Q2 2022 Certara Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the second quarter 2022 earnings Conference call.
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 the session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now like.
The conference over to your Speaker today, David <unk>. Please go ahead.
Good afternoon, everyone. Thank you all for participating in today's conference call.
And the conference at <unk>, we have one furry Chief Executive Officer Bennett Chief.
Chief Financial Officer earlier today, <unk> released financial results for the quarter ended June 32022.
Copy of the press release is available on the company's website.
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.
Made pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act of Bank to 95 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 Securities and Exchange Commission on March one 2022, we urge you to consider these factors and you 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.
Conciliation of adjusted EBITDA, adjusted net income adjusted EPS and constant currency revenue to the most directly comparable GAAP measures are available on our recent earnings release, which is available on the company's website.
This conference call contains time sensitive information is accurate only as of the live broadcast today August nine 2022, surcharges 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 and with that I will turn the call over to William.
Thank you David.
Afternoon, everyone. Thank you for joining <unk> second quarter earnings call.
Andrew and I will start with prepared remarks, and then we will take questions.
In the second quarter, So Tara delivered significant growth in bookings and the Biosimilars in software and services business achieved mid teens growth in revenue despite headwinds from foreign exchange rates.
Our performance in regulatory services, which comprises less than 25% of our business did not meet expectations due to ongoing delays and recent regulatory decisions.
Guarding China only clinical trial data.
Our operating cash flow growth, which was not impacted significantly by foreign exchange rates continues to be strong.
We reported second quarter revenue of $82 8 million.
Growing 18% year over year on a reported basis and 21% on a constant currency basis, including clinical 'twenty one.
As you know <unk> operates a global business with employees and customers located in many different countries around the world.
This global footprint has many advantages however during periods of foreign currency volatility on our reported revenue growth figures may be impacted as a result, we have decided to disclose our second quarter financial results on both a reported basis and a constant currency basis to help you better understand the underlying trends in the business.
Which remained healthy.
Reported software revenue was $28 7 million growing 48% year over year on a constant currency basis with a 92% aggregate renewal rate.
These results were in line with our expectations and driven by mid teens growth in our core Sim Sip and Phoenix, Biosimilars and software businesses as well as the contribution from Pinnacle 'twenty one.
Demand for bio stimulant continues to be strong with customer interest and new applications growing at a very healthy rate.
We are committed to expanding the role of Biosimilars to meet the needs of researchers with innovation and expansion of our software offerings in.
In June we launched our new sensitive discoveries simulator, which applies biased stimulation earlier in discovery and development.
Discovery advances lead optimization first in human dose prediction and early formulation development.
We're excited to help identify and progress the most promising new drug candidate for further investigation.
In addition, we released new versions of our Immunogenicity.
<unk> and vaccine simulators to help predict how drugs work and to address key questions in the development of novel biologic therapies.
Later versions of these simulators help our customers tackle the toughest challenges in drug discovery and development.
We also recently announced an initiative to develop a bias stimulation platform for car T cell therapies with Memorial Sloan Kettering.
We are excited to be collaborating in the MSA innovation hub and look forward to developing a bias and relation model that will help researchers practitioners and ultimately patients with Paris personalized therapies.
Clinical 21 continues to meet our expectations.
Last week, we introduced an updated version of clinical 21 enterprise with a new data exchange module.
Charity of pharmaceutical companies are grappling with four or more primary data sources and clinical trials.
The exchange is a data management solution that streamlines the process of adjusting clinical trial data from external sources.
This solution ensures data integrity and regulatory compliance, while empowering sponsors to maintain executive oversight to drive objective decisions.
Turning to technology, driven services, we delivered revenue of $54 million.
Representing a 10% growth on a constant currency basis, compared with the second quarter of last year.
Within technology, driven services bio stimulation services revenue continues to show robust growth in the high teens on a constant currency basis.
