more into AI, which we continue to see kind of across the board, but also maybe some impact on Tier 1 customers. So I guess, first, just wondering how the new software adds within pharma compared to maybe new customer adds within smaller emerging biotech. Just any trends to call out in those relative buckets?

Yes. Brandon, we were pleased, obviously, with the rebound that we saw with software on the quarter. So to your point, across all customer tiers 1, 2 and 3. We saw pretty significant acceleration in the bookings. We saw a good achievement on the revenue with 7% software revenue growth on the quarter. I'd say as it relates to specific within the tiers, we saw Tier 3 customers and Tier 2 customers leaning in on -- as John mentioned before, we saw a strong performance in Phoenix as well as in Chemaxon. I'd say in the Tier 1 category. We had another good quarter on Simcyp. So that's the overall highlights of the customer tiers in the quarters. But they came above expectations on the quarter, which was good on the heels of some choppiness we saw in Q4.

Okay. Got it. And then maybe just a quick follow-up. Just kind of talking about the [indiscernible] efficiencies you mentioned. I know it's being an internal target for kind of helping drive margins. But can you maybe help us understand kind of through that lens, the structure, even of the NVIDIA collaboration really what that looks like and how we should think about the impact over the next couple of quarters there?

So you mentioned execution first. Look, there's a range of initiatives in play. I mean, obviously, today, we're announcing. Well, some reorganization where we do have done the divestiture. There's also been some -- a lot of broader work on operational cadence and execution and cost base. So we're moving incredibly quickly, certainly at a rate in pace, which I'd expect to set up the business for a long term. So we can go through some of those mechanics, if you want later. But the NVIDIA partnership, I think our general mindset on these things is let's not throw out splashy press releases [indiscernible] things, [indiscernible] of substance. We've been working with NVIDIA for the last couple of months through an MOU and through a signed partnership agreement really to define ways of scaling speed at which you can execute on particularly some of the more complicated simulations, allowing more democratization. The belief is if we can speed some of the core QSP and PBPK offering we can allow for much broader use with an organization we can get quicker, reads on what's going on earlier and kind of meet the expectation that discovery of preclinical users of the applications. So we're excited about it. We'll come back with more details on how to think about it exactly in terms of product development and how to think about it in terms of kind of joint join efforts here and its impact in terms of our thinking about overall operational efficiencies.

Our next question comes from Luke Sergott with Barclays.

I just want to talk about the reorg there that you guys are talking about across the 2 segments. And is it more about just the consistency, or stability that we could see from software versus services? Because it seems like 1 quarter, one of the segments is really strong and then at the expense of the other and then vice versa? And just what you guys are doing to build in some consistency and more sustainability here going forward between the two?

Yes. I've had the same observation. There's been a lot of inconsistency in back and forth over the last few quarters that we clearly put a lot of focus on software this quarter. We got a strong software results. So I think our approach moving forward is, obviously, to try to get that balance right. So there's a number of things. First of all, the exiting of the regulatory medical writing business will help. That's been an extremely lumpy business on the service side. A result and mix of business will be much more mixed between services and software on an ongoing basis, which will give much more predictability into what we do. The exit of the regulatory business, which wasn't really tied to our core software business. As I said last quarter, we do best when our technology and services are integrated, and what we've effectively done on the MIDD business here, [ MID 3 ], is we've brought together all of our kind of expert services and our technology to [indiscernible] that flywheel effect. So there should be more stability when those two businesses [indiscernible] able to [ route ] around it. We're also taking some steps with our sales teams and our commercial organization to better align specialty engagement on that side that should drive more predictability. I wouldn't say we've completely solved the riddle, but we're -- we see the same pattern. And obviously, we're focused also on creating the incentives in the organization that [indiscernible] both of those segments moving at the same written pace.

Great. And then I guess with regards to that kind of -- when you think about the guidance and the back half step up here. You had a really big bookings -- bookings have pretty good on the services side. So like when is the timing of there when we see that flow through? And if you could just help us out with the pacing on that services ramp through the year?

