Simulations Plus Q2 2025 Earnings Call Transcript

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Provided by Quartr
April 3, 2025
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Operator

Greetings, and welcome to the Simulations Plus Second Quarter Fiscal twenty twenty five Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Lisa Fortuna from Financial Profiles.

Operator

Ms. Fortuna, you may begin.

Lisa Fortuna
Lisa Fortuna
Investor Relations at Simulations Plus

Good afternoon, everyone. Welcome to the Simulation Plus Second Quarter twenty twenty five Financial Results Conference Call. With me today are Sean O'Connor, Chief Executive Officer and Bull Frederick, Chief Financial Officer and Chief Operating Officer of Simulation Plus. Please note that we have 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 www.simulationswww.simulations+.com.

Lisa Fortuna
Lisa Fortuna
Investor Relations at Simulations Plus

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 contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. In the remarks or responses to questions, management may mention some non GAAP financial measures.

Lisa Fortuna
Lisa Fortuna
Investor Relations at Simulations Plus

Reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures are available in the most recent earnings release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. With that, I'll turn the call over to Sean O'Connor. Please go ahead.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Thank you, Lisa. Good afternoon, everyone, and thank you for joining our second quarter fiscal twenty twenty five conference call. The momentum we reported at the beginning of twenty twenty five continued into the second quarter. We're pleased to report that total revenue increased 23% year over year and 5% on an organic basis, excluding the contribution from our Adaptive Learning and Insights and Medical Communication business units. Diluted EPS was $0.15 adjusted diluted EPS was $0.31 and adjusted EBITDA was $6,600,000 or 29% of revenue.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Turning to the macro environment. Our operating environment remained unchanged from last quarter and in line with recent trends. Our customers are still taking a cautious, cost conscious approach to spending. In our software business, which provides biosimulation infrastructure to our customers, we're seeing continued steady growth as it plays a critical role in our customers' expanding use of biosimulation to improve their development efforts. While services spending picked up since the start of the year and we enjoyed a second consecutive quarter of robust bookings, clients have remained slow to initiate project starts.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

We have received several investor inquiries on potential impacts from recent federal cost cutting measures under the new administration. We see minimal risk related to National Institutes of Health and other academic funding sources. While we have leveraged NIH grants for certain R and D projects in the past, we have no current exposure to NIH. Additionally, our software is provided free of charge to academic institutions, so we have no revenue risk associated with potential federal funding reductions. As we have consistently stated, our highly disciplined approach to executing effectively in challenging environments is a key operating strategy that has served us well over the past two years.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

At the same time, we are prepared to capitalize on any increase in customer spending as conditions evolve. Turning to our software segment. Our software performance was impressive with strong growth. Renewal rates remain at historical levels and new logo sales are tracking well even with the funding challenges some of the smaller biotechs are facing. Software revenue grew 16% in the second quarter of 'twenty five, '8 percent on an organic growth basis, excluding the $1,000,000 in revenue from the Alley and MC business units.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Our quantitative systems pharmacology, or QSP, business unit led software growth this quarter. Its revenue surged by 89%, largely driven by a model license for atopic dermatitis. As a reminder, QSP's quarterly results can be lumpy based on the high ticket price per license and a smaller pool of end users. Our chem informatics, or chem business unit, software revenue grew by 8%, driven by higher revenues from AdMap Predictor. Additionally, there were 10 new customers and seven upsells to existing customers during the quarter.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

In our Clinical Pharmacology and Pharmacometrics, or CPP, business unit, revenues grew 9%, and we added 11 new customers and had two customer upsells during the quarter. Our physiologically based pharmacokinetics, or PBPK, software revenue grew 1%. In the second quarter, we had some renewal slippage for GastroPlus. However, these deferred renewals have already closed in the third quarter. GastroPlus added seven new customers and booked seven upsells with existing customers.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Software revenue in our Alley business unit was $900,000 and software revenue in our MC business unit was $100,000 Overall, software revenue for these two new business units was in line with expectations. Moving to our Services segment. Services revenue grew by 34% in the second quarter, yet was flat on an organic basis. While bookings in our Services segment continue to be strong, these clients continue to pace project initiation out to the second half of the year. This will result in a push of some service revenue to the back half of our fiscal year.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Services revenue was led by strong performance in our CPP and MC business units. CPP services revenue increased 19%. MC services revenue was 2,300,000.0 Our PVPK services revenue decreased 23%, reflecting the cautious pace of project initiation, as previously mentioned. And our QSP services revenue decreased 7%. Services bookings during the second quarter were very strong, especially in our CPP and MC business units.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

