session. Thanks for joining us, everyone. My name is Mike Ryskin. I'm on the BofA Life Science Tools and Diagnostics teams, and I'm excited to be joined by John Gallagher, Chief Financial Officer of Certara. John- Hi, Mike. Thanks. Thank you for coming. Yeah, thanks for having me, Mike. We'll do a fireside chat as usual, but maybe just to kick things off, you know, you recently reported 1Q results. Anything you want to recap or just give us an update on, you know, how things played out relative to your expectations? Yeah, I mean, look, the Q1 played out in line with our expectations. And as far as how we had looked at the plan and things came in line. Software performed really well, which is a continuation of what we saw last year. Software put up 19% revenue growth on the quarter, and that's on the heels of a mid-teens% last year. So, very pleased with what we've seen on the software side of the business. And then in Services, although Services was flat, we did see a continuation of this notion of stability. So coming out of the back half of last year, we were looking for stability in our bookings, stability in the performance of the services business, and looking at Q3 of last year, Q4 of last year, and now Q1 of this year, we are seeing that stability. So that's kind of what we're seeing for the quarter. Okay. And then, from there, we'll just take a step back a little bit and talk about some of the bigger picture items. I think to start, you know, Certara is a very unique business, not a lot of direct comps, very unique technology and sort of unique market you play in. So maybe you could just, you know, walk us through sort of, you know, your view of biosimulation and what the value add is to the pharma company. Yeah, yeah, sure. So Certara is a software and services company that's focused on model-informed drug development or biosimulation. And what that means is we're developing computer-aided models of biological processes, and then we're using those to help our customers with their, mainly in the clinical phase of drug development, is where most of our business is, and we're helping enable that clinical phase through our software and our services. Our customers, we have over 2,000 customers, from the biggest biopharma customers to biotechs, and we're helping enable them by selling both the software, and of that software, we have a few different programs that really comprise the, or platforms that comprise, the majority of our software. That's Simcyp, it's Phoenix, and it's Pinnacle 21. Then our Services offerings are centered around biosimulation services, which help support either those software platforms or can help—we work on projects with biotechs to help them even in the earlier phases of their development. Okay. So a lot there that I want to sort of follow up on. Maybe just to start, you know, some of the ones you called out, Simcyp, Phoenix, Pinnacle 21. You know, you've talked about those, those platforms, for, for years. Could you give us a little bit of, of further detail on each of them, sort of like what the value add is? What do they enable your customers to do that they wouldn't be able to do otherwise? Yeah. So, so the three largest software platforms comprise about 80% of our software revenue, and it is the ones you just said, Simcyp, it's Phoenix, and it's Pinnacle. Simcyp is sort of core biosimulation tool. It's a consortium model with some of the largest drug companies in the world come together in this consortium to help drive model-informed drug development, which started a long time ago with a model of a liver and has since moved on to having, you know, over a dozen different organs modeled. So that's sort of core biosimulation, if you will. Phoenix is also biosimulation related. It has a larger customer base and very strong renewals and expansions. In fact, one thing that I should have mentioned before, too, is our software. On the quarter, our software net retention ratio was 114%. And that—what that's indicative of is, it's indicative of our existing customers and not only renewing, but then also expanding, driving that ratio to a high point that we've seen historically. And when it comes to Phoenix, that's indicative of strong renewal rates and then expansions of additional products. And then the third one is Pinnacle 21, which is in the space of data formatting, data standardization for regulatory submissions. It's a ratable software business with high penetration across biopharmas. Okay. And then that covers the Software side of things. And on the Services side, as you said, you know, a lot of it's really tied to biosimulation services. So how do those two parts of the business go hand in hand and sort of, so what's the relationship between them? Yeah. So probably the best way to think about that is if you break it down into customer tiering. We think about our customers in three tiers: a Tier 1, a Tier 2, and a Tier 3. And we define that as Tier 1 customers are customers whose annual revenue is $5 billion or more, so think big pharma companies. And then Tier 3s are customers whose annual revenue is $100 million or less. So there, you can think more biotechs. And the way to think about how the services offerings, you know, pour into and correlate to the software business is the software business, as you would expect, naturally skews more toward Tier 1, because those big customers have more of a propensity to be buying the software products that we have, and they've got more experience in the drug development space that's allowing them to make use of that software. And oftentimes they use services associated with it. But when you skew over to the