Q3 2023 Simulations Plus Inc Earnings Call
Yes.
Greetings and welcome to the simulations plus third quarter fiscal 2023 financial results Conference call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host John will fall from financial profiles. Thank you Mr. Wolfgang you may begin.
Good afternoon, everyone welcome to the simulations plus third quarter fiscal 2023 financial results Conference call with me today are Shawn O'connor, Chief Executive Officer, and will Fedrick, Our Chief Financial Officer of simulations plus please note that we have but we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks.
You can access the presentation on our Investor Relations page at Www Dot Stimulations hyphen, plus dot com After me numbers and after management's commentary commentary, we will open the call for questions. As a reminder, information discussed today may include forward looking statements that involve risks and uncertainties.
Words like believe expect and anticipate referred to our best estimates as of this call. There are no. There can be no assurances that these will actually takes place. So our actual future results could differ significantly from these statements further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the securities and exchange.
But that said I will turn over the call to Shawn O'connor Shawn.
Thank you John Good afternoon, everyone and thank you for joining us today to discuss our third quarter 2023 results.
To start off I am pleased with our team's successful acquisition of an immune metrics, a well respected modeling and simulation company.
This acquisition is highly complementary to our core strength and expertise in <unk>.
Quantitative systems pharmacology or USP.
With any metrics, we can rapidly expand into the SaaS growing therapeutic areas of oncology immunology and auto immune diseases. We.
We are very excited to welcome the <unk> team that brings proven USB technology, our strong reputation in the market and incredible scientific talent to simulations plus.
Joining forces we believe we can establish a leading position in these rapidly growing therapeutic areas.
Moving on to current market conditions as you know we operate in an innovative and fast growing market that is being driven by the vital need to achieve higher rois from the costly and time consuming drug development process.
The compelling value proposition that Biosimilar <unk> delivers continues to grow, especially with new advancements in technology and expanding impactful use cases.
However, as I've mentioned in previous calls our industry is not immune to macroeconomic pressures in the current environment is challenging.
We anticipated. These challenges this past October when we provided our fiscal 'twenty three guidance of 10% to 15% revenue growth after delivering 16% revenue growth in fiscal year 'twenty two.
During the third quarter small biotech large pharmaceutical and CRO customers remained more cautious and we did see several non renewals from smaller biotechs.
Even so we continue to perform within the guidance. We provided we believe this near term hesitancy around investment will eventually reverse the health care needs are so great and the stakes are too high requirement to ignore it faster more efficacious ways to bring drugs to market.
On a positive note there has been good uptake of our price increases throughout the fiscal 2000, 22023, which we think demonstrate the value of our products and services.
The adoption and growth of Biosimilar <unk> software and services continues to grow despite current market conditions.
In this context third quarter results were in line with our expectations, we delivered 9% top line growth year over year, driven primarily by strong revenue in our software segment, which was up 10% while service revenue increased 5% over last year.
From a profitability standpoint, we delivered strong gross margins of 82%, which reflected a favorable mix of higher margin software sales as well as the ability to pass on price increases.
While carefully managing expenses is a top priority this quarter, we incurred M&A expenses related to the <unk> acquisition.
Point $4 million or <unk> <unk> per share <unk>.
Despite this we delivered net income in the third quarter of $4 million or <unk> 20 per diluted share in line with our guidance adjusted EBITDA was $6 5 million, representing 40% of total revenue.
Will will cover our third quarter results in more detail.
Now I'll take a few moments to discuss how our software segment performed during the third quarter.
Overall, we're pleased with our performance as previously mentioned large pharma spending constraints and small biotech funding challenges have impacted some renewals and upsell opportunities that said our software revenue grew 10% in the quarter benefiting from strong uptake of our price increases.
Good renewal rates and up sells and the addition of 17 new customers.
Our topline growth reap some benefits from a renewal organization initiative, which.
Which we implemented at the beginning of this year and is proceeding as planned.