And we ended the quarter with a backlog of $20,400,000 up 18% compared to the first quarter and up 13% year over year. With that, I'll turn the call over to Will.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

Thank you, Sean. To recap our second quarter performance, total revenue increased 23% to $22,400,000 including a $3,300,000 contribution from the ALI and MC business units. Software revenue increased 16% representing 60% of total revenue and services revenue increased 34%, representing 40% of total revenue. Turning to the software revenue contribution from our products for the quarter, GastroPlus was 46%, MonolixSuite was 23%, Admet Predictor was 17%, Proficiency was 7%, and other products were seven percent. For the trailing twelve months, GastroPlus was 48%, MonolixSuite was 20%, Admet Predictor was 17%, Proficiency was 7%, and other products were 8%.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

The trailing twelve month software revenue for the ALI and MC Biz products only includes revenue since the acquisition of Proficiency in June 2024. With the Proficiency short form merger into Simulations Plus completed in January, we also rebranded the ALI training platform to Proficiency to leverage the name recognition with our customers. During the quarter, our software customer renewal rate was 90% based on fees and 84% based on accounts. The renewal rate based on accounts was in line with the prior year, and the decline in renewal rates based on fees was primarily due to one large customer renewal that did not close until the third quarter. Given the size of that renewal, there was a more significant impact on the fee based renewal rate than on the account based renewal rate.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

Note that renewals which are recovered in a future quarter are not included within the calculation of our published renewal rates in the future quarter. Average software revenue per customer for the quarter increased to a hundred and $24,000 from a hundred and $13,000 last year. On a trailing twelve month basis, our software customer renewal rate was 91% based on fees and 83% based on accounts, both generally in line with prior period trends. Average revenue per customer increased to $101,000 from $95,000 on a trailing twelve month basis. Shifting to our services revenue contribution by business unit for the quarter, CPP was 39%, MC was 25%, QSP was 19%, and PBPK was 17%.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

On a trailing twelve month basis, CPP was 40%, QSP was 26%, PVPK was 18%, and MC was 16%. Again, the trailing twelve month services revenue for the MC business unit only includes revenue since the acquisition of proficiency last June. Total services projects worked on during the quarter were two zero three and year end backlog increased 18% to $20,400,000 from $17,300,000 last quarter. The largest driver of the backlog growth quarter over quarter was in the CPP and MC business units. Total gross margin for the quarter was 59% with software gross margin of 81% and services gross margin of 25%.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

On a comparative basis, total gross margin for the prior year quarter was 72% with software gross margin of 88% and services gross margin of 44%. The decrease in total gross margin was due to a $4,200,000 increase in cost of revenues. The increase in software cost of revenues was primarily due to a $1,200,000 increase in software related costs, including $800,000 of amortization related to the proficiency acquisition and $400,000 higher amortization of capitalized software costs. The increase in services cost of revenues was primarily due to a $3,000,000 increase in service related costs for the acquired MC business unit and the reclassification of expenses from G and A expense to cost of revenues in connection with the prior year business unit reorganization. Turning to our consolidated income statement for the quarter, R and D expense was 10% of revenue compared to 7% last year.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

Sales and marketing expense was 17% of revenue compared to 11% last year. G and A expense was 20% of revenue compared to 30% last year. And total operating expenses were 46% of revenue compared to 48% last year. Income tax expense for the quarter was $400,000 compared to $1,200,000 last year. And our effective tax rate was 12% compared to 23% last year.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

Lower effective tax rate was primarily driven by the tax benefit associated with disqualifying dispositions during the quarter. We now expect our effective tax rate for the fiscal year to be in the range of 21% to 23%. Net income for the quarter was $3,100,000 or 14% of revenue, compared to $4,000,000 or 22% of revenue last year, and diluted EPS was $0.15 compared to $0.20 last year. Adjusted EBITDA for the quarter was $6,600,000 or 29% of revenue compared to $7,100,000 or 39% of revenue last year, and adjusted diluted EPS was $0.31 compared to $0.32 last year. The reconciliation of non GAAP financial metrics to the relevant GAAP metrics is in our earnings release and on our website.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

