Q4 2022 Simulations Plus Inc Earnings Call
[music].
Okay.
Greetings and welcome to the simulations plus fourth quarter fiscal 'twenty 'twenty financial results Conference call.
At this time, all participants are in listen only mode.
A brief question and answer session will fund at the formal presentation.
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As a reminder, this country.
<unk> is being recorded.
Good afternoon, everyone welcome to our fourth fiscal 2022 financial results Conference call.
Before we begin I want to remind everyone that the matters discussed in this presentation are forward looking statements that involve risks and uncertainties, except for historical information where it is.
Like believes expect anticipate mean that these are our best estimates as of this call still.
Still there can be no assurances that expected or anticipated results or events will take will actually take place. So our actual future results could differ significantly from these statements.
Factors that could cause or contribute to such differences include but are not limited to our ability to maintain our competitive advantages acceptance of new software and improved versions of our existing software by our customers.
General economics of the pharmaceutical industry, our ability to finance growth our ability to continue to attract and retain highly qualified technical staff, our ability to identify and close acquisitions at terms favorable to the company and a sustainable market.
Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the U Nine States Securities and Exchange Commission with that said I'd like to turn the call over to Shawn O'connor Shawn.
Thank you, Brian and welcome everyone joining us today for our end of year call.
I hope you're all doing well this afternoon.
After the close we reported fourth quarter and full year revenue growth of <unk>.
19% and 16%, respectively exceeding our fiscal 2022 guidance of 12% to 15%.
Full year diluted EPS growth was 28% and we reported an adjusted EBITDA margin of 39% representing growth of 24% over last year.
These results reflect significant achievements by our company and my outstanding colleagues at simulations plus.
We demonstrated our leadership and model informed drug development with enhanced product offerings, expanding collaborative partnerships with industry and regulatory organizations.
<unk> robust attendance and participation and our M. D D conference this year.
We successfully executed on business development strategies, enhancing our client facing capabilities.
Creasing, our cross selling results and extending our geographic presence globally.
It was a very good year for simulations plus.
Our software business generated 18% annual growth driving record software and company gross margins.
Gastro plus revenue declined 8% for the fourth quarter and increased 15% for the fiscal year.
Typically our lowest quarter for gastro, plus we saw a changing renewal timing dynamic in the fourth quarter, which I will speak to in a moment.
We signed six new commercial clients in the fourth quarter and made seven Upsells Gastro plus was also referenced in 14 peer reviewed journals during the quarter supporting our progress in making modeling and simulation mainstream in drug development.
Two weeks ago, we introduced version nine <unk> eight three of gastro plus unveiling key enhancements.
Importantly, the release includes improved reporting templates for interactions with model X and new validated Naphthyl and Nash disease populations with options to inform Naphthyl DSM software.
These enhancements maintained gastro plus its position as the industry's leading physiologically based biopharmaceutical and farmer connect kinetics modeling platform.
Further establishing the powerful interrupt dirt, but the Lilly of the products in our software portfolio.
Monolithic suite revenue increased 55% for the quarter and 36% for the fiscal year.
We continue to see a strong renewal upsell and new customers for this platform with.
We signed seven new commercial clients during the quarter.
We continue to believe that Monolith suite is taking market share and established markets and expanding its addressable market geography geographically in China and Japan.
I've met predictor revenue increased 15% during the quarter and 14% for the fiscal year.
We added five new customers commercial customers and add eight upsells in this quarter.
I'd also note that we've issued 245 licenses in 53 countries as part of our University plus program.
Integrating our software into educational facilities, and making it part of advanced academic programs ceding the market of next generation modeling and simulation professionals to drive future demand.
The fourth quarter capped off a good recovery in our services business with 13% growth and finishing the year with a backlog of 16 million, 22% greater than the end of last year.
PK PD revenue increased 3% in the quarter and increased 4% for the year.