We expect continued strength in Biosimilars and services in the second half of 2022 and into 2023.
The industry has clearly shown an interest in expanding the use of Biosimilars <unk> with strong growth in bookings and new customers.
As demand for Biosimilars and services continued to grow we are investing in our team to expand existing customer relationships as well as establish new relationships.
Yeah.
In our regulatory services business, we have experienced more volatility this year than planned.
Our customers continue to experience delays in projects and our business in China has been impacted by recent regulatory decisions, causing Chinese customers to reassess their U S strategy.
As a result performance in the regulatory business was below plan in the second quarter and we are taking a more conservative outlook on this business for the remainder of the year.
We believe in the strategic value of this of the regulatory business, which generates very healthy cash flow and remain committed to supporting our clients.
With our revised outlook regulatory services and the negative impact from foreign exchange rates, we are adjusting our revenue guidance for the full year to $325 million to $335 million.
Reflecting an approximate $10 million reduction due to foreign exchange and $15 million related to the performance and regulatory services.
Andrew will provide more details to the guidance shortly.
Overall, we continue to see industry trends moving in the right direction to drive growth in the adoption of Biosimilars and critical 21.
We see opportunities to expand our software and services offerings throughout the entire drug development cycle as well as into new modalities in disease areas.
I am confident <unk> team will capitalize on these opportunities as we continue to deliver on our mission.
I'll now turn it over to our CFO , Andrew Shebek to discuss second quarter financial results in more detail.
Thank you William Hello, everyone.
Total reported revenue for the three months ended June 32022, with $82 8 million representing year over year growth of 21% on a constant currency basis, and 18% on a reported basis.
Excluding pinnacle 'twenty, one constant currency second quarter revenue growth was 11%.
As a reminder, the largest non US dollar currency exposures are the British pound euro and yen and the majority of the foreign currency translation impacts bio stimulation software and services.
We remain well positioned with trailing 12 months bookings coming in at $393 5 billion up approximately 25% year over year on a reported basis.
And excluding pinnacle 21 up 17%.
We continue to look at trailing 12 months bookings as the basis for forward 12 month revenue.
We reported software revenue was $28 7 million in the second quarter, which increased 48% over the prior year period on a constant currency basis.
43% on a reported basis.
Excluding $6 $5 million in Pinnacle 'twenty, one software revenue contribution year over year growth was 16% on a constant currency basis.
The growth in this quarter, excluding pinnacle 21 was driven by our Biosimilar <unk> software seems to have been Phoenix, which grew approximately 15% compared to the same period a year ago. Despite the foreign exchange headwinds.
Software bookings were $30 5 billion in the second quarter, which increased 57% from the prior year period.
Clinical 21 contributed $8 6 billion for software bookings in the second quarter.
So the <unk> year over year software bookings growth, excluding pinnacle 'twenty, one was 13%.
Trailing 12 month software bookings were $113 1 million up 44% year over year and up 14%, excluding pinnacle 'twenty one.
Software aggregate renewal rate was 92% in the second quarter.
And net retention rate was 139% or 107%, excluding pinnacle 'twenty one.
Reported services revenue was $54 million in the second quarter, which increased 10% over the prior year period on a constant currency basis.
And 8% on a reported basis.
As William mentioned Biosimilars and services revenue growth was in the high teens on a constant currency basis.
Regulatory services growth was flat and were no longer forecasting it to grow at historical rates for the remainder of this year.
Technology, driven services bookings in the second quarter were $69 7 million, which increased 25% from the prior year period.
TTM services bookings.
$280 4 million, which increased 19% as compared to the prior year.
Regulatory services booking growth is trending in the low single digits, and we're forecasting a longer conversion of bookings to revenue in this business due to elongated customer cycles.
Total cost of revenue for the second quarter of 2022 was $35 2 million.
An increase from $27 5 million in the second quarter of 2021.
Primarily due to a $4 2 million increase in employee related costs due to billable head count growth.