Turning to our balance sheet, we ended the quarter with 21,400,000 in cash and short term investments. We remain well capitalized with no debt and strong free cash flow to execute our growth strategy. I'll now turn the call back to Sean.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Thank you, Will. Our strong second quarter results reflected solid performance in both our Software and Services segment. The team executed well in the first half of the year, and our results are in line with our guidance despite the persistent cost constraint and limited funding environment that our customers have been facing for some time. Our Alley and MC business units continue to show good progress, and in fact, we recently closed on a multi drug project for speaker bureau support and training with an existing MC client for just over $5,000,000 Revenue from this engagement will ramp up during the second half of our fiscal twenty twenty five, with the rest to be earned over the course of calendar twenty twenty five. Moving on to our outlook for the balance of fiscal year twenty twenty five.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

With our first half twenty twenty five results aligning with our expectations, we are reaffirming our fiscal year twenty twenty five guidance as follows: total revenue is expected to be between $90,000,000 to $93,000,000 and we still expect Alley and MC to contribute between 15,000,000 to $18,000,000 as previously provided. Year over year revenue growth is expected to be in the range of 28 to 33% software mix between 5560% adjusted EBITDA margin between 31 to 33% and adjusted diluted earnings per share of between $1.07 and $1.2 We expect total revenue for our third fiscal quarter to be approximately 25% of our fiscal year guidance range, with a year over year growth rate of between 2125%. We expect a sequential step up in revenues in our fourth fiscal quarter. As a reminder, our guidance does not include the impact of any future acquisitions. I also want to reiterate our near term priorities, which include continuing the ramp up of our Alley and MC business units, expanding cross selling opportunities and driving towards our historical adjusted EBITDA margin target of 35% to 40% and corresponding profitability levels.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

We believe we are well positioned to achieve our goals this year and remain focused on executing our disciplined growth strategy to deliver long term value to our shareholders. Thank you for your time today. And with that, I'll now turn the call over to the operator for your questions.

Operator

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that you are in the question queue. You may press 2 to remove yourself from the queue.

Operator

For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys. And our first question comes from David Larson with BTIG. Please proceed with your question.

David Larsen
Analyst, Managing Director at BTIG

Hi. Congratulations on the good quarter. Can you maybe just talk a little bit about the software organic revenue growth and the fee renewal rate declined to 90% from 94%? Just, I guess, what would the organic revenue growth rate for software have been had that account renewed this quarter? Thanks.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yeah. Thanks, Yves. The software organic growth was good this quarter, 8% from an organic basis excluding the proficiency software contribution. The renewal rate, we lost a few points down the 90% renewal rate on fees related to one large account that was renewed in the week subsequent to the end of the quarter. That was a six digit renewal and you can sort of extrapolate from there.

David Larsen
Analyst, Managing Director at BTIG

Okay, that's great. And then can you maybe just talk about, you mentioned a couple of times some clients might be reluctant to start new projects, but the bookings are good. But the software organic growth seems very good. Maybe just talk a little bit. How do I reconcile that?

David Larsen
Analyst, Managing Director at BTIG

Like they're buying the software, but they're a little bit slow on implementing the service deals, but they're signing contracts for the service deals. How do we reconcile that? Thanks.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yeah. Our software licensing business, our software business is really providing infrastructure to our clients for their undertaking or modeling and simulation deployment within their organization as our clients tighten the belt and are cautious in terms of spending. They're not whittling away at the infrastructure that they've built, and so the software renewal rates and the software business generally continues to perform buffered against that cost constraint environment. Their manageable side in terms of reducing costs or managing costs more slowly is in their service budget lines, where they can contract and expand that with a little bit more feasibility, quickness in terms of pulling back. Part of the service experience has been both in terms of their slow pace there, but also what we're seeing is contracts that are being signed and those clinical trial related activities that may make up many of those projects are scheduled for later in the calendar year.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

So, I'd say over the last couple of years, we've seen them hold off and not contract until closer to when the project was going to initiate. Today, we're seeing some contracts being signed for a work effort that is scheduled to be initiated later in the year.

David Larsen
Analyst, Managing Director at BTIG

Okay. And then just one more before I hop back in the queue. I mean, my whole thesis is that biopharma needs your software solutions to increase the accuracy of the clinical trials that they actually start. They want more success rates and that's going to increase their investments in the software. And that's maybe why the CRO market is under a little bit of pressure, but we see good software growth coming from you.