Operationally, we continue to see rising consultant utilization rates and higher project pricing.
U S. P. S T revenue increased 29% for the quarter and 9% for the year.
Fourth quarter growth was tied to the re acceleration in bookings during the first half of the year combined with higher CRO pass through revenue in support of client projects.
Both of which are positive signals for growth in fiscal 2023.
During the quarter, our daily some services Division released Ild's.
Version one <unk>.
Quantitative systems pharmacology modeling software.
The development effort, leading up to this release was sponsored by a leading biotechnology company that is used ILD sem to inform planned clinical trial design.
ILD sand targets potential treatments to reduce the progression of ILD in patients with systemic sclerosis and underserved condition.
We believe Ild's M can contribute to a better understanding of underlying disease mechanisms using the predictive power of software to accelerate treatment development and leading to new standalone treatments or combined treatments that could halt or reverse ILD progression.
Uh huh.
P D PK revenue increased 84% this quarter and 48% for the year.
Our project Count and backlog continued to grow up 41, and 83% respectively compared to last year.
This performance reflects deeper implementation of PB PK modeling into new use cases and increase in the perceived value of these projects and its impact on drug development cycles.
Overall, our services backlog continued to grow increasing 22% during the quarter compared to the prior year as a result, we entered fiscal 2023 with strong momentum.
Yeah.
Moving to our fiscal 'twenty 'twenty three outlook and guidance.
Our revenue outlook for the fiscal 2023 remains consistent with our long term organic growth rate of 10% to 15%, which translates to $59 3 million to $62 million.
During fiscal 2023, we anticipate changes in the seasonality of our revenue, especially with regard to our software revenue renewals.
This results from two dynamics.
First our focus on cross selling has been successful with a growing number of clients licensing multiple platforms, which have expanded through internal R&D efforts and acquisition.
And supported this effort, we are standardizing, our renewal pricing and discounting policies to make it easier for our clients to acquire multiple offerings.
When this occurs our clients often desire to align multiple renewal dates cross licensed products into one synchronized renewal date.
This in fact benefits us as well in terms of the efficiency of license administration and business development support.
Second we have seen beginning in the second half of fiscal 2022, and elongated buying cycle on the part of our clients that includes the renewal of existing software licenses. This.
This seems to be tied to budgetary reviews and tighter cash management on the part of the industry in response to the economic environment.
While these dynamics may impact renewal timing, we expect our annual renewal rates to be inline with historical trends, even if some renewals move between quarters.
We expect to achieve our overall yearly revenue outlook of 10% to 15% revenue growth guidance. Despite this changing seasonality.
From a quarterly perspective.
We expect Q1 revenue to be about 20% of full year revenue in Q2, three and four to be more evenly distributed for the remaining 80% of revenue.
Similar to fiscal 2022, we expect higher software growth rates to shift our revenue mix, we expect software to represent 60% to 65% of revenue with services, making up the remaining 35 to $40.
With fiscal 2023, we're adding diluted earnings per share to our guidance, we expect to achieve diluted earnings per share of <unk> 63 to 67 cents, which translates to 5% to 10% growth.
Okay.
Fiscal 2023 will be a year in which we invest in people.
The market for modeling and simulation professionals is competitive and we expect to invest in employee growth recruiting and retention to support our continued success.
Our expected growth is in the areas of revenue generating scientific and business development staff.
The net impact of these investments is expected to be increased operating expense levels in fiscal 2023.
As we digest these incremental costs.
However over the medium to long term, we expect to see a return to higher levels of operating leverage and margins as we deliver on our long term organic revenue growth targets of 10% to 15%.
And finally concerning M&A, we continue to evaluate opportunities to expand our software portfolio and service offerings. Our guidance does not include the impact of any M&A activity that might transpire in fiscal 2020 story.
Let me now turn the call to will to discuss the financial results.
Thank you Sean.
Total revenue growth was 19% for the quarter comprised of 10% software growth and 30% services growth.