$1 7 million increase in intangible asset amortization of.
The $1 2 million increase in stock based compensation expense.
And as <unk> 5 million increase in cost of licenses.
Total operating expenses for the second quarter of 2022 were $43 4 million.
An increase from $37 3 million in the second quarter of 2021.
The components of operating expenses are as follows.
Sales and marketing expenses were $7 1 million compared to $4 6 million for the second quarter of 2021.
This increase is primarily due to $1 6 million in employee expenses due to the expansion of the sales force.
The <unk> 5 billion increase in marketing and travel costs, and miscellaneous sales and marketing operations costs.
R&D expenses were seven $7 7 million compared to $4 6 million for the second quarter of 2021.
The increase in R&D expenses was primarily due to R&D expense from acquisition.
And software R&D head count investments.
G&A expenses were $17 8 million compared to $18 million for the second quarter of 2021.
The decrease was primarily due to a $1 $1 million decrease in transaction and M&A costs.
<unk> 6 million decrease in stock based compensation offset by $1 million of investment in head count.
<unk> <unk> 6 billion and higher professional services costs, primarily related to accounting and Sox implementation.
Intangible asset amortization was $10 4 million compared to $9 5 million in the second quarter of 2021.
Increasing due to amortization costs from acquired intangible assets.
Depreciation expense was <unk> 4 million compared to <unk> 6 million last year due to a decrease in depreciation for furniture and equipment.
<unk> down the P&L.
Interest expense was $3 9 million compared to $6 3 million for the second quarter of 2021.
Due to slightly higher interest expense offset by the reclassification of our interest rate swap to an effective hedge.
Miscellaneous income was $2 5 billion compared to a loss of <unk> 3 million in the second quarter of 2021 due to foreign currency gains of $2 7 million.
Income tax expense was $3 4 million as compared to $1 5 billion in the prior year due to the relative mix of domestic and international earnings and the impact of pre IPO stock compensation expense, which is not deductible for corporate income tax purposes.
We expect the rate to come down in the back half of the year.
Net loss for the second quarter of 2022 was <unk> 6 million compared to a net loss of $2 9 million in the second quarter of 2021.
Diluted earnings per share for the second quarter of 2022 with zero cents as compared to a loss of <unk> <unk> in the second quarter of 2021.
Reported adjusted EBITDA for the second quarter of 2022 with $28 million compared to $25 5 billion for the second quarter of 2021, representing 9% growth.
Reported adjusted net income for the second quarter of 2022 was $14 6 million compared to $11 8 million for the second quarter of 2021.
Adjusted diluted earnings per share for the second quarter of 2022 was <unk> <unk> compared to seven for the second quarter of 2021.
Now moving to the balance sheet, we ended the quarter with $194 8 million of cash and cash equivalents.
As of June 32022, we had $299 million of outstanding borrowings under our term loan and full availability under our revolving credit facility.
Turning to guidance.
We are adjusting our full year guidance due to foreign exchange rates and slow recovery in the regulatory services market. We are lowering our revenue forecast by approximately $10 million due to foreign exchange headwinds and $15 million due to the performance and outlook of the regulatory services business.
Our updated forecast for the full year of 2022 is as follows.
Revenue in the range of $325 million to $335 million.
Adjusted EBITDA in the range of $112 million to $117 million.
Adjusted EPS in the range of 43 to <unk> 48 per share.
Fully diluted shares in the range of 159% to 100 $161 million.
The GAAP tax rate in the range of 40% to 45% and cash tax rate in the range of 20% to 25%.
I would like to point out that due to capital planning the approximately $10 million of foreign exchange headwind, we have forecast it flows through to a minor impact on reported adjusted EBITDA and virtually no impact to reported adjusted EPS.
Lastly, as we look towards the second half of the year, it's worth highlighting that we have a particularly challenging third quarter comparison and reported technology driven services revenue due.
