Q1 2022 Certara Inc Earnings Call
Good day and thank you for standing by welcome to the <unk> first quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you only the press star one on your telephone please be advised that today's conference maybe recorded.
If you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, David Biegler. Please go ahead.
Good afternoon, everyone.
You all for participating in today's conference call on the call from sitar will in theory, Chief Executive Officer, and Andrew <unk>, Chief Financial Officer Earl.
Earlier today Soutar released financial results for the quarter ended March 31 2022.
Copy of the press release is available on the company's web site.
Before we begin I'd like to remind you that management will make statements. During this call may include forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 any statements contained in this call that relate to expectations or predictions of future events results or performance are forward looking.
Statements actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors for a list and description of risks and uncertainties associated with <unk> business. Please refer to the risk factors section of our Form 10-K filed with the Securities and Exchange Commission on March one 2022, we urge you to consider these factors you should be aware of that.
These statements should be considered estimates only and are not a guarantee of future performance.
Also in our remarks or responses to your questions management may mention some non-GAAP financial measures reconciliations of adjusted EBITDA adjusted net income and adjusted EPS to.
To the directly comparable GAAP measures are available on our recent earnings press release, which is available on the company's website.
This conference call contains time sensitive information and is accurate only as of the live broadcast today may five 2022, so Tara disclaims any intention or obligation except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.
And with that I will turn the call over to William.
Thank you David.
Afternoon, everyone. Thank you for joining <unk> first quarter earnings call Andrew.
Andrew and I will start with prepared remarks, and then we will take questions.
I am pleased with how the <unk> business performed in the first quarter of 2022.
Executed on our strategic and financial goals, we continue to grow our position as a global leader in Biosimilars.
We reported strong first quarter revenue of $81 6 million growing 22% year over year, including clinical 'twenty one.
Software revenue was $29 2 million growing 33% year over year with a 92% renewal rate.
By double digit growth in our core sensitive and Phoenix licenses and the impact from Pinnacle 'twenty one.
Clinical 21 continues to meet our expectations.
Technology, driven services revenue was $52 4 million representing.
Representing 17% growth compared with the first quarter of last year.
We are pleased with the sequential improvement in our technology driven services business.
As expected and discussed on our fourth quarter call. We saw some impact from the omicron Barry in January and several regulatory services projects continued to be delayed.
We remain focused on navigating through the delays and our clients clinical trials to better manage the conversion of our bookings to revenue and regulatory services.
We effectively managed through issues related to Covid and the bill.
<unk> exited the first quarter at more normalized levels of employee and client availability as well as project activity.
Looking forward to the remainder of the year we.
We expect the positive momentum in the business to continue.
Bookings trends in both software and technology driven services remained very strong and we continue to add new customers.
We continue to experience healthy double digit growth in new customers over last year.
As such we remain well positioned to achieve our 2022 financial guidance.
Now moving on to other recent highlights.
Our sensitive COVID-19 vaccine model continues to get recognized for its contributions to combat the pandemic and improving patient outcomes.
Two weeks ago, we were honored to receive a Tommy Thomas Edison Award in the therapeutic impact category winner.
Winning an Edison award as one of the highest accolades a company can receive for the successful launch of our game changing new product or service.
Results from our COVID-19 vaccine model have been submitted to global regulatory agencies, including the FDA.
<unk> clinical trial designs.
Our clients and we are currently using the COVID-19 vaccine model to optimize dosing for special populations, such as the elderly and children.
The FDA continues to support expanded use cases of Biosimilar <unk> to help advance the safety and efficacy of medicines.
On our last earnings call, we highlighted our first quarter announcement that the FDA recently licensed our immunogenicity simulator to be used in the valuation of biologics.
You ended the reactions can be a major problem in biologics and can lead to reduced effectiveness <unk> adverse events.
Our stimulator helps guide improved study designed to drive better clinical outcomes.
In February the FDA released draft guidance, providing recommendations for incorporating clinically relevant information into the labeling of products, having immunogenicity assessments. We think that this is a growth area within the R&D pipelines at customers.
Additionally.
As I've mentioned, the Fda's project Optimists as an initiative to reform the dose optimization and selection paradigm in oncology drug development.
There was a dose the workshop just this week helped by the FDA that we contributed to.
This is a positive development for the use of Biosimilars <unk> regarding dose finding and optimizing clinical study design.
We continue to invest in capabilities that are strategically aligned with regulatory guidance.
Innovation and growth are driven by the people at the time.
We remain committed to growing retaining and developing talent is hitachi and we have invested in additional professional development programs to support these goals.
Our culture people and commitment to innovation and customer partnerships continue to make sentara and <unk> an employer of choice.
We continue to invest in our global team of experts across the organization and we are well positioned to capitalize on the opportunities ahead.
Started the year with a higher level of investment, particularly in software R&D and sales spin.
Specifically, we are investing to expand the use cases of our sensitive stimulator and also advancing R&D initiatives to support clinical 21 enterprise software development.
This elevated level of investment did pressure our reported adjusted EBITDA margins in the quarter as Andy will discuss in a minute, but I remain confident in our ability to deliver on our EBITDA guidance for the year.
A few weeks ago. So Tara issued its inaugural ESG report, which can be found on our Investor Relations website.
This report released our commitment to understanding managing and monitoring our ESG impact to support sustainable growth and we are pleased to share it with our stakeholders.
In summary, I'm pleased with the performance of the company in the first quarter and our continued dedication to advance global adoption of our software and technology driven services.
We remain on track to achieve our revenue and adjusted EBIT goals for the remainder of the year.
I will now turn it over to our CFO <unk> to discuss first quarter financial results in more detail.
Thank you William Hello, everyone.
Total revenue for the three months ended March 31, 2022 was $81 6 million representing year over year growth of 22%.
Which included approximately 100 basis points of negative FX impact.
Excluding pinnacle 'twenty one.
