Q3 2025 Simulations Plus Inc Earnings Call
Greetings and welcome to the simulations plus third quarter, fiscal 2025 Financial results conference call.
At this time, all participants are in a listen-only mode.
A question and answer session will follow the formal presentation.
If anyone wants to require operator assistance, please press star zero on your telephone keypad.
As a reminder, this conference call is being recorded and now my pleasure to introduce Lisa Fortuna from Financial profiles. Just want to know, please go ahead.
Speaker Change: Good afternoon everyone, welcome to the simulations plus third quarter, fiscal 2025 Financial results conference call.
With me today are Shaun o'conor, chief executive officer and will Frederick Chief Financial Officer of simulations. Plus
Speaker Change: Please note that 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 website at simulations.com after Management's commentary. We will open the call for questions as a. Reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties words like believe expect and anticipate refer to our best estimates as of this call and 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 Commission.
In the remarks or responses to questions, man, May mention some non-gaap Financial measures. Reconciliations of these non-gaap Financial measures to the most directly comparable. Gaap measures are available in the most recent earnings release and on the company's website,
Please refer to the reconciliation tables in the accompanying materials for additional information.
Speaker Change: With that, I'll turn the call over to Sean o counter. Please go ahead.
Thank you, Lisa.
Sean O'Counter: Good afternoon, everyone and thank you for joining our third quarter, fiscal 2025 conference call.
Sean O'Counter: third quarter Revenue came in slightly above our preliminary range, communicated in June,
Final results. Showed Revenue, growth of 10% to 20.4 million, including a 2.4 million contribution from the proficiency acquisition.
On an organic basis, Revenue decline for 4 4 percentage and a decrease, in our bio simulation Services Revenue.
Diluted EPS loss was 3.35.
Which included a 777.2 million charge non-cash? Impairment expense related to Prior acquisitions?
Compared to 15 cents last year.
Adjusted diluted EPS was 45 cents compared to 27 cents last year.
Adjusted the debit dial was 7.4 million or 37% of Revenue compared to 5.6 million or 30% of Revenue last year.
To expand our capabilities into the clinical operations space to leverage our Science and Technology capabilities and the use of Predictive Analytics. To support our clients, ability to better manage a critical contributor to clinical trial failures.
Sean O'Counter: The acquisition doubled, our Tam and positions us well for future growth in clinical operations.
For the opportunity to improve outcomes. With better use of Predictive Technologies is recognized as an important area of potential Improvement in drug development.
The proficiency training platform and medical communication Services have been significantly impacted by market, headwinds that disrupted clinical trial, initiations and tightened, commercialization budgets.
Sean O'Counter: These are similar in nature to the headwinds encountered in our bio simulation Market.
As a result, our outlook for these Revenue sources for fiscal year 25 and into fiscal year 26 decrease and we took what? We believed was a prudent and conservative step to align the book value of these assets to their near-term market value.
Sean O'Counter: We are deeply committed to our clinical operations and medical Communications businesses and their long-term growth Outlook.
Sean O'Counter: The clinical operations space is Rich with opportunities to combine science and new AI Technologies to deliver significant clinical operational. Efficiencies
Sean O'Counter: we remain bullish on this opportunity and believe the proficiency platform will provide the appropriate path.
To extend our footprint with new and current customers. When the market stabilizes.
And the technology acquired in the proficiency acquisition allows us to more quickly Advance the introduction of AI applications across our full portfolio of software platforms.
Sean O'Counter: Reinforcing our commitment and belief in the opportunities presented in the clinical operations space.
Today we issued a press release announcing our investment in New York which offers a software platform designed to improve efficiency. Reusability, governance, and automation for pharmaceutical companies through the digitization in the clinical development phase.
Sean O'Counter: It is highly complimentary to our proficiency software and is a straightforward extension of our presence in clinical trial design.
Speaker Change: Whitten, or we are further enhancing our capabilities to provide a more seamless and data-driven approach to trial, execution, which reflects our ongoing commitment to clinical trial Design Services.
As most of you are aware, the biofarma market has been difficult for the past several years.
Speaker Change: Large Pharma is facing headwinds such as patient patent expirations.
And inflation reduction act, the pricing pressures. While biotech companies have seen a significant pullback in available sources of capital,
Speaker Change: these challenges have been further exasperated by the threat of tariffs.
Was favored, nation, pricing policies, and significant budget. Reductions at the NIH and FDA.
Speaker Change: combined, these Market, headwinds that created more uncertainty, and further, constrained biofarma spending
Speaker Change: With solid Revenue growth in the first half of our fiscal 2025. I think it's fair to say that our team has generally executed well through some choppy market conditions.
Our software Revenue while impacted has continued to grow. Well,
however, our services Revenue has been more significantly impacted by the cost constraints implemented by our clients.
Speaker Change: We encountered a Slowdown in our services, bookings. In the third quarter, that will affect near-term project flow.
Speaker Change: Additionally, more delays and contracted projects, Push Services Revenue out to Future quarters.
We also experienced a significant client cancellation during the quarter due to unfavorable outcomes in their drug programs. That impacted near-term revenues by approximately 2 million dollars.