David Larsen
Analyst, Managing Director at BTIG

That's my thesis. And then just lastly, before I hop in the queue, what are your thoughts on these tariffs? I think biopharma maybe for now got a pass, but if there are tariffs in the world of biopharma, how do you think that will affect your business? Thank you.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Well, yes, I don't think that they feel that they've escaped maybe at the tariff level, but they've certainly been dealing with IRA and other issues for some time, which are focused on their business. Tariff scenario, pharma businesses are global entities, manufacturing is dispersed around the world, And so, they could be subject to the tariffs at some point and have some impact. I just saw, from an M and A sort of perspective, recent tallies of significant increase in terms of assets, development programs, molecules that are being developed, the acquisition of those assets out of China has stepped up tremendously at play. So there is a global dynamic that may be impacted by tariffs down the road that adds to the cautiousness, I would say, of many of our clients as they map out their futures here.

David Larsen
Analyst, Managing Director at BTIG

Okay. I'll hop back in the queue. Congrats on a good quarter.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Thanks, Dave.

Operator

Thank you. Our next question comes from Scott Stonahas with KeyBanc Capital Markets. Please proceed.

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

Hey, team. Thanks for taking my question. Wanted to touch on the services side. Clearly, you're see this from proficiency. Just wanted more color on these.

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

Are these legacy or is that are finally seeing re ramping from last quarter in terms of demand for the MC services? Are these new logos? And then Sean, you mentioned some cross selling at the end of your prepared the opportunity there. Thanks.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yeah, Scott, you were checking in and out in terms of your call there, but I think I got the gist of the question. Proficiency in Medical Communications contribution was good this quarter. On the proficiency side, their business, their software initiates its license upon clinical trial start. So this was a slow quarter in terms of clinical trial start, but their book of business and outlook for the year is in the range of our guidance that we gave previously. Activity is quite an active pipeline in that business segment.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Medical Communications, yeah, had a very significant win. The client was an existing client of Medical Communications. They provided services to them in the past, but the business was a combination of some continuation of previous drug support, a particular specific drug that they've been supporting in the past, but was most importantly expanding it to another drug entity that we will be supporting them with our medical communication services. It's a good example of a nice contract signed. Certainly, it will contribute to our back half of the year revenue, but a contract that extends through the entirety of the calendar year of 2025.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

So, a contract that will contribute revenue this year, but also seeping out into next year. Your last point was with regard to cross selling, which is a significant component of our strategy as we've built over the years quite a portfolio of products and services. The opportunity to sell through to existing clients more of our product suite and service capability, obviously, is a leverage point in terms of versus acquiring new logos. Both are important, but our expansion of our average revenue per customer with existing clients is a significant leverage point for us and that continues to be a focus on our part now enhanced with the addition of the Alley and medical communication products and services.

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

That's very helpful, Sean. I guess my follow-up would be, you know, on the preliminary kind of fiscal third quarter and the steep ramp in the fourth quarter. Can you just walk through all the assumptions as we think about how the year progresses going forward? Thanks.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yes. It's a bit of a change as we've alluded to in terms of our seasonality, which typically saw peaks in the second and third quarter with a bit of a step down in the fourth quarter, not to first quarter levels, but a step down in terms of fourth quarter. You know, that traditional seasonality primarily driven by our book of renewal business on the software side where our renewing accounts were more larger population in the middle two quarters of our year. The change and shift there is driven, a, by a more continuous flow of revenue from the acquired businesses, Ally and Medical Communications, which does not have that same profile in terms of seasonality as our software business, and contributed to as well by what we've seen in terms of as we entered calendar year 'twenty five and our step up in bookings with our clients on the service side, the scheduling, timing of those projects being more back half loaded than typical service seasonality of the past and therefore see a little bit of leveling of our second, third and fourth quarter revenue contribution on a combined consolidated basis.

Scott Schoenhaus
Scott Schoenhaus
Managing Director at KeyBanc Capital Markets

Thank you.

Operator

Thank you. And our next question comes from Matt Hewitt with Craig Hallum. Please proceed with your question.