Reported first quarter revenue growth was 13%, which included approximately 200 basis points of negative FX impact.
As a reminder, the largest non U S. Dollar currency exposures are the British pound euro and yen.
We remain well positioned with trailing 12 months bookings coming in at $3 $68 3 million.
Up 19% year over year on a reported basis.
And up approximately 14% excluding pinnacle 'twenty one.
I continue to look at trailing 12 months bookings as the basis for forward 12 months revenue.
Software revenue was $29 2 million in the first quarter, which increased 33% over the prior year period.
Excluding $5 6 million in Pinnacle 'twenty, one software revenue contribution.
Year over year growth was 8%.
The growth in the quarter, excluding Pinnacle 21 was driven by our Biosimilar <unk> software simply have been Phoenix, which grew 13%.
Each month during the quarter.
Technology, driven services bookings in the first quarter were $79 1 million, which increased 32% from the prior year period.
TTM services bookings were $266 4 million, which increased 15% as compared to the prior year.
The strength in bookings provide support for the confidence we have in our 2022 outlook.
Moving further down the P&L for first quarter results total cost of revenue for the first quarter of 2022 was $32 8 million an increase from $26 million in the first quarter of 2021.
Primarily due to a $4 5 million increase in employee related costs, resulting from billable head count growth.
And a $1 7 million increase in intangible tangible asset amortization from acquired software.
Total operating expenses for the first quarter of 2022 were $42 6 million an increase from $35 1 million in the first quarter of 2021.
The components of operating expenses are as follows.
Sales and marketing expenses were $6 1 million compared to $3 8 million for the first quarter of 2021.
This increase is primarily due to the aggressive hiring that we successfully executed during the last two quarters and our commercial organization.
R&D expenses were $7 5 million compared to $4 7 million for the first quarter of 2021.
The increase in R&D expenses was primarily due to people and investments made to support software development.
G&A expenses were $18 3 million compared to $16 6 million for the first quarter of 2021.
The increase was primarily due to operational head count medical and other benefit expenses.
Additionally, the company incurred.
$9 million increase in professional and consulting costs associated with the financial audit and Sox implementation.
The increases were partially offset by a reduction of $1 million in acquisition related costs.
Intangible asset amortization was $10 1 million compared to $9 5 million in the first quarter of 2021.
One <unk> as compared to <unk> in the first quarter of 2021.
Adjusted EBITDA for the first quarter of 2022 was $27 7 million compared to $23 9 million for the first quarter of 2021, representing 16% growth.
As William mentioned, we accelerated operating investments in the first quarter, resulting in adjusted EBITDA margin of 34% disc.
Despite this performance in the quarter, we remain on track to deliver our adjusted EBITDA margin target of 36% for the full year.
Adjusted net income for the first quarter of 2022 was $16 9 million compared to $14 4 million for the first quarter of 2021.
Adjusted diluted earnings per share for the first quarter 2022 was <unk> 11, compared to <unk> <unk> for the first quarter of 2021.
Now moving to the balance sheet, we ended the quarter with $184 3 million of cash and cash equivalents.
As of March 31, 2022, we had $294 3 million of net outstanding borrowings on our term loan and full availability under our revolving credit facility.
We are reiterating our full year guidance issued during the fourth quarter call with the exception of an update to our year end fully diluted shares.
Revenues in the range of 350 to 360 million <unk>.
Adjusted EBITDA in the range of 127% to $131 million.
Adjusted EPS in the range of 48 to <unk> 53 per share.
Fully diluted shares in the range of 159% to $161 million.
Our GAAP tax rate in the range of 40% to 45% and our cash tax rate in the range of 20% to 25%.
Thank you.
Now we will open up the line for questions.
Operator, please open the line for questions.
Thank you Ed do you have a question at this time. Please press Star then the number one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of Dave Windley with Jefferies. Your line is open. Please go ahead.
Hi, Thanks for taking my questions and good afternoon.
Thinking looking back to this time last year when your customer count was about.
650, and now over 2000, so you've added about 350 customers in the last year.
And then the last two quarters of seeing your bookings really step up so I wondered.
If perhaps those threads where interwoven.
And you could talk about the progress you're making with with that new customer base, where they are engaging in how quickly they are expanding.
Yeah.
Yes, hi.
David It's Andrew.
The <unk>.
We've seen.
<unk> seen in the metrics, particularly coming out of Q1 with a higher customer count.
Strong growth rates in the clients with greater than 100 K.
And we've seen growth in the number of clients and also a growth in the dollar amount with those clients.
So that's kind of driving that growth we've also seen.
Strength with our largest accounts accounts greater than $1 million.
So I think.
Newer clients are coming on board and Theyre progressing into that greater than 100, K nicely and but we're also seeing strong growth with the larger clients greater than $1 million.
And in terms of.
The products.
Theyre starting with or.
With which they are engaging in contract are there any themes. There is it is it kind of same old same old and Biosimilar R. R.
Are you seeing.
Other avenues of customer engagement.
At this point.
It's primarily driven by by buyouts him.
Particularly Phoenix.
And <unk> services, we're also getting introduced to new customers.
Through clinical 'twenty one.
Okay and then.
Maybe just on the guidance.
The margin point that you made and so comfortable with.
EBITDA margin guidance for the year, how should we think about the higher investment in <unk> tapering off or is it is it.
Level through the year and your revenue grows into that just help us with cadence that gets you to the 36 by the end of the year.
Yes.
The way the way that just to clarify that so the first quarter margin.
The bridge from 34% of the target about half of that was accounting costs.
Merrily associated with.
Higher the higher than expected costs for the integrated audit in the socks and completing the Sox implementation.
The other half.
Was was.
Growing head count, particularly in lineup.
In light of the strong performance in bookings.
Q4, Q1, and what we can see in the pipeline.
In terms of the terms of the margin progression for the year.
Essentially what I'm seeing right now is a.