Due to the change in outlook and regulatory services.
As a result.
We anticipate reported revenue growth and technology driven services to be in the low single digits for the third quarter before returning to mid teens growth in the fourth quarter.
I will now turn the call back to our CEO William theory.
For closing remarks.
Thank you Andrew.
In summary, we remain focused on our commitments to customers and delivering strong results for our shareholders as we continue to grow as a global leader in Biosimilars.
We will now open the line for questions. Operator can you. Please open up the line.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from the line of Dave Windley from Jefferies.
I wanted to understand a little bit more on the regulatory services, it's Ben.
A little bit choppy for you at different times in the last year plus.
I guess first question there would be.
What visibility what communication level and visibility do you have with your clients too.
Two.
Kind of understand in real time, what the what the anticipated project and dates and delivery of databases to you.
For your start of these projects if you could just kind of help us understand how tight is your visibility there.
Yes, Thanks, David.
It varies by client.
And number.
Many times, what we find is that.
The clients are.
Still working that out themselves, sometimes when they book with US. So there is there can be some some discrepancies, but generally we have been.
In touch with all of our clients in our backlog.
Talking with them about when they expect to start the projects. We currently have booked.
And.
We have seen.
A slowdown in.
The number of.
Alright, we just sort of seen a slowdown.
And some of the projects starting that started last year, which I think is what you referred to and during the pandemic and its continued a little bit I would say generally we have about 60% visibility at any given time.
Said that in the past.
And that just relates specifically to the rig services projects on hands, we would have.
Some visibility and to start dates about 60%, 40% we're in dialogue with the customers.
Got it and that 60% visibility on fourth quarter for four quarters.
Regulatory specifically.
Regulatory specifically that relates only to the.
The total.
Work work available to work on and that gives us 60% visibility if it gives us basically 100% coverage to what's in the guidance here.
Okay.
Okay.
Maybe on the on the product side.
You mentioned discovery stimulator.
Versions of Simpson Phoenix Enterprise version of Pinnacle 'twenty, one and then I would also throw in you had carved out biologic simulator and we're beginning to sell that on more of a stand alone basis, I guess I'd be interested in how that biologic simulator is taking hold in the market what kind of receptivity you're good.
There and then.
Political 'twenty one being late.
Last year acquisition looks.
It looks like it's tracking pretty well, what what opportunities do you see for that.
To inflect a little bit.
Thanks, Yes so.
What youre, referring to is we launched in the quarter to new products. One of them is the citizenship discoveries simulators. So this is targeted more towards the earlier.
And discovery and preclinical specifics as we've said.
<unk>.
Drive more of as revenues in the past in the clinical phase.
Beyond.
So it's been a successful launch we already have.
Paying customers for that product.
Owing nicely.
To answer your question about the biologics.
It's been growing.
Over time.
The.
In the simulator I would say that the percentage of our customers focus on biologics has been growing pretty nicely I don't think we've given the exact numbers on that particular product.
Clinical 21, I'll, let Andy talk in a minute, but the product we launched recently and are called 21 data exchange.
Obviously it was in the pipeline before we bought the company.
But it is also.
Breached early sales already this year.
And we expect it to continue and then as people put it in their budgets for next year to continue to grow next year.
Andy do you want to comment on.
Growth in pinnacle's volume versus our expectations political 'twenty one is.
Pleased to say tracking in line with our guidance from the beginning of the year. So we did about $13 million year to date $7 million in the second quarter, 95% SaaS.
We've seen.
Sure.
Some uptake on the on the new product launch there. So so we're feeling feeling.
But thats performing well relative to our expectations.
Excellent I'll leave it at that thank you.
Thank you David.
Yes.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
To ask a question you will need to press star one one on your telephone.
Okay.
Our next question comes from the line of Joy Zhang from SBB Securities.