Software and services were each 50% of revenue during the quarter.
Total revenue growth for the quarter was 21% on a constant currency basis.
Total revenue growth rate was 16% for the fiscal year with software growing 18% and services growing 13%.
Software accounted for 61% of total revenue.
Services contributed 39%.
On a constant currency basis total revenue growth for the fiscal year was 17%.
Total fourth quarter gross margin increased year over year to 77%, reflecting the higher margins in both divisions.
Fourth quarter software gross margin increased to 86% from 85% last year due to leverage from the cost of revenue line.
Services margin increased more dramatically to 68% from 56% last year.
The lower services gross margin last year was primarily due to the revenue decline in that business.
Total gross margin for the fiscal year increased to 80%, reflecting higher software revenue mix.
Software gross margin increased to 91% from 88% last year, while services margin increased to 63% from 61% last year.
For the quarter Gastro plus represented 48% of software revenue monolithic suite was 20% admit predictor was 23% and other software was 9%.
For the fiscal year, Gastro, plus represented 57% monolithic suite, 18%.
Admit predictor, 18% and other software was 7%.
For the quarter, our renewal rate for commercial customers was 92% based on fees and 85% based on accounts.
As Sean mentioned quarterly renewal rates fluctuate year to year, depending on customer renewal timing.
This quarter the decrease in the fee renewal rate also reflects the impact from foreign currency exchange rates.
Average revenue per customer was flat compared to the fourth quarter last year remaining in line with historical trends.
For the year, our renewal rate for commercial customers was 95% based on fees and 88% based on accounts, which continue to be in line with historical rates.
Average revenue per customer is down compared to last year, but remains in line with historical trends.
As we continue to expand our customer base into smaller biotech companies will see downward pressure on the average revenue per customer.
Shifting to our services business, our fourth quarter services revenue breakdown was 42% from PK PD services, 25% from Q S Peak U S T services.
22% from PV PK services.
And 11% from other services.
Our full year services revenue breakdown was 45% from PK PD services, 27% from Q S. P. Qs T services.
21% from PV PK services.
7% from other services.
Other services consist primarily of regulatory services, we provide our customers to help them meet global regulatory compliance and quality requirements.
Reducing the number of information requests and accelerating their drug product development.
We also provide comprehensive learning services focused on modeling and simulation training with a variety of options to help our customers succeed.
Regarding key services metrics.
Total services projects increased 8% this fiscal year compared to last year and.
Now turning to our consolidated income statement for the quarter.
R&D expenses for the quarter were $8 million or 7% of revenue compared to $1 $3 million or 13% of revenue last year.
Capitalized R&D for the quarter was <unk> $9 million.
Or 8% of revenue compared to $7 million or 7% of revenue in the same period last year.
As mentioned last year, we saw increases in operating expenses for the fourth quarter of fiscal 2021 as a result of switching from a semi monthly payroll to a bi weekly payroll and a true up in the fourth quarter with an additional payroll period.
R&D expenses as a percentage of revenue also fluctuate each quarter, depending on the amount of capitalized work performed ranging from about 35% to 55% of total R&D costs.
SG&A expense for the quarter was $7 $6 million or 65% of revenue compared to $5 $6 million or 57% of revenue last year.
The increase in SG&A expense was primarily due to increases in personnel costs drew.
Driven by increased head count and salary increases due to competitive wage pressure in a tight labor market.
Increases in travel costs as COVID-19 restrictions have been removed, allowing for more in person conference attendance and increases in the cost of cyber and D&O insurance.
Income from operations increased 299% to point $7 million and operating margin was 6% compared to 2% last year, reflecting the leverage in our business model.
Income tax benefit was flat from last year $1 million, while the effective tax rate decreased from negative 74% to negative 8%.
The fourth quarter is the quarter, we true up our annual tax expense and similar to last year. The benefit this quarter reduced our effective tax rate for the fiscal year.