We'll take the one time half of those costs. The one time costs out of the first quarter in the second quarter, we'll see we'll see some improvement quarter over quarter.
Q1 to Q2, and then kind of in excess of target in the back half of the year to get back to the 36%.
Okay, great. Thank you.
Thank you and our next question comes from the line of Michael <unk> with Bank of America. Your line is open. Please go ahead.
Alright, great. Thanks, as Wolf Chanoff on for Mike Thanks for taking the questions.
No you've spoken to this a little bit but I was wondering if you could give us some more color on how successful you've been in capturing recapturing the service revenue shortfall from <unk> and how we should be thinking of.
And modeling that dynamic as it plays out through the rest of the year.
Yeah. Thank you Michael.
William theory here.
As you know at the end of last year, we saw a lengthening in.
To start certain services projects, particularly in regulatory we.
We saw that continue in the months of December and January .
But then as we went through the quarter, we saw a month to month improvement.
Each month through the quarter.
So what I'd say is we haven't quite gotten back to the point, where all the delays have been removed there are still some projects that are delayed waiting on.
Largely waiting on in clinical data too.
To be completed but there has been.
We were marching in the right direction.
It made up a lot of a lot of the ground in first quarter.
Great. Thank you very much and then just to kind of higher level. One can you give us some color on the early cross selling opportunities you've been able to realize with the pinnacle deal maybe.
I know, some particular products or just yes.
Anything you could speak to you in that area.
Yeah. Thanks.
So.
Clinical 'twenty, one has opened up a lot of opportunities for us.
There is.
I think immediately we found a lot of cross selling opportunities between clinical 'twenty, one and are integral.
Data repository products.
<unk> data repository.
It ties into a data validation product they kind of go nicely together so we.
We think theres some opportunities as we go forward there.
We've also seen tie ins between clinical 21, and some of our services business.
We've been able to add onto some of our services projects by adding by basically offering.
Data validation using pinnacle two projects managed to make some larger we've managed to open up some.
Some new customers as well for clinical 'twenty one.
<unk>.
There'll be more to come as we go forward, but I think we're off to a pretty good start with clinical 'twenty one.
Yes.
Great. Thank you.
Thank you and our next question comes from the line of Vikram <unk> with Morgan Stanley . Your line is open. Please go ahead.
Great. Thanks for taking my question. So I had a broad one on your Biosimilar relation Tam I noticed that in your current corporate presentation, you broke out the Tam buy software versus services and then within each of these segments you have.
Further breakout between drug discovery and drug development. So the two questions I had here are.
First if you could just walk us through a bit of what's feeding this high level build for for the Biosimilars <unk> Tam and then secondly, which are the specific areas of the opportunities you laid out here.
Thanks for Taro has the most opportunity to grow and moving forward over the next couple of years, especially now the clinical 21 is fully within the Sentara umbrella.
Sure. Thanks Vikram.
The information we put on the corporate we're just always trying to update the research we've done on the size of the market a lot of people have been.
No we're not.
Last few years, the Biosimilars market has been <unk>.
And maybe you got defined in a lot of investors' minds. So we wanted to provide the latest thinking we had on the different sizes and break it down.
In terms of.
So tires, playing the bulk of our.
Biosimilar <unk>.
Expertise in revenue has been on the development side.
Typically it particularly with services.
Companies get involved.
During.
Ah clinical or during the design of clinical.
Trials.
But in our services.
Kind of mirror that as well.
But we've also moved some of our software earlier to earlier stage. So we.
We have.
Clinical 21, which.
Largely comes in.
At the end of clinical when you submit to the FDA, but is increasingly being used.
During the clinical phase in during the preclinical phases companies are collecting data and want to hold that data to a certain standard.
And then we have other software.
We either have or have been developing which have.
Pushed our reach.
Earlier stage into preclinical and even a little bit into discovery.
For example, we have we acquired a piece of software a while ago called <unk> explorer, which is.
Kind of like.
Data visualization product during the preclinical phase we have <unk> hundred 60, which is primarily used during the discovery phase. So I think over the time as we go forward overall.
Over time the company is interested in.
In extending the reach of Biosimilars Asian earlier stage into discovery, but.
The reality today is probably 60, 70% of our of our business is really tied to that.
The development phase.
Hopefully that helps.
Very helpful. Thank you.
Thank you and our next question comes from the line of Justin Lin with William Blair. Your line is open. Please go ahead.
Hi, good afternoon, congrats on the quarter.
First of all I think you said your software bookings was up 34%, but excluding political 'twenty one it was up five.
<unk>, 5%.
First of all I want to clarify I heard that right and secondly, I guess, how does how does that compare to your expectation.
Yes.
You did hear that right.
Software.
Typically we look at bookings over a trailing 12 month period.
And.
Software bookings ex Pinnacle 'twenty, one trailing 12 months is 13%.
Factors that drive us to look at it over a longer time horizon is that.
We have client renewals that tend to shift from quarter to quarter, sometimes early sometimes late they don't have an impact on revenue recognition.
We also saw some disproportionate.
The net impact on FX.
In terms of the software bookings given.
The nature of where our products are developed around the world.
So that impacted that bookings line, we didn't adjust for that from a constant currency basis, and then we had a.
A sale last year.
That.
Was essentially.
The delivered this year through service services arrangement.
So when I normalized for those in the quarter was I think about 10% in terms of kind of software bookings and looking at the quarter and looking at the TTM I would call that.
Things were healthy and is what we're expecting we're expecting.
Got it Thats helpful.
Can you I guess can you remind us what your capital deployment priorities.
Our priorities are as the rising rate environment affected your thinking on.
M&A or investments in general at all.
We.
From my perspective, we're still.
Evaluate M&A opportunities.
We're open to that.
Given.
The current environment could be could be.
It's a good time to be.
Have a strong balance sheet.
Take advantage of opportunities.
So I would say this has been a relatively fast moving.
Event, we haven't changed our capital deployment strategies.
Okay, and just last one for me.