The goal of this initiative is to smooth out renewal contracts to create greater predictability and minimize seasonality.
Largely due to more favorable renewal harmonization, we saw robust software revenues for monolithic suites.
Grew 84% year over year.
While we expect to see ongoing benefits from our renewal harmonization initiatives in the short run it can temporarily dislocate some revenues in certain product categories. For example, this quarter's gastro plus revenues declined 2% year over year due to the timing of harmonization.
The renewal contracts.
Once we cycle through this harmonization, we expect to capture recapture these dislocated revenues.
During the quarter, we saw 9% revenue growth and Avnet predictor, our AI powered software solution with six customer Upsells and three new customers.
In Q3 AD met also achieved an important milestone with the successful integration of data provided by large several large pharmaceutical and argue our agro chemical companies to retrain, our machine learning models to predict ionization constraints.
Constance I'm sorry.
This has significantly expanded our library experimental P. J a data to over 70000 measurements, which gives our industry leading models unprecedented accuracy of their predictions.
As such all users will be able to benefit from this major advancement in the new admin predictor version 11 rhythms that it is expected.
The fourth quarter.
Other notable software highlights include significant collaborative work between our modeling experts from the pharma co metrics software and services team.
They are working together to develop a PK P. D platform model framework that will quantitatively support our clients go no go decision, making for oncology compounds based on weekend early biomarker data to predict late clinical endpoints.
We're very focused on driving synergies like this example across all of our acquisitions.
On the international front.
China was a strong performer with 29% revenue growth.
Mostly from Gastro, plus an add Matt predictor products.
This is a massive market that is underpenetrated and we anticipate continued growth here.
Yeah.
Moving onto our services segment revenues grew 5% year over year, representing 35% of total revenue.
Services backlog declined 6% to $16 million and our services team performed 212 projects during the quarter 16 more than this time last year.
PK PD services revenues grew 2%.
Selecting the shift to higher margin time and material contracts, which represented 42% of projects this quarter and contributed to expanding our services gross margin.
Furthermore, our farmworker metric consultants performed PK PD modeling to support a highly anticipated novel therapy.
Investigated to treat a rare childhood disease.
Team of experts subsequently assisted this drug sponsored and preparing for an advisory Committee meeting that resulted in attaining an accelerated approval granted by the FDA.
And our business. These victories are personally meaningful to everyone involved.
In Q S Peak U S. T service revenues were up 6% for the quarter, primarily due to the market conditions previously discussed.
Of note, we conducted a quantitative systems pharmacology project or a financial services firm that focused on predicting efficacy related clinical trial outcomes in the pulmonary space.
This was an interesting project because the goal was to use modeling and simulation.
The best future outcomes that would warrant investment considerations by the firm.
This is a great example of how industries outside of pharma are beginning to use predictive analytics and modeling to reach an informed business decisions.
We see some solid opportunity to expand the use of our applications in this space and others.
We also conducted a daily some liver safety project or a pharma company focused on evaluating and early development drug candidate.
<unk> is a quantitative system's toxicology software platform capable of predicting and explaining drug induced liver injury.
This assignment identified liver safety issues with the compound and helped inform the company's decision to abandon the candidate and a bowl avoid a multi million dollar failure in future clinical trials.
As you can imagine predictive outcomes like this go a long way in strengthening relationships with our clients.
P B PK revenues increased 5% in the quarter.
We have made substantial progress on the five FTA funded brands, which advance the mechanistic modeling and simulation science of drugs delivered through non oral pathways. Additionally, we provided PV PK consulting support on seven projects in the quarter, which assisted.
Bolt and generic companies in the design and development of pulmonary ocular inter aural dermal and long acting injectable drug products.
The launch of our consult in coach program in early 'twenty. Three has garnered significant interest in adoption from our clients. This innovative program provides clients with access to our cutting edge software and valuable learning opportunities, we believe that over time, our consulting coach program.
