Certara (NASDAQ:CERT), a leader in biosimulation and AI for the healthcare industry, has reported a 7% increase in total revenue for the first quarter of 2024, reaching $96.7 million. The company's software segment showed robust growth, with revenue up by 19% to $39.3 million, attributed to strong performance from its Simcyp, Phoenix, and Pinnacle 21 platforms. Despite a slight dip in earnings per share from $0.12 to $0.10 compared to the same quarter last year, Certara is confident in the recovery of its markets and has reaffirmed its full-year guidance with expected revenue between $385 million and $400 million and an adjusted EBITDA margin of 31% to 33%.
Key Takeaways
- Certara's total revenue for Q1 2024 grew by 7% year-over-year to $96.7 million.
- Software revenue increased significantly by 19%, driven by key platforms.
- Earnings per share for Q1 stood at $0.10, slightly lower than the previous year's $0.12.
- The company launched Certara Cloud, enhancing access to its software suite.
- Certara ended the quarter with $224.8 million in cash and cash equivalents.
- Full-year revenue guidance is set between $385 million to $400 million, representing a 9% to 13% growth.
- Adjusted EBITDA margin is projected to be between 31% and 33% for the full year.
Company Outlook
- Certara remains optimistic about market recovery in 2024.
- The company plans to expand commercial infrastructure and enhance biosimulation software capabilities.
- Full-year guidance is reaffirmed, with anticipated growth in revenue and stable adjusted EBITDA margins.
Bearish Highlights
- The company experienced a slight decline in earnings per share from the same quarter in the previous year.
- Margin for Q1 was reported at 30.2%, lower than the full-year margin guidance due to increased expenses and integration of recent acquisitions.
Bullish Highlights
- Software bookings and revenues saw a 19% growth in the first quarter.
- Certara is targeting companies gaining funding in capital markets, expecting activities to pick up in the second half of the year.
- The company is optimistic about the second half of the year, anticipating higher revenues and improved margins.
Misses
- Earnings per share in Q1 2024 were lower than Q1 2023.
Q&A Highlights
- Executives expect an increase in bookings in the second half of the year, driven by an improved funding environment.
- Changes to the sales force organization are aimed at improving efficiency and cross-selling, with further benefits expected from ongoing training and sales territory improvements.
- Stability in end markets is anticipated, and guidance does not include potential benefits from the biotech funding environment.
Certara's first-quarter performance and strategic initiatives, such as the launch of Certara Cloud and the strengthening of its software portfolio, underline the company's commitment to maintaining its growth trajectory. With a solid cash position and a clear focus on expanding its commercial reach and software capabilities, Certara is poised to capitalize on the expected recovery of its end markets and the potential uptick in biotech funding activities. Investors and stakeholders will be watching closely as the company progresses towards its goals for the remainder of 2024.
InvestingPro Insights
Certara's recent financial performance paints a picture of a company in a growth phase, with a 7% increase in total revenue for Q1 2024 and a significant 19% boost in software revenue. The company's strategic moves, such as the launch of Certara Cloud, are designed to solidify its position in the healthcare industry. To provide a more nuanced view of the company's financial health and future prospects, we can turn to some key metrics and insights from InvestingPro.
InvestingPro Data shows a market capitalization of $2.83 billion, reflecting the company's substantial size within its sector. Despite not being profitable over the last twelve months, analysts predict that Certara will be profitable this year. This is supported by a notable gross profit margin of 60.2% in the last twelve months as of Q1 2023, indicating strong operational efficiency. Additionally, the company's revenue growth of 5.57% during the same period suggests a steady upward trajectory.
One of the InvestingPro Tips highlights that analysts have revised their earnings downwards for the upcoming period, which could be a point of concern for potential investors. However, it's important to note that the stock price has experienced a large uptick over the last six months, with a total return of 41.51%, signaling investor confidence in the company's future performance.
Investors interested in a deeper analysis of Certara's financials can find more InvestingPro Tips on https://www.investing.com/pro/CERT, with additional insights to guide investment decisions. For those considering a subscription, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 11 additional tips available on InvestingPro that could provide further clarity on the company's financial health and stock performance.
