Q3 2025 Certara Inc Earnings Call
Speaker #2: Good day and thank you for standing by. Welcome to the Certara, Inc. Third Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode.
Speaker #2: After the speaker's presentation , there will be a question and answer session . To ask a question during the session , you need to press star one one on your telephone and wait for your name to be announced .
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Speaker #2: I would now like to hand the conference over to your first speaker today . David Deuchler Investor Relations . Please go ahead .
Speaker #3: Good afternoon everyone . Thank you all for participating in today's conference call . On the call from Satara , we have William Feehery Chief Executive Officer and John Gallagher Chief Financial Officer .
Speaker #3: Earlier today , Satara released a financial results for the quarter ended September 30th , 2025 . Copy of the press release is available on the company's website .
Speaker #3: Before we begin , I would like to remind you that management will make statements during this call that include forward looking statements and actual results may differ materially from those expressed or implied in the forward looking statements .
Speaker #3: Please refer to slide two in the accompanying materials for additional information , which you can find on the company's investor Relations website . In the remarks or responses to questions .
Speaker #3: Management 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 recent earnings press release available on the company's website .
Speaker #3: Please refer to the reconciliation tables in the company materials for additional information . This conference call contains time sensitive information and is accurate only as the live broadcast today , November 6th , 2025 , Star disclaims any obligation except as required by law , to update or revise any financial projections or forward looking statements , whether because of new information , future events or otherwise .
Speaker #3: And with that , I'll turn the call over to William .
Speaker #4: Thank you . David , and afternoon , everyone . Thank you for joining Certara, Inc. third quarter earnings call . John and I will begin with prepared remarks , and then we will take your questions .
Speaker #4: During the third quarter, our team continued to execute against our 2025 goals while also positioning Certara, Inc. for long-term success by investing in our R&D and commercial teams.
Speaker #4: Third quarter revenue of $104.6 million was in line with our expectations , representing 10% reported year over year growth . We outperformed internal profitability expectations , delivering adjusted EBITDA of $35.2 million , representing a margin of 34% .
Speaker #4: Our team remains focused on investing for growth , with R&D up 24% versus the same period a year ago . And increasing to 10% of revenue from 9% in the prior year period .
Speaker #4: On the other hand , third quarter bookings of $96.6 million came in below our expectations , representing growth of 1% among our tier one services customers .
Speaker #4: We observed cautious spending behavior , with some customers pushing deal timelines later into the fourth quarter and into 2026 , taking this into account , we are narrowing our revenue guidance to 415 to $420 million , which we believe reflects the most likely range of outcomes for the year based on our performance to date .
Speaker #4: We have raised our adjusted EBITDA margin guidance to the high end of our previous guidance range and raised our adjusted EPs guidance to reflect a continuation of outperformance against our profitability targets and the impact of share repurchase activity .
Speaker #4: We continue to see pockets of outperformance throughout our portfolio , including our Simcyp , Pbpk software and our Qsp services . However , some of our customers are still dealing with factors that impact decision making , timelines and R&D allocation decisions .
Speaker #4: As large pharma customers adjust focus with their R&D programs and onshoring initiatives that are impacting personnel and resource allocations, we have seen a slowdown in deal completion timelines, particularly in regulatory services and biotin services.
Speaker #4: This slowdown has persisted into the beginning of the fourth quarter , conflicting with historical seasonality trends . We are closely monitoring consumer spending patterns as we begin to plan for 2026 at a high level , we continue to see several positive leading indicators for the Biosimulation market and for Certara among large pharma customers , the use of model informed drug development is growing throughout all stages of development .
Speaker #4: Customers are adopting Biosimulation solutions for use in dosing , efficacy and toxicity analysis , and using the technology earlier , as we expand our software capabilities into discovery and preclinical among our smaller customers , the adoption of Biosimulation is accelerating through the use of our technology enabled services .
Speaker #4: As drug developers look to optimize their speed and efficiency , they're often attracted to areas of our business such as qsp , which can help streamline decision making and trial design .