Yes. So it -- services bookings take a couple of quarters to pull through. One of the focus areas that we've had over the last quarter has been on backlog conversion. And we saw good -- despite the choppiness and softness we saw on the bookings side for services, we did see very good backlog conversion, and we expect to be able to continue that through the course of the year. So backlog is going to help support the revenue achievement, especially in the back half of the year here with the with the bookings that we posted in Q1, along with the bookings that we're posting now. What we're seeking to do is drive an inflection point through the execution on ensuring we're filling up that backlog, and that's some of the focus area that we have right now.

Our next question comes from David Windley with Jefferies.

I wanted to ask on the references to execution and go-to-market challenges that impacted the first quarter. Think you -- Jon, you touched on those as kind of a high level, but I wanted to understand better, was that caused by a lot of the realignment that you talked about and just kind of the intensity of that during the quarter? Or what, in more detail would you use to describe those execution and go-to-market challenges that impacted the first quarter?

Well, first of all, I'd say, David, there's a legacy model that was in place. So a lot of the changes that we're making, I think, are meant to enhance it. I'm pleased by the progress we made on the software side, there was a real focus there, and you could see the results of that focus on that side of things. I think overall, what we're looking to is just more consistency across the teams. And we're focused on that in a few areas. One, how can we make sure we're optimizing expert-to-expert engagement across the business. A lot of these -- a lot of -- a lot of the engagement that happens here is scientists to scientists. We want to make sure we're putting that foot forward. Second area that we're focused in on is extending partnerships. We mentioned [indiscernible] relationship. That really, I hope, signals and reflects a different approach to -- partnering in a different approach to go into it in different ways. Our offerings are incredibly strong in terms of being complementary to what a number of players have out in market. So there are a number of scale players, whether their venture capital players or whether they're CROs that we are very good potential partners for. So a renewed focus on partnership and how we can drive through. We've leaned in much heavier on targeting approach, continuing to focus on Tier 1. There's a number of clients in the Tier 2 space that we're working on building out new relationships and extending where the overall integrated tech service proposition fits very well. We've layered in a number of kind of AI initiatives to help drum up more opportunities to drive more growth across the business. So look, we're doing a number of things. I don't necessarily [indiscernible] create some churn as you'd expect. And we got Reg business in and Reg business out those. Things do have an impact. But our goal here is to set up a business that's going to be growing in line with our expectations and our shareholders' expectations over time. And that's going to be taking some short-term tougher decisions that are going to lead to that longer-term growth.

Got it. Appreciate that. My follow-up is around biologics, in particular, I think there's been some effort over multiple years to refine, or augment some of the software platforms, maybe in particular, Simcyp be amenable to or to better address the large molecule market. I wondered if you could comment on the progress there and what specific client traction the software in general, but again, thinking primarily Simcyp [indiscernible] getting on the biologics side?

Yes, it's a great question. The -- I don't have the data points in front of me, and I can provide them in a subsequent discussion. There's obviously been a lot of focus on that point internally as I've gotten ramped up. We are -- we do see not only in Simcyp but QSP, which is kind of the extension beyond that, which brings in more to biological components. We do see growing percentage of our business on outside of the oral components, which you get into peptides and a whole range of other things. There is a range of other things. There's a ton of need for both of these. I don't -- I was actually asking over the weekend for quantification of a percentage of each of them. I don't have it to hand right now, but we're looking. There is strong growth as you look at the net new offerings that we're building. They are equally as relevant to the chemical and to the large molecule side. So I can provide a follow-up when we speak next with a little bit more color on it. But we are focused on extending the applications into that large molecule base.

Our next question comes from Michael Cherny with Leerink Partners.

Maybe if I can just circle back on the strategic AI expansion that you noted earlier. [ Jon, either John ], as you think about the investments you're making, the reorg you're doing internally, how are you balancing the need to ensure appropriate returns versus the spend levels? We hear so many stories about AI spending at [indiscernible] What is the risk -- the up-down dynamics that you're pursuing to make sure that the investments you're making are the right ones?

Yes. Yes, good question, Mike. We -- well, what we've undertaken this year, you've seen R&D spend in the quarter continued to increase, and we've said that we're deliberately making investments. What with Jon's onboarding one approach that we've changed to ensure that we're getting the return on that capital invested is starting to look at, we call it a portfolio view, or looking at business cases around what we're investing in and when the revenue is going to come on that. So Jon talked about some changes to the organization. Jon talked about some of the platform investments that we're making. And -- but I'd tell you that we're taking a disciplined approach toward the investments that we're making this year in R&D and looking at when the return is going to come, i.e., when is the revenue going to start to show up for that? Which, as you understand, many of the investments that we've been making in 2026 will start to show up in 2027.