We'll gain meaningful traction by training and expanding in house clients expertise with the goal the end goal of driving incremental software licensing revenues.
Additionally, our team of PV, PK consulting and regulatory experts successfully delivered a model informed drug development strategy to support a top 50 pharmaceutical company.
A mechanistic gastro plus model was developed and applied to define the test solution acceptance criteria for the company's commercial formulation of a new drug product.
And the simulation results submitted to a global regulatory agency to support the waiver of bio bio equivalents.
The growing acceptance of these applications of PV PK analysis versus costly trials are driving growth in this service segment.
We have made some significant strides in the third quarter and I'm very proud of our teams collaborating with one another and with our clients to deliver exceptional work.
Going forward, we will continue to execute our strategy that combines organic growth.
Operating leverage and inorganic inorganic growth to create long term value for our shareholders.
Our renewal harmonization strategy is providing significant benefits to smoothing out our contract renewal timing and seasonality impacts.
As anticipated we should complete this shift of seasonality as we conclude fiscal year 'twenty three.
With that I'll turn the call to will to review, our third quarter financial results in detail.
Thank you Sean.
We had another solid quarter with total revenue, increasing 9% with software up 10% and services up 5%.
Software represented 65% of revenue during the quarter.
For the nine months total revenue increased 4% comprised of a 2% increase in software and services growing 9%.
Software represented 62% of revenue during the year.
Gross margin for the quarter declined slightly to 82%, reflecting softer margins in our services segment.
Software gross margin was down slightly to 91% from 92% last year and services margins came in at 63% primarily due to lower margin work on grants.
Gross margin for the nine months was flat at 81% with software gross margin at 90% and services margin at 66%.
Now turning to software for the quarter.
Gastro plus represented 57% of software revenue modeled suite was 18%.
Isn't it predictor was 19% and other software was 6%.
For the nine months Gastro plus represented 55% of software revenue monolithic suite was 20%.
I've met predictor was 18% and other software was 7%.
During the quarter, our customer renewal rate was 96% based on fees and 87% based on accounts.
These rates reflect the positive impact of our ongoing revenue harmonization program offset slightly by non renewals with smaller biotech customers.
Generally the smaller customer non renewals were offset with price increases as reflected in the higher fee based renewal rates.
Average revenue per customer increased to $97000, mainly due to higher prices and some seasonality in our software business.
We expect quarterly comparisons to prior periods to fluctuate through Q4, with our new seasonal expectations based on our revenue harmonization program.
For the nine months, our customer renewal rate was 94% based on fees and 83% based on accounts.
Average revenue per customer increased to $118000.
Up from $108000 last fiscal year.
Shifting to our services business the services revenue breakdown for the quarter was 45% from PK PD services, 23% from Q S Peak U S. T services, 25% from PV, PK services and 7% from other services.
The services revenue breakdown for the nine months was 48% through PK PD services, 20% from Q S Peak U S. T services, 25% from P. B PK services and 7% from other services.
Other services consist primarily of the regulatory services, we provide customers to help them meet global regulatory compliance and quality requirements.
We also provide comprehensive learning services focused on modeling and simulation training with a variety of options to help our customers succeed.
Total services projects worked on during the quarter increased 8% compared to last year and backlog decreased by approximately $1 million from last year to $16 million.
The backlog decrease is primarily due to the Q S. P. Qs T services business.
Turning to our consolidated income statement for the quarter we.
We saw an increase in total R&D costs, primarily due to the development of the newest version of Gastro plus version 10, where G. P acts and from an increase in personnel costs from market compensation adjustments.
Total R&D costs in the quarter increased to $1 $8 million compared to $1 $4 million last year.
R&D expenses were $9 million compared to $7 million and capitalized R&D was <unk> $9 million compared to $8 million.
SG&A expense increased by one $4 million or 21% to $8 $2 million compared to $6 $8 million last year.
This increase was driven by an 11% increase in total headcount to meet our growing demand for our services business, along with market compensation adjustments to attract and retain talent in this area.