Speaker #4: In both the preclinical and clinical stages . Since our IPO , we have seen a significant increase in both the number of customers using our products and services , as well as the wallet share of Satara within larger organizations .
Speaker #4: Most of all , we are encouraged by our evolving relationships with key stakeholders and users at customers . Earlier this year , we hosted our second annual Certainty Conference , bringing together hundreds of our users to discuss the future of model informed drug development .
Speaker #4: In early October , we held the same conference in Barcelona with our European user base and the experience was very productive for all parties at both events , I had the opportunity to discuss Atari's products with customers where they provided feedback on our software , suggested new features and functionality , and learned about our new products and long term vision for the Satara platform .
Speaker #4: There is tremendous value that can be gained by making more informed decisions . Earlier in the drug development lifecycle , which is why we are moving into discovery and preclinical .
Speaker #4: We closed the chem axon acquisition a year ago in early October of 2024 , which gave Satara an established product suite and discovery with synergistic capabilities relative to Simcyp .
Speaker #4: In the first 12 months under Satara ownership, Chemaxon has continued to grow and is on track to reach corporate average margins by the end of the year.
Speaker #4: Elsewhere , our services group has grown pre-clinical work in Qsp , especially since the FDA's guidance promoting the use of new approach methodologies GSP has grown ahead of the rest of the Biosimulation business on a year to date basis and is becoming an increasingly important part of our business .
Speaker #4: Now , turning to our financial performance in software bookings of $40.8 million represented growth of 17% . We saw solid bookings performance in tiers one and three , which were in line with expectation .
Speaker #4: While tier two was below expectations , which we attribute more to timing than anything . Software revenue of $43.8 million grew 22% on a reported basis , and 6% organically , led by strong growth from Simcyp .
Speaker #4: In addition to $5.6 million of contribution from Chemaxon in services . Bookings of $55.8 million declined 9% on a reported basis , driven by slowness in the tier one customer base .
Speaker #4: We have continued to observe cautious decision making among large pharma customers into the fourth quarter . Services revenue of $60.8 million grew 3% on a reported basis , and and on an organic basis , led by growth in qsp services .
Speaker #4: On the innovation front , 2025 has been our most active product development year since our IPO . We've embedded artificial intelligence into both our development processes and our products , accelerating the pace of new model creation following our visa acquisition , we launched several major products this quarter pinnacle 21 enterprise , a cloud based upgrade improving regulatory data compliance and submission speed .
Speaker #4: Phoenix cloud , which transitions our customers from on premise to cloud deployment and provides significant upgrades to product functionality and Certara, Inc. . Our new software for Qsp modeling designed to expand the use of Biosimulation across discovery and clinical phases .
Speaker #4: Early customer feedback on these releases has been excellent , and we're confident they strengthen our long term software growth engine . Last year , we announced the the strategic review of our regulatory services business .
Speaker #4: To date , we have made significant progress in our evaluation , including dialogue with external parties and significant internal analysis of best practices .
Speaker #4: As we evaluate our business , we recognize that regulatory writing performance has been inconsistent . Simultaneously , we value the regulatory writing business ability to generate cash , which we have used to invest in growth and support .
Speaker #4: Recent share repurchases . At this point in time , we are in the final stages of our process and intend to share the outcome before the end of 2025 .
Speaker #4: To close , we remain focused on delivering our 2025 plan and entering 2026 , well prepared to capitalize on the opportunities ahead . Although we are seeing some variability in tier one services , we are encouraged by the widespread momentum of Biosimulation adoption in drug development .
Speaker #4: I'll now hand things over to John Gallagher to discuss our financial results in detail .
Speaker #5: Thank you . William . Hello everyone . Total revenue for the three months ended September 30th , 2025 was $104.6 million , representing year over year growth of 10% on a reported basis and on a constant currency basis .
Speaker #5: Total bookings in the third quarter were $96.6 million , which increased more period on a reported basis . Trailing 12 month bookings were $471.4 million , increasing 12% on a reported basis .