Net income increased 215% to $1 million compared to $3 million last year.
Diluted earnings per share increased.
Increased 400% to five cents compared to <unk> last year.
The revenue impact for the quarter from foreign currency exchange was $137000 in expenses related to M&A during the quarter were $335000 for a total of $472000 or about <unk> <unk> diluted earnings per share.
Adjusted EBITDA for the quarter was $2 $3 million.
And adjusted EBITDA margin was 20% compared.
Compared to adjusted EBITDA of $1 $7 million or 18% margin last year.
As a reminder, we calculate adjusted EBITDA by adding back stock based compensation expenses and.
And expenses related to M&A or other non cash non operating expenses.
We provide a reconciliation of this non-GAAP metric to net income the relevant GAAP metric in.
In our earnings release and on our website.
For the fiscal year income statement.
Total R&D cost for the year were $6 $4 million or 12% of revenue compared to $6 $9 million or 15% of revenue last year.
R&D expenses for the year.
Were $3 $2 million or 6% of revenue compared to $4 million or 9% of revenue last year.
Capitalized R&D for the year was $3 $2 million or 6% of revenue.
Paired with $2 $9 million also 6% of revenue in the same period last year.
Over the last five years, we've seen annual R&D expense generally range from 6% to 8% of revenue.
SG&A expense for the year was $25 million or 46% of revenue.
Compared to $26 million or 44% of revenue last year.
Similar to the quarterly variance the increase in the fiscal year expense was primarily due to increases in personnel costs.
<unk> costs and insurance costs.
As well as increases in stock compensation and software licenses.
Our competitive advantage with our scientific personnel and operating model is that employees perform various functions depending on the business needs.
Contributing on services projects software development and sales and marketing support.
We allocate personnel costs for these activities to cost of revenue R&D expense and SG&A expense.
As competitive cost for these individuals have increased and the SG&A contribution supporting revenue growth has intensified we've seen operating expense as a percentage of revenue increased to the mid fifties and expect to see this level continue.
Income from operations was $14 $9 million, an increase of 32% and operating margin expanded to 28% from 24% last year, reflecting increased revenue expense management and the leverage inherent in our software and services mix.
Income tax expense was $2 $6 million.
<unk> was $1 $3 million last year, with our effective tax rate, increasing from 12% to 17% year over year.
Last year, we saw a lower effective tax rate, primarily driven by the tax benefit associated with disqualifying dispositions.
We expect our effective tax rate for fiscal 2023 to increase again closer to 20%.
Net income increased 28% to $12 $5 million and diluted earnings per share increased 28% to 60 cents.
The revenue impact for the year from foreign currency exchange was $339000 in expenses related to M&A during the year were $335000.
For a total of $674000 or about <unk> <unk> diluted earnings per share.
Adjusted EBITDA increased by 24% to $21 million this year, while adjusted EBITDA margin expanded to 39%.
We ended the year with cash and short term investments of $128 $2 million and no debt.
During the year, we made dividend payments of $4 $8 million and the final payments of $3 $7 million for our link soft acquisition.
Demonstrating our strong cash generation ability.
We remain well capitalized with sufficient cash to support our continued expansion through internal.
Investment and acquisition opportunities.
Now I'll turn the call back to you Sean.
Yeah.
Well.
We have strong momentum heading into fiscal 2023 as both our software and service businesses are taking advantage of a growing number of opportunities I am proud that we continue to deliver on our commitment to science driving greater adoption of in silicone tools to accelerate innovation.
And drive down costs.
We are investing in internal R&D efforts to maintain and grow our leadership position.
And our increased scale enables us to expand our industry collaborations.
We continue to enjoy strong global regulatory relationships and now have multiple FTA technology development collaborations and process.
Our recent investments in sales and marketing resources are enhancing our client facing capabilities and in fact, our business development organization now totaling sales and marketing staff of 16 is mature and generating strong returns on those investments.