Can you talk about the opportunities you see in cell and gene therapy specifically.
Are you happy with your expertise in this area at the moment or are there.
Additional investments needed whether towards expanding our software capability or.
Hiring the right people.
Yes. Thanks.
Uh huh.
Wade.
A lot of our solvency therapy work.
Bye.
Quantitative systems Pharmacology group, which has been.
One of our faster growing areas.
A lot of the work.
LNG and therapy is for.
Yes.
Orphan drugs.
It tends to be what's in the pipeline.
And that tends to lend itself to the type of modeling and dosing work that <unk> is known for to deliver.
So okay.
I guess to answer your question.
I feel very good about the group we have in the offering we have.
But our ambitions are much larger.
So we.
We think the USP in general.
We will be a growth we know for a fact that it will be a growing part of the pharma market going forward.
Company is adding a lot of pharma companies, adding to their groups in that area.
And there's a lot of need for it so.
So we are planning to continue to invest in growing that group.
As we go forward.
We're also.
Thinking about how best to tie that to our software offerings.
We already tied a lot to our <unk> offering.
But there is.
Theres other our other opportunities to kind of create specialized software and <unk> that were also.
Thinking about or pursuing.
Got it Thats very helpful. Thank you very much.
Thank you and our next question comes from the line of Jacob <unk> with Barclays. Your line is open. Please go ahead.
Hey, guys. Thanks for the question.
Can you talk about your ability to pass on pricing and how many of your contracts allow pricing scale given that the long term for the life of the program.
Yes, I can start and then Andrew can chime in here.
Of our contracts are.
For one year or less.
We do occasionally because customers ask for it.
Enter into longer term contracts and particularly in the current environment, we're very sensitive to making sure that there is appropriate price.
Increases in any contract that goes out.
We're aware that we're in an inflationary environment.
Right now it's just as every other company is.
And.
We have the ability to we believe we have the ability to.
Basically offset inflation with pricing and maintain our margins.
Great that's helpful and how about any other offsets to resin costs.
Well there is.
Always.
Efficiencies to be gained in any company in particular.
We're growing quite rapidly and thats, enabling us to make investments in.
And it basically and company infrastructure that leads to efficiencies that offset some of that.
We've been investing heavily for example in our sales and marketing group.
Basically since we went public we said we would do that.
What that lets US do for example is free up our.
Our scientists from having to sell and they can they can.
More software or go to more project work, which for example leads to one sort of efficiency.
Great. Thank you so much that's helpful. Thanks.
Thank you and again if you have a question at this time. Please press Star then one.
And our next question comes from the line of Vikram Curser Bottler with Baird. Your line is open. Please go ahead.
Yes. Thank you for taking the question I think on the last call you talked about the fact, you saw some increased attrition in the workforce towards the end of the year. It sounded like that it starts to normalize towards the start of the year I'm wondering if you can just give us an update there and talk about what turnover has looked like in the organization. So far this year and what your expectations are for managing head count through the balance of this year.
Yes, vikram thanks for the question.
Youre right, we did see an uptick in <unk>.
And attrition at the end of last year.
Fortunately, we saw that drop down to more normalized level in the first quarter.
I think.
I think.
We are.
Making sure we keep up with with market in terms of wage wages and were made.
Maintaining our margins.
But the.
The uptick I guess, we saw I think there were a lot of I think there were a lot of disruptions.
At the end of last year due to.
Covid or people's perception of Covid and things like that that have kind of.
Work their way through People's perception of their of their careers.
I think <unk> got it.
Tremendous.
Backlog of really interesting work right now, which helps to attract people and.
We've been investing in training.
Okay.
We've been bringing in some really great colleagues here, so I think.
I think all of that's been reflected in the fact that we've seen.
Much more normalized attrition as we went into it as we went through the first quarter.
Okay. Thanks, and then I guess from a high level can you just remind us of the visibility that you have into the revenue guidance range at this point in the year I think historically, you've talked about the approach that you've taken into building guidance based on your bookings performance. Just wondering if there's been any update to that approach and I guess at this point of the year or do you think some of the.
Key areas of variability to come from in the revenue performance.
Yes, so we use the same methodology in terms of forward visibility.
I think.
We have high confidence.
In the.
The guidance for this year.
In light of the Q1 performance the bookings for the last two quarters, the TTM bookings as well as the.
The pipeline looking forward for bookings.
The variability.
<unk>.
From the perspective of predicting the revenues at the end of the year today versus the.
The actuals primarily rely around.
Opportunities that we don't have visibility into right now so we can do that kind of a bottoms up build to get to the revenue forecast and I think.
Offset to that is just variability in client client timelines and client.
Client drug drug development program successes.
Alright, thank you.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to William theory for any further remarks.
Yeah. Thank you all for joining us I think.
Overall message I would say is that <unk>.
Or.
Where we were in the fourth quarter, we saw.
Significant improvement in Q1, we're very happy to see very strong bookings, we saw month over month improvement.
Throughout all of <unk>.
Three months in the quarter.
And.
Sure.
Feeling quite confident.
As we look forward to the rest of the year. So look forward to updating everybody in future quarters. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
[music].
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[music].
Good day and thank you for standing by welcome to the <unk> tariff first quarter 2022 earnings conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you only the press star one on your telephone. Please be advised that today's conference may be recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, David Biegler. Please.
Go ahead.
[music] good afternoon, everyone.
You all for participating in today's conference call on the call for your time, we have well in theory, Chief Executive Officer, and <unk> Chief Financial Officer earlier today Soutar released financial results for the quarter ended March 31 2022.
Copy of the press release is available on the company's website before.
Before we begin I'd like to remind you that management will make statements. During this call may include forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the <unk>.
Securities Litigation Reform Act of 1995 any statements contained in this call that relate to expectations or predictions of future events results or performance are forward looking statements actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors for a list and description of risks and uncertainties associated with your towers business.
