Simulations Plus, Inc.SLPNASDAQ
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Operator: Greetings, and welcome to the Simulations Plus First Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Lisa Fortuna, Investor Relations. Please go ahead.
Lisa Fortuna: Welcome to the Simulations Plus First Quarter Fiscal Year 2026 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial Officer of Simulations Plus. 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-plus.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, 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 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 Shawn O'Connor. Please go ahead.
Shawn O'Connor: Thank you, and happy New Year to everyone. We delivered on the first quarter top line guidance we communicated in December, with revenue decreasing 3% as expected. Adjusted EBITDA was $3.5 million and adjusted EPS was $0.13, in line with our internal expectations. Turning to the macro environment. The positive trends we cited last quarter continued to present themselves. At the global level, most favored nation pricing agreements are moving forward, tariff threats have subsided and the biotech funding environment is improving. At the regulatory level, the FDA recently issued NAM guidelines for review as well as support of in silico methodologies. We began to see an uptick in spending at the client level, which is reflected in good performance in our Services segment, both revenue and bookings. We've experienced an acceleration in year-end spending, and this increase is encouraging since improvement in services typically precedes an increase in software activity. Our priorities in fiscal 2026 are to advance the progress we've made toward an integrated product ecosystem that combines 3 strengths of Simulations Plus, validated science, cloud-scale performance and AI that is grounded in regulatory-grade modeling. Across GastroPlus, MonolixSuite, ADMET Predictor, our QSP platforms and proficiency, we are driving innovation through advanced science, ongoing investment in the scientific engines trusted by global regulators in leading R&D organizations, a connected ecosystem, seamless interoperability across products powered by the S+ Cloud enabling end-to-end modeling workflows from discovery through clinical development. AI-driven services, intelligent tools that enhance data curation accelerate simulation analysis and simplify regulatory compliant reporting. AI and human collaboration, Copilots and reusable modules, that boost efficiency, consistency and turnaround times for scientists and consultants alike. These advancements aren't theoretical. They directly address customer pain points and aligned with the industry's trajectory. More importantly, they position us to deliver new capabilities to market faster and with greater cohesion than ever before. With that, I'll turn the call over to Will.
William Frederick: Thank you, Shawn. To recap our first quarter performance, total revenue decreased 3% to $18.4 million. Software revenue decreased 17% representing 48% of total revenue and Services revenue increased 16%, representing 52% of total revenue. Turning to the software revenue contribution from our products for the quarter Discovery products, primarily ADMET Predictor, were 15%. Development products, primarily GastroPlus and MonolixSuite were 81%. In clinical ops products, primarily proficiency were 4%. On a trailing 12-month basis, Discovery products were 18%. Development products were 77% and clinical ops products were 5%. We ended the quarter with 302 commercial clients, achieving an average revenue per client of $97,000 and 88% renewal rate for the quarter. On a trailing 12-month basis, we achieved average revenue per client of $147,000 and our renewal rate was 87%. During the quarter, software revenue and renewal rates continue to be impacted by market conditions and client consolidations. Specifically, Discovery revenue increased 3% for the quarter and for the trailing 12-month period. Development revenue declined 6% for the quarter and grew 1% for the trailing 12-month period. Clinical Operations revenue declined 82% for the quarter and 28% for the trailing 12-month period. Shifting to our services revenue contribution by solution for the quarter, development, which includes our biosimulation services, represented 71% of services revenue and commercialization, which includes our MedCom services, represented 29%. The revenue contributions for the trailing 12-month period were 74% and 26%, respectively. Total services projects worked on during the quarter were 186 and ending backlog increased 18% to $20.4 million from $17.3 million last year. Overall, we have a healthy pipeline of services projects. Services revenue for the quarter increased compared to the prior year, primarily due to the strong contribution in our MedCom business. Specifically, Development Services grew 8% during the quarter and declined 5% for the trailing 12-month period. Commercialization Services grew 42% during the quarter and 191% for the trailing 12-month period. Total gross margin for the first quarter was 59%, with software gross margin of 84% and services gross margin of 36%. On a comparative basis, total gross margin for the prior period was 54%, with software gross margin of 75% and services gross margin of 26%. The increase in software gross margin was primarily due to the lower clinical ops revenue and the increase in services gross margin was attributable to the prior year reduction in force and the reorganization of services personnel to support product development efforts. Other income was $0.3 million for the quarter compared to $0.1 million last year, primarily due to higher interest income. Income tax expense was $0.3 million compared to income tax expense of $0.1 million last year, and our effective tax rate was 30% compared to 24% last year. Moving to our balance sheet. We ended the quarter with $35.7 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow as we continue to execute our growth and innovation strategy. Our guidance for fiscal year 2026 remains the same as previously provided. Total revenue between $79 million to $82 million, year-over-year revenue growth between 0% to 4%, software mix between 57% to 62%, adjusted EBITDA margin between 26% to 30% and adjusted diluted earnings per share between $1.03 to $1.10. We anticipate second quarter revenue to be approximately $21 million to $22 million. I'll now turn the call back to Shawn.