Geographically, we are focused on expanding our coverage in the EU by growing our business development that scientific consulting local presence.
Increasingly we are supporting international markets covered by distributor partners.
Way of example, our new Latin American partnership is off to a strong start with solid kickoff events in the fourth quarter.
Including webinar and business development efforts with our distributor.
We do have our challenges we are managing through a change in the seasonality of our software renewal patterns, we operate in a competitive market for scientific talent and.
And the general economic environment has impacted the timing of client buying in foreign currency exchange rates, but simulations plus is well positioned to address each of these challenges.
In conclusion, I am very optimistic as we enter our new fiscal year.
Thank you for your time and attention and now I'll turn the call over to the operator for the question and answer session.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Question is from Matt Hewitt from Craig Hallum. Please go ahead.
Good afternoon, and thank you very much for the update a lot to unpack. So I've got a couple of questions and then it might have to come back with a few more in a bit but maybe first up.
Thanks for giving us the update on the sales and marketing head count at 16.
Sounds like you want to continue to add not only to that team, but the rest of the operations team where are you today, maybe from a total head count and what is your target as we exit 'twenty three given your plans to add.
Add head count.
Good afternoon, Matt, yes, thanks for the questions.
Hopefully I've got two answers for you and more if you've got more questions down down the road.
In terms of head count overall, we are at about 157, I believe is where we were at at the end of the fiscal year with plans that Oh.
I would see growth in two areas as we go into the next fiscal year, one in terms of the consultant scientific consultants.
For that side of our business and as well in support of our.
Collaborations and R&D development, So scientific staff and business development staff, So I would say the business development staff growth.
Is anticipated to be less than our overall revenue growth of 10% to 15%.
But maybe the addition of the.
Less than a handful of people there and then the consulting efforts.
Growth in terms of the scientists.
We'll follow the growth of our needs in terms of.
The consulting services, it's a very competitive market out there.
We're very active in the recruiting effort.
The more we can hire the more we'll deliver in terms of service revenue.
Got it and then I guess with the shift that you're seeing and the timing of renewals. It sounds like some of that is is a positive as you're able to cross sell and get everybody on the same renewal track off across the offerings.
But you also mentioned that there is a little bit of a disruption because of budgets and whatnot. What gives you confidence that those customers that maybe are delaying on the renewal side are going to ultimately come back and you know either at the same level or or ideally at higher levels.
Well.
It's something that we've seen.
Our client's budgetary cycle started.
Already for their year end, we've seen this phenomenon start as early as our third quarter, a little bit, but certainly in the fourth quarter.
You've seen it.
And during this timeframe, we've not really seen too much of a drop off at all in terms of the.
Anticipated new license Theres, new customers that we would sign up we're actually on the service side in terms of customer accounts or signing up no more new customers than we have for for some time, we're seeing a lot of the.
New names new smaller.
Pharma and biotech companies engage our service organization.
So we are seeing a trend.
New customers are closures, despite the fact that.
Discussions are prolonged gated.
In terms of renewals and license.
And so on and so forth.
It's a nasty thorn in terms of the success, we've had in terms of cross selling our licenses.
Bringing additional platforms into the hands of existing customers and this synchronization process that are that is.
Desire understandably, so benefits both sides in terms of handling those renewals on an annual basis.
But the corn is better changes around the timing of those renewals of the existing part of.
Our business with that client and so shifts things around.
But again, they're not seen.
Any changes in terms of the overall renewal rates when you look at it from a year over year basis, as opposed to a quarter by quarter basis.
Got it and I think you've kind of touched on one of the other questions I had which was maybe.
One of the things you've heard now for the past several quarters has been concerns about the health of the smaller biotechs smaller pharma companies given.
The environment the funding environment that we've seen here in the past few quarters.