And I'd add just a little bit to -- the good news about this portfolio is that it's built on, what I described as kind of clinical and scientific intelligence already. If you think about the fundamental business, 10,000 projects, thousands of published articles, the regulatory know-how, the entrenched workflow, 160,000 users. I mean, there's a lot of, I think we said 36 trillion data points, in Pinnacle since record. There's a lot of know-how and unique data and unique applications that exist within our 4 walls. So the investment itself doesn't have to be in building out that capability and the ability to create the infrastructure. Investment is on top of it in terms of turning that unique capability and that unique insight we have is something that's going to be broadly available on a more systematic basis to work within a client's ecosystem. So that's one. Two, I'd also say that I think we signaled that -- I think we understand where our fit will be in here relative to some of the other model providers and other work phone agent providers in market. And so we're very comfortable with our perspective in terms of being able to partner with in this ecosystem. So NVIDIA is one good example of of kind of where we're going with some of that. We also have a number of other discussions going on around how [indiscernible] be as effective as possible and as target as possible, and do some of this in a [indiscernible] fashion so that we can get the return that we're expecting.

And just one quick additional question. I apologize if I missed this. With the divestiture now completed, what's the plans for use of capital raised?

Yes. So on capital allocation, I mentioned in the prepared remarks, we bought $40 million of shares against our authorization in Q1. So share buyback continues to be a focus and a capital allocation vector for us. What I'd also say though is we've got a good track record of tuck-in M&A and looking at the pipeline there is also something that we're evaluating. So we didn't specifically highlight Mike, that we would do one or the other. But both of those are now areas where we've been deploying capital successfully over the course of the last year.

Our next question comes from Jeff Garro with Stephens.

I wanted to ask about the new [ MID 3 ] and ACE categories. And just to start, if you could spell out in a little more detail the products that fit in each area, and what we should expect in terms of metrics or commentary on those categories going forward?

Sure, absolutely. So MID 3 is going to be our core model-informed drug development and discovery, applications that will house not only the technology assets, things like Simcyp and CertaraIQ, but also the full range of expert-based service capabilities that we have. [indiscernible], PBPK. So it would be, kind of a one touch up there. Accountable and responsible for building up the regulatory footprint and the scientific footprint, and offering development on that side. A good mix between that flywheel effect between technology and expert based services. The other side ACE. ACE is going to be focused on solving a lot of the data problems that exist within -- which is probably underlying best [indiscernible] some of the recent FDA trial acceleration commentary. That will include things like Phoenix and Pinnacle, and [ co-op ] there and go to submit and some other things that we have within our 4 walls, which are really focused in on kind of solving the data on the flow problems and helping to accelerate the rate and pace at which data can be turning that into evidence for submission.

Excellent. I appreciate that. And the follow-up on that topic. Curious about how the going market evolves with these categories. Any way you can frame kind of, how big of a change is this going to be for your go-to-market teams? And then how should we think about the time line of making those operational changes? And finally, any expectation you would set on expected impact from these go-to-market changes?

So I've mentioned a couple of times. I think the predominant focus here from the management team is how are we going to build this business to get to that double-digit growth that everyone externally expecting, and that we believe is 100% possible. So as you're kind of making of all of these changes, you may have a little bit of churn in the near term, but these are being set up for long-term opportunity, maximization and long-term growth. What -- the changes that we're making -- that we've announced today and that we're moving forward are really what I would characterize as more alignment based changes than kind of fundamental restructuring of our commercial organization. We've taken our -- we had historically had [indiscernible] last couple of years, there's been a centralized sales organization that operated independently from the businesses. One of the changes that we've made is basically to align the portfolio teams that are selling the products within MID 3 or ACE with the actual businesses. This will shorten feedback from clients. It will create more accountability within the business. It will help -- help us with the product innovation and ensure that we have focused hubs for sales and product execution. So look, I don't think we're -- we've quantified near-term versus long-term churn attached to this. But again, our expectation is that this will set up this business to have the type of growth that you want over the midterm, and that's the goal of these changes and it's the goal of strategic moves that we're making.

Our next question comes from Craig Hattenback with Morgan Stanley.