Additionally, we incurred <unk> $4 million in merger and acquisition costs.
Income from operations decreased 17% to $4 $1 million in the quarter, while operating margin was 25% compared to 33% last year.
Interest and other income was <unk> $8 million this quarter versus an expense of $1 million last year.
Due to returns from higher interest rates on our investment portfolio balance.
For the quarter income tax expense was <unk> $9 million compared to $7 million, reflecting an effective tax rate of 19% this quarter compared to 15% last year.
Net income decreased 2% to $4 million and diluted earnings per share remained at 20 cents.
The revenue impact for the quarter from foreign currency exchange was <unk> $1 million.
Expenses related to M&A during the quarter were about <unk> <unk> and diluted earnings per share.
Adjusted EBITDA was $6 $5 million and adjusted EBITDA margin was 40% compared to adjusted EBITDA of $6 $5 million were 43% margin last year.
As a reminder, we calculate adjusted EBITDA by adding back stock based compensation expenses and expenses related to M&A or other noncash operating expenses.
We provide a reconciliation of this non-GAAP metric to net income the relevant GAAP metric in our earnings release and on our website.
Turning to our consolidated income statement for the nine months, our total R&D costs were $6 million or 14% of revenue compared to $4 $7 million or 11% of revenue last year.
The increase was primarily due to the development of the newest version of bolt monolithic suite version 2023, or one and G. P X along with an increase in personnel costs from market compensation adjustments.
R&D expenses were $3 $4 million compared to $2 $4 million last year.
Capitalized R&D was $2 $6 million compared to $2 $3 million last year.
For the nine months SG&A expense increased by 34% to $23 $3 million or 53% of revenue compared to $17 $4 million or 41% of revenue last year.
This increase was primarily due to a $4 3 million dollar increase in employee and labor related expenses.
Additionally, we incurred merger and acquisition cost a point $8 million.
Income from operations decreased 37% to $9 million, while operating margin was 20% compared to 34% last year.
Interest and other income was $2 $6 million versus the nominal amount last year due to interest income of $2 $6 million driven by the increase in interest rates.
Income tax expense was $2 $2 million compared to $2 $7 million last year, reflecting an effective tax rate of 19%. This year similar to last year.
We expect our effective tax rate for the fiscal year to be in the range of 19% to 21%.
Net income decreased 18% to $9 $4 million and diluted earnings per share decreased to 46 cents.
The revenue impact for the nine months from foreign currency exchange was point $6 million.
<unk> is related to M&A during the year were about four cents in diluted earnings per share.
Adjusted EBITDA was $15 $7 million and adjusted EBITDA margin was 36% compared to adjusted EBITDA of $18 $7 million or 44% margin last year.
Now turning to our balance sheet.
Ended the quarter with $122 $4 million in cash and short term investments the.
The change from last year was primarily driven by the addition of $15 $5 million and free cash flow less $3 $6 million in dividend payments and $20 million for our accelerated share repurchase.
We concluded the ASR with Morgan Stanley during the quarter and received a total of 492041 shares at an average cost per share of $40 65.
The repurchased shares were retired and treated as authorized and issued shares.
As Sean discussed earlier, we recently acquired immuno tricks and under the terms of the agreement we agreed to pay the shareholders of Internet tricks cash consideration at closing and the amount of $15 $5 million, including a $1 8 million dollar hold back.
Just two future earn out payments in the aggregate amount of up to $8 million based on the revenue performance of immune ethics through December 31 2024.
We continue to be well capitalized have strong free cash flow and seek opportunities for strategic acquisitions investments and partnerships.
I'll now turn the call back to you Sean.
Thank you will.
Our team delivered solid results this quarter, despite a challenging operating environment.
We have been executing on our strategic priorities and as a result, they are delivering profitable growth generating cash and strong returns for our shareholders as such we remain well positioned to meet our stated goals for fiscal 2023, which include.
Year over year revenue growth in the range of 10% to 15%.