Speaker Change: Taken together. These factors had a substantial effect on our third quarter performance.
And they'll continue to flow into our fourth quarter and fiscal year 26.
This lower than expected Services Revenue contributed to the downward revision of our full year 2025 guidance, that will is going to cover shortly.
Speaker Change: Moving to our software Revenue.
Business continued to perform well given its role as critical infrastructure and Drug development programs.
Software Revenue grew 6% in the quarter, mainly driven, by our admet, predictor solution, and modest growth in our gastro, plus and monolithic sweep platforms.
Speaker Change: Partially offset by a decline in our qsp qst. Bio simulation platform.
Our Discovery can informatics platform admit predictor, grew 8% year-over-year and 4% on a trailing 12-month basis.
Speaker Change: At the end of the quarter, we released admet, predictor 13. Our Flagship machine learning modeling platform for the design optimization and selection of new molecules during various stages of drug. Discovery with improved features in the areas of first to invent Advantage elevated predictive power and Enterprise ready automation.
Our pbpk bio simulation platform, gas for plus increased 4% year-over-year and was flat on a trailing 12-month basis.
Revenue growth for gastro plus was below expectations. As it was impacted by client, consolidations, and some site closures that resulted in lower renewal rates,
Speaker Change: Our outlook for gastro plus remains strong in anticipation of the next upgrade later. This year with enhanced AI capabilities.
Our pkpb simulation platform. Monolithic Suite.
Speaker Change: Crew, 3% year-over-year and 18% on a trailing 12-month basis.
This platform was also impacted by a client consolidation this quarter, but otherwise, it has continued to grow in the High Teens.
Our qsp qst bio simulation platform, declined, 39% year-over-year and grew 7% on a trailing 12-month basis.
Speaker Change: The year-over-year decline was driven by very strong, third quarter 2024 Revenue.
Speaker Change: We have always communicated the lumpy nature of USP software revenue. And while the revenue contribution was down this quarter, it was positive on a trailing 12-month basis.
Our clinical operations platform, proficiency contributed 04 million in revenue for the quarter and 4.4 million on a trailing 12-month basis.
Speaker Change: Although a small contributor to software Revenue, new licenses for this training platform have slowed along with the flow of clinical trial Solutions.
As we've previously mentioned demand for services has proven more sensitive to Market volatility and came in below our expectations.
Services Revenue, which represented 38% of total revenue grew 17% in the third quarter.
Speaker Change: Primarily driven by solid performance in medical, communication services, in group 27%, on a trailing 12-month basis.
Speaker Change: Pbpk Services, Revenue declined, 10% year-over-year and declined 13% on a trailing 12-month basis.
Pkpd Services, Revenue declined, 9% year-over-year, and grew 6% on a trailing 12-month basis.
This is the service solution where we encountered the client cancellation that I noted before.
Qsp Revenue declined, 22% year-over-year and 1% on a trailing 12-month basis.
Speaker Change: Medical communication Services. Revenue was million dollars for the quarter and 7.3 million for the trailing 12-month period.
overall we have a healthy pipeline of serving service projects, but the pace of contractual, commitments, slowed, during the third quarter,
Speaker Change: Further, some contracted businesses business. In our backlog has been delayed to Future quarters,
We ended the quarter with backlog of 20.7 million up from 20.4 million. In the second quarter, and up from 15.7 million year-over-year.
Will: We have always been a very client-centric company and before I turn the call over to will I want to discuss the actions. We've recently initiated to be better better serve our clients going forward and to position us as their partner of choice based on our innovative solutions that meet, their current and future needs. And for operational efficiencies that keep us competitive in the marketplace.
Will: We implemented a strategic reorganization.
Transitioning from a business unit structure to a functionally driven operating model.
Will: We also made key leadership appointments to enhance client engagement and Elevate our sales and marketing capabilities.
These actions marked the Final Phase of a multi-year transformation aimed at streamlining operations, unlocking, synergies across teams.
Will: And concentrating. Our resources on the most promising growth opportunities.
We believe the new organizational structure will. Also Foster greater collaboration through centralized product and Technology development,
Will: Contributing to accelerated delivery of software enhancements platform integration and AI advancements.
2 tangible examples of the benefits from this reorganization.
First like consolidating our product management and software development teams into a single functional organization.
We've achieved greater consistency in development improved efficiencies and accelerated delivery of enhancements across all our platforms.
This structure enables us to continue advancing the scientific enhancements of each of our products while maintaining our leadership position.
Will: Key development opportunities. Such as AI functionality optimized, Cloud infrastructure and enhanced product interoperability will be more effectively executed through our unified software team.
The integration of our Services Group, reflects the increasing value of our diverse modeling Service Solutions which are often combined to support complex client projects.
our clients frequently present unique challenges, that require multi-disciplinary teams to efficiently solve their needs in this consolidation allows us to better support them
Will: Through this reorganization, we also streamlined our Workforce, which will result in Greater efficiency.
In our cost structure.
Beyond these cost savings. We also aligned our services capacity, more closely with current needs. We remain confident that we will be able to scale operations effectively as demands stabilized.