Shawn O'Connor: Thank you, Will. Fiscal 2026 marks our 30th year as a company, and we're excited about the opportunities ahead. Simulations Plus is transforming from a collection of pioneering modeling tools into a fully integrated ecosystem that supports discovery, development, clinical operations and commercialization. Through strategic acquisitions, continued investment in science and a unified operating model, we've broadened both our reach and our impact. What remains constant is our core purpose. Providing our clients the tools to bring safer, more effective therapies to patients through science-driven innovation. What is accelerating is how we fulfill that mission. With proven scientific engines, enhanced cloud capabilities, AI-powered workflows and a coordinated road map, we're positioned to support our clients with greater speed, consistency and interoperability than ever before. Thank you for joining us today. And with that, we'll open the call for questions.
Operator: [Operator Instructions]. Our first question is from Matt Hewitt with Craig-Hallum.
Matthew Hewitt: Maybe first up, I was hoping we could get a little bit more color on some of the positive commentary you spoke to regarding most favored nations lower tariff risk, those types of things? And how that you see impacting budgets from your customers and whether or not you're anticipating a greater allocation of those R&D budgets towards modeling and simulation.
Shawn O'Connor: Sure, Matt. We just did our fourth quarter earnings call not that long ago, and we spoke to some of the events in the latter part of the calendar year '25 of agreements at some level in terms of most favored nation pricing and certainly, tariff talk as died down a bit. The U.K. agreement was put in place. So I think all of these things are starting to stabilize outlook for our clients, and we saw that begin to impact the discussions we had through the latter part of '25 as they were preparing budgets, so certainly a lot of activity and give us proposals, we want to put it in the budget for next year. And so that was a very positive impact. As an update here in January, we saw a pretty robust activity turning those proposals into contracts for next year. And, in some cases, accelerated requirements in terms of getting some of that work done before the year-end that budget flush that happens every year in the industry. Certainly took place this year, and that translated into a pretty robust service revenue delivery for us in our November and ending quarter. So certainly puts more wind in the sale in terms of optimism as we move into the calendar year of '26 that the constrained spending environment that we've operated in for the last number of years is starting to show some signs of opening up a bit. I'm Missourian and we'll believe it when I see it, but certainly, very optimistic given the activities of late.
Matthew Hewitt: That's very helpful. And then maybe just to dive into the software a little bit. It looks like GastroPlus was pretty good. ADMET predictor was pretty good, but it looks like more on the DILIsym QSP side, things might have been a little bit soft. Is there -- was that just kind of a one-off in the quarter? Or is it waiting for the FDA guidance that we just got here a couple of weeks ago. If you could just kind of provide a little more color on the puts and takes there.
Shawn O'Connor: Yes, certainly, certainly. The QSP models, if you recall, though, there is a recurring license, subscription license for the basic platform that many of our QSP models are accessed through. But the majority of QSP software licensing is the licensing of the therapeutic models, and our clients acquire those models on perpetual license basis. And we had an extremely good quarter a year ago, first quarter of last year and sold multiple therapeutic QSP models. And while we did have a closure here in this first quarter of this year, not the same level of activity on the QSP side in this quarter. Maybe look at it on a year-to-year basis, we anticipate QSP therapeutic model licensing to grow. But on a quarter-to-quarter basis, we had a difficult comp compared back to the first quarter. So in general, QSP software revenue came in as expected. It's always a lumpy perpetual license flow of business there, but the interest is very high for those models high and QSP space altogether, both software and service support in that area, a very rapid growing area in terms of biosimulation altogether. But this quarter, in particular, on a year-over-year basis that QSP software license growth impacted by a bunch of models that were recognized last year.
Operator: Our next question is from Max Smock with William Blair.