Total revenue between $59 3 million to 62.0 million.
Software revenue mix between 60% and 65%.
Services revenue mix, 35% to 40%.
Diluted EPS of <unk> 63 to 67.
We announced this range in October not including any impact from M&A activity through the end of the third quarter, we have incurred M&A expenses.
Poor.
And anticipate an additional M&A expense of five cents in the fourth quarter.
Regarding the <unk> acquisition.
Based upon the timing of the acquisition close and its historical seasonality Ami metrics fourth quarter revenue contribution will be positive but limited.
This revenue contribution is contemplated in our 10% to 15% overall revenue growth guidance.
Q4 Emmy metrics operating results will be accretive to earnings.
We will provide fiscal year 'twenty for guidance for <unk> in conjunction with our guidance for the entire business at the end of our fiscal year 'twenty three.
In conclusion.
Our ability to create value for our customers by using innovative solutions is transforming drug development R&D.
Optimizing treatment options and improving patient lives as a result, we continue to see greater adoption of our solutions to reduce cost and save time across the industry.
Thank you for your time and attention with that I'll turn the call over to the operator for.
The question and answer session.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Matt Hewitt with Craig Hallum. Please proceed with your question.
Good afternoon, and thank you for taking the questions maybe first off regarding the immune metrics acquisition first of all congratulations I know, it's something you've been trying to close.
Clothes.
An acquisition that is for the last couple of years. So it's nice to see you get one across the goal line, but as we look at this opportunity obviously it expands you into some new markets, particularly the college area and I'm just curious how quickly do you anticipate being able to see.
See some cross selling.
Opportunities kind of get closed is that something that we could even see here in the fourth quarter or do you think it's going to take a little bit longer to get everything integrated and get the sales teams up up and ready.
Okay.
Yeah, Matt Thanks for the compliment.
They're great pleasure to finally get an acquisition across the finish line here I know everyone is anticipating one.
Integration.
<unk> some time ago.
Anticipation of the deal closing.
The interaction between the teams are commenced and full speed now as we.
Have them on board.
The acquisition closed and from a internal operational point of view from a business development point of view.
The integration process is moving quite nicely.
They come into the transaction with a pipeline of business.
Revenue outlook.
That Ah well somewhat distracted no doubt.
During the closing part of the acquisition.
Acquisition discussions.
They are very focused on and driving towards their revenue expectations.
Cross selling opportunities that will be derived from.
Including their portfolio of models, which I would say are already built so these are models.
And these key strategic areas therapeutic areas.
That may require some tailoring for clients, which we bring them on board, but the model itself is is already in place.
That business development efforts, leading to cross selling new lead generation new opportunities beyond.
The opportunity that they see or saw before them.
It should happen quite quickly sales cycles being what they are are not 30 days sales cycles in this space. So it'll take some time.
For lead generation too.
Project.
Scoping to closing of the deal to take place, but we could see that certainly accrue to us as we enter into fiscal year 'twenty four.
Looking forward to.
Not just the business the book of business that they bring to the table, but that which we can.
System wide going forward much like our previous acquisition of works off.
Paul Company.
Relatively slim in terms of their resources in the business development area, Steve chain Seattle comes on Board and continues those relationships that he has in the marketplace with some key clients.
But our team our business development team can certainly.
Expand.
The coverage of the <unk>.
<unk> place in the doors, we knock on the leads that we generate in opportunities, but we have to close going forward here pretty quickly.
That's very helpful. Thank you and then maybe a separate question here regarding the.
The customer landscape. If you will if maybe if we could dig in a little bit deeper small versus large it sounds like maybe there's a little bit more of a nuance with the large customers, taking a little bit longer to get across the goal line to get those contracts signed.
Is that something you anticipate is may be shorter in duration or how do you see that kind of.
Playing out here over the remainder of the calendar year and is there anything to read into some of these dynamics and.
Whether there's maybe some new competitive.