Will: These changes are expected to improve operational, efficiency, and better position us for sustainable and profitable long-term growth.
With that, I'll turn the call over to Will.
Will: Thank you, Sean.
Will: To recap our third quarter performance, total revenue increased 10% to 20.4 million including a 2.4 million contribution from the proficiency acquisition.
Software Revenue, increased 6% representing 62% of total revenue and services Revenue, increased 17% representing 38% of total revenue.
Turning to the software Revenue contribution from our products for the quarter gastro, plus was 56%, admit predictor was 20%.
Will: Model X Suite was 17% proficiency, was 3% and qsp. Qst products were 4%.
For the trailing 12 months gastro plus was 48%.
Monolithic Suite was 20%, admit predictor was 17%.
Proficiency was 9% and qsp qst products were 6%.
Will: The trailing 12 month, software revenue for proficiency, only includes Revenue since the acquisition in June 2024.
During the quarter, our software customer renewal rate was 84% based on fees and 71% based on accounts.
Average software Revenue per customer for the quarter was 96,000 down slightly both sequentially and compared to last year.
Will: On a trailing 12-month basis, our software customer, renewal rate was 89% based on fees and 78%, based on accounts slightly lower than last fiscal year.
Will: Average revenue per customer increased to 101,000 from 95,000 on a trailing 12-month basis.
Shifting to our services, Revenue contribution by solution for the quarter.
Will: Pkpd Services. Were 38% medcom Services were 26%.
Qsp qst Services were 19% and pppk services were 18%.
Will: on a trailing 12-month basis, pkpd services, with 37%
Will: 4%.
Medcom Services were 22%.
Will: And PVP Services were 17%.
Again, the trailing 12-month medcom Services Revenue. Only includes Revenue since the acquisition of proficiency last June.
Will: Total Services projects worked on during the quarter were 202 and year in backlog, increased to 20.7 million from 19.6 Million last year.
Total gross margin for the quarter was 64% with software gross, margin of 80% and services, gross margin of 38%.
Will: On a comparative basis.
Total gross margin for the prior year quarter was 71% with software gross, margin of 88% and services, gross margin of 41%
The decrease in total gross margin was due to a $2 million increase in cost of revenues of which 1.1 million dollars was related to software related costs and 0.9 million was related to service related costs.
Turning to our Consolidated income statements that a quarter R&D expense was 6% of Revenue compared to 7% last year.
Will: Sales and marketing expense was 13% of Revenue equivalent to last year.
GNA expense was 30, 30% of Revenue compared to 41% last year.
Will: In total operating expenses including impairment. Ex excluding impairment expense were 49% of Revenue compared to 61% last year.
Will: Total operating expense for the quarter includes a 1-time, non-cash impairment expense of 77.2 million.
Will: Based on evaluation assessment, we made to align the book value of our assets to their current market value.
Will: Income tax income tax benefit for the quarter was 6.7 million compared to income tax expense of 0.8 Million last year.
Will: And our effective tax rate was 9% compared to 19% last year.
Will: Net loss for the quarter was 67.3 Million compared to net income of 3.1 million and diluted, EPS loss was 3.
$3.35 compared to diluted EPS of 15 cents last year.
Adjusted ebata for the quarter was 7.4 million or 37% of Revenue compared to 5.6 million dollars or 30% of Revenue last year.
Will: And adjusted diluted EPS was 45 cents.
Will: Compared to 27 cents last year.
The reconciliation of non-gaap financial metrics to the relevant Gap. Metrics is in our earnings release and on our website.
Will: Turning to our balance sheet. We ended the quarter with 28.5 million in cash and short-term Investments.
Will: The decrease in total assets, this quarter reflects the non-cash impact of the impairment charge.
Will: We remain well capitalized with no debt, and strong free. Cash flow to execute our growth strategy.
Will: Moving on to our revised outlook for fiscal year 2025. We now, expect total revenue to be between 76 to 800 million and proficiency to contribute between 9 to 12 million dollars.
Year-over-year Revenue growth in the range of 9 to 14%.
Will: Software mix between 55 to 60%.
Adjusted, Evita margin between 23% and 27%.
Will: And adjusted diluted earnings per share of between 93 cents and a dollar 6.
Sean O'Counter: I'll now turn the call back to Sean.
Speaker Change: Thank you, will.
We Face new challenges in the third quarter, which recalibrated our outlook for the balance of fiscal 25.
At the same time, we remain optimistic about the long-term. Prospects for Bio, simulation growth. And the use of AI Predictive Analytics in clinical operations,
positive long-term Outlook is underpinned by growing demand for more efficient drug development, an area where our platforms and solutions deliver clear value
Speaker Change: Additionally, the FDA commissioner is publicly endorsed the use of AI in drug development, highlighting, its potential to enhance both speed and efficiency without sacrificing safety and efficacy.
Just this week, the NIH announced that the biomedical agency would no longer award funding to new Grant. Proposals solely relying on animal testing,
Speaker Change: Since it remains unclear, when the market will stabilize, we believe that we have taken necessary actions that will allow us to operate effectively and efficiently to serve our clients until the market dynamics improve.