Christine Rains: It's Christine Rains on for Max. So just diving on the services side in a little bit more, it's nice to see that business performed so strongly this quarter. But given the relative softness this quarter in software relative to your mix guide, I'm hoping you can give us some color on the expected mix cadence for software in the remaining 3 quarters? And what will catalyze the relative step-up in software performance.
Shawn O'Connor: Yes. No change in our guidance range in terms of software service mix. So the robust first quarter on the service side that brought its percentage of revenue up. That doesn't change our outlook for the year. Our guidance there is 57% to 62%. I think it is on a full year software contribution to our revenues. And our biggest software quarters are in third -- second and third quarter just from the seasonality of our renewals, the book of renewals that we have in those 2 middle quarters. So great performance in the first quarter from the service organization, as I indicated in the prepared remarks, I think, as our clients turn to a little bit more accelerated spending, they've got a backlog of projects that they've been holding back on in terms of giving green light to that's more easily initiated on their part, software licensing, acquisition, increasing their staffing and modeling and simulation department with come as a lag to that or follow the ease of opening up the outside service line of their budgets. And so I don't anticipate any change in what we've guided to in terms of software service mix at this time.
Christine Rains: Great. That makes sense. And then just one more on the software side for us. You discussed last quarter how the consolidation of large pharma was somewhat of a headwind to software renewals in the back half of fiscal 2025. So given what appears to be an improving M&A environment, did you see this headwind intensify in the first quarter. And then what is your typical impact from normal consolidation historically versus what's baked into your 2026 guide?
Shawn O'Connor: Yes. Consolidation is always an impactful contributor to that less than 100% renewal bankruptcies, the other component there in, and we certainly did see an uptick in some consolidation in the back half of our fiscal year '25. No major contribution in the first quarter in that regard. And certainly, as we've mapped out in terms of larger entity acquisitions. Typically, there's some visibility to announced acquisitions ahead of the renewal time frame and whatnot, so we get a little bit of forewarning, there's no forewarning of that in our renewal base for '26. I think the uptick in the accelerated acquisition activity that we're starting to see in the industry is large pharma acquiring assets from smaller biotechs or the smaller biotechs are typically not large software licenses. And so while it is a headwinds and it can have an impact as we experienced in the back half of '25, the outlook doesn't show tremendous impact there, not in the first quarter results, nor in our expectations or guidance for the year.
Operator: Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets.
Scott Schoenhaus: So Shawn, I know you mentioned that the regulator guidance doesn't reflect any mix changes from the prior guidance. But it seems like the environment has improved and that there's a lot of momentum and backlog here. Does the cadence of your guidance change, should we expect less extreme back-weighted guidance here based on this sort of momentum and this improved environment.
Shawn O'Connor: Well, there is a little backloaded when you look at it from a percentage growth perspective, from an absolute dollar perspective, it's not quite so backload. What do I mean by that? I mean we're pretty open in looking at our '26 versus '25 revenue streams. And we knew that on the software side, proficiency platform revenue, software revenue contribution was at its peak in the first and second quarter of '25, and its run rate trend line came down in the back half of '25. And while it moves forward positively, our first half of the year, year-over-year software growth is going to be impacted by proficiency contribution at a little lower level. The biosimulation software much, much better shape. You've got the dynamic that I just described in terms of the QSP perpetual license and they're having some impact, so on and so forth. So when we look at the software revenue flow on an absolute dollar basis, it kind of runs to the seasonality patterns of the past. But when you're looking at a year-over-year comp, given our profile of software revenue coming down in the back half of last year, 25 being at a higher level in the first half of the year, that overall year-over-year increase percentage is going to step up in the back half of the year as we get into a different comp situation.
Scott Schoenhaus: And then actually it's a great fall earlier to my follow-on. So I think in the prepared remarks, you guys have mentioned that MedCom's business was outperforming beyond expectations in the quarter. If that's right, should we assume that those proficiency comps that you just talked about should prove to be a little bit more conservative than your initial expectations 90 days ago.
Shawn O'Connor: Yes. Keep in mind, we're talking proficiency software platform licenses on the software side. Met Communication is the support we provide in commercialization service revenues. And yes, that came out of the shoots here better than anticipated, quite frankly, in the first quarter, and their backlog is looking good, and we look forward to their contribution in growth, but they will provide during the course of our fiscal year '26 here. That comp year-over-year challenges more dramatic and tackle on the proficiency software side.
Operator: Our next question is from Jeff Garro with Stephens.