services side, then you see that the higher proportion of our revenue on the services side is in Tier 3s. So that's what and so that sort of fits together. Our software services offerings are complementary from a customer tiering perspective, because we're hitting these customers with different value propositions at different points in their life cycles. That's helpful. And then within Services, you know, you also have, Regulatory Services, Regulatory Affairs. What's been the sort of the key factors there? That business has been a little bit more choppy over the last couple last couple quarters, last couple years. Yes, it has. And the Recovery in Regulatory Services is slower than we anticipated. That business, or that market rather, is growing more slowly than the biosimulation side of the market. But one thing that we've been doing to address that is last year, we did consolidate leadership of our Services business to have biosimulation services and regulatory services under one leader. Allows for more cross-sell opportunity, and we really saw some fruits of that combination in the late part of last year as we were getting some of the larger regulatory services bookings in Q4, which has typically been the case. Yeah. Last year, earlier in the year, we weren't seeing that. They came in in Q4, and that was a, that was a good sign toward the recovery, but it continues to be a challenging spot for us. Okay. All right. So we kinda ran through the background, the sort of the setup. I wanna dive into a little bit more of the, you know, the forward outlook, your 2024 guide and sort of the story beyond that. So, as you said, you know, on 1Q, you reissued your 2024 guidance, it calls for about 11% revenue growth, a little bit of a year-over-year step down in margins. In 1Q, you put up 7%. So you, you know, you're implying some acceleration as you go through the year. What are the factors underpinning that? What's driving that pickup as you go through the year? Yeah, that's a good question, Mike. So, well, one of the things there, at the time that we did the guidance, we had laid out that the services business is typically, and we expect to be this year, too, more weighted to the back half. So there's a first half, second half story around what we're seeing or expecting for revenue achievement in the services business. So there's a natural lift associated with that. Additionally, the performance of the acquired businesses, we expect to accelerate during, you know, as the quarters progress, with Q1 being one of the lower quarters for this year. So what our guidance contemplates is, it contemplates that the stable end market environment kind of persists for the year. For us to be at the lower end of that guidance, we would need to see a deterioration in the end markets. We're not seeing that. The good news is that's not something we're seeing. It's not something we're anticipating. To be at the higher end of the guidance range, that's really focused on some of the efforts that I mentioned earlier. It's really centered in this stable end market environment, our execution against some of the initiatives that we've had in place. We said we were investing in sales and marketing. We made some changes to the commercial organization. I just mentioned that we combined the services businesses leadership during the course of last year. We think that that can help drive execution and growth during the course of this year, and if that plays out a little better than we had anticipated, then that would push us more to the higher end. Okay. And then, you know, thinking about underlying customer demand, underlying customer budgets, things like that, you know, there's been a lot of talk about biotech funding. You know, first quarter was off to a really good start. You know, you talk about Tier 1 versus Tier 3 in terms of your customer segments. Obviously, Tier 3 is where we're talking about emerging biotech and that funding environment. So early signs there, are you incorporating any of that improvement in that market into your outlook, or would that just be upside at this point? That would be upside. So the guidance that we contemplated did not rely upon a recovery in the end markets there. What we've seen is that in the Tier 2, and particularly the Tier 3s, as you said, Mike, we have not seen a recovery back to, at least as it relates to our bookings and sales, back to historic levels of spend. And so that's something we're keeping our eye on. Obviously, it's a really great sign that the capital markets have been conducive, and biotechs are getting funding. And, you know, make no mistake, we are sending our commercial team squarely at the organizations that are receiving funding. But it takes time, and we thought that would be the case. We didn't see it in the Q1 numbers. We wouldn't expect to see it in the Q2 numbers, 'cause from the time a company gains funding to, sorting out capital allocation priorities, to then ultimately creating a booking with Certara, we expect that, to take time and have not baked that into, the guidance for the year. Okay. And you know, you touched on earlier when you were discussing the business, you talked about 114% net retention in 1Q in software. You know, I don't think you gave a number for services, but in general, as you look back over the last year or so and some of the choppy market environment we've been, you know, has the retention rate dropped? Is it not—it's not upselling new accounts, not bringing in new accounts? Sort of where's the choppiness materializing in the business? Yeah, that 114 is more of a software metric that we look at. But to your point, though, where the