Full transcript - Certara Inc (CERT) Q1 2024:
Operator: Good day and thank you for standing by. Welcome to the Certara First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, David Deuchler.
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 John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2024. A copy of the press release is available on the company’s website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying materials for additional information, which you can find on the company’s Investor Relations website. In their remarks and 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 recent earnings press release available on the company’s website. Please refer to the reconciliation tables in the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 7, 2024. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I’ll turn the call over to William.
William Feehery: Thank you, David. Good afternoon, everyone. Thank you for joining Certara’s first quarter earnings call. John and I will start with prepared remarks and then we will take your questions. Throughout the first quarter, Certara built upon the solid business momentum observed in the fourth quarter of 2023. We are pleased with our start to the year, delivering total revenue of $96.7 million representing reported growth of 7% and constant currency growth of 6%. Customer demand for our biosimulation software and services has remained strong, while interest in our AI-enhanced products continues to grow following the acquisition of Vyasa just over a year ago. As drug developers look for new and exciting ways to increase pipeline efficiency and accelerate project timelines, Certara’s products and services remain top of mind. We have been encouraged by positive trends in clinical trial activity and biotech funding so far this year. Sentiment around the industry is becoming more optimistic as capital raising has allowed smaller companies to shift their spending back towards R&D initiatives. Conversations around pipeline priorities and project timelines have become more constructive across all three of our customer tiers. Considering recent developments, we are cautiously optimistic that our end markets will continue to recover throughout 2024. However, it will take time for funding to translate into bookings and sales at Certara and we have not yet seen an inflection point in activity through the first several months of the year. Internally, our focus remains on several key initiatives that will drive Certara’s next stage of growth. On our last earnings call, we highlighted the investments we are targeting in 2024, including improving our commercial infrastructure and expanding the reach of our biosimulation software capabilities. We are dedicated to unifying our organization both internally and externally, which will drive commercial success alongside strong product improvements. Last month, we launched Certara Cloud, a unifying platform that integrates access to our entire software suite of applications. Certara Cloud will make our software solutions easier to navigate across each user’s organization and with external parties, enabling collaboration across different workflows. Certara Cloud already has 1,500 client-specific portals and is currently used by 15 of the top 30 biopharmaceutical companies. Investments like Certara Cloud and other initiatives underway are designed to ease access to the Certara platform, improve data and information security and deliver enhanced capabilities to customers. I am proud of the work we have accomplished so far and look forward to updating you further on our progress throughout the year. Now turning to the performance of the business. In the first quarter, we delivered software revenue of $39.3 million representing 19% reported growth and 18% constant currency growth. Growth in the quarter was driven by our industry leading Simcyp, Phoenix and Pinnacle 21 platforms, which make up the majority of our software revenues. One area of focus during the quarter was converting customers from Phoenix licenses to Phoenix hosted, which is a cloud-based version of the product. With cloud computing integrated into Phoenix, customers will have immediate access to upgrades, remote workflow processing and improve performance and run times. Customer uptake continued to progress nicely and we are pleased by the feedback we have received to-date. Throughout the quarter, our software team also began to accelerate the development of CoAuthor, a regulatory writing tool that uses AI and machine learning to drive regulatory submissions. The next version of CoAuthor will be officially launched at the end of the second quarter and early versions are used by our internal regulatory writing team on customer projects. Over time, CoAuthor will drive efficiencies across different regulatory writing processes and we have received significant interest from customers. Our technology-driven services segment delivered revenue of $57.3 million in the first quarter, which was flat year-over-year on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious customer spending in 2023. In the first few months of the year, we have been encouraged by customer discussions across our services group. Certara’s ability to identify and close new deals has been enhanced by the organizational changes we made last August. Customer activity has remained stable and we continue to have constructive conversations with prospective customers for both biosimulation and regulatory services projects. We believe that recent strength in biotech capital markets could be a leading indicator of improvement, but we remain patient as we approach new engagements. In conclusion, Certara is in a strong position to grow in 2024 headlined by continued strength in software and a recovery in our services business. We are investing to expand our commercial footprint and uncover new capabilities for biosimulation, while also making our products easier to use. I am confident in our ability to meet our 2024 goals and I look forward to updating you as we progress throughout the year. I will now turn things over to John to discuss our financial performance.