Matthew Hewitt
Senior Research Analyst at Craig-Hallum

Good afternoon. Thanks for taking the questions. Maybe a couple on proficiency for starters. Maybe if you could talk a little bit about the pipeline and specifically what you're seeing from a cross selling opportunity standpoint. And then maybe as a follow-up or as congenitally to that, what was the $5,000,000 win that you just signed, was that contemplated in the thirteen million to '18 million dollars that you expected from the proficiency business this year?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yes, I'll work backwards, Matt. No, we haven't we didn't change our guidance. So it adds to our Medical Communications contribution for this year, but doesn't put us in a position where our expectations have increased in terms of the 15,000,000 to 18 million dollars from the combination of Ally and Medical Communications this year. As I said, it's a recurring client. We've done work for them in the past, so it's not entirely unanticipated business out of that segment of the business.

Matthew Hewitt
Senior Research Analyst at Craig-Hallum

And then as far as the pipeline is concerned, are you having some early success on the cross selling front?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

We're having success in terms of filling the pipeline with new opportunities. The two business units on the Ally side, it's been identifying the time to clinical trial opportunities for them to engage in. And on the medical communication side, it's getting to know and establishing credibility there, introductions and networking. So I think we've been very successful in terms of upping the pipeline activity and seeing that bolus go through the snake, if you will, and expect that down the road we'll see that cross selling contribution from EMC Alley business units.

Matthew Hewitt
Senior Research Analyst at Craig-Hallum

Got it. And then maybe separately, regarding the contract starts, on the services side, is there anything that you can do? Maybe not so much from a pricing perspective, but is there anything that you can do to, help your customers kinda speed that process up a little bit? I guess I look at it if if if it ends up being more q four weighted, is there risk there that either they decide to hold off until their you know, until your q one? Or conversely, they say, okay.

Matthew Hewitt
Senior Research Analyst at Craig-Hallum

We're ready to go, but you have everybody do that at the same time, and you maybe don't have the people support in place to be able to run all of those programs. I'm just trying to think, there anything that you can do to kind of speed that process up? Thank you.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yeah, I'm not being facetious when I say, hey, everything that we do is trying to assist our clients in terms of getting to decisions more quickly, get to protocols and clinical trial activity that is more assured of being successful. A lot of that which we do is try to accelerate the programs. It's not something that you can we'll give you a 10% discount if you start your clinical trial a couple of months earlier or something of that nature. That's not how PIPE operates in terms of direct development. You know, are we prepared, you know, if we get the flood of green lights and starts in terms of projects?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

You know, obviously, there's ceiling to saying yes to that question. But as communicated pretty consistently, I mean, we're poised to step up if the market picks up and gates open in terms of spending in general, more specifically with regard to those things that we've contracted for and are in our backlog. Our ability to respond is not unlimited, but a) I'd love to be in that position and b) I don't think we'd have an issue in terms of responding to that sort of demand.

Matthew Hewitt
Senior Research Analyst at Craig-Hallum

Got it. Alright. Thank you very much.

Operator

And our next question comes from Max Schmuck with William Blair. Please proceed with your question.

Christine Rains
Healthcare Equity Research Associate at William Blair

Hi. It's Christine Raines on for Max Schmuck. Thanks for taking our questions. So, kind of building on the last question, I appreciate the commentary you gave on services visibility. So, just assuming these bookings burn as you contemplate in the second half, How much of second half services revenue do you have in hand today versus how much do you still have to go out and win?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yes, as is typical. I mean, we map out the backlog, and I don't recall. We usually are running at about 90% to realizable in twelve months, so that extends beyond our year end. Obviously, our detail reflects the timing and schedule of what's in the next six months. And that's not a number that we've typically disclosed in the past, but our characteristics today are no different than they have been in the past in terms of what needs to come out of backlog and what needs to be booked and built in the second half of the year.

Christine Rains
Healthcare Equity Research Associate at William Blair

Great, thanks. And turning more on the kind of disruption side of things at the FDA, do you see any impact from the recent layoffs and turnover at the FDA? And if there's any adoption on bio simulation moving forward, just in general, are you using people who are pushing for adoption of bio simulation and therefore acceptance? And are you worried there at all that that might cause kind of a stall out in bio simulation adoption?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

First and foremost, it's very disruptive and distracting and know, people's speed of work effort is no doubt impacted at the FDA. I would point out that most of the drug development approval process, interaction with drug sponsors and the approval of drugs, is funded through fee based sources and not funded by federal funding. So, you know, it's the other areas outside of drug development and certainly within drug development, there is impact of the federal funding cuts, but they are in the research and leadership and so on and so forth. The drug development approval process is funded primarily through fees. So, you know, a difficult environment as it conceptually reduce, you know, support for biosimulation.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

No, I don't it does. And, you know, their support has always been positive and a contributor. But this is not a, you know, early stage advocacy for biosimulation out of the FDA to start adoption in the industry. The wheels of adoption are flowing and motivated by the significant impact that we can have in terms of efficiency and time and cost in drug development. So, no doubt, distraction not without its concern, but does it slow down the adoption of biosimulation?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yeah, I don't think it's a big speed bump in that regard.