Thanks for taking my question once you revisit one of your comments in the prepared remarks about Chinese customers reassessing their strategy is that a headwind only for the regulatory business or could that eventually become a bigger headwind another powerful.
It's Paul.
Yes.
I can start bill.
Specifically addressing a headwind in our regulatory business, we started to see some we call export work, helping Chinese companies with global submissions last year and based on some FDA feedback and the current pipeline that works not materializing this year, but we're continuing to add.
<unk> resources.
On the Biosimilar front and.
Believe that.
The opportunity to use Biosimilars <unk> with regards to some of the concerns about the lack of diversity in the populations of submissions could create some new.
Entry points for us in discussions with clients.
Got it no that's helpful.
Maybe a question on the USG side I know you touched on this a little bit.
Once again update on in terms of large molecules modeling.
What is possible to do now and what are some of the areas for future innovation.
I'm curious if you are building models of.
The action of a drug on whatever system, it's targeted to do two to interact with.
And so some of the work that we've been investing in in <unk> and that we've been bringing in from our clients has been on things like cell and gene therapy, We recently announced.
Collaborations Memorial Sloan Kettering that will that is designed to let us build up our models for car T therapies.
And in addition, we've done a lot of work on modeling the immune system in general and specifically that's led to our for example, our vaccine simulator, which was used by some of the companies who launched.
Vaccines during the pandemic.
That's a little bit of a flavor for what we're doing there that helps.
No that's super helpful. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jeff Garro from Piper Sandler.
Yes. Good afternoon, thanks for taking the question.
Wanted to follow up on the regulatory services outlook and just was hoping you could comment more on.
Whether any headwinds there are being caused by capacity with the regulatory agencies themselves or just various reasons, causing delays from clients.
No we're not seeing this as a as an issue specifically that we believe is because of regulatory agencies.
Our.
What we're seeing with the regulatory business I think is a combination.
Several factors in our case. So one is what we've talked about around we had some Chinese clients, where we were we were developing our business as they came to the U S and thats what to the FDA and Thats.
Paused a bit this year <unk>.
Second one is we believe that some of the tier two and tier three clients.
Have slowed down.
Just to conserve cash and so that there is a slow slowing and then the third third effect, which really isn't.
We did talk about.
In past quarters has been that there has been during the pandemic a slowdown.
And completing studies and.
And so generally our work doesn't begin until Theres, a 100% database lock.
And we've seen just sort of a slowdown in study completion, which is kind of made a lot of those.
A lot of the backlog stretch out much longer than it had historically.
Got it very helpful. There.
Maybe to follow up a little bit on the funding environment.
Saw the strong bookings number in the quarter, but wanted to ask more about your business given some of the discussion from the <unk> around the how the pros and cons of a long sales cycle and but the various steps before a project gets into their backlog and as Mark does the net new win.
So hoping you could discuss the typical length of your sales cycle and whether any elements of that have changed over the last six months.
Yes, I mean, our sales cycle tends to run.
A couple of quarters or most of most of the company I am not sure its really radically different.
On Biosimilars <unk> versus regulatory.
There are some differences in software sales is that we tend to get more.
Since we had to get a lot of renewals for example, and that guy in that business, which happen disproportionately in the first quarter.
Which we've disclosed in the past.
I think relative to what <unk> I think my impression is.
Yeah.
What we're seeing in regulatory in our regulatory business is not too dissimilar from what it looks like some of the Crs or seeing the difference. There is we don't get started until the.
The study is completely finished and Theres a database lock.
Where does the CFO tends to get paid.
Throughout the entire study.
But I don't think that what we're reporting is radically different than some of what what what ive seen people talking about it on the market.
I will say in general, though that one thing we are seeing with our bookings is that we are seeing very strong bookings on the biosimilar <unk> side.
So.
The effects that are happening in regulatory.
With Chinese customers, the tier two and three in tier three and tier one and everybody else does it doesn't seem to be happening in biosimilars.