choppiness has been centered really in both sides of the services business. So we talk about biosim services, and then as we talked about regulatory services offerings that we have, we've seen the choppiness in both of those, particularly with Tier 3 customers. And there's been some churn there as some of those customers have gone away, and then other customers have come in. And what we haven't seen is we haven't seen the spending patterns or the bookings engagement return to historical levels. So that's, you know, that inflection. Well, I think we said on the call that, you know, although the funding environment is much better, and that's a great sign, it's not yet an inflection point for Certara's bookings, and that wasn't totally unexpected, but perhaps something that we see later in the year. Okay. And since you touched on bookings, I kind of wanna follow up on that. You know, historically, from a model perspective, we've always kind of relied on trailing twelve-month bookings, both in software and services, to guide the forward model. You know, your outlook for revenue growth in 2024 is a little bit better than, than trailing twelve-month bookings would indicate from last year. Is there anything... You know, part of that, obviously, is the M&A you completed. Yeah. So that's, that's a factor of it, but is there anything else driving that? Do you think that relationship continues to hold longer term, or is there some reason you're able to, to outperform your bookings? There's two points that really go beyond, as you said, just the fact that the book-to-bill ratio is more like a 1:1. There's two factors that would, you know, drive us to be able to achieve higher than what would historically been indicated by that 1:1. One of those factors would be the backlog. So we had stronger services bookings in Q3, and especially Q4 of last year, and the engagement with our customers to initiate, progress and complete projects was slower than we've seen historically, which created a bit more backlog than we'd seen historically, to solve for and convert to revenues during the course of this year. And you saw that play out even in Q1, where our revenue achievement remained strong and in line with our expectations, even though the bookings on the services side was softer. The other thing, as far as, you know, why would we achieve, you know, a bit higher than what you might have seen historically on a book-to-bill, the other reason is associated with new software products. So we've seen really strong uptake on new software product offerings, more so than we've seen in recent years, and obviously that was reflected in the results that we had on Q1. And that, you know, that is the other key driver, why, you know, we would be able to achieve higher, at least contemplated higher in our guidance on the year. So... And all of that, as you said, is in addition to the accretion associated with the M&A transactions that we did in Q4, which are adding to our overall growth number on the year. Okay. Just 'cause you talked about new software offerings, you know, how do you think about price as part of the algorithm, you know, both in 2024 and longer term? You know, you've got a lot of, you've got high retention and high renewals. Are there, you know, automatic price escalators, and sort of what role does that play in the model? Yeah, price, so we do take price, and we take price on an annual basis. Obviously, we have a lot of customers, and we have long relationships with many, many of our customers. And so, you know, what we've found is that consistently raising price in and around sort of the level of CPI has been something that, you know, helps the business and is also conducive to the relationships we have with our customers. And, you know, that is... Most of our bookings are annual, but for any multi-years there, that's about the level of price we'd have built in as an escalator. But we do take price every year, but just and we do that consistently, but just not in any outsized way. Okay. Maybe we can touch on competition here. I mean, there's one public competitor that we know. It's not a direct head-to-head competitor, but there's another biosimulation play out there. There's a lot of private offerings. There are a lot of sort of do-it-yourself solutions. There's also just the more traditional non-simulation way of running clinical trials. What's your view of sort of the evolution of the competitive landscape? You know, as your technology has improved, you know, what's pharma's biotech sponsors perspective on where they want to take this market? Yeah, yeah. Well, as you look at biosimulation, you're right, there are a lot of players that are sort of at a smaller level. There are high barriers to entry as it relates to biosimulation, when it comes to software and then doing biosimulation at scale. So, you know, the barriers are less if it's a small consulting shop that's coming in and working on one project. But to do it at scale, the way that Certara does, is really what some of our key competitive advantage is, and that's why we're the market leader in this space. Okay. So yeah, you haven't really seen a big change in terms of other entrants or in terms of pharma being more willing to sort of maybe take on some of these costs internally? It still seems like you're sort of in that leadership position. Yeah, we haven't seen a large change from that standpoint. You know, obviously, the big pharmas have always been able to have the resources to do some of that work in-house. But certainly, we've been able to prove out that there's a good model here to be able to leverage Certara's software and services