As in Prior years, we will provide our fiscal 2026 Outlook when we report fourth quarter results.
Speaker Change: assuming current market conditions persist in the near term, we generally anticipate modest Improvement in fiscal 2026 compared to fiscal 2025
We anticipate exiting fiscal year 25 with relatively flat organic Revenue growth with software, Revenue growth in the 5 to 9% range and services Revenue decline in the 9 to 13% range.
Continue now. And when we provide fiscal year 26 guidance, we will have the benefit of understanding the ongoing impact of Market, headwinds, as well as input from clients, as they undertake their calendar year budgeting Cycles.
Speaker Change: Looking to the Future simulations plus is rolling out a series of new AI driven initiatives across our product Suite as part of our commitment to innovation.
Key upcoming developments include.
Speaker Change: Cloud platform development.
Speaker Change: Our expectation. Is that this platform will become the con connective tissue linking artificial intelligence across our Solutions seamlessly, embedding AI driven insights and automation into each of our new products.
Each of our major projects.
Our AI enhanced gastro, plus release and anticipated later this year.
Speaker Change: Will debut integrated AI assistance accessible via a cloud platform.
Speaker Change: This will augment users modeling workflows with intelligent guidance and real-time Predictive Analytics demonstrating the first step in our cross-product. AI integration.
Specifically, our next guest for plus release will include.
Speaker Change: Assessments plus a modeling co-pilot that offers instant assessment and recommendations.
Speaker Change: For compounds and simulations.
Speaker Change: Its expert-driven guidance is built on real scientist input and is engineered to avoid hallucinations.
Speaker Change: It ensures experienced modelers.
cons it ensures experienced modellers consider potential model optimizations and empowers newer users to quickly gain competency in model building and the multiple disciplines that underpin pbpk
Speaker Change: Orchestrator.
An automation package for complex and time-consuming workflows.
Once set up, users can build modify execute and visualize modeling projects and results with a single click, using our scripts, python code and more.
Streamlining, tedious tasks, minimizing errors and accelerating data processing to free up time for researchers to engage in deeper analysis, and innovation.
Speaker Change: And guests were plus GPT and AI powered chatbot. That provides conversational style real-time answers and support for Technical and operational questions.
And extracts information from unstructured data sources for effortless setup of gastroplus input, files and reports.
Speaker Change: The foundational open AI large language, model driven program is available. 24/7 and enhances, users modeling proficiency and efficiency.
Speaker Change: The portfolio wide. AI rollout.
Following the gastro Plus update we plan to introduce additional AI Integrations into our Flagship tools, such as admet, predictor, and monolithic Suite in the next fiscal year. Each integration is aimed at enhancing product capabilities and delivering greater value. To our clients through improved productivity, deeper Data, Insights, and streamlined decision support.
To drive Innovation and business growth.
Speaker Change: By leveraging, our new AF, AI powered features, We believe We Will gain a distinct competitive advantage, and expanded value proposition in the bio simulation Market.
Speaker Change: this strategy, not only enriches our product ecosystem, but also positions simulations Plus for sustained growth,
Speaker Change: Further solidifying, our leadership in model, informed drug development Solutions.
Thank you for your time today. And with that, I'll turn the call over to the operator for questions.
Speaker Change: Thank you.
Ladies and gentlemen, if you would like to ask a question, please press star 1 over the telephone keypad and the confirmation total indicate your luggage in the question queue. You may press star 2. If you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key please.
Scott Showhouse: And our first question comes from the line of Scott showing house with keybanc capital markets, please proceed.
Scott Showhouse: Hey team, thanks for taking my questions. So I guess my first question is on the implied, fourth quarter, fiscal, fourth quarter margin guide, it comes down.
Scott Showhouse: Steeply from the margins, you just posted and you talked about your efficiencies and streamlining the operations to get to those margins. This quarter what is driving uh that margin erosion next quarter. Thanks.
Yeah, the uh, reorganization. And the actions we took in terms of, uh, our expense structure Scott, uh, primarily did not impact the third quarter. They impact the business on the go forward basis. Uh, as we, uh, have communicated the, uh, the, the ref, uh, representative, uh, annual cost Savings of millions, and that, uh, starts to kick in, and they, in the fourth quarter, really impacts our next fiscal year. Um, our um,
Challenge in terms of the fourth quarter margins really is uh embracing that uh the revenue step down uh on the top line. Uh and while we're making our expense structure, more efficient uh fourth quarter revenues uh impact those those margins, um, and bring us down to that guidance. Uh, in the mid to Mid mid to high 20s in terms of the
Scott Showhouse: And then on the renewal rates on the software side, you know, it's stepping down to from, you know, 93% to 84% on the fees and 86% to 71% on the accounts. And I think, you talked to me for prepared remarks about
Speaker Change: Mostly, this was driven by gastro, plus a site closures from certain accounts. Can you just give provide more color here? Um, seems like a pretty big drop off in. You know, what? Historically, have you seen that? Um,
Floor, um, for Renewal rates, are we is there more risk for Renewal rates to fall? Even further from here, thanks.