We're seeing pretty good pretty good.
Customer interest in bookings across the board for both software and services in Biosimilars.
Yes, I would just add specifically in Q2 in terms of the bookings mix ex Pinnacle 'twenty, one we saw 2% growth on the on the on the regulatory side and 42% growth on the Biosimilar side.
And.
Similar similar trend when I look at it on a TTM basis as well.
Okay great.
One last follow up there it sounds.
Very positive in terms of the client activity and the overall end market.
But to specifically ask is the pipeline growing roughly in line with the bookings growth that you've printed year to date.
Yes.
The pipeline remains healthy, particularly around on the Biosimilar side on the regulatory side.
What are the factors.
Incorporated in the guidance, it's just a lack of major submission project, which we typically have.
Sure.
One or two years, which are in the 7 million several million $1 billion price range. So I would say that the biosimilar pipeline it remains healthy and we expect.
Continuation of strong bookings performance, but with that being said we did have.
Two large deals that occurred last year.
That were scheduled to book last year that booked in the first half of this year. So I do I do anticipate.
Pretty consistent with historical trends.
<unk> down in the bookings in Q3, and then I'll return back up to Q4, which is typically our largest quarter.
Great helpful color. Thanks again.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
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Thank you. Our next question comes from the line of Dave Windley from Jefferies.
Or are there any questions in the queue I would come back in on margin.
Sure Mark.
Adjusted EBITDA margin.
Was lower in <unk>.
I'm going to guess that that's at least partly a function of the revenue coming in lower than you expected. So perhaps you could explain.
Or add some color to the impacts on your adjusted EBITDA margin.
In the quarter.
Is your regulatory services business appropriately sized.
Two what you now view as the outlook for that business or are there. Some some some cost changes in that and that cost structure that need to happen as a result.
Alright, Andrew you want to take the first part.
There are some.
I would say that generally speaking the business is Si is size there are some opportunities and we're looking at those opportunities for the back half of the year, but the biggest opportunity is the rate of hiring they do have they do have a pretty healthy backlog.
So the rate of hiring will be slower than historically.
Given the revenue growth projections for regulatory.
The.
The way that I look at the margins.
<unk>.
On a product basis.
Kind of the contribution from the software and the services.
We're still basically flat.
Year over year on contribution there. So we did see a dip in regulatory but was offset by higher margin elsewhere. So no change we had some mixed benefit from stronger software and the margin impact is really the lower revenues impacted by.
Some investments at corporate it's about a third a third a third.
Its audit and Sox costs going up is the build out of the commercial office and it's a build out of the.
The.
Recruiting and talent and HR team.
Okay.
In the second half so it looks like Youre at mid point your full year adjusted EBITDA margin.
Is it just a little bit lower not much but a little bit lower than what you posted year to date.
Should we expect.
Yes.
It's a little bit more even through the back half.
I'm not quite sure. What you are looking at we could talk offline, but I think I've got about 35, 5%.
For Q3, and Q4 got it okay. Okay, that's fair to be a little skewed towards Q4, yes. Okay. That's very helpful. Thank you.
Thank you.
I would now like to turn the conference back over to William Tahira for closing remarks.
Alright, well, thank you everybody for joining.
I would say that to summarize.
What I would see for the quarter as we've seen.
Healthy by a simulation business.
Well in the quarter, our bookings are strong.
We're making investments as evidenced by our new products.
And we're very bullish about that our regulatory business.
Has.
Grown less than we had anticipated for the factors that we talked about.
We're still.
Very supportive of that business.
It is a.
As a very nice margin generates a significant amount of cash flow for us.
And we view it as an important part of the business.
But.
Small we have a small regulatory business in a big market and it can grow.
Faster or slower than maybe by a simulation Ken.
But overall I think.
We're excited for the future we have a lot of good things coming for the company and we will look forward to talking to you all next quarter. Thank you very much.
Thank you I would now like.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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