Called it out in your press release, you just mentioned it again that you are seeing some demand from those smaller biotech customers I guess that runs somewhat counter to maybe what investors had expected given the commentary in the past few quarters. So maybe what are you seeing from those customers and and.
Is that because the.
Option of modeling software has become so mainstream that they now are adopting as well or are you, bringing something unique that that is driving the business.
Well, you're touching on the right answers there Matt you got to realize there's two dynamics going on there.
Post <unk>.
Active funding markets number the population of biotech companies went up.
Many many more small biotech players in the market out there, but the real driving force here is the adoption of modeling and simulation, which has historically been relatively slow on the biotech side of the <unk>.
Profile of our target market.
That is picking up the adoption of modeling and simulation in biotech in general regardless of a small population or a growing population of biotech companies is expanding quite rapidly that is in part contributing to the.
Professional scientists in this in this field.
More rapid pace than earlier in terms of their strategic.
Our plans are than they have ever in the past and so I think we are benefiting from the adoption of modeling and simulation in the biotech space, saying more biotech customers and you have that population is larger as a result of the funding.
Our history of a year ago and no doubt.
Some of those biotech companies.
May not survive in the long run as their funding runs out and they're not able to requirements.
But the impact of losing one small biotech customer versus the overall effect of it.
Adoption of modeling and simulation in the biotech segment or large.
Far outweighs the benefit to to semi license cost at this point in time, and we expect going forward into the future.
That's really helpful color. Thank you I'll hop back into queue.
Thanks, Dan.
Okay.
Next question is from friendship peso of Oppenheimer. Please go ahead.
Hi, Thanks for the question.
Question, Bob put in after that as well. So just can you just on Matt's question about the head count of 16 that you mentioned at the end. There you just help US you talked about your overall head count around 157, but 16 that sales and marketing is that your scientists just to make sure we know exactly what that 16.
Yeah, that's the account Frank of the professional sales and marketing organization. So it does not include.
The resource out of our scientific staff that is devoted to the.
Business development effort.
And do you mentioned, how many scientists or for consulting services that you do have.
Yes, it's not a clear timeline it.
A process whereby mountain.
Most all of our certainly more senior scientists that are involved in the business development effort on a client by client basis, an opportunity by opportunity basis, but they are performing.
A.
An assortment of duties that include project work and business development work and so on so forth. So we can't.
Can't say that there's 10.
Or an exact number there I will refer to that process that we go through on a.
Quarterly basis in terms of identifying the number of hours that are devoted out of the scientific staff to the business development effort and that gets allocated appropriately.
I would say in general.
No.
Trend line in terms of a REIT devoting more scientific resource today to the business development effort than we were yesterday, yeah, it's growing the number of accounts.
The accounts that are in the pipeline project opportunities that we're working today is greater than it was a year ago two years ago. So it's growing hard to put an exact number on that so claim.
Okay, and you know I'm sure you can talk about how competitive it is and scientists.
There's probably going to be more and more as your software.
The academic setting where they get to train on it.
But can you maybe you know because it's so competitive you're talking about these biotechs hiring.
Have you ever quantified maybe the.
The addition of scientists and Gallo versus.
How quickly they leave or is that something that you don't quantify it.
Yeah.
Well, we certainly have a close eye to the situation you know our retention as an example.
The rate is extremely high.
And that doesn't mean, we don't we are scientists we have lost scientists to primarily industry.
And that's been ongoing maybe it's a one or two scientists more of this.
Cycle round, but it was the last but.
But not dramatically changed.
The difficulty has been on the recruiting side there are more.
Entities recruiting the same staff that is available out there pharma is hiring a.
Right.
Aggressively I referred already to the biotech space.
So the demand is very high and I think there is an element of post.
Covid job.
Migration and transition.
Taking place.
I believe it'll settle down I'm, knocking on the wood of my desk as I say that.
And as we enter 'twenty, three it's pretty pretty tight market right now and hope that during the course of the year things.