Yeah, our renewal rates. Uh, as, as we've said, previously, historically, the, the renewal rate has impacted primarily by consolidations, uh, site closures, uh, combinations of our clients that result in, you know, reduction of the, uh, the removal of the size. And, and that certainly was the case in the third quarter. Um, a consolidation of both the with regard to a guess, gastro, plus client, and uh, as well, a monolix client impacted those renewal rates for those, those 2 products. Um, you know, I don't, uh, see, you know, others on the horizon. A great significance. But, uh, consolidations are occurring in a, a client base. And, uh, you know, as they have contributed historically, I'm sure they will in the future. I don't know that, uh, our experience here.
Speaker Change: In the third third quarter was indicative and we've we've maintained historical rates and that 90 to 95, uh, renewal rate on fees which I expect. Uh, we will in the long term maintain
Speaker Change: Thanks.
The next question comes from the line of Matt Hewitt with Craig Howland Capital group. Please proceed.
Speaker Change: That this calendar year and get into fiscal 26 for you guys.
Speaker Change: Yeah, thanks Matt. Um you know first I'd say that you know the announcement by the FDA with regard to uh you know
Speaker Change: Use of damn uh, alternative methodologies and Replacements of animal testing. You know is is is 1 component of the of the drug development process and uh you know, that taking place in early preclinical translational activities with our clients, our products and services, serve the full development cycle. Um and so you know the announcement is a very specific to a certain area of drug development and and and be you know, not never underestimate the, you know, the time it takes for these uh objectives stating goals to be translated down into uh, actionable steps. We certainly it is topic. I hung a list of all of our conversations today with the clients that are in that phase of development, with some of their programs, um, but action is still at that stage of waiting for clarity, um, from the FDA.
Speaker Change: And their stated process of putting together guidelines and interacting with the industry uh, in their development. And, you know, that's a, that's a process that will take some time. Certainly it is an indicator of momentum, in terms of the use of modeling and simulation there. At that stage of development, and broadly wind in the sales of the use of modeling and simulation. It's where future drug development, will, will go and become more dependent upon insilico techniques, but, um, you know, measuring it right now in a quarter to quarter basis impact on Revenue, uh, is is probably too quick in your anticipation of, of its impact. Uh, certainly long term impact, uh, modeling and simulation to continues to grow over the years through its uh continued adoption of, not only existing applications but the creation of new applications.
Speaker Change: Like this will be, uh, over the long term, but increase the ways in which modeling and simulation is used in the full drug development process. So, great news, uh, certainly a topic of conversation that's quite prevalent, a lot of momentum in terms of modeling and simulation, uh, patience required in terms of saying its impact on on Topline Revenue.
Got it and then maybe a a different way of kind of looking at this. But you you listed off a number of different headwinds that you're facing the, the funding environment. Um, you know, customer consolidation site closures as you look at those. What, what do you think has been the biggest headwind recently and what's it going to take for, for that to kind of ease so that you could maybe start to get back to double digit growth, particularly on the software side?
Speaker Change: Yeah, the uh, uh, million-dollar question. Uh, you know, I wouldn't point to any single factor. It's really the plethora of uncertainties that exist that caused clients to be cautious. Um, and, uh, their investment decisions, uh, they're spending decisions. Um, and, uh, I think we got to see a shortening of the list of all those items that are on, uh, on that list that contribute to, hey, let's, uh, let's slow play. And let's wait and see a little bit. Um, um, you know, it's, it's, uh, each of them has their impact with specific, clients specific programs. It's the, uh, the length of that list that I think is, is really impactful right now. As we look at, um, you know, our business today, we've taken some actions to, um, you know, gain,
Speaker Change: Some efficiencies right size, uh, are expense, run rates, um, and, uh, you know, not anticipate a significant uptick in uh, the market characteristics and in the near term we'll Poise and be ready if they do. Uh but uh, you know, our view right now is Let's uh, optimize performance in this environment, uh, and work and be be ready to ready to step up, uh, when the market does turn down the road.
Speaker Change: Got it. Thank you.
Speaker Change: Next question comes from Max small with William Blair please proceed.
Christine: Great, it's Christine.
Um, so just to start with, um, circling back on the previous question on, uh, for QE the margin expectations, um, just helping to get a bit more clarity here. So at the midpoint of your guide, uh, seems like revenues dropping off around 4 million sequentially but your adjusted Eva just stepped down as roughly 6 and a half million. Um, even though I think you're expecting around, uh, a million of savings from Cost Cuts, um, so maybe it'd be helpful to get a breakdown of your expectations for, uh, cogs and Opex spend as a percentage of Revenue to help us get a handle on drivers, uh, for your margin guide for this year and then how you expect both to Trend in 2026, giving your recent cost coming efforts?
