Certara, Inc. (CERT) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Certara First Quarter 2021 First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler Investor Relations. Please go ahead.
David Deuchler: Good afternoon everyone. Thank you all for participating in today's conference call. On the call from Certara we have, William Feehery, Chief Executive Officer; and Andrew Schemick, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2021. A copy of the press release is available on the company's website.
William Feehery: Thank you, David. Good afternoon everyone. Thank you for joining Certara's first quarter earnings call. Andrew and I will start with prepared remarks and then, we will take questions. I am very pleased with how the Certara business performed overall in the first quarter of 2021, our first full quarter as a public company. While we are turning the corner on this pandemic in some regions, COVID-19 continues to impact many lives around the world. I am deeply proud of how our Certara team has remained focused on our customers, developing innovative ways to further the adoption of our end-to-end platform to accelerate medicines to patients. In this quarter, we continued to strengthen our position as a global leader in biosimulation, by delivering strong financial results and executing against our well-defined strategic plan. Revenue in the first quarter grew 16%, compared with the first quarter of 2020, achieving another record quarter of revenue.
Andrew Schemick: Thank you William. Hello, everyone. As mentioned earlier, total revenue for the three months ended March 31 2021 was $66.7 million, representing year-over-year growth of 16%. Software revenue was $21.9 million, which increased 8% over the prior year period as a result of strong first quarter bookings and renewal rates. Software bookings were $21.9 million, which increased 22% from the prior year period and the aggregate renewal rate was 92%. We continue to see strong demand for our biosimulation software products. Services revenue was $44.8 million, which increased 21% over the prior year period. The growth in services revenue was also driven by strong demand for our biosimulation solutions. The overall growth rate in services was very robust despite some lingering effects of clinical trial delays from last year, which may impact the timing of project start-ups for regulatory science engagements. The installed base of Certara customers continue to see the value of our highly technical consulting business, which has led to continued success of our land and expand strategy. This can be seen in services bookings of 60 million, which increased 39% from the prior year period. Total cost of revenue for the first quarter of 2021 was $26 million, an increase from $22.2 million in the first quarter of 2020, primarily due to a $2.3 million increase in employee-related costs and a $0.8 million increase in stock-based compensation costs, partially offset by decreases in travel related costs and retention expenses. Total operating expenses for the first quarter of 2021 were $35.1 million, an increase from $27.3 million in the first quarter of 2020, primarily due to a $3.9 million increase in stock-based compensation expenses, $1.4 million increase in employee related costs and $1 million of ongoing public company costs. The remaining increases were due to increases in secondary offering costs and acquisition related costs.
William Feehery: Thank you, Andrew. In summary, Certara had a successful start to our year and our first full quarter, as a public company. Our Certara team continues to focus on our commitments to customers. And deliver strong growth for our shareholders. We believe that, our end-to-end platform is well positioned to continue benefiting from solid market trends. We expect to capture a larger share of overall biopharmaceutical R&D spend, as we continue to innovate acquire and add new solutions to our end-to-end platform. At this point, we'll open the call for questions. Operator, can you open-up the lines?
Operator: Our first question comes from the line of Luke Sergott from Barclays. Your line is now open.
Luke Sergott: Hey guys. Just a couple of -- just a quick one here on guidance, so I'm just trying to get a sense of you had a really strong bookings quarter. Things seem to be opening up. And a decent beat on the top line. So, on a modest guidance raise, is this just -- as we think about conservatism, I know you have 85% visibility into your business. Is there something with those bookings that they're going to flow through later on, most likely 2022, or just how to think about that from -- as things seem to be opening up it seems like we should be expecting a little bit more.
William Feehery: Yeah. Thanks Luke. And Andrew, why don't you take that?
Andrew Schemick: Okay, sure. So the year-over-year growth rates have been stronger than we had anticipated. I would say that, in terms of conservatism, given we're a new public company, those bookings results make us very comfortable with our guidance, but we'd like to see another quarter or two before making any adjustments. We'll certainly reassess it at that time. The way that I look at this is not just in a quarter, but also looking back in the trailing 12 months. And on a trailing 12 months basis, the bookings growth was a little bit over 20%, 22% which is highly supportive of achieving the mid-to-high teen's revenue growth. And with another quarter of activity, I would be in a better position to assess the guidance.
Luke Sergott: All right. That's fair. Yeah, I fully get that. And so, when I think about the margin trajectory here and the pacing through the year, between services and the software piece, any dynamic that you want to call out and from a modeling perspective?