outside as well. Okay. All right. And I guess the other thing, the other thought to build on that, too, is that, you know, there's an adoption curve for biosimulation that's... Sort of, like, the key to really unlocking a lot of growth for biosimulation is escalating that adoption curve for biosimulation by the big pharma companies taking on and understanding the value proposition at senior levels of their organization. That's one of the sales organization moves we made, is to increase the call point within the largest biopharma companies to a level of decision authority, where they're able to see really what the value proposition is to use biosimulation more pervasively across their programs, instead of it being isolated in various silos inside of these large companies. So that's a, that's a key to unlocking adoption, and that's what's really gonna help aid Certara growth. The other piece of that, too, is the regulators. So take, like, the FDA as an example. The FDA is a big user of our software. We hold webinars to train them on the software. They've provided guidances on Certara's software, but it certainly will help to get some continuation of that kind of support, to smooth the pathway to use more technology, rather than the traditional pathway for clinical studies. Just following up right on that, I mean, I think one of the things we always debated is: What is the right pace of adoption? What do you think we should be thinking about? And if you think about, you know, you just touched on the FDA, yeah, they've been your, I believe, your number one customer for a number of years, so clearly, the regulators are on board, and they're not the only regulatory agency that's on board with biosimulation. Correct. And a lot of your major pharma customers have been using either Simcyp or, or Phoenix or, more recently, Pinnacle 21, for a number of years. So there's familiarity with this, with the solutions. So why isn't penetration happening even faster? I mean, what's... Sort of like, what's holding back that faster adoption? Because you are still very under-penetrated in the market- Yes and what the opportunity could be. Yeah, that's right, Mike. That's right. We are relatively under-penetrated, just the—not just Certara, but just biosimulation- Yeah. Yep Yep use cases in total, and I think that what you're touching on and the dynamic that I was speaking of is the key sort of tension in the industry in order to unlock what we believe is significant growth into the future. Because we see the biosimulation market with Certara as a leader, but the whole market, in general, growing at about 15%. I think one of the key questions or the way that you put it is, well, why wouldn't it- Yeah ... why wouldn't it grow 100%? And I think that the answer to that really lies in you know, both the regulators providing a smooth pathway for drug companies to use more technology, and then also for the drug companies to really embrace and look at the use of technology to help drive more efficiency in their spend programs and be in a position where they feel comfortable submitting more and more submissions to the FDA with the use of technology. And so I think that that dynamic takes time to play out, and that's why we think it's an adoption - it's more of a multiyear adoption than it's something that happens overnight. Okay. All right. Any questions from the audience? Anyone want to jump in? All right, I'll, I'll keep going in the meanwhile. You know, as I think you were just touching on, you recently went through a pretty major sales force reorganization. Can you highlight the, some of the changes you made and, you know, what the impact you're, you're seeing in terms of cross-selling and some of the business momentum there? Yes. Yeah, yeah. So going back to a couple of points I made earlier. So last year, we made some changes to the way that we approach our customers and the way that we organize the sales force. We named a Chief Commercial Officer, and then we centralized the commercial support under the Chief Commercial Officer, all with the goal of a couple of things. One, as you were touching on cross-sell opportunities. So how do we bring, you know, the sort of the message of one Certara when we're having customer conversations? Many of our customers view us from the lens of, "I buy Phoenix," or, "I buy Simcyp," or, "I buy Pinnacle." And we wanna make sure that we open the door for, you know, all of the possibilities of what Certara offers from a, from a product portfolio perspective. In fact, that brings up a point on, you know, Certara Cloud that we started talking about on the call, starts to introduce that notion as that's a single sign-on kind of a platform that allows visibility to all of the products that we offer. So that, that's an enhancement centered on cross-sell. But then the other, the other part of our sales reorganization was also centered on, you know, elevating that discussion and elevating the call point at our customers. How do we, you know, get ourselves to a spot where we're talking at the right level that really can really help drive that adoption curve? Because they have the decision authority about how they're gonna allocate R&D dollars within these larger organizations. Okay. All right. And then maybe just switching to the, to the P&L really quick, a couple points I want to hit on. You know, you're one of the, the rare IPOs that not only doesn't have to worry about cash burn, but is also actually not just profitable, but very profitable with your, you know, low 30s EBITDA margin. But there's a lot of moving pieces there, right? There's the mix shift between software and