Christine: Yeah. Uh, you know, I I'll
Provide you an answer at the high level and then will, I I I certainly invite you to, to, to jump in, um, you know, the, the revenue drop in the fourth quarter, uh, at an environment even with a riff and a reduction. Uh, our expense load generally is is, you know, linear. Uh, and while that's impacted by some of the efficiencies, uh, fourth quarter is also a quarter in which a lot of marketing activity takes place. Uh, number of our conferences, keep coming from the industry conferences, uh, our uh, in that quarter and uh, so um the combination
Revenue step down and uh expense while muted. Uh, there are expense drivers that that come into the fourth quarter. You know, we we started out the year looking to, uh, try and step up. Our original guidance was pointed towards getting close, uh, uh, to and stepping up, uh, to the 31 to 33%, uh, range for the significant drop in Revenue. Some expense reduction was taking place, but that still is going to fall through and, and, and leads to a reduction on Ava, do guidance.
Speaker Change: Well, I don't know if you have anything to to add to that.
Speaker Change: Yeah, I'd say that pretty much
Characterizes the expectation that with a a revenue drop. But largely fixed costs for us uh on the Personnel side. Although we will see some cost reductions as a result of the layoffs in May. Uh, We've also got
Amortization costs with intangibles that, uh, I wouldn't expect to see a significant drop off in the, uh, cost of revenues or the operating expenses, compared to say, where we were in q1, uh, but with a lower Revenue number that'll flow down to, uh, both that IBA margin as well as the, uh, adjusted diluted earnings per share.
Got it. That makes um, sense and then uh when do you think it's a good timeline? Um more reasonable to get back to kind of your initial guide range of uh low 30% for Ava.
Check in, with us, when we, we announced our fourth quarter results. Uh, you know, cautiously Outlook, uh, over the fourth quarter here, uh, we'll take into consideration. What we learned in terms of change of those headwinds Andor, uh, discussions with our clients, as they enter their budgetary Cycles, uh, and that will help. Formulate, uh, certainly our expectations, long term uh, in a market that is allowing us to grow, uh, Topline revenues uh, at historical rates. Um, you know, our long-term uh expectation of being able to achieve uh 35% adjusted. Eva is unchanged, uh question as to how uh quickly we can get to that point. Given the market conditions, that's the open question right now.
Speaker Change: Got it. That makes sense and 1 more clarification question for us. Um so it looks like your guide is calling um for a step-up sequentially in 4 q for services um on the top line but a significant like around 20% sequential decline for software sales. So just hoping you can help us understand this Dynamic and it seems like your commentary and your prepared remarks was more focused on Services pressure and I mean software has been relatively resilient up in till now. Um and seems like expected going forward based on your commentary to be in 2026 more resilience.
Services. The impact on Revenue decline in our guidance. As it relates to fourth, quarter is, uh, is driven significantly by the service side. Uh, our software business, um, is, you know, anticipated that, uh, you know, we'll continue to grow and find the 90% time a level for, for fiscal year 25. Um, and it's the service side that is down 9 9 to 13%, uh, anticipated for the year. So, I think our first quarter um, is, uh, is impacted primarily by service.
Speaker Change: Got it, that makes sense. I think I was just applying the, um, percentage breakdown that you had for, um, your Revenue by software services. So maybe I was reading a little bit too much into that, but that Clarity is helpful. Um, thank you for taking your questions.
Sure.
David Larsen: The next question comes from the line of David Larsen with btig please proceed.
David Larsen: Hi, uh, can you please, uh, remind. Uh, us what the organic year-over-year? Revenue growth was in total, and then also for software, and then also for service please
For, for which period.
Speaker Change: Did for the quarter. Um the the organic growth rate for total revenue software Revenue, Service Revenue, please
Will you have that?
Yeah, I can jump in there. Um, so total was uh, just for the quarter down 3%.
Software was up 2% and services were down 13%.
Okay. Um, that's very helpful. Thank you. And then when I look at the number of ads for gastro, Plus in the quarter,
Speaker Change: It actually looked pretty good to me. I think you added 12, new customers for gastro.
That's, that's relatively High over the past 2 years. And you're I think gastro Revenue growth,
Speaker Change: We're we're estimating around 6%. Year-over-year growth for the for the quarter. That's
that's fairly High relative to the Past.
Speaker Change: 5 quarters. I mean
Speaker Change: Correct me if I'm wrong, but it seems like the gastro business was doing fairly well.
But monologues maybe came under a little bit of pressure. Is there a difference in like the kinds of clients you're serving between the 2? Can you just sort of like why would 1 grow nicely? But the other would not gastro looks pretty good monologues under pressure.
Well, you know, a couple of things, let me unpack the the question a little bit, uh, you know, our our software Revenue generally is contributed to 80% renewals 10%, upsells 10% new clients. Uh, you know, round numbers on quarterly basis and uh, as you point to yeah, our, our upsells new clients uh, you know, that that continues to flow pretty well, those tend to be those new clients tend to be, you know, introductory clients starting with a small footprint. So smaller dollar value clients. Um, upsells were good. It's in that renewal side where, you know, a couple of the consolidations acquisition activity in our client base. Uh, uh impacted uh, impacted us.
Speaker Change: um,
Speaker Change: the uh,
Gastro plus and, and monolithic. Yeah. Monolix, uh, on on this quarter in the third quarter, that impacted by 1 of those consolidations, but, uh, is, uh, is growing very nicely. It's, it's our fastest growing product up in the high teams, uh, is on a 12-month trailing 12-month basis. We'll be in that ballpark for the year and expect expectations or continue.