Changes or maybe a pricing dynamic or is there anything beyond just the funding issues that that's really kind of holding up some of those customers. Thank you.
Yes.
Talking about basically two segments of the marketplace.
The small biotech which we.
Certainly talked about for multiple quarters, or maybe eight quarters since the funding clip.
Occurred in that segment.
The disruption to that segment of the market.
Oh it was abandoned.
Long term here now.
Conoco that I'm getting from.
People such as yourself, there seems to be a little bit of an uptick in terms of.
What type of opportunities and funding are there are certain.
It was not.
We'll come back to where it was eight quarters ago, two three years ago.
Hopefully, we see that on the upswing in the future.
Business as usual there as it has been for the last three quarters.
Large pharma as well I mean, we saw that in their budgets are in cycle of October November of last year.
That particular reasons not the.
They're funding unnecessarily both macroeconomic conditions.
Causing them to be more cautious and prudent in terms of the.
Our budgets are coming into the public school their calendar year fiscal year.
On the 20th Crane, we saw that began to slow at that point in time, I'm, sorry, reduce the guidance at the beginning of the year.
Challenging market.
It gets changed here as we are in our third quarter of the fiscal year.
Going to the calendar year.
That's played out.
So simply their loved ones to the mix.
No a stake in the ground will be as we see them start to prepare their budgets in October and November for the following year.
And we'll see how those fallout will be the next opportunity to see whether that dynamic will change or.
Near medium or long term.
We've been operating in this environment for a couple of three quarters in.
I'm really proud of the team they.
They've delivered.
More challenging environment to our expectations here.
Well, we'd like to see them.
You know the results a little bit more robust they are as we anticipate a good plan.
No one in the long run.
The impact of the Biosimilars than it has in the industry.
It's not one more than sort of them kind of go by the wayside and will continue to grow and it's growing today L. P for.
For Russia.
But some of this group to grow into the future.
<unk> are very strong.
Thank you that's very helpful. Thanks.
Do you care about.
Our next question comes from the line of David Larsen with <unk>. Please proceed with your question.
Hi, congratulations on the good quarter can you maybe talk a little bit more about immune Nat tricks.
Our channel checks, we were hearing that oncology.
It could be a good opportunity area for simulations plus obviously, there's a lot of investment into the oncology space just any any color around.
Sort of like the different areas of oncology that immune Eric's focuses on or any thoughts around or anything that you can share around like how much revenue <unk> springs annually or maybe how many customers they have.
Any more color there would be very helpful. Thanks, a lot.
Sure Jamie.
Netflix is a real strength and there's you know based upon a name that's been focused in areas.
I mean allergy oncology.
And of course, it's.
Long tenure and certain models that they built large mechanistic, let's be models.
Oh, well tuned over many years of data flow and client engagement models.
<unk> is a fast growing area in the industry.
And curious speed development for the acquisition of the build of <unk> models the acquisition by clients in the space.
Most relevant in areas where our.
Clients have ongoing multiple drug programs.
And oncology certainly fits the bill and that characteristic.
It's typically a focus or a density and typically not just simple a single drug candidates.
And so that is the environment in which an investment in a large mechanistic model that can guide their development program over a longer term period of time makes the most sense.
So it is what is attractive so on our part.
To get there more quickly as opposed to a longer term build it internally at the model in that space the acquisition of MST.
<unk> brings is to us.
Quickly.
In terms of the size I mean, maybe begin to be able to.
Go to the bottom line first it's accretive.
Immediately we will be in the fourth quarter and so as we move forward.
There'll be some efficiencies, but are probably improve there.
<unk> profitability, but then the simulations plus family most.
Most importantly on the top line.
Yeah, it's a.
No.
Revenue.
Profile of the company as you know that's pointed to and their earn out.
Characteristics for me in terms of the earn out payments.
Which calls for there.
Earn out payments.
Payments in 'twenty three calendar year 'twenty three.
We achieved revenue of $6 million for the 12 month calendar year.