Please refer to the risk factors section of our Form 10-K filed with Securities and Exchange Commission on March one 2022, we urge you to consider these factors we should be aware that these statements should be considered estimates only and are not a guarantee of future performance also in our remarks or responses to your questions management may mention some non-GAAP financial measures reconciliations of adjust.
The EBITDA adjusted net income and adjusted EPS.
The comparable GAAP measures are available on our recent earnings press release, which is available on the Companys website.
This conference call contains time sensitive information and is accurate only as of the live broadcast today may seven 2022 targets claims any intention or obligation except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.
With that I will turn the call over to William.
Thank you David.
Good afternoon, everyone. Thank you for joining <unk> first quarter earnings call.
Andrew and I will start with prepared remarks, and then we will take questions.
I am pleased with how this entire business performed in the first quarter of 2022 as we executed.
On our strategic and financial goals, we continue to grow our position as a global leader in Biosimilars.
We reported strong first quarter revenue of $81 6 million growing 22% year over year, including clinical 'twenty one.
Software revenue was $29 2 million growing 33% year over year with a 92% renewal rate driven by double digit growth in our core sensitive and Phoenix licenses and the impact from Pinnacle 'twenty one.
Clinical 21 continues to meet our expectations.
Technology, driven services revenue was $52 4 million.
Representing 17% growth compared with the first quarter of last year.
We are pleased with the sequential improvement in our technology driven services business.
As expected and discussed on our fourth quarter call. We saw some impact from the omicron Barry in January and several regulatory services projects continued to be delayed.
We remain focused on navigating through the delays and our clients clinical trials to better manage the conversion of our bookings to revenue and regulatory services.
We effectively managed through issues related to Covid.
<unk> exited the first quarter at more normalized levels of employee and client availability as well as project activity.
Looking forward to the remainder of the year.
We expect the positive momentum in the business to continue.
Bookings trends in both software and technology driven services remained very strong and we continue to add new customers.
We continue to experience healthy double digit growth in new customers over last year.
As such we remain well positioned to achieve our 2022 financial guidance.
Now moving on to other recent highlights.
Our sensitive COVID-19 vaccine model continues to get recognized for its contributions to combat the pandemic and improving patient outcomes.
Few weeks ago, we were honored to receive a ton of Thomas Edison Award in the therapeutic impact category winner.
Winning an Edison award as one of the highest accolades a company can receive for the successful launch of a game changing new product or service.
Results from our COVID-19 vaccine model have been submitted to global regulatory agencies, including the FDA to support clinical trial designs.
Our clients and we are currently using the COVID-19 vaccine model to optimize dosing for special populations, such as the elderly and children.
The FDA continues to support expanded use cases of Biosimilar <unk> to help advance the safety and efficacy of medicines.
On our last earnings call, we highlighted our first quarter announcement that the FDA recently licensed our immunogenicity simulator to be used in the valuation of biologics.
Humidity reactions can be a major problem in biologics and can lead to reduced effectiveness.
Or adverse events.
Our stimulator helps guide improve study designed to drive better clinical outcomes.
In February the FDA released draft guidance, providing recommendations for incorporating clinically relevant information into the labeling of products, having immunogenicity assessments. We think that this is a growth area within the R&D pipelines at customers.
Additionally.
As I've mentioned, the Fda's project Optimists as an initiative to reform the dose optimization and selection paradigm in oncology drug development.
There was a dose the workshop just this week helped by the FDA that we contributed to.
This is a positive development for the use of Biosimilars <unk> regarding dose finding and optimizing clinical study design.
We continue to invest in capabilities that are strategically aligned with regulatory guidance.
Innovation and growth are driven by the people at the time.
We remain committed to growing retaining and developing talent is hitachi and we have invested in additional professional development programs to support these goals.
Our culture people and commitment to innovation and customer partnerships continue to make sentara and <unk> an employer of choice.
We continue to invest in our global team of experts across the organization and we are well positioned to capitalize on the opportunities ahead.
We started the year with a higher level of investment, particularly in software R&D and sales.
Specifically, we are investing to expand the use cases of our sensitive simulator and also advancing R&D initiatives to support clinical 21 enterprise software development.
This elevated level of investment did pressure our reported adjusted EBITDA margins in the quarter as Andy will discuss in a minute, but I remain confident in our ability to deliver on our EBITDA guidance for the year.
A few weeks ago Setara issued its inaugural ESG report, which can be found on our Investor Relations website.
This report released our commitment to understanding managing and monitoring our ESG impact to support sustainable growth and we are pleased to share it with our stakeholders.
In summary, I'm pleased with the performance of the company in the first quarter and our continued dedication to advance global adoption of our software and technology driven services.
We remain on track to achieve our revenue and adjusted EBIT goals for the remainder of the year.
I will now turn it over to our CFO , Andy <unk> to discuss first quarter financial results in more detail.
Thank you William Hello, everyone.
Total revenue for the three months ended March 31, 2022 was $81 6 million representing year over year growth of 22%, which.
Which included approximately 100 basis points of negative FX impact.
Alluding pinnacle 'twenty one.
Reported first quarter revenue growth was 13%, which included approximately 200 basis points of negative FX impact.
As a reminder, the largest non U S. Dollar currency exposures are the British pound euro and yen.
We remain well positioned with trailing 12 months bookings coming in at $3 $68 3 million.
Up 19% year over year on a reported basis.
And up approximately 14% excluding pinnacle 'twenty one.
I continue to look at trailing 12 months bookings as the basis for forward 12 month revenue.
Software revenue was $29 2 million in the first quarter, which increased 33% over the prior year period.
Excluding $5 $6 million in Pinnacle 'twenty, one software revenue contribution.
Year over year growth was 8%.
The growth in the quarter, excluding Pinnacle 21 was driven by our Biosimilar <unk> software simply been Phoenix, which grew 13%.
Reported software growth was affected by a reallocation of software revenues to services under select contracts.