Jeffrey Garro: Yes. Shawn, earlier in the prepared remarks, I think I heard a comment that services should be a leading indicator for software demand. Maybe you could revisit on why that's been the case historically and how that rationale would apply to the current setup of the integrated product vision and the maybe larger portfolio of products than you've had historically?
Shawn O'Connor: Yes. I don't mean to imply that a clients will acquire service business prior to engaging in licensing. I mean, it goes both ways in terms of a new logo will start up -- could start up on either side of the business model. What I was referring to was the fact that as our clients work their way through their '25 -- calendar '25. And we're challenged to constrain their spending, cut back on their budgets. That didn't impact software as much as it affected outside services. That was the discretionary, if you will, budget line that they could hold back on, and we saw that impact our service business. As clients turn more favorably to spend, their ability to turn on and initiate a project to sign the contract or give the green length of the performance of the contract that's been sitting there on hold is much quicker. And as they open up their budgets, often software upsells with existing clients occur as they expand the modeling departments. So that expansion that green length to go hire more modelers into their organization, obviously, takes a little bit more of a lead time in terms of their recruiting process and building their organizations. So the fact that service bookings activity is picking up quite nicely and what that may be that a leading indicator that the budget in totality is going to increase, and we'll see on the software acquisition side, some follow step-up in activity there to come.
Jeffrey Garro: Excellent. I appreciate that. And maybe to switch gears a little bit to the profitability side of things. There was the comment around the reallocation of services personnel to product development. want to see if there's a specific impact to the P&L in the quarter to call out there? And just whether that's a temporary shift or something a little bit more permanent in nature related to the integrated product strategy. And I'll just tack on a follow-up. I know we'll get the cash flow statement in the 10-Q, but with R&D expense a little bit higher than we modeled. I want to see if there's anything to call out on capitalized software development expense.
Shawn O'Connor: Sure. Yes. I mean if I take you back in time, we undertook a reorganization of our organizational structure and the risk back in the third quarter fiscal year '25. And so the objective there was twofold. One, we rationalized our service resources to a lower level service revenue, and that has an impact on favorable margin in terms of excess staff that is no longer here. We also retained some of those valuable assets, people, scientists, and fully devoted them to our R&D effort, which was picking up with regard to the product vision that we were honing in on and beginning its implementation on. So that increase in R&D spend comes from additional personnel there invested in accelerating our product activity, which we look forward to take the opportunity to advertise. We have an Investor Day meeting scheduled on January 21 to walk through and give some visibility in more detail as to what that unfolds with for the future. And so yes, some increase in R&D expense. I'll let Will comment in terms of software capitalization and those sorts of things. I'd also before I hand it off, I point out that the R&D expense at a little bit higher percentage. Keep in mind that higher percentage were in our first quarter seasonality, the revenues are lower in the first and fourth quarter than second and third quarter. So the percentage increase of R&D spend in the first quarter will be averaged out over the course of the year as we work through our seasonal revenue quarters due to the end of the year. But Will, do you want to comment on capitalized software?
William Frederick: Sure. I'll sort of step back as well, kind of revisit some of the items you mentioned, the reorg that we talked about, that was a reduction in services staff to look towards increasing utilization targets for billable personnel as well as reevaluating the work that folks did in the company on product development. So we've historically had last couple of years, services margins at around the 30%, and we're certainly looking, as we've messaged getting that closer to 30% to 35%. And that's due to the reorg as well as the reduction in force. The R&D expenses, certainly, we have continued to invest in that area. So what you saw in first quarter, the 16% of revenue we do expect to see about a 15% to 17% R&D spend of revenue for the year. But we're still keeping our operating expense total around [ 50% ] of revenue for the year. So that's sales and marketing continuing to run at the 13% to 15% range. And then G&A is the one that will continue to come down as a percentage of revenue. On the capitalized software standpoint, that's running about the same. It's in the mid-20% of the work that's done is going into capitalized software and then that comes through as amortization expense on a quarterly basis.
Operator: Our next question is from David Larsen with BTIG.
David Larsen: On the services side, I think you mentioned that the commercialization efforts showed the growth there. Is that mainly proficiency? And just any more color around the strength there would be very helpful.
Shawn O'Connor: Yes. Just -- thanks, Dave, for the question. Yes, the proficiency acquisition in today's vernacular, brought us two revenue streams. One was the proficiency software platform, the training platform and clinical operations and the second revenue stream was medical communications and medical communications represents today 100% of our service revenues in the commercialization space. So yes, the medical communications in the commercialization market, it source was the proficiency acquisition.