And the $8 million.
Incidentally in fiscal.
Fiscal year 'twenty four.
Please with our revenue projections targets on which lines are for the earn out payments.
Oh aggressive maybe but all of our past acquisitions, you announced something properly paid and pull through our acquisitions. So it.
We'll be working with them to achieve those targets.
Targets.
Little tough with a short quarter here of the close of the transaction into the corridor.
They're.
I'm going to have to adjust to the fact that they're part of a public company with an August year end.
It wasn't necessarily a key.
Calendar milestone Portland in the past.
So we'll make the transition here in the fourth quarter, they will contribute to revenue.
When it will be accretive will be better positioned to Jennifer wants in terms of guidance when we get.
Get to the end of our fiscal year.
For the 12 months into.
Of course fiscal year 'twenty four.
Okay, great. Thanks, that's very helpful and then in terms of.
Software growth up I think around 12%.
Our 10% year over year.
Shows she was a very good.
Uptake, especially relative to <unk> fiscal <unk> about 23.
Can you maybe just talk a bit about I think there were 13 gastro plus upsells that seems very good to me quite frankly, you got a tough comp in the year ago quarter for gastro, plus obviously, a very good quarter.
A year to year ago period, and then how much of that growth came from the renewal harmonization sort of process and how far along are you in that renewal harmonization process, we've got like 80% of the way through it and will you be through it by the end of the fiscal year. Thanks.
Yes fair question guests surplus.
Unlike the contrasting with monolith that had a great quarter with 80 plus percent growth in the third quarter. They benefited from the harmonization.
Harmonization process by seeing more of their license license renewals dislocate out of.
First and second quarter.
And a little bit.
<unk> from fourth quarter into the third quarter and so they saw that benefit we saw that benefit.
But modeling some harmonization in the third quarter.
That's teed up.
The Guestroom plus side for the fourth quarter, where we see a lot more of those focal dates of when licenses will be renewed.
Dislocating too to the fourth quarter so.
From a.
The price increase perspective from or up sell perspective.
Hum.
You know cross selling.
Scenario, new customers, so pretty pretty good statistics in terms of the gastro quest performance.
But the harmonization is pushed are pushing revenue into the into the fourth quarter.
That being said again would we like to have seen some more logos new logos.
And some larger upsells.
Taps in other product lines sure.
The market is it is growing a little lesser this year, but.
Gastro plus in the third quarter.
So the primary impact was the harmonization.
Okay, Great and then just my last question I guess.
Visibility into fiscal <unk> revenue it sounds like it would be pretty high, especially on the software side is is that correct.
Yeah, we've been we've always had good due to the renewal process a good book of our business, 80% plus or minus of our software revenue in any given quarter comes from renewal.
We've had pretty good predictability in terms of the harmonization, which has moved those licenses license renewal dates around.
So pretty good pretty good.
Paul in terms of the software businesses the service businesses.
We start getting into the summer months, which can be disruptive but.
Coming into the quarter with a good good backlog to support its expectations.
In the fourth quarter.
Visibility is pretty good fourth quarter this year.
Okay, and then just a quick one for Wil will did I see that this was the best cash flow quarter of the past seven quarters.
From a cash flow standpoint, we mentioned is the free cash flow for the year.
But I mean, we continue to have pretty good free cash flow that we're paying dividends out from.
Okay. Appreciate it thanks, I'll hop back in the queue.
Thanks.
Our next question comes from the line of your honesty with B Riley. Please proceed with your question.
Alright, Sean well congrats on the culture and the central for taking our question just one from us.
Provide more clarity on that $16 million backlog are those project time sensitive does it mean does it make sense to hire more consultants to compete the backlog sooner. Thank you.
Yeah sure. Thank you.
Yeah that is good we've made that transition really them.
Covid time timeframe here transition in terms of <unk>.
Contracting business that often comes in multiple stages.
And an initial upfront discussion and contracting those in pieces as opposed to one large amount.