Andrew Schemick: So we talked about it briefly, last call. So the first quarter and the fourth quarter are high quarters for software bookings, given the renewal cycles in software. The services we expect to kind of grow sequentially throughout the year, given the kind of profile of the bookings that are coming in. Historically, if you kind of normalize for one-time items or movements about, 49% of the EBITDA is generated in the first half of the year, 51% in the second half of the year. The margin trajectory will pace with the revenue growth. So targeting that kind of mid-teens revenue growth with the -- maintaining our EBITDA margin outlook.
Luke Sergott: Okay, great. If I could sneak one last one in on the Shanghai office, I know you guys are opening that one. Where are you on that being on? And when can, we start expecting more of a meaningful contribution from that area?
William Feehery: Hi. Thanks Luke. The office is open. It opened at the very end of last year. And we started hiring then. So we have a small but growing team there. And so, as you'd expect we've got some growing to do, as we go forward. We do have a nicely growing business in Asia Pacific and in China, partly due to the fact that we get some sales that were coming in even before we opened that office. So I think it's a good sign for the future, but we've got some building to do as we go through the year here. And we hire people.
Luke Sergott: Yeah. It sounds great. Thanks a lot. I leave it there. See you forward.
William Feehery: Thanks a lot, Luke.
Operator: Thank you. Our next question comes from the line of Dave Windley from Jefferies. Your line is now open.
Dave Windley: Hi. Good afternoon. Thanks for taking my questions. William, I wanted to ask around the biologics simulator description that you gave. And my curiosity is, whether you as a management team, have visibility into either how your clients are applying your software between biologics and small molecule and applications? Or if you could comment perhaps on how this expanded biologics simulator opens up new market to you? Just trying to get an understanding of how that could accelerate growth in the biologics side.
William Feehery: Yes. So, if you go way back, Simcyp started focused on small molecules. And we've been adding functionality related to biologics over the last, I don't know, five years or so. So in some ways the latest release is a culmination of that. And it's not the final state, so we'll continue to innovate. We are doing a lot of work in biologics today. Quite a lot of our customers are working on biologics. There are somewhat different questions that get asked around biologics versus small molecules, which is why the software is different. What we've announced is that, we've decided to make the biologics module a stand-alone module. Because we have some customers that work on both small molecule and biologics, but there's a large group of customers that are only working on biologics. So it, sort of, lets us address them a little bit and more straightforward way with that product.
Dave Windley: Got it. That's helpful. Thank you. And then, I guess, kind of similar questions about the Secondary Intelligence product that you announced this week. It sounds like that's very unique in the market newly launched. Is that something that you expect to have rapid uptake? Or is that something that you need to kind of seed the market and make your customers familiar with? How would you expect that to evolve? And do you expect that your clients, maybe on both of these, are they likely to license software from you on these or engage you through tech-enabled service to get at these capabilities, predominantly?
William Feehery: Yes, great question. No. Great. Thanks for that question. So we believe that the Secondary Intelligence product is the only software we're aware of, of its kind that predicts. And what it does is, it predicts safety issues that are derived from secondary pharmacology. So this would be the action of a drug on targets that were sort of unintended. So there isn't an existing market for this. We are -- to your point, I think, we're creating the market. And we're out there announcing this, so that we're starting to get customer feedback over the next six to 12 months. What we've announced right now is the first version of the product. We have about, let's say, about a dozen receptors right now. By this summer, we'll have more than 40 in the product. And I think that as we add more and more we're going to find that there's a fairly large group of safety pharmacologists and toxicologists at drug companies and we'll find this to be a very useful product. But as a new category, we do need to go out and do our introduction and demonstrate it. So that's what we're kicking off right now.
Dave Windley: Got it. And then, the -- you think clients will license the software or engage in services or…
William Feehery: I'm sorry. I apologize. Yes, sorry, I didn't get to your whole question. The answer is both. You can license the software and we will also provide service through tech-enabled services as well. It depends on -- as I think we've said in previous calls, it really depends on the client. Larger clients with internal groups, a lot of times they prefer to license the software directly. And other ones prefer to use our services groups to do the work, to basically use our software and do the work for them. So both of them are valid, I guess, you call it, delivery mechanisms for the technology to our customers.
Dave Windley: Got it. I’ll leave it at that. Thank you very much.
William Feehery: Thank you, David.
Operator: Thank you. Our next question comes from the line of Michael Ryskin from Bank of America. Your line is now open.
Michael Ryskin: Hey, guys. Thanks for taking the question. Andrew or William, first one would be on -- I think in your prepared remarks you had an interesting comment in there on clinical trial delays from last year and sort of the lingering impact on the services business. I was wondering if you could expand on that a little bit, sort of, how should we think about that impacting the business as we go through the rest of the year. Are you sort of hinting that, that could be a nice little tailwind, as some of those delays work their way through the system and sort of we go back to operating in normal, specifically, on the tech-enabled services side of things? I was wondering if you could clarify that a little bit.