John Gallagher: Thank you, William. Hello, everyone. Total revenue for the 3 months ended March 31, 2024 was $96.7 million, representing year-over-year growth of 7% on a reported basis and 6% on a constant currency basis. Software revenue was $39.3 million in the first quarter, which increased 19% over the prior year period on a reported basis and 18% on a constant currency basis. The growth in the quarter was driven by Biosimulation software and Pinnacle 21. Ratable and subscription revenue accounted for 61% of first quarter software revenues, up from 56% in the prior year period. Software bookings were $33.1 million in the first quarter, which increased 8% from the prior year period. Trailing 12-month software bookings were $139.5 million, up 11% year-over-year. In the first quarter, the software net retention rate was 114%, which is consistent with our long-term growth profile. Now, turning to services revenue, which was $57.3 million in the first quarter flat versus the prior year period on a reported basis and on a constant currency basis. Our services business continues to recover following a period of cautious spending among our customers. Technology-driven services bookings for the first quarter were $72.7 million, which decreased 11% from the prior year period. Trailing 12-month services bookings were $256 million, also down 11% as compared to the prior year. Total cost of revenue for the first quarter of 2024 was $39.3 million, an increase from $34.9 million in the first quarter of 2023 primarily due to a $1.9 million increase in employee-related expenses, a $1.2 million increase in stock-based compensation, and a $0.8 million increase in software amortization. Total operating expenses for the first quarter of 2024 were $58.7 million, an increase from $48 million in the first quarter of 2023. The components of operating expenses are as follows. Sales and marketing expenses were $10.7 million compared to $8 million in the first quarter of ‘23. This increase is primarily due to a $1.7 million increase in employee-related expenses due to the expansion of the sales force. R&D expenses were $12 million compared to $9.3 million for the first quarter of 2023. R&D expenses were up primarily due to a $3 million increase in employee-related costs as we grew our team of software developers. G&A expenses were $23 million compared to $19.8 million for the first quarter of 2023. The increase was due to a $1.6 million change in contingent consideration primarily related to the acquisition of Vyasa and a $1.1 million increase in employee-related expenses, partially offset by a $0.9 million decrease in stock-based compensation. Intangible asset amortization was $12.6 million compared to $10.5 million in the first quarter of 2023. Depreciation and amortization expense was $0.4 million, flat with last year. Continuing down the P&L. Interest expense was $5.8 million compared to $5.5 million for the first quarter of 2023 due to higher interest on the floating rate portion of our term loan. Miscellaneous income was $1.6 million compared to $0.5 million in the first quarter of 2023 primarily related to the return on our cash invested. Income tax was a benefit of $0.8 million compared to an expense of $1.1 million for the first quarter of 2023. Net loss for the first quarter of 2024 was $4.7 million compared to net income of $1.4 million in the first quarter of 2023. Reported adjusted EBITDA for the first quarter of 2024 was $29.1 million compared to $32.3 million for the first quarter of 2023. Adjusted EBITDA margin was 30% for the first quarter of 2024. Reported adjusted net income for the first quarter of 2024 was $16.5 million compared to $19.3 million for the first quarter of 2023. Diluted loss per share for the first quarter of 2024 was $0.03 compared to earnings per share of $0.01 in the first quarter of 2023. Adjusted diluted earnings per share for the first quarter of 2024, was $0.10 compared to $0.12 for the first quarter of last year. Now moving to the balance sheet. We ended the quarter with $224.8 million of cash and cash equivalents. As of March 31, 2024, we had $287.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. We are reiterating our guidance for the full year 2024 as follows. We expect total revenue in the range of $385 million to $400 million, representing growth of 9% to 13% compared with 2023. We expect to grow adjusted EBITDA on a dollar figure basis in 2024 and expect adjusted EBITDA margin in the range of 31% to 33%. We expect adjusted EPS in the range of $0.41 to $0.46 per share, fully diluted shares in the range of $160 million to $162 million, and the tax rate in the range of 25% to 30%. I will now turn the call back over to our CEO, William Feehery for closing remarks.