Christine Rains
Healthcare Equity Research Associate at William Blair

Great, thanks, that makes sense. And then last one for us. I know it's very early, but just trying to get a handle on how you're thinking about the range of outcomes for fiscal twenty twenty six. Just from a high level, given the macro headwinds that are impacting large pharma, should we think about the best case for next year being more of the same as what we're seeing in fiscal twenty twenty five?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

I get the crystal ball out here, Christine? Yeah, I think the biggest impact is the market environment. And do we get a settling out of the challenges, do we see a sorting out and more normal flow of development activities. I think our software business is insulated from these as we've seen over the last three years and we'll continue to see good growth there. Can we see an uptick and perhaps more consistency on the service side?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

The biggest impact is really going to be the market environment there.

Christine Rains
Healthcare Equity Research Associate at William Blair

Great. Thank you so much.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Sure.

Operator

Thank you. And our next question comes from Jeff Garo with Stephens. Please proceed.

Jeff Garro
Managing Director at Stephens Inc

Yeah, good afternoon. Thanks for taking the questions. I wanted to ask about the January press release announcing the PBPK partnership with the Enabling Technologies Consortium that has some key large pharma members. So a few to throw at you here. How long was this in the works?

Jeff Garro
Managing Director at Stephens Inc

What are the possibilities to expand over time? And how should we think about timing of deliverables for this partnership?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yeah, Jeff, I think it's a project that extends out for twelve or more months of that nature. And it's a review process or engagement process prior to coming to its conclusion was probably a six month window of time in terms of pulling together the consortium of players that are involved and working towards the agreement. So again, we've historically looked for opportunities like this. It's a tremendous means to develop technology that ultimately lands into our product, GastroPlus in this case, and brings us the expertise of the partners that are involved, the data that can be provided, the advancement of the technology and capability of our Gastro Plus product enjoys the benefit of that.

Jeff Garro
Managing Director at Stephens Inc

Great, appreciate those comments. And wanted to ask a more discreet question around proficiency and just how we should think about seasonality by revenue line there. Slightly surprised to see a quarter over quarter decline in the software revenue attributed to proficiency and then also thinking through that larger $5,000,000 contract that in the back half of the year I believe will contribute to the services that we would allocate to that, still to the Proficiency acquisition? Thanks.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yeah, the Proficiency acquisition and its two components now is we manage ALI and MC. The ALI quarter to quarter step down, not unanticipated, based upon again, it's tied to clinical trial starts. As we looked at the project for the pipeline, if you will, anticipated that the second quarter was not a robust start up quarter for them and anticipate that will pick up in '3 and '4. The Medical Communications, again, they historically are kind of first quarter is a slow quarter for them, in terms of revenue drive from a seasonality perspective, and it builds second, third, and fourth quarter. That does as opposed to the bookings, which typically are higher in the fourth and first quarters.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

And then that flows into the second, third and fourth quarter revenue flow from per Medical Communications. And hence, with a differing pace of business on a consolidated basis combined with SLP legacy revenue sources, it has that effect of changing our seasonality from a low first quarter, up second and third quarter and down fourth quarter to, as I described, a little bit more contribution, even keel second, third and fourth quarter and even as we anticipate now a little bit of an uptick, but not great uptake in fourth quarter.

Jeff Garro
Managing Director at Stephens Inc

Understood. Thanks for taking the questions.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Sure. Thanks, Joe.

Operator

And our next question comes from Constantine Davies with Citi. Please proceed with your question.

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

Thanks. Appreciate the color on the revenue cadence 3Q to 4Q in terms of the step up. But is that consistent with how should we should also be thinking about EBITDA as well?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Yes. Our expense load is linear, but much no seasonality to it. So as we get into the back half of the year, as those revenues tick up, we see that flow through to EBITDA as well.

