Simulations Plus, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Q3 results were in line with internal guidance, with 14% revenue growth, diluted EPS $0.15, and adjusted diluted EPS $0.19.
• Market funding environment improving, with biotech funding showing signs of recovery. Large pharma client spending varies, with some increasing, others conservative.
• Software segment: Software revenues up 12% in Q3. PBPK up 7%, Cheminformatics up 15%, CPP up 13%, QSP up 80%. New GPX software launched, with positive client reaction.
• Services segment: Revenues up 18% in Q3. CPP up 27%, QSP up 49%, PBPK down 10% due to client source data delays. Total backlog at Q3 end was $19.6M.
• Acquisition of Pro-ficiency: Integration progressing as planned, with fuller update in October. Q3 total gross margin 71%, Software gross margin 88%, Services gross margin 41%. Trailing 12-month total gross margin 73%, Software gross margin 88%, Services gross margin 48%.

Segment Performance

• Software Segment: Revenues increased 12% in Q3, representing 64% of total revenue. For the quarter, Software business unit contributions were: PBPK 56%, Cheminformatics 20%, CPP 18%, QSP 6%. Trailing 12 months, Software revenues increased 22%, representing 60% of total revenue, with PBPK at 54%, CPP at 20%, Cheminformatics at 19%, and QSP at 7%.
• Services Segment: Revenues increased 18% in Q3. For the quarter, Services business unit contributions were: CPP 48%, QSP 29%, PBPK 19%. Trailing 12 months, Services revenues increased 17%, with CPP at 44%, QSP at 31%, PBPK at 21%. Q3 total revenue was $18.5M, with Software at $11.8M (64%) and Services at $6.7M (36%). Trailing 12-month total revenue was $67M, with Software at $40.2M (60%) and Services at $26.8M (40%).

Guidance

• Fiscal 2024 guidance: total revenue between $69M to $72M, year-over-year growth 15% to 20%, Software mix 55% to 60%, Services mix 40% to 45%, diluted earnings per share $0.46 to $0.48, adjusted diluted earnings per share $0.54 to $0.56.
• Pro-ficiency expected to be accretive to 2025 EPS, factoring in the loss of interest income. Fiscal year effective tax rate estimate remains between 20% to 23%.

Risks

• Services gross margin decline due to shift of Services personnel to cost of revenue departments from SG&A.
• Client source data delays impacting initiation of contracted Services projects, particularly in PBPK business unit.
• Varying spending patterns among large pharma clients, with some conservative and others increasing spending, creating uncertainty.

Question and Answer

Q: On a high level, how should we think about 2025 organic revenue growth potential given current improving microenvironment and bookings and backlog visibility? Also, on the inorganic side, are you still thinking about a $15 million to $18 million contribution from Pro-ficiency in 2025? And how should we think about the cadence and breakdown between Software versus Services?

A: Shawn mentioned biosimulation market growing 12%-15% in recent years, and potential for improvement in 2025 but remained cautious as bookings and activity hadn't translated yet. Pro-ficiency expected to contribute $15M-$18M in 2025, with potential for better, and breakdown between Software and Services tied to market dynamics and client spending.

Q: On margins, we were a little surprised to see adjusted EBITDA margin come in a little short of expectations, despite outperformance in Software revenue. So, hoping you can provide some more color on key puts and takes impacting margins in the quarter?

A: Adjusted EBITDA margin down due to a significant software release cost during the quarter and hiring efforts, targeting 35% to 40% long-term.

Q: On the PBPK services side, with that being down this quarter due to client source data delays impacting the initiation of contracted projects, just confirming that this work is delayed and not canceled. And if so, should we expect to benefit from this work materializing in Q4 or 2025?

A: Work is delayed, not canceled. Whether delay catches up in Q4 is to be seen, but portfolio of consulting services usually evens out over time.

Q: In terms of the market as a whole, biotech pharma, the XBI and IBB, they've kind of come back a little bit after the first quarter, it was pretty exciting for the space. So, I was just wondering, in terms of your feel for market and potential upside, your cautious optimism, is this based on where we are now, have you seen anything, or was it kind of more exciting after the first quarter and now we're a little more cautious. Any color there would be helpful?

A: Biotech funding improved but leveled off, waiting for translation to contracted business. Large pharma still has mixed spending patterns with budgetary challenges, keeping cautious optimism.

Q: In terms of the Pro-ficiency updates that you mentioned on the next call, is that all related to guidance? Or what else in terms of updates should we be expecting here from that acquisition? And maybe if you could just touch on the guidance updates, just to clarify here, in terms of the EPS versus what you had announced, is that just related to the acquisition? Just any clarity there on the updated diluted EPS would be helpful. Thanks.

A: Pro-ficiency will be included in Q4 commentary, contributing to financial results. EPS guide adjusted for transaction costs and purchase price allocation, with adjusted EPS excluding those costs at $0.54-$0.56.

Q: Regarding Pro-ficiency, I think when you provided at the acquisition call, you spoke a little bit about how their margins, particularly the gross margins, are a little bit below Simulations Plus' historic margins, and I think you had commented that over time you expect those to get in-line with the company. I think you've mentioned that today. Is that going to be a gradual kind of improvement in the Pro-ficiency, or is there some type of a trigger event that would get those to snap in-line on a faster pace?

A: Gradual improvement, with Pro-ficiency's software margin closer to 80% vs Simulations Plus' 90%, improving through technology investments and growth rate affecting mix.

Q: Congrats on the revenue beat relative to our model this quarter. Can you maybe just clarify with the EPS guide, was that changed on an apples-to-apples basis relative to the June 12th commentary? Because I had thought that in fiscal 2Q, we were at $0.66 to $0.68, and then on June 12th, it declined by about $0.12 to $0.54 to $0.56 because of the lower interest income and the transaction costs. And now we're at, I think it's $0.46 to $0.48 GAAP, $0.54 to $0.56 adjusted. But if the $0.54 to $0.56 is adjusted and we're adding back the transaction costs, just -- was the EPS guide lowered or not? Just how are you thinking about that, please? Thank you.

A: EPS guide adjusted due to transaction costs and purchase price allocation clarity, with adjusted EPS excluding costs at $0.54-$0.56 and GAAP at $0.46-$0.48.