William Feehery: Thank you, John. To summarize our message today, we are pleased with our first quarter results, and we look forward to executing our 2024 goals. We have a lot to be excited about at Certara as we advance biosimulation forward with our innovative technology. We will now open the line for questions. Operator, can you open the line.
Operator: Thank you. [Operator Instructions] Our first question comes from David Windley at Jefferies.
David Windley: Hi, good evening. Thanks for taking my question. I wanted to start with a question on the Cloud launch. Bill, I think you mentioned 1,500 or something in that neighborhood client portals that you’ve already established in 15 of the top 30 biopharmas wondered if you could add a little more detail to that. And then maybe describe – again, you mentioned those top biopharma. So I’m wondering whether the uptake is more skewed to your larger clients or smaller or across the board and just basically how that uptake is proceeding and how it matches with your expectations?
William Feehery: Great. Thanks, David. Appreciate the question. So the Certara Cloud is our first step – well, it’s our next step, I would say, towards making the suite of Certara software products into a true platform. So what we’re doing is we’re setting this up so that our new launches of products. That is how you access them. And so you’ll see – obviously, we have, as you pointed out, quite a number of customers who are starting to use it today, and that will naturally increase as we go forward and as new releases of products come out where that’s really the only way to access the software. We started out – to answer your question directly, we started out with some smaller ones just to make sure that – that everything was operational and then we’ve been migrating to the larger ones. But it should accelerate as we go through the year. We’re pretty excited about this because it has a couple of advantages to us. One is it’s a way to promote reuse of certain software modules across our platform. So instead of writing them for every piece of our – every product we have, we can write them once and we can use a best-in-class functionality across all of our products. We’re also getting to unite the look and feel of our products. And also, this enables us to more easily share data between them. So it’s also probably have some good marketing advantages in terms of, yes, when companies log in, they see which products they have and which products they could have, and we can have a good conversation with them from that standpoint. So we’re pretty excited about it. It’s kind of the next evolution of our software – and as you pointed out, it’s got a good uptake from our customers.
David Windley: On – as a follow-up to that, I believe you’ve regularly versioned Simcyp every year – and I believe that versioning, and you probably do that on other products, but just calling out Simcyp, I believe that versioning drives economics for you, you add capabilities and maybe get a little bit more if nothing else inflationary price, are those types of economics going to be the same in the cloud-hosted products or will that change?
William Feehery: Yes. So Simcyp, as you pointed out, we launched – we have a new version every year. Some other ones, it’s a little bit different. For example, Phoenix, we’re moving to an every 6-month cycle. So there’s certainly an advantage to our economics in terms of each one has additional features and there’s a reason to upgrade. Not everybody – I think with the 6-month cycle, we’ll see maybe people might not do every 6 months, but they’ll sort of be an increasing pressure to do that. In terms of the economics of this, I think a lot of this has to do with when we had desktop installations, a lot of our customers have to go through expensive software validation projects and those become less onerous as we move to the Cloud, partly because we can do a lot of the work ourselves and we could share that with them. And so we hope also that we’ll get – that will also foster more frequent updates as well.
David Windley: Got it. And if I could just ask one more on your guidance on the revenue I believe, at the midpoint, your guidance points to about 11% growth. And our modeling was that a little more than half of that was coming organically little less than half inorganically. I wondered if you could confirm that, that’s still your thinking? And could you break out the organic versus inorganic contribution in the first quarter? Thanks. That would be it for me.
John Gallagher: Yes. Hi, David. So here on the quarter, we put up 7% revenue growth and as we said when we first put out the guidance, and we’re still confident in that guidance, by the way. But when we first put that out, we said that on the services side, there’d be a bit of a first half, second half story or a ramp into the later part of the year related to that part of the business. So we still anticipate that to be the case. And so Q1 came in line with our expectations. On an organic basis, the deals contributed a few hundred basis points to the growth on the quarter.
David Windley: Okay. Great. Thank you.
Operator: Thank you. [Operator Instructions] Our next question comes from Jeff Garro at Stephens.
Jeffrey Garro: Hi, good afternoon. Thanks for taking the questions. Maybe a couple for me on the services bookings results and other trends there. You had cited some timing impact on services bookings in the quarter. So I wanted to ask if you had any comments on how visibility into services bookings has trended since the quarter closed to start?