Got you and do you have any.
People that sometimes can debate it would be our best scientists that have.
I did with you at a school and then they learn and then they go join the industry and then ultimately they can come back and actually be probably better because they spend time in industry is that happening at all.
Common occurrence.
We hire.
Port stocks people are newly minted out of their academic programs. They get some good experience with us at some point in time, they want to see how the IND.
Industry World works, they'll take a step out.
And we've had many come back to us.
Their value has increased by that experience plays out in the industry.
And.
The contributors to the organization going forward sure.
Okay, Great and then just the last one here on cross selling just to be clear it seems like with the seasonality and the discussion around that it seems like sometimes it cross selling can happen between software products are you also seeing inevitably the cross selling between software to services, where more products more need for services.
Yep.
We've seen an increase in our key account management scenarios, where we are focused in building a much broader relationship with some of our key client accounts and seeing.
Increasing rates of consulting revenue flow. There. In addition to cross selling of software platforms are within that same the same accounts. So there's a synergy taking place between the consulting group.
The software group a that.
We haven't seen in the past to the level of recently, we haven't seen in the past and it's also contributed to its is accelerated by the addition of monolith and where we did not have.
A PK PD and house platform in the past prior to model X and with that being the largest segments of our service offerings.
The dynamic of working clients, who are consulting accounts.
And introducing monoliths.
Persons or model X customers.
Seeking service support now having a home to go to.
Our organization there as well so yeah cross selling them on the service side is is picking up quite nicely as well.
Alright, Thank you very much that's it for me.
Our next question is from Danielle.
Raymond James Please go ahead.
Hi, Thanks for taking the questions.
That.
As always the comprehensive review of <unk> financial statements.
Could you maybe just elaborate on your strategy and.
APAC and maybe China, specifically, obviously dead.
Ted.
Macro has changed quite a bit.
Has there been a maybe a refocus and two what you highlighted as maybe Latam or EU growth opportunities outside of your current core markets geographically.
Any color there would be helpful. Thank you.
Sure sure.
You know our primary Asian market, historically and through to today has been the Japanese market.
We have coverage is with a distributor in that marketplace that has served us well for many.
Many many years its probably been in the market that was.
Impacted until I talked to talk with regard to China, but most impacted by Covid.
Over the last couple of years, Japan, I'm, referring to and we're seeing that start to open back up the opportunity to.
To travel there and support the distributor.
Returned to a sort of a normal business cycle on the part of our clients in Japan we've.
We've had relatively flat growth in Japan.
And see an opportunity to get that back into a into a growth profile.
What do they get to China.
We are investing there and some distributor relationships.
We've been precluded and still are precluded really from.
The physical presence there in terms of support of the effort we.
Have invested in.
You know a hybrid.
Our business development activities.
That market is going to be.
The uncertain for a while yet still.
The other geographies that you referred to.
<unk> more of a growth opportunity for us today, certainly personally China, although I believe scam I Wouldnt label. The same I think Japan can get back into gear in terms of its historical growth profile. The Latin market is a very promising one for us we've established some very key relationships in that market.
And the opportunity.
For either through service or license of Gastro plus is very strong and we are.
Made that investment beginning in the back half of the fiscal year 'twenty two so I anticipate that its contribution in fiscal year 'twenty three well.
We will be very nice off a small base, but look very nice in terms of adding to our growth.
In the European market.
We started from a several years ago with without much presence there at all.
We've grown.
Higher by higher in terms of some consulting.
Staff that are located in Europe , we made the like soft acquisition.
And have a presence in terms of a software development team and software application team in <unk>.
Harris.
We've been growing that.
That footprint in Europe for.
Couple of three years now.
And yet more more to be done more to be done in terms of the a.
Extending our presence on the consulting side of having consultants in geographies, where the accounts are.
Be that in France, the that in the.