Can you touch on just the visibility in the software business, the expectation for a stronger second half, including any differences you see by customer tier over the course of the year?

Yes, Craig. The visibility -- so we mentioned the visibility on software for a stronger second half is better this year than what we saw last year. The main reason for that is -- if you look at the deferred revenue, the deferred revenue balance is higher, meaning the ratable software business that we've sold is in hand and it's going to start to build as we as we move through the course of the year. The other thing I'd point out on certainty for a second half ramp is it's more of a ramp in growth rate than it is in dollars. If you look at the actual dollars, and if you were to look at that at the top end of the range, then it's a pretty modest increase in the amount of revenue dollars, but the comps ease as we get into the second half of the year, and therefore, the growth rate at [indiscernible] will be reflected higher. Those are a couple of the key reasons why the first half, second half story on software. And of course, the performance in the quarter gave us some confidence as we move through the year.

And customer tier, you said was kind of broad-based in Q1. Is that the expectation as you move through the year? Or is there anything you would call out by customers here?

Yes. I think across the good growth, exceeded our plan expectations across the customer categories. I'd say that was most pronounced in Tier 2 and Tier 3. That [ outperformance ] Tier 1 was a strong contributor for sure. But we've got some tailwind from funding environment at this point. And we think that as we move through the year, that's going to help us in the Tier 2 and 3.

Great. And then just my follow-up question on, kind of, the AI dedicated team. Just as you're thinking about allocating capital in the business, are there parts of the organization where you're finding efficiencies in terms of where you're shifting spending? Can you give any color around that?

Yes. Yes. We are. You probably remember in the prior call, we mentioned cost avoidance. We're still working through that. And our margin guidance that we gave here today would be reflective of improvement as we move through the course of the year. So the answer is, yes, we are reallocating. We are making trade-off decisions and that's happening on the operating side as well as in R&D investments.

And I think unsurprisingly, similar to others, we're seeing massive acceleration improvement as well as productivity is way up. The amount of [indiscernible] teams are able to generate the productivity of what we're doing is dramatically increased. So quite pleased with the accelerated road maps and the acceleration of capabilities that comes along.

Our next question comes from Sean Dodge with BMO Capital Markets.

Maybe just the partnership you mentioned with [indiscernible]. Is this anything more you can share on how that works? [ With the opportunity ] is there anything about the economics of it? And then just is it just software you're providing there? Or is there going to be services that are part of the [ Alta Sciences ] partnership, too?

Yes, we're excited about this. So I mentioned before, I think as a company, our portfolio lends itself very well to a range of partnerships. We're highly complementary to a number of scale market players here, and I think this is something we'll continue to push on. This relationship is [indiscernible] obviously just announced this past week, there is genuine alignment between the teams around acceleration of trial opportunities to completely rethink early-stage execution in different ways. [indiscernible] is a unique [ 1 or 2 ] who has a set of integrated lab, animal human CDMO capabilities. So they have the opportunity to come from an early stage. Really kind of connect a lot of the things that we do on the modeling side. Everything together, we'll also be able to do some disruptive things with data and help close some of the loops and data and accelerate data flows. So we'll be working with them over the next couple of weeks and months in terms of defining not only kind of opportunities to engage customers with very high customer overlap already, which is the starting spot. But identifying opportunities to better integrate technology and service workflow across the two organizations to the benefit of our clients.

Okay. And then on the software side, and more specifically on the upsells you referenced in the quarter, can you give us an example or two around what is an upsell, would have been kind of some of the more common ones lately. Have those been pretty consistent across all client peers? Or have you seen kind of more one or the other?

Yes. We -- effectively, that's reflected in the net retention rate. So we did [indiscernible] on the quarter, which was an inflect higher than where we've been over the last few quarters, which was which is good. What does that mean? I mean in the Tier 1 customer category, those are all already our customers. So an upsell would basically be some kind of expansion. We're taking more seats. We're selling more functionality in the Tier 2 and Tier 3, and particularly in the Tier 3 category, then that's the opportunity to add some new names or some new logos. But we also have a huge 2,400 total customers -- customer base. So any kind of upsell is that land and expand strategy that you've heard us talk about in the past, which is really working the existing customer base and making sure they're aware of the breadth of product offerings that we have, and that would fall into that upsell category.