John Gallagher: Yes. On services bookings, we did experience some timing on bookings, but it was actually on the software side more so than it was on the services side. So software bookings had some timing that on some large Pinnacle deals that were scheduled for March ended up coming in April, and those have come in and we don’t have any concerns about it. On the services side, though, to your question, the story there is on the Tier 1s, it’s more of a tough compare. So if you look back at services bookings – then we have a very large Q1 of 2023 on the services side, and so there’s a tough compare there. As you look at the other tiers, though, then the business is still recovering. So our recovery is still in place. So when you look at Tier 2 and Tier 3 bookings then what we’re seeing is sort of stability from where we were in the second half of last year. So if you look at Q3 and then look at Q4 and now Q1 services bookings are kind of in line on a dollar basis with what we were expecting to be the case there. So – so a little bit of a tough comp is one on pressuring the growth rate, but then from a dollars perspective and achievement, it’s playing out as we expected with Tier 1 or the Tier 2 and Tier 3s, still not back to their historic levels.
Jeffrey Garro: I appreciate the granularity there on customer pigmention, maybe to probe a little bit deeper on your earlier comment on kind of a first half versus second half story on services revenue growth. How should we think about services bookings or backlog converting to revenue for the fiscal year? It looked like nice execution on that front here in the first quarter. Should we expect more sequential improvement from here or does the first quarter represent kind of the right velocity of conversion for looking at things from say a trailing 12-month services bookings to revenue conversion perspective?
John Gallagher: Right. Yes. So I mean, look, as far as conversion, then we’re pleased with the conversion. It’s on our expectations. So backlog, I’d say there’s not an unusual amount of backlog conversion, but it is playing out as we thought it would with meaning we have some bookings left over from last year. We’re converting those. And the revenue plan played out as we anticipated. As you look forward on bookings and – we are excited about what we’re seeing. And as Bill mentioned in the prepared remarks, we’re excited about the biotech funding environment and the fact that some of our customers are or potential customers are getting funded, but it’s really important to note that we haven’t reached the inflection point. We don’t see that in the bookings in Q1. We don’t see it in the bookings to date in Q2 and so if that’s going to play out for us, it’s definitely going to be more in the back half of the year, and we haven’t seen it yet.
Jeffrey Garro: Fair enough. I will stop there and jump back in queue.
Operator: Thank you. [Operator Instructions] Our next question comes from Luke Sergott at Barclays (LON:BARC).
Luke Sergott: Great. Thanks. I just wanted to follow-up on that M&A and kind of get a little bit more specific there. And what the contribution was to each segment in the quarter? And then as David talked about, what’s embedded in guidance, any changes to those to what you’re expecting for the year?
John Gallagher: No. The guidance, no changes there. We’re confident in the range that we have and Q1 played out in-line with our expectations. The M&A contribution – when you look at bookings, it’s less than 2% of bookings was related to M&A. So it’s really not a material amount. And then as I mentioned earlier, when you look at our 7% reported revenue growth then there was a contribution of a few hundred basis points. But we haven’t split that out on a software services basis.
Luke Sergott: Okay. Thanks. And then I guess as we’re thinking about the guidance, I understand the first half, second half catch up. But on the services piece, we’ve seen the regulatory business be softer for quite a while. And then you’re talking about – you had a little softer bookings here in the first quarter. I’m just trying to figure out when that what kind of visibility you have on the services side? Is that to bake in that kind of second half ramp recovery?
John Gallagher: Well, I mean, a key aspect of that is we put together the guidance with the notion of stability, which is what we saw play out on the quarter, and it was what we saw in the bookings results for the second half of last year. To get to the higher end of the range, then we would need to see that inflection point due to any biotech funding that might be out there. And by the way, we are targeting those companies that are gaining funding in those capital markets, we are targeting them from a commercial basis. But again, any activities are really going to be in the second half of the year. Services, so the regulatory business in the meanwhile as well as our biosim services, especially in the Tier 2 and Tier 3 customer categories continue to be impacted by the same dynamics that we saw last year. Do we see stability? We do. We’re happy about that. We don’t see continued decline, but we also don’t see acceleration and haven’t hit that inflection point yet.