The benefit of that is that the.
Really the quality of the backlog is much stronger there.
A reduction in the amount of backlog that.
Oh, yes.
You know eliminated through a drug cancellation.
For example, because at least some contracts with shorter term them in the metric. There is this backlog pretty high oil content.
Deliverable with.
12 months, there's not much left.
It seems for 12 months.
Or is it still is in the three to six months ahead of time until our expected performance.
In terms of the.
Head count the capacity required to deliver on that backlog.
Certainly in the near term in the fourth quarter sort of horizon.
We have.
Capacity on hand to.
To deliver to our expectation.
That sort of short term expectation.
I was with what's out beyond the next quarter.
It's a continuous process of managing our capacity to our to our needs we've had a good.
Our year this year in terms of bringing on.
I think it's a seven or eight new consultants to add to the team.
And.
It's always something we have to manage it closely.
But we've got a little bit of.
Oh time to prepare for that short term need slipped to be.
Addressable right now.
Got it thanks for the insight thank you.
Okay.
Our next question comes from the line of French Walbridge Boys with Oppenheimer. Please proceed with your question.
Hi, Thanks for the question so just to be clear that in the guidance. There I think you mentioned, but just to be clear on it the fiscal year 'twenty three guidance.
It does include the matrix.
Acquisition correct.
Yes.
Their contribution and their stub window on the fourth quarter.
You know it is going to be positive, but it'll still keep us in that 10 to 15 for someone.
Okay and if you.
Have you discussed at all any metrics the kind of mix of software to services in terms of that business and maybe on its own and then once complete.
Completely integrated with you guys does that change the mix of software and services.
Yeah, It's you know.
Very much like our existing USB Christmas, which delivers maybe a.
2080 split 20%.
Other revenue generated there was licensing.
These models.
A client who brings with in house and uses it.
80% service based revenues clients.
Or asking us to do the heavy lifting and perform projects using the model for them.
Yeah, very very similar between our existing kiosk business and.
It's a business we will not change.
I don't think it'll change dramatically.
Quite frankly, they've been a little bit more successful in getting some.
Technology fees, where projects are essentially service.
Engagements.
So I wish to.
Arrangements with the client to a license model during the project window of time.
Maybe there was something one from Thunder library product.
But I don't think it'll change that mix of 2022.
Keep in mind.
Great and then just lastly, a last one here in terms of the percentage do you disclose the percentage of your business.
Just in relation to all the funding.
Headwinds.
Any of your business that comes from pharma versus smaller biotech and any color on the stickiness that he can we had talked about a 95% kind of stickiness.
Any other color there.
Yeah, I mean, it's where do you draw the line Frank I've been worried where Istanbul a bit.
No small biotech.
Where do you draw the line and we'd have to adjourn impacts some of them in terms of the world.
Identified just small biotech so I didn't know that.
Biotech as a overall label.
Table represents maybe 20% of our.
Business.
Priority again it includes those large players that aren't subject to these funding issues that exist out there.
So it's something much much less than that in terms of the total segment.
In terms of the.
Renewal rates, yeah, certainly the smallest of biotechs are the ones that we see the most churn in.
That are not are we doing.
But as you can see in terms of the differential between the.
Renewal rates for fee in the mid nineties.
That's that's held pretty pretty steady.
Which you know in the end the means about a week.
Overcome any shortfalls there with.
Incremental price increases.
As you know.
By account renewal fee in the mid eighties.
That one has come down from you know maybe more typically in the high 80 percents.
Down to the mid to mid Eighty's.
Collectively these are smaller biotechs are knock on wood.
I'll, just sort of a sheer number of accounts basis.
Thank you.
Very good.
There are no further questions in queue I'd like to hand, the call back to back to you Mr. O'connor for closing remarks.
Well. Thank you everyone for joining us here on our third quarter.
Earnings call.
Look forward to our racing through the fourth quarter here and speaking again.
In due time in October take care everyone.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.