Speaker Change: Sort of uh, cost constraint, pull back and spending on the software side, we'd anticipate that, uh, in better times that they'll be growing their departments more rapidly and therefore add to and contribute to software Revenue growth. That is historically, been in 10 to 15% range historically. Uh, they're not growing their groups but they're not dismantling. That dismantling, if if anything comes from consolidation, when clients combined and are required, um, so hopefully that helps
it does. And then on the server side, what was how did bookings do? I think backlog?
Speaker Change: Correct me if I'm wrong, but I think backlog was actually up 6% year-over-year. How how are bookings themselves in the quarter on a year-over-year basis?
Speaker Change: Yeah, a couple of couple of comments there 1 back log is up year-over-year. We've got the backlog, that's sourced and uh the med Communications business. That was not a component, zero contributor, if you will a year ago at the end of the third quarter. Um so um the backlog increase in part is uh due to uh to to Med Med Communications, the acquired business. Um secondly you know, part part of the issue has been
You know, the delays, uh, we have, uh, a backlog that counts that uh uh, there are contractual start date anticipated, start date of that project and whatnot, uh, gets deferred. Uh and uh, that certainly was the number of delays was uh on an uptick uh, in the third quarter. Um, so those delayed Accounts at some point if they've been delayed or we get information that uh uh tells us. Otherwise we'll, we'll pull those accounts out of out of backlog, but, uh, you know, we're seeing a prolonged uh, uh, time to uh, initiation of project out of the out of the backlog accounts.
Speaker Change: Okay, last 1 for me, um, obviously the the broader S&P 500 pulled way back on Liberation day and it has since come back up, which I kind of view as the Tariff relief rally.
Speaker Change: Um, you know, between the end of May the close of the quarter and today, which is mid July.
Has have your salespeople, sensed, any Improvement in the buying activity of your clients, or is it all still completely sort of cautious in nature? Um, because I mean it seems to me like it's possible that
You know, maybe there was a Slowdown in, in April and May during Liberation day, but now we're in mid July, the S&P is at an all-time high. The funding environment likely has improved
Speaker Change: has there been any discussion of any Improvement at all or or are we still sort of in a very cautiously
Sort of sort of uh careful slow environment.
Yeah. I mean, we're talking about the short window of time, uh, April and May, and we're in July, so a few months, uh, uh, short window of time to see to see if movement know, I'd say that, uh, the environment continues to be, uh, cautious and we're entering summer months, which tends to slow down the activity, uh, for annual reasons. Um,
Speaker Change: and, you know, while the S&P is picked up, but I I don't know that the S&P is an indicator of
Speaker Change: Uh, communication between, you know, our, our sales, force and decision making Necessary, way at at at our client level. Um, yeah, you know, I think, you know these things, you know, have a shock value when they get announced. And maybe an exaggerated, uh, slow down that, uh, dissipates, even though the issue, be a terrorist or whatever, it doesn't go away, the shock value goes away and, uh, things, uh, start, uh, opening up, um, more certainly out there, uh, executing, uh, diligently in the marketplace to, uh, find those accounts that may have been pausing and are ready to to move forward now. Um, but I'd say it's too short of a window of time to uh draw any conclusions just yet.
Speaker Change: Thanks very much. I'll hop back in the queue.
Constantine Davids: The next question comes from the line of Constantine Davids with citizens, please proceed.
Constantine Davids: That had a 2 million dollar. I think you used the word or words near-term impact. So was that all in the third quarter? Or was this something that you'd contemplated in terms of uh hitting fourth quarter as well?
Yeah it was a uh a single client uh with the contracted Services, covering 2 drug programs.
With, uh, you know, from a contract basis were anticipated to begin contribution to the third quarter, with the more significant contribution to the fourth quarter. Um, and uh, uh, both of those programs had bad readouts, the clients, uh, uh, canceled the contracts, canceled their programs. Uh, and in fact, uh, laid off. 90%. Thank you 5% of their their staff. Um, so very impactful, uh, scenario. Uh, its impact was uh, the majority of it in the fourth quarter uh, with some impact in the third quarter as well.
David Larsen: Got it. Um, and then you know, Sean. You you alluded to a number of AI initiatives new product initiatives.
David Larsen: Um, you know, some of the cloud initiatives as well. And, you know, you look at R&D expense and it's, it's running, you know, well below 10 million a year and I know you're not giving guidance for next year, but I guess as you think generally about sort of
The AI cycle we're in which is going to be multi-year, the FDA um, initiatives around animal testing uh, you know, should we just start to think about you know more R&D investment um over the next several years relative to where, where you've been just wondering? If you can give us a little color on that. Thank you.
David Larsen: Yeah. Uh, opportunities abound. And we're very excited about uh, what is um, both the near-term hopper in terms of our
Gas or plus release uh anticipated uh late summer uh with some pretty impactful, AI functionality uh to be delivered to the marketplace uh and beyond that uh into next. Next fiscal year, both the extension of that into our uh other platforms uh and the opportunities for its ongoing.