Luke Sergott: Okay, that’s helpful. Thank you.
Operator: Thank you. [Operator Instructions] Our next question comes from Michael Ryskin at BofA.
Michael Ryskin: Great. Thanks for taking the question. I want to go back to the bookings in the quarter. I know you called out a couple of times the strong or the elevated comp in services bookings I mean I think it’s elevated on the dollars basis, but on a percent basis, it was only up 4% last year. So just trying to parse out a little bit on – is the seasonality on that expect to be a little bit different? Or put another way, if I look at services bookings, last year, it’s $82 million in 1Q and then $50 million, $57 million, $75 million the rest of the year. So sort of a big step down and then ramping in through the rest of the year. Are you expecting a little bit of a more spread out seasonality there? I know it’s tough to talk about bookings ahead of time, but just trying to reconcile that trailing 12-month bookings growth and the 1.1 book-to-bill with, like you said, some expectations with pretty steady revenue growth this year. Thanks.
John Gallagher: Yes, Mike. So – what we typically see is we do typically see a Q2 that’s lower than Q1. So to your point, that seasonality and that typical seasonality there’s not – especially given that the end market environment has really not changed, then there’s no reason to think that, that typical seasonality wouldn’t continue to play out the way that it has. So that’s probably the best indication that we can give. Sorry, go ahead.
Michael Ryskin: No, I was going to say, just to clarify, yes, there’s usually a step down, but last year, there was a very sharp step down from $82 million to $50 million. I think this year, is it safe to say that you expect less of a step down and then last year, 1Q was just elevated in dollar terms. I’m just trying to think about services…
John Gallagher: Yes. The answer to that is yes. The step down last year was unusual. And then from that point forward, we saw some recovery and stability. And so even though we do anticipate some level of seasonality at what I would say happened last year, versus what you saw in other years was unusually large of a step-down. And sitting here in May, we don’t anticipate that we’d see that level because we once we step down there, then we started to see recovery into Q3, we saw some acceleration into Q4 and now Q1 of 2024 has played out in-line with our expectations.
Michael Ryskin: Okay. And then just sort of the…
John Gallagher: The other thing to add to that, I guess, is really, if you look at the years before 2023, if you look at 2021 or 2022, then that’s what we would point to as more sort of typical seasonality.
Michael Ryskin: Okay. Alright. Fair enough. And then, I guess, sort of the second part of that question would be on the book-to-bill, using the trailing 12 months, I think it’s 1.1 this quarter for most of the last year, it was in sort of like the 1.15. And then prior years, it was more of 1.18, 1.2. is a little bit lower than it’s been in prior years. Is that just sort of like catching up to the softer bookings you saw last year? I mean is it fair to say that you expect that to reaccelerate back into the 1. 2 range as we exit the year?
John Gallagher: Yes, we do expect acceleration over time, but it’s – we need to see some of the customer end market behavior recover as well. We have – keep in mind, we exited the year at 1.1, where – and in Q3 of last year, we were at 1.1. So we continue to be at 1.1 as a spot that we haven’t yet seen an inflection point in the end market customers.
William Feehery: So Michael, I think you’re talking about software a little bit. So in Q1, our software bookings were a little bit less than we expected because we had some bookings move in April. We did actually get those. So we’re feeling pretty confident that the bookings are appropriate for what we’re giving you in our outlook for the [indiscernible].
Michael Ryskin: Okay, alright. Thank you.
Operator: Thank you. [Operator Instructions] Our next question comes from Max Smock at William Blair.
Max Smock: Hi, good afternoon, guys. Thanks for taking our questions. I wanted to follow-up on Lukes question earlier about inorganic bookings. And I might have missed here, but I think you said in total, inorganic bookings are around 2% of total bookings, which implies something about $2 million in total for the quarter here. And coming into this year, you talked about those two recently acquired businesses contributing mid-single digits to growth, which I think implies based on our model around $18 million in revenue in 2024 in total. So I guess my follow-up would be, was it $2 million in bookings from the recent acquisitions in line with your expectations? And then given that small bookings number, are you still as confident in that mid-single-digit organic contribution in 2024 as you were earlier this year?