Speaker #5: Excluding Chemaxon . Total company organic bookings declined 4% compared with the third quarter last year . Software revenue was $43.8 million in the third quarter , which increased 22% over the prior year period .
Speaker #5: On a reported basis and 21% on a constant currency basis . Organic growth was 6% in the quarter , driven by strong growth from Simcyp chemaxon contributed $5.6 million to our reported revenue , which was in line with our expectations .
Speaker #5: Radical and subscription revenue accounted for 65% of third quarter software revenues , or 71% , excluding Chemaxon , slightly down from 72% in the prior year period .
Speaker #5: Software bookings were $40.8 million in the third quarter , which increased 17% from the prior year period . Third quarter bookings included $4.2 million of Cmaxand bookings .
Speaker #5: Organic software bookings grew 5% versus the prior year , trailing 12 month software bookings were $187.9 million , up 23% year over year , and the software net retention rate was 104 in the quarter , consistent with our full year plan .
Speaker #5: Looking at our software bookings , performance by tier , we saw strong performance in tiers one and three , driven by the continued adoption of our software in tier one , we saw some timing related slowness due to renewals , which we expect to normalize in the fourth quarter .
Speaker #5: Now turning to services revenue , which was $60.8 million in the third quarter , up 3% versus the prior year period on a reported basis .
Speaker #5: And on a constant currency basis . We saw strong performance from our Qsp and Simcyp services businesses in the quarter , which was partially offset by softness in the regulatory services technology driven services .
Speaker #5: Bookings in the third quarter were $55.8 million, which declined 9% from the prior year period. TTM services bookings were $283.5 million, up 6% as compared to the prior year.
Speaker #5: During the quarter , we saw softer performance from tier one customers in Biosimulation services , driven by spending hesitancy among our largest customers in regulatory bookings declined in the double digits , while Biosim services were down low .
Speaker #5: Single digits . Total cost of revenue for the third quarter of 2025 was $39.7 million , an increase from $37.2 million in the third quarter of 2024 , primarily due to higher software amortization and consulting expenses , offset by lower employee related costs .
Speaker #5: Total operating expenses for the third quarter of 2025 were $61.9 million , an increase from $55 million in the third quarter of 2024 , primarily due to higher employee related costs and sales and marketing and R&D .
Speaker #5: Adjusted EBITDA for the third quarter of 2025 was $35.2 million , an increase from $33.1 million in the third quarter of 2024 . Adjusted EBITDA margin in the quarter was 34% , wrapping up the income statement .
Speaker #5: Net income for the third quarter of 2025 was $1.5 million , compared to a net loss of $1.4 million in the third quarter of 2020 .
Speaker #5: For reported adjusted net income for the third quarter of 2025 was $22.2 million , compared to $20.3 million for the third quarter of 2020 .
Speaker #5: For diluted earnings per share for the third quarter of 2025 was $0.01 , compared to a loss of $0.01 per share in the third quarter of 2020 .
Speaker #5: For adjusted diluted earnings per share for the third quarter of 2025 was $0.14 , compared to $0.13 per share in the third quarter of last year .
Speaker #5: Moving to the balance sheet , we finished the quarter with $172.7 million in cash and cash equivalents . As of September 30th , 2025 , we had $293.1 million of outstanding borrowings on our term loan and full availability under our revolving credit facility .
Speaker #5: Subsequent to the end of the quarter , we executed a reprice of our outstanding term loan , which is expected to save $700,000 annually in interest expense beginning in 2026 .
Speaker #5: Earlier this year , our board authorized a $100 million share repurchase program . We have repurchased approximately $41 million of stock during 2025 .
Speaker #5: With year to date results in our outlook for the fourth quarter , we are providing the following guidance for 2025 . We are narrowing the revenue range to $415 million to $420 million , representing 8 to 9% growth compared with 2024 .
Speaker #5: We expect Chemaxon to contribute software revenue of 23 to $25 million . We expect an adjusted EBITDA margin around 32% , which is the high end of our previous guidance range , reflecting outperformance versus our internal profitability expectations to date , we expect adjusted EPs in the range of 45 to $0.47 per share , fully diluted shares in the range of 160 to 162 million , and a tax rate in the range of 25 to 30% .