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

Okay. And then in the second quarter, the sales and marketing line, a pretty sharp step up. Is that headcount addition or some other type of spend at work there?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

I'll ask Will to comment, but I don't think it's headcount driven, but conference cost driven. But Will, you've got maybe better visibility to the details there.

William Frederick
William Frederick
COO, CFO & Secretary at Simulations Plus

Yeah, you're spot on. It's timing of conferences and when they occur in the year. So it's usually a little bit low in Q1 when we were running 15% of revenue for sales and marketing this quarter, 17% just conference timing.

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

Got it. That makes sense. And then lastly, Will, I heard you kind of reaffirm that 35% to 40% margin objective. And I guess how much of that is dependent on an inflection in the macro environment? That is to say, if you can kind of keep grinding out this level of organic growth, is that something that's within reach in the next year or so?

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

Or does it again really hinge upon the macro factors kind of changing a bit?

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

John, you want go? Yeah, I'll jump in there. Yeah, we've operated at that level in the past, and that's our objective to get to it at whatever revenue growth level we're looking at, achievement is contributed to by both, you know, revenue growth levels but more significantly by, management in terms of our costs, our costs in capacity, matching capacity to top line service revenues, improvements that we're making in terms of the service organization overall, their use of AI, as an example, the impact in terms of the advance advancement of AI tools and the development of the proficiency training modules. Know, all of these come come together to contribute to and and really the bigger drivers on the expense side, not necessarily on the revenue side.

Constantine Davides
Managing Director at Citizens JMP Securities, LLC

Thank you.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Sure.

Operator

Thank you. And our next question comes from Francois Brisebois with Oppenheimer. Please proceed with your question.

Analyst

Hi, this is Dan on for Frank. Thanks for taking our questions. I guess firstly on the 89% growth in QSP due to the addition of atopic dermatitis. Could you add some color on the customer profile here? Are these mostly existing clients or new customers working in the atopic dermatitis space?

Analyst

And related to that, how should we be thinking about QSP growth moving forward? And are you sharing at this time what other indications you see as additional opportunities for QSP? Thanks.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Sure. Yeah, in this case, the QSP model of this nature is a pretty healthy ticket item. This is a license that can be a half million or more in size. And so, as we've always indicated, they are more discreet in terms of their occurrence. They don't occur every quarter, if you will, although we've had success in terms of QSP, therapeutic license, disease model licensing in each of the first two quarters this year, which has led to that robust growth rate on the QSP software side.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

The nature of them is usually too large pharma accounts and underneath the large disease models we've got smaller licensing that takes place for our DiliSyn software as an example, and that can be across large, medium sized pharma, biotech as well. So, on a forward basis, it's best to look at an annual year over year growth, the haphazard large license size is not, I wouldn't project out 89% growth for QSP, but QSP software disease model licensing is a very good growth area for us, and our smaller license will be more consistent on a quarterly basis and hopefully on a year over year basis, we'll see good growth from the large disease models just on a quarter to quarter basis. It's not so consistent.

Analyst

Thank you. Clients on the quarter.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Sure.

Operator

Thank you. And with that, there are no further questions at this time. I'd like to turn the floor back to Sean O'Connor for closing remarks.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Well, thanks again, everyone, for joining the call today. In the next few months, we'll be attending some important industry events including twentieth Annual Drug Discovery Chemistry Conference in April, a key event for our cheminformatics business, and the American Society for Clinical Pharmacology and Therapeutics. Their annual meeting is in May, and I'm currently here in Boston at the BioIT World Conference Expo. In the financial community arena, in May, We'll be attending the twenty second Annual Craig Hallum Institutional Conference in Minneapolis, and as well the JMP Citizens Medical Devices and Healthcare Services Forum, again, back here in Boston in June. Hope to see many of you there, and appreciate your continued interest in Simulations Plus.

Shawn O'Connor
Shawn O'Connor
Chief Executive Officer at Simulations Plus

Thanks a lot, everyone.

Operator

Thank you. And with that, that does conclude today's conference call. We thank you for your participation. You may disconnect your lines at this time.

Executives
    • Lisa Fortuna
      Lisa Fortuna
      Investor Relations
    • Shawn O'Connor
      Shawn O'Connor
      Chief Executive Officer
    • William Frederick
      William Frederick
      COO, CFO & Secretary
Analysts
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Earnings Conference Call
Simulations Plus Q2 2025
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