John Gallagher: Hi, Max, yes. Yes. So we are – the first quarter, to your question, did play out as we expected it to, so not a huge contribution in bookings from the acquired companies from the Q4 closure of the deal. We’d expect that to accelerate as we move the year. So I’d say that Q1 played out as we thought. And we’re still confident in the guidance message that we gave with both the reported and then the organic ranges.
Max Smock: Understood. Thank you. And then maybe one on budget plus here, so last year, you had some clients that came to you had to necessarily cut their budget but hadn’t spent their budget either. So you had some benefit there at the end of the year. Just wondering, based on your conversations so far this year, it sounds like things are getting better but not necessarily translate into orders. How do you think about the potential for that budget flush to occur at the very end of this year, Similar to what you saw last year? And what would that mean for your results relative to the 2024 guide that you’ve reiterated today?
John Gallagher: Well, in our guide, we did anticipate some seasonality, and I think that part of that seasonality is the budget flush dynamic, which typically makes our Q4 stronger on bookings than the other quarters of the year. I’d tell you that as we put together our plan we did anticipate that, that would be the case. We saw that be the case in Q4 of last year as we did in years prior as well. So what’s cooked into the guidance range is the anticipation that we see a somewhat typical tonality that we’ve seen in the business in the past.
Max Smock: Got it. Thank you both again for taking our questions.
John Gallagher: Thanks you, Max.
Operator: Thank you. [Operator Instructions] Our next question comes from Steve Dechert at KeyBanc.
Steve Dechert: Hey, guys. Thanks for taking our questions. With the nice increase in software revenues in the first quarter, was there a certain real you didn’t see more of an expansion in your margins given software is your higher-margin business? And then – can you provide more color on the strength you’re seeing in your software bookings and revenues? Thanks.
John Gallagher: Yes, sure. So we’re pleased. – software growth in the quarter was 19%. The net retention ratio was 114%. So we’re pleased with the continued execution by the software team as we exited last year, we were in a good spot and we saw that continue and accelerate into Q1. As far as the margin is concerned on the quarter, we had a 30.2% adjusted EBITDA margin. And while that margin was below our full year guidance range of 31% to 33% and it was impacted about 200 basis points by the newly acquired companies that we just closed in Q4, including 1 in December. So as we work through that, then we’re expecting some margin lift. But what I’d tell you is the software achievement during the quarter fell through with a typical margin. And then that would have been partially offset by some of the dynamics that I just described.
Operator: [Operator Instructions] Our next question comes from [indiscernible] at UBS.
Unidentified Analyst: Hello. Thank you for taking the question. Maybe if we could dive a little bit more into the margins. It sounded like a lot of the increase in cost was also associated with additional employee expenses. So maybe if you could provide more detail on how we should think about margins playing out throughout the rest of the year, keeping in mind the impact of acquisitions and hiring.
John Gallagher: Right. So full year margin guidance is 31% to 33% on the quarter, as I just mentioned, is 30.2%. So it’s below the full year range, primarily because – well, two things. One, you saw that expenses were up. I’ll come to that in a moment. But two is we’re still integrating the deals that we just closed in Q4. So that pressured the margin a bit in Q1, and we think that will resolve as we continue and finalize integrations there. The other thing, though, is you’re asking about investments or you’re asking about cost increases, what they are as investments. So we laid out our plan around investing in the business during 2024. And of course, we’re executing on that plan. As a reminder, that was centered in two areas. It was investments in sales and marketing and expanding the sales force and it was investments in R&D which was adding software developers to our team to continue to enhance our software programs, including embedding AI in all of our product offerings. So – that is what you see playing out in the quarter, and you’ll continue to see those investments during the course of the year. You asked about margin progression. We do anticipate, as I mentioned earlier, some dynamic that will drive revenue to be higher in the second half than in the first half, which is typical for the company when you look back at prior year periods. And that will help margin acceleration and accretion to that margin as well as finalizing the integration on the deal.
Unidentified Analyst: Thank you.
Operator: [Operator Instructions] David [indiscernible] at Citizens JMP.