Speaker #5: I will now turn the call back over to our CEO, William Feehery, for closing remarks.
Speaker #4: Thank you John . To summarize our message today , our team is working diligently to execute our growth and profitability goals . Despite a mixed operating environment , we are excited to bring several new products to market and look forward to providing further updates on our progress early next year .
Speaker #4: Operator: Can you please open the line for questions?
Speaker #2: Thank you . At this time , we will conduct a question and answer session . As a reminder to ask a question , you need to press star one one on your telephone and wait for your name to be announced .
Speaker #2: To withdraw your question , please press star one one again . Please stand by while I compile the Q&A roster . Our first question comes from Michael Cherny from Leerink Partners .
Speaker #2: Please go ahead .
Speaker #6: Great . Thank you . This is Dan Clark on for Mike . Just wanted to ask a little bit on the tier one services revenue or bookings dynamic in the quarter .
Speaker #6: I guess one when did you start to see a slowdown in decision making ? Timing . And of the potential deals that got pushed ?
Speaker #6: Appreciate the color on some of them . You know , hopefully closing in for Q with the remainder in 2026 . How are you kind of thinking about that split at this point ?
Speaker #6: Thank you .
Speaker #5: As it relates to the bookings . So it was our tier one services customers where we saw delays and what we were seeing is hesitancy .
Speaker #5: So a slowness in decision making . And a lot of times we would talk about that as impacting timing and trickling into the next quarter .
Speaker #5: But what we just said in the prepared remarks , though , is that , you know , through through the month of October , we continued to see some deceleration in tier one services , bookings related to these larger customers of ours .
Speaker #5: And as a result of that , we're expecting it to continue in Q4 .
Speaker #2: Thank you . One moment for our next question . Our next question comes from David Windley from Jefferies . Please go ahead .
Speaker #7: Hi . Thanks for taking my question . Hopefully you can hear me . I'm in the car . I was hoping you could comment or disentangle the gross profit outperformance between mix and perhaps efficiency .
Speaker #7: Productivity .
Speaker #5: Yeah . Thank you David . Yeah I mean so on on the gross margin line then you know , we've certainly seen some productivity , especially compared to last year .
Speaker #5: You might recall we did some reductions last year on the services side that hits cost of sales . We're still we're still comping to that in the third quarter of this year .
Speaker #5: And therefore some of that productivity is a key component of of why the gross profit is , is accelerating . The other piece of it , of course , is the fact that that we're achieving more mix on a software basis .
Speaker #5: So , you know , when when we're looking at the software business has , of course , a higher gross profit than services .
Speaker #5: So not only are we getting productivity on the cost of sales side , when we look at services , but the mix shift towards software is also a tailwind to the gross profit .
Speaker #7: So thank you for that . I was going to make my next question . My second question about your areas of innovation , but it does end up being somewhat related .
Speaker #7: So I think you talked about Certara, Inc. is your is your more AI enabled Qsp and Phoenix Cloud launches ? It sounds like those have been well received .
Speaker #7: The the comment in the prepared is about Qsp being your fastest growing area . Maybe you could also drill into that because I think today most of Qsp is service driven , but you're launching this what I think sounds like a more , you know , more technology or software driven qsp .
Speaker #7: And how do you expect that to evolve ? And does that growth in Qsp mix kind of reverse the software mix until the technology , the software picks up a little bit more ?
Speaker #7: I just curious if how the qsp feathers into that , since you highlighted its growth . Thanks .
Speaker #8: Yeah , thanks , David . This is this is Bill . We we are executing the strategy that we set out to do when we acquired applied biomass about whatever it was about two years ago , which was to take Qsp and to bring a software platform to it .
Speaker #8: And that is that is Certara, Inc. , which we launched , as you pointed out . So , you know , there's a huge demand for qsp .