Additionally, the software business was disproportionately impacted by the move in FX rates.
Software.
Bookings were $29 4 million in the first quarter, which increased 34% from the prior year period.
Pinnacle 'twenty, one contributed $6 4 million for software bookings in the first quarter.
So first quarter year over year software bookings growth, excluding pinnacle 'twenty, one was 5%.
Trailing 12 months software bookings were $101 9 million up 32% year over year and up 13%, excluding pinnacle 'twenty one.
Software aggregate renewal rate was 92% in the first quarter and net retention rate was 130%.
Yeah.
Services revenue was $52 4 million in the first quarter, which increased 17% over the prior year period.
As expected weakness in technology driven services during December and January was transitory and we saw improvement in each month during the quarter.
Technology, driven services bookings in the first quarter were $79 1 million, which increased 32% from the prior year period.
TTM services bookings.
$266 4 million, which increased 15% as compared to the prior year.
The strength in bookings provide support for the confidence we have in our 2022 outlook.
Moving further down the P&L for first quarter results total cost of revenue for the first quarter of 2022 was $32 8 million an increase from $26 million in the first quarter of 2021.
Primarily due to a $4 5 million increase in employee related costs, resulting from billable head count growth.
And a $1 7 million increase in intangible and tangible asset amortization from acquired software.
Okay.
Total operating expenses for the first quarter of 2022 were $42 6 million an increase from $35 1 million in the first quarter of 2021.
The components of operating expenses are as follows.
Sales and marketing expenses were $6 1 million compared to $3 8 million for the first quarter of 2021.
This increase is primarily due to the aggressive hiring that was successfully executed during the last two quarters and our commercial organization.
R&D expenses were $7 5 million compared to $4 7 million for the first quarter of 2021.
The increase in R&D expenses was primarily due to people and investments made to support software development.
G&A expenses were $18 3 million compared to $16 6 million for the first quarter of 2021.
The increase was primarily due to operational head count medical and other benefit expenses.
Additionally, the company incurred $2 $9 million increase in professional and consulting costs associated with the financial audit and Sox implementation.
The increases were partially offset by a reduction of $1 million in acquisition related costs.
Intangible asset amortization was $10 1 million compared to $9 5 million in the first quarter of 2021.
Increasing due to amortization costs from acquired assets.
Depreciation expense was <unk> 5 million compared to $6 million last year.
And continuing down the P&L other expenses include interest expense.
And miscellaneous income.
Interest expense was $3 2 million.
Compared to $3 9 million for the first quarter of 2021 due to lower interest rates on the term loan and interest swap.
Miscellaneous income was <unk> $8 million due to foreign currency gains from Remeasurement accounting at one of our foreign subsidiaries that maintains a U S dollar bank account.
Income tax expense was $1 5 billion.
Compared to <unk> 5 million in the prior year due to a 41% effective tax rate compared to 33% last year.
Net income for the first quarter of 2022 was $2 2 million compared to a net income of $1 1 million in the first quarter of 2021.
Diluted earnings per share for the first quarter 2022 was <unk> <unk> as compared to <unk> in the first quarter of 2021.
Adjusted EBITDA for the first quarter of 2022 was $27 7 million compared to $23 9 million for the first quarter of 2021, representing 16% growth.
As William mentioned, we accelerated operating investments in the first quarter, resulting in adjusted EBITDA margin of 34%.
Despite this performance in the quarter, we remain on track to deliver our adjusted EBITDA margin target of 36% for the full year.
Adjusted net income for the first quarter of 2022 was $16 9 million compared to $14 4 million for the first quarter of 2021.
Adjusted diluted earnings per share for the first quarter 2022 was <unk> 11 compared to <unk> for the first quarter of 2021.
Now moving to the balance sheet, we ended the quarter with $184 3 million of cash and cash equivalents.
As of March 31, 2022, we had $294 3 million of net outstanding borrowings on our term loan and full availability under our revolving credit facility.
We are reiterating our full year guidance issued during the fourth quarter call with the exception of an update to our year end fully diluted shares.
Revenues in the range of $350 million to $360 million.
Adjusted EBITDA in the range of 127% to $131 million.
Adjusted EPS in the range of 48 to <unk> 53 per share.
Fully diluted shares in the range of 159% to $161 million.
Our GAAP tax rate in the range of 40% to 45% and our cash tax rate in the range of 20% to 25%.
Thank you.
Now we will open up the lines for questions opt.
Operator, please open the line for questions.
Thank you if you have a question at this time. Please press Star then the number one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of Dave Windley with Jefferies. Your line is open. Please go ahead.
Hi, Thanks for taking my questions and good afternoon.
I was thinking looking back to this time last year.
When your customer count was about.
<unk> 50, and now all of our 2000 and so you've added about 350 customers in the last year.
And then the last two quarters I've seen your bookings really step up so I wondered.
If perhaps those threads where interwoven and.
And you can talk about the progress you're making with with that new customer base, where they are engaging in how quickly they are expanding.
Yes, Hi, David It's Andrew.
The <unk>.
We've seen.
Scene in the metrics, particularly coming out of Q1 with a higher customer count.
These strong growth rates in the clients with greater than 100 K.
And we've seen growth in the number of clients and also a growth in the dollar amount with those clients.
So that's kind of driving that growth we've also seen.
Strength with our largest accounts accounts greater than $1 million.
So I think.
Newer clients are coming on board and Theyre progressing into that greater than 100, K nicely and we're also seeing strong growth with the larger clients greater than $1 million.
And in terms of.
The products.
Theyre starting with or.
With which they are engaging in contract are there any themes. There is it is it kind of same old same old and Biosimilar R. R.
Are you seeing.
Other avenues of customer engagement.
At this point.
It's primarily driven by by buyouts him.
Particularly Phoenix.
And <unk> services, we're also getting introduced to new customers.
Through clinical 'twenty one.
Okay and then.
Maybe just on the guidance.