Uh, development, more, broadly. Um, so opportunity abounds, um, um, does that mean, uh, increased R&D expenditure next year? Uh, hey, we're committed and, and, and balancing both um, previous questions in terms of getting our
30 plus, and to a longer term expectation of 35% and opportunities to spend more in R&D, uh, and, uh, we will cautiously balance those 2, uh, opportunities, as, as as we move forward. Um, the
David Larsen: Productivity on, on the AI side of the R&D team is, hi. Uh, it's been complemented with, uh, the technology that, uh, underlies the proficiency platform, uh, which provides a provided us as provided us a accelerated U, ability to deliver, uh, utilizing that technology to support the, uh, Cloud platform. And, uh, delivery of AI functionality into gastro, plus, uh, and subsequent weight down the road at that particular in in monolux as well. Uh, so pretty exciting times on the, on the technology side. Uh, how that impacts R&D, uh, it'll be a balancing act between, uh, between ibida, uh, improvements and, uh, the needs on our new side.
Speaker Change: The next question comes from the line of Jeff Garrow with Stevenson, please proceed.
Jeff Garrow: Yeah, good afternoon, may maybe a couple follow-up from me on the AI topic. Want to ask if we should expect, um, product development, product, release pacing in line with historical product, releases and adding new features and capabilities with regular updates or or will it be more discreet on the AI front? And then also want to ask about any gross margin implications. We should think about with AI and and with you know some of the the the the costs related to to usage there. Do you do you move to a more transactional model? Thanks.
Yeah, I mean, I I'll work backwards, uh, you know, impact on margins. Um, you know, we are, you know, a couple of things both on both on the revenue line and on the cost side, on the revenue side, uh, we're looking at, uh, you know, pricing configurations, uh, for this increased functionality, uh, and, uh, how we can optimize, uh, both the expansion and upsells, and new clients. But also, uh, a step up in terms of renewal improvements. Um, so there should be some contribution there, uh, on on the expense side. Uh, really the, the, the the banner is on the service side where AI capabilities in our operational group. Uh, can lend to improvements in terms of the uh cost uh to perform projects and uh anticipate. We'll see some some opportunity there.
Jeff Garrow: the uh,
Um pricing structure or we're going to move to a more transactional uh sort of perspective, um you know, not on the near-term horizon. Our our our clients really are not demanding that uh we may provide some of these Solutions in a situation that is more transactionally based but a movement to a transaction based SAS model is still uh, deep in the Horizon uh, for our customers and that's really
Jeff Garrow: Driven by their and their desires that at this point in time.
Jeff Garrow: Hope that answers your question, Joe.
Joe: Yeah, then the, the first part of it was around pacing of, of releases, kind of a regular updates, or, or more discreet.
Joe: More frequent updates, uh, is certainly a driver in terms of our new, uh, products and Technology organization. Uh, our clients operate in a regulatory environment and uh, their desire is primarily to, uh, not be updating frequently. Um, so the base application gastro Plus or monoliths. Uh, it's uh, you know, releases on an annual basis. It's their need and their investment desires on updating in ter inside their it operations, to the extent that we provide some of these in the cloud that are more accessible outside their sop environment. Uh, we may be to be able to deliver those, you know, more quickly paced during the course of the year. Uh, and, uh, you know, and tend to be able to do so whether our clients will be able to in their environment and their it infrastructure and costs and
Joe: The planning capabilities, whether they're adopt them more rapidly or not we'll we'll see. Certainly give them the opportunity to
Speaker Change: Understood, appreciate that. And and then Wanda to his proficiency and, and see if you had any updated Financial expectations for for FY, 25 and and any color you might be able to provide on the the large Prof proficiency engagement that was expected to start in the the back half of the year that you had discussed last quarter. Thanks.
Yeah, that engagement was in the medical communication side of the business. And, uh, and that has preceded. It was, uh, impacted a little bit. Uh, uh,
Speaker Change: You know, delayed in part on the commercialization side by the client. Not canceled. But, uh, but but delayed, but that, uh, project has has initiated, uh, overall, as we indicated in our guidance, uh, 9 to 12, uh, million dollar contribution from, uh, both the proficiency platform and the med Communications business. Uh, certainly down from our expectations, at the beginning of the year. But again driven by the same, uh, factors headwinds, in terms of uh slow startup clinical trials and cost constraint environment.
Got it. Thanks for taking the questions.
Speaker Change: Thank you.
Speaker Change: Thank you.
Sean O'Counter: Close the question and answer session and I'll turn the call back to Sean o Conor for closing remarks.
Speaker Change: Thanks again, everyone.
Attending some important industry events.
Speaker Change: Including the controlled Release Society annual meeting which started today.
Speaker Change: And the American Chemical Society national meeting, uh, in August.
Can, can you with technology leadership Forum in August?
Speaker Change: And the Wells Fargo, 2025 Healthcare conference in the Morgan Stanley, annual Global Healthcare conference, both in September, hope to see many of you there, appreciate you joining the call. And look forward to talking to you again and updating you uh, at the end of the fourth quarter, take care everyone.
This concludes today's conference. We may now disconnect your lines at this time. Thank you for your participation.