Speaker #8: Some of it has to do with the recognition that this type of modeling has been quite useful . Now that the FDA has made its announcement on on Nam's and on reducing the number of of nonhuman primates , and some of it has to do with the growth in biotech or in , in large molecules where qsp has been particularly particularly valuable .
Speaker #8: We're attempting and I think we will very much succeed with this product to create a standard product that qsp modelers use , not just within pharma companies , but also as they go forward and submit their models for approvals to regulators .
Speaker #8: There's a big need in the market for this , and there's a big opportunity to make Qsp a lot more widespread by improving the efficiency of modeling , which we can do with AI and providing a platform where our consultants are much more efficient , providing the same platform so that our our pharma customers are using the same platform internally .
Speaker #8: It can also drive that kind of same efficiency . And we can get , you know , work going back and forth . And then finally , you know , this is an opportunity for us to create foundational models in particular therapeutic or drug modalities that we can sell over and over again using the using this software platform .
Speaker #8: So there's multiple ways that , you know , this will benefit the company financially as we go forward . There's nothing like it really on the Qsp market .
Speaker #8: You know , there's obviously modeling tools out there , but we believe this is a significant advance . It's been well received . We only launched it a couple of weeks ago .
Speaker #8: So , you know , it's a bit early to talk about the . You know , the the financial success . Obviously . But we we expect as we go into into 2026 this will this will be a success for the company .
Speaker #7: Thank you . Thanks for that . Just so all right . Go ahead . That's fine . Go ahead .
Speaker #2: Thank you . One moment for our next question . Our next question comes from Matt Hewitt from Craig-hallum capital Group . Please go ahead .
Speaker #9: Good afternoon . Thanks for taking the questions . And I apologize . I'm having to hop between a couple different calls , but first off , I recognize that there's some challenges or hesitancy with your tier one customers .
Speaker #9: I'm just curious if you've heard or seen any change since we got a little bit of clarity on the most Favored Nation pricing and what that could mean , some clarity on the tariffs and what that impact could be .
Speaker #9: I mean , we've heard from a few other companies that post some of those initial , most favored nation type contracts or changes that pharma was kind of re-engaging .
Speaker #9: Is that similar to what you're seeing or any color along those lines ?
Speaker #8: Yeah, thanks. This is Bill. We have also heard other companies talking about that and have heard some discussion among customers.
Speaker #8: So I would say that we're , you know , we're cautiously optimistic , you know , that that's a pretty recent development . So we need to , you know , see that kind of get out in the , in the marketplace .
Speaker #8: But I think any sign of kind of the macro stability for the tier one customers and their and what's going on with pricing , I think would be ultimately good for us and , you know , will flow into hopefully a better environment as we go into 2026 .
Speaker #9: Got it . And then maybe just as a follow up and I realize it's still very early and we haven't even closed out this year yet .
Speaker #9: But as you're talking to your customers , not only about , you know , the remainder of fiscal 25 , but as they're starting to think about their budgets for fiscal 26 , are you getting any sense for where those budgets may be going ?
Speaker #9: Any sense for how modeling and simulation kind of fits into those budgetary plans for 26 , recognizing , yes , it's early days , but having gone through this now for a while , I sense you guys might have a feel for , okay , if we're if we're hearing this at this stage , that bodes well for the final budgets when they're announced , you know , later this year or early next year .
Speaker #9: Thank you .
Speaker #8: Yeah . I mean I we obviously only have kind of anecdotes . You know , you're asking a question about the overall industry .
Speaker #8: Let's see what I can say is I think some of our new products have been very well received . People have talked about making sure that there will be budget for them as they go into 2026 .
Speaker #8: And , you know , we're we're getting some sense that the pullback in , you know , the pullback in services is not across the entire industry .
Speaker #8: We see it in tier ones . We're actually doing quite well with tier threes with biotechs right now . You know the tier one seems to be kind of a hesitancy based on the overall macroeconomic environment .
Speaker #8: And you know I think every time we hear kind of positive signs of stability , it's , you know , things get a little bit more bright for us .