The margin point that you made and so comfortable with.
EBITDA margin guidance for the year, how should we think about the higher investment in <unk> tapering off or is it is it.
Level through the year and your revenue grows into that just help us with cadence that gets you to the 36 by the end of the year.
Yes.
The way the way that just to clarify that so the first quarter margin.
The bridge from 34% of the target about half of that was accounting costs primarily associated.
Associated with.
Higher the higher than expected costs for the integrated audit in the socks, and we'll be completing the sox implementation.
The other half was was.
Growing head count, particularly in line of.
In light of the strong performance in bookings.
Q4, Q1, and what we can see in the pipeline.
In terms of the terms of the margin progression for the year.
Essentially what I'm seeing right now is a we'll take the onetime half of those costs. The one time costs out of the first quarter in the second quarter. We will see you will see some improvement quarter over quarter.
Q1 to Q2, and then kind of in excess of target in the back half of the year to get back to the 36%.
Great. Thank you.
Thank you and our next question comes from the line of Michael <unk> with Bank of America. Your line is open. Please go ahead.
Alright, great. Thanks, as Wolf chat off on for Mike Thanks for taking the questions.
You've spoken to this a little bit but I was wondering if you could give us some more color on how successful you've been in capturing recapturing the service revenue shortfall from <unk> and how we should be thinking of.
In modeling that dynamic as it plays out through the rest of the year. Thanks.
Yeah. Thank you Michael this is.
William theory here.
As you know at the end of last year, we saw a lengthening in.
Time to start certain services projects, particularly in regulatory.
We saw that continue in the months of December and January .
But then as we went through the quarter, we saw a month to month improvement.
<unk> gone through the quarter.
So what I'd say is we haven't quite gotten back to the point, where all the delays have been removed there are still some projects that are delayed waiting on.
Largely waiting on in clinical data too.
To be completed.
There has been a.
Basically we're marching in the right direction.
Made up a lot of a lot of the ground in first quarter.
Great. Thank you very much and then just to kind of higher level. One can you give us some color on the early cross selling opportunities you've been able to realize with the pinnacle deal maybe.
Some particular products or just.
Yes, anything you could speak to you in that area. Thanks.
Yes. Thanks.
So.
Clinical 'twenty, one has opened up a lot of opportunities for us.
Yeah.
There is.
I think immediately we found a lot of cross selling opportunities between clinical 'twenty, one and are integral.
Data repository products.
So data repository.
That ties into a data validation product they kind of go nicely together so.
We think there are some opportunities as we go forward there.
We've also seen tie ins between clinical 21, and some of our services business.
We've been able to add onto some of our services projects by adding by basically offering.
Data validation using pinnacle two projects Madison make some larger we've managed to open up some.
Some new customers as well for clinical 'twenty one.
<unk>.
There'll be more to come as we go forward, but I think we're off to a pretty good start with clinical 'twenty one.
Yes.
Great. Thank you.
Thank you and our next question comes from the line of Vikram <unk> with Morgan Stanley . Your line is open. Please go ahead.
Great. Thanks for taking my question. So I had a broad one on your Biosimilar relation Tam I noticed that in your current corporate presentation, you broke out the Tam buy software versus services and then within each of these segments.
Further breakout between drug discovery and drug development. So the two questions I had here are.
First if you could just walk us through a bit of what's feeding this high level built for for the Biosimilars <unk> Tam and then secondly, which are the specific areas of the opportunities you laid out here.
Thanks for Taro has the most opportunity to grow and moving forward over the next couple of years, especially now that political 'twenty one is fully within the Sentara umbrella.
Sure. Thanks Vikram.
The information we put it on the corporate we're just always trying to update the research we've done on the size of the market and a lot of people have been.
We're in the last few years, the Biosimilars market has been.
Growing and maybe got defined in a lot of investors' minds. So we wanted to provide the latest thinking we had on the different sizes and break it down.
In terms of where so tires, playing the bulk of our.
Biosimilar <unk>.
Expertise in revenue has been on the development side.
So typically in particularly with services.
Companies get involved.
During.
Clinical or during the design of clinical.
Trials.
But and so our services kind of kind of mirror that as well.
But we've also moved some of our software earlier into earlier stage. So.
We have.
Clinical 21, which.
Largely comes in.
At the end of clinical when you submit to the FDA, but is increasingly being used.
During the clinical phase in during the preclinical phases companies are collecting data and want to hold that data at a certain standard.
And then we have other software, which we either have or had been developing which have.
Our reach.
Earlier stage into preclinical and even a little bit into discovery.
For example, we have we acquired a piece of software a while ago called <unk> explorer, which is.
Kind of like.
Data visualization product during the preclinical phase we have <unk> hundred 60, which is primarily used during the discovery phase. So I think over the time as we go forward overall.
Over time the company is interested in.
And extending the reach of Biosimilars Asian earlier stage and new discovery, but.
The reality today is probably 60, 70% of our of our business is really tied to that.
The development phase.
Hopefully that helps.
Very helpful. Thank you.
Thank you and our next question comes from the line of Justin <unk> with William Blair. Your line is open. Please go ahead.
Hi, good afternoon, congrats on the quarter.
First of all I think you said your software bookings was up 34%, but excluding political 'twenty one it was up five.
5%.
First of all I want to clarify I heard that right and secondly, I guess, how does how does that compare to your expectation.
Yes.
You did hear that right.
<unk> software.
Typically we look at bookings over a trailing 12 month period.
And.
Software bookings ex Pinnacle 'twenty, one trailing 12 months is 13%.
Factors that drive us to look at it over a longer time horizon is that.
We have client renewals that tend to shift from quarter to quarter, sometimes early sometimes late they don't have an impact on revenue recognition.
We also saw some disproportionate impact on FX.
In terms of the software bookings given kind of.
The nature of where our products are developed around the world.
So that impacted that bookings line, we didn't adjust for that from a constant currency basis, and then we had a.