services. There's, on the one hand, you know, you've got continued investment, in R&D and SG&A, as you discussed, and you've also got some acquisitions you've got coming in. So putting all that together, sort of what's your view on, the pathway for margins from here, specifically EBITDA margins? Yeah. Yep. Yep, good question. So historically, the company has run with an Adjusted EBITDA margin in the range of sort of the mid-30s. This year, we made a conscious decision to make investments. Those investments were centered in sales and marketing and R&D to catalyze growth into the future, some of which I touched on during the course of this conversation. But those were investments that obviously we believe will pay off with returns at the tail end of this year or moving into next year. But it does provide for some margin compression inside of this year. In addition to that, we did two acquisitions in Q4. And because we're still working through the integration of those acquisitions, then the Q1 margin, as an example, was impacted by about 200 basis points because we're still working through the integrations. Now, you know, we believe that we can get those—both of those organizations up to the Certara corporate average, relatively quickly, but, you know, not in one quarter. So that was a piece of it, too. So as we look out and think about longer-term, margins for Certara, then, you know, we made a conscious decision to take that margin guidance and make it lower based on the investments, as well as some of the dilution that we knew was coming on the M&A activity. We fully believe that the revenue growth that these investments will catalyze is gonna help put us in a spot where we think that that margin compression is temporary, and into the future, we'd expect to be able to get some margin expansion as a result of that. You know, Bill and I have been pretty clear. Like, we can operate. We do have flexibility to be able to operate the company at various different margin points. If we chose to, we could have not done those investments and had a higher margin this year. But we think now is the right time to make those investments, and we do think it'll provide for margin expansion into the future. And so the longer-term outlook is not that we took a step function down this year, and then we stay at those margin levels, but instead that we're making conscious investments that are gonna drive margin expansion into the future. Okay. And on the topic of acquisitions, you touched on it a couple of times, but, you know, you closed two deals late in 2023. And historically, you know, Certara has been a pretty acquisitive business. What's... You know, can you give us an update on your capital deployment priorities from here in terms of, you know, debt, leverage, you know, what you're looking for in further assets, how much capital you have to deploy? Yeah. Yeah, yeah. So on capital allocation, a few things about the balance sheet. So we have $225 million of cash. As you pointed out, we've not only been spending, because we did acquisitions, especially in the Q4 of last year, but we also generate cash, too. So we're adding to that cash balance. You know, we have very low net leverage, thanks to the cash. And we do have a term loan out there, but it's, you know, that's the cash and the term loan are basically partially offsetting one another. So from a leverage and balance sheet and cash position, you know, we're in a good spot to take advantage of opportunities that come our way. Those opportunities, you know. First of all, we don't have to do a deal. You know, as we just got done talking about, there's plenty of organic investments that we can make into the company. But we have been successful with M&A, and we do continue to look at the pipeline. And, as we look at it, then, you know, there's deals. We've generally been doing tuck-ins. I think that we could also, based on everything that I just said, we could also do deals of a, of a larger size, too. I think it just depends on what that opportunity looks like and what the profile and the valuation is as to whether it would make sense for us. I can tell you that, you know, we look more towards software strategically, when we think about M&A, and sort of rounding out our portfolio. Okay. All right. Almost out of time, so maybe just my last question. John, now you've had a couple of quarters to sort of settle into your role at Certara. Just sort of what are your biggest learnings? What do you see as the really interesting opportunities in front of you, as well as the bigger challenges? Yeah, yeah. Well, I've been thrilled to have joined Certara. As I already mentioned, I think that the, you know, the growth prospects for biosimulation and for Certara as the market leader in biosimulation are tremendous going forward. And so I think that what we've seen over the course of the last 12 months or more, related to some of the, the volatility that we've seen, particularly on the services side in our bookings, is something that will revert over time. And I think that we will see a return to historical spending patterns at some point, and that drug companies are gonna continue to spend on drug development. And I think that, you know, so certainly, the end market environment has been a challenge for us in the near term, but we haven't lost sight of, you know, the real growth opportunity over the long term, and that's why, you know, we've taken this opportunity to lean in with some investments that we know are gonna help us pay off into the future. Great. And with that, we're gonna call it. Thank you so much. Thanks, everyone, for joining. Thank you. Thanks. Thanks, John.