Speaker #8: So we're not you know what I've heard . And you know , we're expecting kind of , you know . What do you want to call it a stabilizing environment , I guess , is the way I'll put it as we go into into 2026 , as opposed to , you know , as it as opposed to kind of where we've seen , you know , part of this year where it's been getting a little bit tougher .
Speaker #9: Okay . That makes sense . Thank you very much .
Speaker #2: Thank you . Our next question comes from Luke Sagar from Barclays . Please go ahead . Luke , you may be on mute .
Speaker #2: One moment for our next question . Our next question comes from Brennan Smith from TD Cowen . Please go ahead .
Speaker #10: Great . Thanks , guys , for taking the questions . Actually , I just wanted to follow up on some of the earlier questions related to the software business .
Speaker #10: A little bit more . And this is frankly something we're just asked by investors a fair amount . But I guess , you know , we're obviously seeing pharma and some of those tier one customers invest a lot more internally in some of their own AI .
Speaker #10: Plus capabilities . And I guess , do you kind of feel that . Net net headwinds , tailwinds , maybe a wash to where you guys come out just trying to understand like to what extent as they build out those capabilities , they turn to you all to help make sure that those internal processes are ramping as they should .
Speaker #10: Or is it kind of a or rather than an and within their budgets , just based on your conversations ? Thanks , guys .
Speaker #8: Yeah , thanks for the question . What we've seen happen with AI has been tremendous . You know , this is starting more than a year ago .
Speaker #8: You know , a tremendous excitement and and willingness to try things in pharma . But somewhat of a hesitancy to commit to enterprise sales until they understood the full implications of putting AI in terms of data security and you know , how the products will be used .
Speaker #8: You know , sort of the the let's call it the quality controls that you need to put in around , around AI . And some of these uses .
Speaker #8: So , you know , we saw a lot of , you know , in the beginning , they were really great marketing opportunities .
Speaker #8: But slow to sell . And as we've gotten through 2025 , we've seen somewhat of a pickup in actual sales of of the pure AI products .
Speaker #8: All of our products that we've recently launched . Well , let's say Phoenix , Phoenix and and Certara, Inc. are have embedded AI in them .
Speaker #8: And that's been quite well received . And I think we're we're seeing a bit more willingness to move faster to put these things in as you deploy them across the enterprise .
Speaker #8: You're asking a somewhat different question also around is pharma . You know , considering building our core products using AI , internal internally versus versus buying them from us , you know , the core modeling technologies we have are really quite specialized .
Speaker #8: And so . We're , you know , that doesn't tend to be a real option . And you can see that with our software , which is which is still growing quite nicely .
Speaker #8: And we expect we'll will continue to be strong as we go into 2026 .
Speaker #10: Got it . Thanks guys .
Speaker #2: Thank you . Our next question comes from Joe Vruwink from Baird . Please go ahead .
Speaker #11: Hi Greg , thanks for taking my questions . Just to go back , a couple of questions ago . You mentioned , you know , the prospect of stabilized environments for 2026 .
Speaker #11: What do you think stabilized means for Certara, Inc. growth potential at this point . And I just ask because the last three years have obviously seen a lot of macro turbulence , organic growth has averaged 3 to 4% over that stretch of time .
Speaker #11: Is stabilized , supportive of mid to high single digit growth and robust gets you back to the double digits or any any way directionally just appreciating kind of what the company has been through over recent history .
Speaker #5: Yeah , hi , Joe . So as it relates to us calling it stabilized , then really what we're saying is we see continued performance on the software side , which has been playing out according to plan this year .
Speaker #5: So , you know , year to date software bookings have been 7% on a TPM basis . And then , you know , we're seeing or 6% year to date , 7% PTM .
Speaker #5: And then 6% organic software this year . And then we're adding the product . That Bill was talking about , of course , too .
Speaker #5: So that those are those are the positives . The , the the headwind to all . That is what we're seeing in services right now .
Speaker #5: And we saw that you can see it in the Q3 results , but you can also see it . We saw it in October and that's why we were indicating that , you know , as we look toward the end of the year , this year , we're not really expecting to see the same level of seasonal seasonality that we've seen over prior years .