William Feehery: Yes, it's a great question. As we pointed out, the market is somewhat disrupted due to COVID and the fact that there were delays in clinical trials in 2020, for parts of 2020, that are still working their way through the drug development cycle and have resulted in delays to certain projects that we have. We haven't lost any projects, but we have seen, in some cases that, projects are delayed as they're waiting for their data to come in. As you point out, that will mean -- that has some implications around the potential that we'll have multiple projects catching up with us in the later part of the year. But the post -- I don't know if it's fair to call it a post-COVID situation. But as we come out of COVID, we're in kind of a unique situation and want to keep an eye on that.
Michael Ryskin: Okay. All right. That's fair. And then, a follow-up on the last couple of questions on some of the new product introduction, Secondary Intelligence, the new Simcyp nodule. I'm wondering, how should we think about the cadence of new software introductions or new solutions going forward? Is this a couple of new launches a year, a couple of new launches a quarter? And are these more sort of complementary to the business, or is there any -- or should we should anticipate any material introductions on their own sort of as a complementary package? So how do you think about expanding the portfolio?
William Feehery: Yeah. I think it would be a challenge for any software company to do a couple of products a quarter. So I guess you should think more around a couple of a year is something that I think we could be proud of. These products are I think extensions of our existing business, but pretty sophisticated extensions. Particularly the Secondary Intelligence product we're very excited about that moves us into really what we think will be an entirely new market and a new way to help our customers out. But at the same time, it is an extension of a logical extension of what we've been doing in Simcyp. And there'll -- how do I put it? You should expect there'll be others as we go forward.
Michael Ryskin: Okay. And then one last one, one last quick one for me. Andrew, I think you mentioned a 5% increase to head count in the quarter. Is that just sort of early in the year bump up, or are you anticipating sort of a similar cadence through the rest of the year? How do you think about SG&A and sort of head count additions as we go forward?
Andrew Schemick: Yeah I think that's a similar -- I think the best way to look is similar cadence for the rest of the year.
Michael Ryskin: Okay. Great. Thanks.
Operator: Thank you. Our next question comes from the line of John Kreger from William Blair. Your line is now open.
John Kreger: Thanks guys. I have a couple of questions about mix. I think in the past, you've talked about your revenue mix being mainly in clinical with much smaller chunks in discovery preclinical and post market. Assuming I've got that right, if you look at your recent bookings, are you seeing any shift in that mix, or should we expect that to be fairly typical? What I'm getting at is sort of where are you seeing the biggest changes in how clients are using your software?
William Feehery: Andrew, do you want to address that question?
Andrew Schemick: Sure I can start. The mix is consistent with the previously discussed mix. No changes there.
John Kreger: Great. Thanks, Andrew. And maybe a similar one how about mix between large and small clients? Is that fairly stable, or are you seeing any change?
Andrew Schemick: What we see -- I mean -- I can answer that. What we're seeing is growth in both areas. We're seeing growth in more of the mid-teens in large clients and higher growth rates and uptick with the small clients. We had a record number of new logos in the first quarter.
John Kreger: All right. Thanks. And then maybe one more, Bill. Can you just talk a little bit about how you guys have played a role in COVID work? Should we view that as at all a material contributor if you think back to the last couple of quarters? And therefore, would you expect it to be a headwind or a tailwind as you move through 2021?
William Feehery: Yeah. Thanks, John. The way I think about this is that the business was really resilient throughout COVID. So I'm really proud that we were able to continue serving our clients without really skipping a beat. We did work on I forget what we have said last year, more than 30 COVID projects last year. But a lot of that had to do with the customers moved to work on COVID and we moved with them. And then when they move back to work on other things we're moving back with them. So from a financial standpoint, we don't believe this that it will really be a significant event. Obviously, the operations of the company we worked on somewhat different projects last year. And we're managing the disruptions that to some extent happened in the pharmaceutical pipeline as we go into the first quarter. But we have a very diverse and broad business across pharma. And so that kind of lets -- it basically makes us pretty stable throughout the whole things. I wouldn't expect it to be either really a headwind or a tailwind as we go into this year.
John Kreger: Okay. Thank you.
Operator: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to William Feehery, CEO for closing remarks.
William Feehery: I wanted to thank everybody for joining us. This was our first quarter as a public company. I believe that Certara performed very well. I'm very proud of our team. The team set out with a very good solid plan. I believe we've delivered on that throughout the quarter. And I think we are quite well set up as we go forward for the rest of the year. We'll look forward to updating everybody in the coming quarters. Thank you very much. And with that, I think we can wrap up tonight. Thank you.
Operator: This concludes today's conference call. Thanks for participating. You may now disconnect.