Northern Northern Europe , and Switzerland, where there are a number of key large pharmaceutical companies, which we do work for as it passes through into their U S subsidiaries.
But having a geographic presence.
On board will enhance our ability to grow there and then the other area will be in regard to business development.
We've got some business development support out of the Lake soft in Paris.
Tim.
But its disproportionate to.
Our revenue opportunity of existing revenue in Europe versus North America, and the potential going forward. So.
Yeah, Latin America, and Europe are probably the.
Investment opportunities with the biggest leverage today.
Today in Asia, Japan, I believe theres opportunity to leverage them back up to historical growth patterns that they had before COVID-19.
China market is probably you know.
What.
To keep our eyes open opportunistically.
Our presence there, but in terms of near term opportunity.
Not something we're counting on.
Thank you.
Very good.
Okay.
We have a follow up question from Matt Hewitt of Craig Hallum. Please go ahead.
Thanks, Yeah, just one follow up question.
You spoke to some of the wage pressures that youre seeing it sounds like it's more competitive in nature versus.
The run of the mill inflationary pressures that I think a lot of the economy is facing but are there. Some things that you can do from a pricing perspective, I think historically when you've introduced new.
New gastro plus.
Capabilities, that's typically come with a pricing are up.
Price increase is there something on the pricing side that you can do to off help offset some of the wage pressures that you're seeing thank you.
Yeah sure Matt Yeah.
But has pricing skus and updates that take place not necessarily tied to.
The upgraded releases, but we have an annual.
Price change.
Change to our rate sheets that are that occurs and certainly we can be more aggressive in that regard and and have been.
And yes that is a process that plays out.
Over time as existing licenses come up for renewal so on and so forth.
And as you know your larger clients have some negotiating capability there.
You know obviously the you know the.
Cost side the compensation side.
Out of the tight market competitive market is driving those prices up pretty dramatically.
We have an ability to raise prices and are doing so.
And if you look in terms of our gross margin on service.
It really can impact it.
And in a dramatic way.
<unk>, which is reflective of the fact that we are getting.
You know that that has.
That increased cost pass through.
To our clients to a certain extent in terms of our service organization.
But it is you know a a mesh of timings.
That.
Can't be perfectly damage to cover today.
<unk> cost increases with immediate price increases that are effective today.
So if there is there is some impact there, but yes. We are we are diminishing the impact of the of.
The underlying competitive costs.
As best we can with that with some price price increases as well.
That's really helpful. Thank you.
We have a follow up question from friendship your song of Oppenheimer. Please go ahead.
Hi, sorry, just a last one here I feel like it wouldn't be an earnings call. If I didn't ask this because it hasn't come up but.
Just wanted to know if there's any additional color you can say on M&A or is it still kind of looking for accretive.
Companies and just any color around obviously valuations.
Valuations have come down a little bit or the IPO window in terms of getting funds.
As a.
Berlin shut down a little bit here, so any additional color at all from the prepared remarks on M&A.
Yeah.
Destined to disappoint you Frank in terms of I don't know that I'm going to give you anything dramatically.
What I've said the last the last.
Last quarter in terms of.
Yeah improved market in terms of valuations that doesn't mean the valuations are are easily resolved.
A lot of effort and investment.
And a multitude of opportunities that are out there and.
I think the new thing is it is we are we are making steps forward.
But we're certainly not at any stage, where they came in which we can say that.
If theres anything you know there is nothing to comment in terms of actual deals, but the environment now.
So favorable.
We've got to put it in your vernacular.
Got some shots on goal here and we'll get one pass will go away eventually.
Okay I had to ask.
Yeah.
Okay.
There are no further questions at this time I would like to turn the floor back over to Mr. Sean O'connor.
O'connor for closing comments. Please go ahead Sir.
Very good well short and brief closing comments I appreciate everyone's attention and interest in the in the call today and look forward to reporting.
Our next next time around next quarter and have a good rest of the evening take care.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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