A sale last year.
<unk>.
Was essentially.
Delivered this year through service services arrangement.
So when I normalize for the for those in the quarter was I think about 10% in terms of kind of software bookings and looking at the quarter and looking at the TTM I would call that.
Things were healthy and is what we're expecting we're expecting.
Got it Thats helpful.
Can you.
Can you remind us what your capital deployment priorities.
Our priorities are as the rising rate environment affected your thinking on.
M&A or investments in general at all.
We.
From my perspective, we're still.
Evaluate M&A opportunities.
We're open to that.
Given.
The current environment could be could be.
It's a good time to be.
Have a strong balance sheet.
Take advantage of opportunities.
So I would say this has been a relatively fast moving.
Event, we haven't changed our capital deployment strategies.
Okay, and just last one for me.
Can you talk about the opportunities you see in <unk>.
LNG and therapy specifically.
Are you happy with your expertise in this area at the moment or are there.
Additional investments needed whether toward expanding our software capability or.
Hiring the right people.
Yes. Thanks.
Uh huh.
Great.
A lot of our policies therapy work done by all.
Right.
Data systems, Pharmacology group, which has been.
One of our faster growing areas.
A lot of the work.
LNG and therapy is for.
Yes.
Orphan drugs.
It tends to be what's in the pipeline.
And that tends to lend itself to the type of modeling and dosing work that <unk> is known for to deliver.
So.
I guess the answer to your question.
I feel very good about the group we have in the offering we have.
But our ambitions are much larger.
So we.
We think that USP in general.
We will be a growth we know for a fact that will be a growing part of the pharma market going forward.
Company is adding a lot of pharma companies, adding to their groups in that area.
And there's a lot of need for it.
So we are planning to continue to invest in growing that group.
As we go forward.
And we're also.
Thinking about how best to tie that to our software offerings.
We already tied a lot to our <unk> offering.
Yeah.
But there is.
Theres other other opportunities to kind of create specialized software and <unk> that were also.
Thinking about or pursuing.
Got it that's very helpful. Thank you very much.
Thank you and our next question comes from the line of Jacob <unk> with Barclays. Your line is open. Please go ahead.
Hey, guys. Thanks for the question.
Can you talk about your ability to pass on pricing and how many of your contracts allow pricing scale is given that the long term for the life of the program.
Yes, I can start and then Andrew can.
Chime in here.
Some of our contracts are.
For one year or less.
We do occasionally because customers ask for it.
Enter into longer term contracts and particularly in the current environment, we're very sensitive to making sure that there is appropriate price.
Increases in any contract that goes out.
We're aware that we're in an inflationary environment.
Right now it's just as every other company is.
And.
We have the ability to we believe we have the ability to.
Basically offset inflation with pricing and maintain our margins.
Great that's helpful and how about any other offsets to rising costs.
Well.
As always.
Efficiencies to be gained in any company.
Particular.
We're growing quite rapidly and thats, enabling us to make investments in.
And it basically and company infrastructure that leads to efficiencies that offset some of that.
We've been investing heavily for example in our sales and marketing group.
Since we went public we said we would do that.
And what that lets US do for example is free up our our scientists from having to sell and they can they can write more software or go to more project work, which for example leads to one sort of efficiency.
Great. Thank you so much that's helpful. Thanks.
Thank you and again if you have a question at this time. Please press Star then one.
And our next question comes from the line of Vikram <unk> with Baird. Your line is open. Please go ahead.
Yes. Thank you for taking the question I think on the last call you talked about the fact, you saw some increased attrition in the workforce towards the end of the year. It sounded like that it starts to normalize towards the start of the year I'm wondering if you can just give us an update there and talk about what turnover has looked like in the organization. So far this year and what your expectations are for managing head count through the balance of this year.
Yes, vikram thanks for the question.
We did see an uptick in.
And attrition at the end of last year.
Fortunately, we saw that drop down to more normalized level in the first quarter.
I think.
Okay.
I think.
We're.
Making sure we keep up with with market in terms of wage wages and where we are.
Maintaining our margins.
But the.
The uptick I guess, we saw I think there were a lot of I think there were a lot of disruptions.
At the end of last year due to.
Covid or people's perception of Covid and things like that that have kind of worked their way through people's perception of their of their careers.
I think <unk> got it.
Tremendous.
Backlog of really interesting work right now, which helps to attract people and.
<unk> been investing in training.
Okay.
We've been bringing in some really great colleagues here, so I think.
I think all of that's been reflected in the fact that we've seen.
Much more normalized attrition as we went into it as we went through the first quarter.
Yeah.
Okay. Thanks, and then I guess from a high level can you just remind us of the visibility that you have into the revenue guidance range at this point in the year I think historically, you've talked about the approach that you've taken into building guidance based on your bookings performance. Just wondering if there's been any update that approach and I guess at this point of the year or do you think some of the key areas of <unk>.
The ability to come from in the revenue performance.
Yes, so we use the same methodology in terms of.
Forward visibility.
I think.
We have high confidence.
And in the.
The guidance for this year.
In light of the Q1 performance the bookings for the last two quarters, the TTM bookings as well as the.
The pipeline looking forward for bookings.
The variability.
<unk>.
From the perspective of predicting the revenues at the end of the year today versus the.
The actuals primarily rely around.
Opportunities that we don't have visibility into right now.
That kind of a bottoms up build to get to the revenue forecast and I think.
Offset to that is just variability in client client timelines and client.
Client drug drug development program successes.
Alright, thank you.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to William theory for any further remarks.
Yes. Thank you all for joining us I think.
Overall message I would say is that <unk>.
Or.
Where we were in the fourth quarter, we saw.
Significant improvement in Q1, we were very happy to see very strong bookings, we saw month over month improvement.
Throughout all of <unk>.
Three months in the quarter.
And.
Sure.
Feeling quite confident.
As we look forward to the rest of the year. So look forward to updating everybody in future quarters. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.