Speaker #5: And so that's going to provide a bit lower of a jumping off point as it relates to services . So services is likely to be in the in the low single digits as we approach next year .
Speaker #5: As a result of that . So software going well playing out according to plan . We've got new products but services is the is the spot that we're keeping our eye on as we finish 26 .
Speaker #11: Okay . That's helpful color . Thank you . Just to go back to David's question on gross margin , as I look at the mix of software sales this year , a lot of the incremental growth has come from higher license sales as opposed to subscriptions .
Speaker #11: Does that . And that might be come axon related . But in case it's not , is that a beneficial margin mix to year to date results or how does think of that versus a higher proportion of I guess , radical subscription revenue ?
Speaker #5: Yeah . You've got that straight , Joe . So like if bringing in Cmax on Cmax on is predominantly a license based at least at least right now .
Speaker #5: So whenever we're recognizing revenue there , we're getting all of it at once . And so that combined with Phoenix achievement on revenue this year is what's is what's helping the the gross margin , if you will , from that perspective .
Speaker #5: While at the same time is reducing the proportion of radical that we have . And that's why I like to cite it , you know , not just what the radical portion of software is , but even excluding Cmax on is a better comp to the prior year .
Speaker #11: Okay , great . Thank you very much .
Speaker #2: Thank you . Our next question comes from Kyle Kruse from UBS . Please go ahead .
Speaker #12: Hey , thank you for taking our questions . You mentioned that customers were adopting model informed drug development for use in toxicity and dosing analysis .
Speaker #12: Seaver earlier in October here announced that , you know , you could use potentially pharmacokinetic analysis to replace some animal testing for first in human dosing .
Speaker #12: Can you elaborate a bit more on that point that you made earlier in the call ? Thank you .
Speaker #8: Yeah . One of the significant uses around Qsp has been in these two areas . So first , in human dosing has been particular area of interest in pharma for modeling .
Speaker #8: You know , the it sounds it doesn't sound like the biggest problem . But when you really think about it , you know , the initial dose that gets tried in a phase one trial really defines the range that will be used for all trials later .
Speaker #8: Many of the , you know , if the if the doses that are tried are outside the the effective or the safe range , they're kind of wasted .
Speaker #8: And so that's been recognized by a lot of companies in the pharmaceutical industry . And it's been , you know , also good to see the that the that , you know , the regulators are paying attention and are encouraging it as well .
Speaker #8: So that's been one of the reasons for the for the uptake in , in , in modeling services like Qsp that we've seen .
Speaker #12: Great . Thank you for that . Can you speak briefly on your exposure to biologics or small molecule drugs at this point with your software offerings ?
Speaker #12: Thank you .
Speaker #8: We have exposure to both . We are fairly we always said , and I believe this has not changed , that our exposure is pretty similar to what the pharmaceutical industry as a whole is working on at any given point .
Speaker #8: So , you know , the questions that get asked in modeling between small molecules and , and large molecules are often somewhat different .
Speaker #8: You know , for example , a small molecules , there can be more formulation questions and absorption . You know , absorption questions and large molecules .
Speaker #8: They're often more questions around , you know , things like dosing and immunological responses and things like that . However , we have products targeted for both .
Speaker #8: We have quite healthy and active businesses for both technologies and even other technologies that maybe don't even quite fit the the kind of definition , you know , for example , we've got products , you know , focused on radioligands and and , and peptides , things like that .
Speaker #8: So , you know , I think we're pretty well covered in terms of our , our exposure and , and our investment in the technology to kind of serve both of these .
Speaker #12: Great . Thank you .
Speaker #2: Thank you . Our next question comes from Max smock from William Blair . Please go ahead .
Speaker #11: Hi , guys . Good afternoon . Thanks . Thanks for taking our questions here , John .
Speaker #12: Maybe wanted .