Yes. If you recall, in the last call, we talked a lot about price as particularly pricing discipline as a lever. And we've looked at this on 2 or 3 dimensions. We've looked at this on an operational level, which John just referred to look at our net contract values, look at our existing upgrade path and potential, which is a tactical plan we have in place and we've got a SWAT team who's looking at that. We've also looked more broadly set of strategic initiatives. One of the pieces of feedback that I've received from some of our enterprise clients is that they're looking to consume more of our software that consume more of our technology in an integrated way. And sometimes the pricing structures are inhibiting to doing that. So how can we develop more enterprise-based pricing approaches that will be [ considered ] with our push more into platform engagement is another big initiative that we have as well. We think both of these will be -- will be net beneficial to our growth rates over the coming months.

Our next question comes from Matt Hewitt with Craig-Hallum Capital Group.

Just one for me. So Jon, you spoke about your partnerships, and there's been consortiums announced over the past few quarters. And you've got these relationships with NVIDIA and the new one with [ Ulta Sciences ]. I'm curious, as you look at the news flow regarding these partnerships, whether it's yours or others in the market, is the ultimate goal here to drive either adoption of simulation and modeling to accelerate that, which obviously would benefit you to create a wider moat, allowing you to not only retain but maybe grow that business even further? What is the ultimate goal? And when do you expect to see some benefits from these types of partnerships?

Good question. And maybe I can say yes and yes, you're -- I mean, I think those are both look true. Look, this -- we know success in this market is not one-offs. We live in a very connected ecosystem. There are a range of capabilities it's going to take to be successful and to grow at the written pace at which we believe we can. And so we're being focused in terms of what we think we're very, very good at, and we're doubling down and tripling down and what we're very good at, and we'll look for partnerships to fill in some of those gaps. Partnerships with technology with technology suppliers and with modeling. Those things are complete accelerators to what we do. Commercial partnerships with at scale players like early-stage CROs in fact, perhaps others as you go along, who add scale, have large books of business as well and are working in the core kind of clinical side, which we don't have capabilities, we're not a CRO per se. Is it another -- if we can integrate that on behalf of our clients, it's win-win. It's a win-win-win. It's win for us, it's win for an [indiscernible] type partner. And it's a win for clients who will be working with because we can accelerate time lines and drive cost down for them and help disrupt conventional flows. So look, I think it's a realization that it will help accelerate the market is also a realization that we know what we do very well and that we're comfortable in partnering with others and that they do well to help create winning scenario for our clients.

Our next question comes from Max Smock with William Blair.

Maybe just one for us quickly. You talked a lot about just interest and impact of AI on drug development. I'm curious to get your thoughts on how much interest is out there on the large pharma side from building out internal solutions actually, it seems like there's been a lot of focus on discovery. So do you expect these investments to result in solutions that are going to be competitive with your offerings in that space. And then in clinical, how should we think about the risk that large pharma [indiscernible] solutions that compete with your MIDD solutions here going forward?

Max, I just want to make sure I understand the second question. Can you just repeat that one more time?

Just around large pharma and their willingness and ability to build out solutions that compete with your offerings, whether that's in discovery or the clinical space?

Yes. Look, I generally think in the near term, where most of the productivity is happening and where most of the big splash press releases are is on the earlier stage discovery. And I think we mentioned, we see this as kind of a net positive to the market. More compounds means more demand for MIDD services. And so look, I know there's a lot of press releases, a lot of uncertainty out there around how some of these things go. So what we are hearing on the other side of it is phone calls from a lot of these players and providers about how do we tap your capabilities into what we're building and doing started in the opening statements. And I think I reiterate again and we told the story about what it took to get Simcyp approved in the EMA, and we've been working with the 25 member companies in 2 years and the importance of transparency and important [indiscernible] in that. We talked about the mechanics around Pinnacle and 36 trillion data points and mechanics of it. [ Talk ] about the legacy of the historical data and all the kind of unique IP that we have. It's pretty tough to replicate. I mean, this is not easy stuff. So I would see it as hugely inefficient for others to be building their own capabilities. I think it's a bit upon us to democratize it to the extent that we can make it broadly available within their 4 walls and partner with them in different ways so that the companies are getting broad application, the benefit of the capabilities that we bring.

I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.