David Larsen: So if I recall correctly, like a year ago, proficiency services revenue growth was under some pressure, and that was leading to some challenges. And correct me if I'm wrong, but I think what we're seeing here is kind of a recovery there and maybe a little bit of an easier comp.
Shawn O'Connor: Yes. The commercialization, the Med Communication service revenues like most all of our services was under pressure in the back half of our fiscal year '25 as budgets pulled back. And so the delivery in terms of MedCom in the first quarter was a bit above our expectations and very reflective of more active spend on our clients in that space and its outlook is pretty positive for fiscal year 2026.
David Larsen: Okay. And then just one more quick one for me. On the software side, I think I saw clinical operations software down. I thought it was like 80% or something like that, which led to the overall decline in software year-over-year. So it looks like it's like is that one product line? Which product line was that? And is there a reason why it was unusual. Did a deal push or something like that?
Shawn O'Connor: Yes. The clinical operations software is our proficiency training platform. And so upon acquisition, its contribution in its first and second quarter of fiscal '25 was pretty strong. We saw that come down in the back half of the year, driven by clinical trial start-up challenges and the like. And so here in the first quarter, while they delivered pretty much to expectation, the year-over-year comp is negative, but in line with our expectation at this point in terms of fiscal year '26.
David Larsen: Okay. And just -- I'm sorry, one more quick one. 88% fee retention. Is that in line with your expectations? And then I'll hop back in the queue.
Shawn O'Connor: Yes. It's been at that level over the last several quarters. Historically, 90% plus is where it's at. We did have a couple of renewals that didn't get signed over Thanksgiving weekend and got signed in the first week of December, that impacted that number a bit. So I think the renewal rate was relatively good, especially if you think of it in terms of those couple of deals that slipped into the beginning of the fourth quarter.
Operator: Our next question is from Brendan Smith with TD Cowen.
Brendan Smith: I wanted to actually first ask about this ongoing AI integration with the core platform and how the initial rollout is going? Anything of note you're hearing from customers? And maybe just how we should think about that as it pertains to license renewals and maybe pricing flexibility within those renewals over the coming months.
Shawn O'Connor: Yes. The initial release of some of the new AI features went out with the GastroPlus release late last fiscal year, response has been favorable, very favorable to it with the -- what more can you do as some clients have gotten visibility to our road map and what that it's monetization comes along the way in several forms and shapes. We were a bit more aggressive this year in terms of our price increase, with some of that AI technology being embedded in the base model, if you will. And there will be opportunities to monetize it modules and other new products into the future. I look forward to walking through that in a couple of weeks at our Investor Day. But it certainly is immediately contributing as we bring it out across our product line in terms of an ability to be a bit more aggressive in terms of pricing.
Brendan Smith: Got it. That's super helpful. And maybe just related to that, and this might be more a question for the Investor Day in a couple of weeks. But are there plans to launch any new verticals or products within the existing platform over the next, say, 12 to 18 months? Or should we really see this year as a time to land and expand within the existing franchises you have on hand now.
Shawn O'Connor: There's no desire, if other verticals take us outside of our supportive drug development now. We do support work effort in the chemical space, agrobusiness, cosmetics, some business there. But certainly, our focus is primarily in drug development discovery clinical development, commercialization, clinical ops. And our baseline engines GastroPlus, Monolix, QSP capabilities, et cetera, are the engines that drive there are -- there's ability to create new revenue streams with the product ecosystem that we're working to deliver to the marketplace. And yes, we -- we'll walk through that in a little bit more detail at the Investor Day. I wouldn't anticipate that their delivery and translation into revenue flow I guess the way to put it is that it's not anticipated to be significantly impactful to our '26 revenue and/or is embedded in our guidance already.
Operator: There are no further questions at this time. I'd like to hand the floor back over to Shawn O'Connor for any closing remarks.
Shawn O'Connor: Yes. Thanks, everyone. We look forward to sharing more about the strategy we've been talking about and referring to our product road map. The next phase of our evolution is at our Virtual Investor Day on January 21. We're excited to give you a deeper look at how our ecosystem comes together and how it will create value for our clients investors and patients will go. You can register on the Investor Relations section of our website. And if you have any questions, please feel free to reach out to Lisa Financial Profiles who can assist with any questions you might have there. But otherwise, I appreciate your attention, and look forward to seeing you later in the month. Take care, everyone.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.