Unidentified Analyst: Thanks. I just wanted to double quick quickly into the funding backdrop we saw a pretty fairly significant spike in the first quarter funding activity. I’m just wondering, are you surprised you aren’t seeing that inflecting yet? Or is this, I guess, relative to prior cycles you’ve experienced fairly normal in terms of what you think the timing will be between when funding picks up and when it might translate into bookings?
William Feehery: Yes. Thanks for the question. Yes. No, we didn’t expect to see an immediate increase in bookings from funding. It really started just from what we read kind of started in February and moved into March. We think it takes typically several months before that will typically start to get through to us, which is why we’ve indicated that we’re a little bit more optimistic for the second half and the first half.
John Gallagher: But to be clear, too, the – any tailwinds related to the funding environment are not in the not included in the guidance. We guided from a stability standpoint for the year.
Unidentified Analyst: Got it. Thanks. And then I guess just a follow-up on the sort of some of the investments. Can you give us a sense of on the sales force where it stands currently and kind of how much you want to scale that this year? And then I know you made some changes last year in terms of how you structure and organize the sales force. I’m wondering what some of the early returns are with those measures, whether it’s win rates or attach rates or anything else you’d like to call out? Thank you.
William Feehery: So last year, we – yes, we made some changes to our commercial organization so that we could sell products from across all of Certara to our customers who are typically buying more than one. So it’s a more efficient way of reaching them and our belief was that we would see more cross – effectively what you call cross-sell, but in terms of more customers buying a bigger range of products and also that we would become more efficient over time as well because we are – particularly in services, we still had a lot of the seller-doer model where we were taking fairly expensive technical people away from billable work and tasking them with the sales process. So I would say that we’re very pleased with how far we’ve gotten on this, but there’s still more to go. We’re probably a bit further ahead in terms of what we’ve done on the software side just because we started that earlier. And there’s been an opportunity, I think that we’ve taken into account over the last two quarters to really do some solid training of the sales force of the entire range of Stars products. We’ve done a lot to professionalize just how we’re covering the world in terms of sales territories and assigning key accounts to the appropriate salespeople – and we started to see some benefits of that in the first quarter. But like I said, I don’t think we’re fully at full strength there. So we’re – we’ll see some further benefits as we move through the year and kind of pull that team together even more than it is right now.
Operator: [Operator Instructions] Our next question comes from Vikram Purohit at Morgan Stanley (NYSE:MS).
Unidentified Analyst: This is [indiscernible] on for Vikram. We have one question so that is with the 1Q behind you now, what do you think drives the bookend of revenue and EPS guidance for 2024.
John Gallagher: So the guidance on the year remains the same. Q1 played out in line with our expectations and our plan. So the guidance that we had laid out before, which was reported revenue growth of 9% to 13% on an organic basis, mid-single digit is – remains intact. The other piece of that, of course, we’ve talked about the margin a bit is that we’re committed to growing EBITDA dollars on the year and the margin would land in the 31% to 33% range. So nothing has really changed that from this point. If we were – I think what you’re saying is what takes you the higher, what takes you to the low end. To get to the lower end here, we would need some deterioration in the end markets. which we’re not seeing, to be clear. So we talk about stability a lot in Q3, Q4 of last year and now through Q1 of 2024. We’ve continued to see that. So we’re not really seeing that as playing out, but to get to the bottom end of the range, that’s what would need to happen is we need to see some deterioration from the spot where we are now, meaning in Tier 2 and Tier 3 and Tier 1s for that matter as well. We’re not seeing that. To get to the high end of the range, then we would need to see some acceleration. As I mentioned, we have not baked into our guidance. the notion that – of any benefit related to the biotech funding environment, that’s not in our guidance. So obviously, if we start to get some benefit there, it would start to take us to the higher end of our range. And if we continue to see acceleration, the software performance has been really solid. We’ve been very pleased with it. If we continue to see acceleration, thanks to the many new products that we’re offering on the software side that too would start to take us more to the higher end of the range.
Unidentified Analyst: Well, thank you very much.
Operator: I am showing no further questions at this time. I would now like to turn it back the call over to Bill for closing remarks.
William Feehery: Thank you, everybody, for joining us tonight. We – as we said, we remain very optimistic for the rest of the year. We had a lot of good things happen in the quarter, and we look forward to reporting at the end of this quarter at the same time, same place. Thanks.
Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
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