Speaker #13: To follow up on some of your earlier commentary around services , bookings , particularly in Q4 . I think you mentioned you haven't seen much improvement or you didn't see much improvement in October , just kind of looking back , historically , you know , typically see a 3,040% sequential increase in bookings in Q4 .
Speaker #13: You just kind of frame out , given the volatility , volatility quarter to quarter here . How you're thinking about kind of the range of the outcomes on the services bookings in Q4 , just to give us some more color around what organic growth in that segment can look like in 2026 ?
Speaker #5: Yeah . Hi , Max . It . So we do still expect from Q3 and Q4 sequential increase , but not to the same magnitude that we've seen historically .
Speaker #5: Historically , you've seen a book to bill in Q4 . That's , you know , 1.3 to 1.4 . And we don't anticipate that being the case given what we've seen through through October .
Speaker #14: Or .
Speaker #13: Yeah , thank you for that . That's helpful . Maybe just one on the margin side , I really nice performance in the quarter .
Speaker #13: And I know in the past you talked about maybe pulling back on some of your investments . If the macro environment got a little bit more challenging , just want to make sure that that wasn't a factor , that contributed to the to the beat on margins in the third quarter .
Speaker #13: Here . And then as we're thinking out in 2026 , you just talk about how you're going to prioritizing the opportunity that you have to here to continue to advance or invest in your pipeline versus prioritizing margin expansion and just your initial thoughts on how we should be thinking about margins moving forward .
Speaker #5: Yeah , yeah . So definitely not pulling back on the investments . And you can see that reflected in the 24% growth in R&D year on year .
Speaker #5: So, we're continuing to make those investments with good discipline across the rest of the P&L. We talked a little bit about gross profit, but if you exclude Chemaxon from the expense lines, you'd see that they're in line or lower than growing at the rate of sales.
Speaker #5: So I'd say yes . Making the investments . Absolutely . You can most notably see that reflected in the R&D line . As you would expect .
Speaker #5: And there is more investment to come as , as as we look at next year . But we've been pleased with our ability to navigate both making those investments in software development while also preserving our margin .
Speaker #13: Got it . Thanks again for taking our questions .
Speaker #2: Thank you . As a reminder to ask a question , please press star one one on your telephone and wait for your name to be announced .
Speaker #2: Our next question comes from John Park from Morgan Stanley . Please go ahead .
Speaker #4: Hey guys .
Speaker #15: Thanks for taking my question . I was wondering , I know you guys talked about tier one and some of the macros that they're facing .
Speaker #15: I was wondering if you could talk to us . Tier two and tier three acknowledging that they make up a smaller portion of the revenue .
Speaker #15: But is it any different in terms of some of the macro headwinds that that tier ones are facing ? Thank you .
Speaker #5: Yeah , that's a bright spot for us actually . So tier three both tier two and tier three services have we have had good growth throughout the year .
Speaker #5: And in fact in you know in in Q3 we saw double digit growth in Biosyn services . Tier three . So this has been a a partial offset to the headwinds that we've been describing in tier one has been the positive growth and momentum that we have in tier two .
Speaker #5: And most notably in tier three .
Speaker #15: Great . And just as a follow up , I know you guys work with the FDA . I was wondering if there was any type of , you know , waterfall implications with the government shutdown regarding for FDA or any of the agencies that you guys work with ?
Speaker #8: Yeah , thanks for the question . You know , it's a I guess the question revolves around how long it lasts . I think most people in the pharmaceutical industry believe , you know , this will resolve itself at some point .
Speaker #8: And , and that point will be , you know , will be less time than than , you know , causes , causes , serious issues .
Speaker #8: You know , if it goes on for a really long time . And we have , you know , a big slowdown in drug approvals or something , that's one thing .
Speaker #8: But I don't think that that's really what people believe . You know , there's , you know , there's a little bit of slowdown in terms of any kind of contracting with the government .
Speaker #8: But we don't expect that we'll have a significant effect on the year .
Speaker #15: Great . Thank you .
Speaker #2: Thank you . I am showing no further questions at this time . Thank you for your participation in today's conference . This does conclude the program .