Simulations Plus, Inc. (SLP) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reveals several concerns: a revenue drop and margin erosion in the fourth quarter, declining renewal rates, and cautious client spending. Although there are positive aspects like growth in GastroPlus and AI initiatives, these are overshadowed by overall financial struggles and unclear management guidance. The negative sentiment is further supported by declining service revenues and uncertain market conditions, suggesting a likely negative stock price movement.

Key Financial Performance

Revenue Third quarter revenue grew 10% year-over-year to $20.4 million, including a $2.4 million contribution from the Pro-ficiency acquisition. On an organic basis, revenue declined 4% due to lower QSP/QST software revenue and a decrease in biosimulation services revenue.

Diluted EPS Diluted EPS loss was $3.35, which included a $77.2 million noncash impairment expense related to prior acquisitions, compared to $0.15 last year. Adjusted diluted EPS was $0.45 compared to $0.27 last year.

Adjusted EBITDA Adjusted EBITDA was $7.4 million or 37% of revenue, compared to $5.6 million or 30% of revenue last year.

Software Revenue Software revenue grew 6% year-over-year, driven by ADMET Predictor (8% growth), GastroPlus (4% growth), and MonolixSuite (3% growth). However, QSP/QST biosimulation platform revenue declined 39% year-over-year.

Services Revenue Services revenue grew 17% year-over-year, representing 38% of total revenue. However, PBPK services revenue declined 10%, PK/PD services revenue declined 9%, and QSP services revenue declined 22% year-over-year.

Gross Margin Total gross margin for the quarter was 64%, with Software gross margin at 80% and Services gross margin at 38%. This was a decrease from 71% total gross margin last year, due to a $2 million increase in cost of revenues.

Net Loss Net loss for the quarter was $67.3 million, compared to net income of $3.1 million last year. This was primarily due to the $77.2 million noncash impairment expense.

Backlog Backlog increased to $20.7 million, up from $20.4 million in the second quarter and $15.7 million year-over-year.

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Operating Highlights

ADMET Predictor 13: Released as a flagship machine learning modeling platform for drug discovery with improved features like elevated predictive power and enterprise-ready automation.

GastroPlus: Anticipated release later this year with enhanced AI capabilities, including AI assistance, automation, and a chatbot for real-time support.

MonolixSuite: Continued growth with plans for future AI integrations to enhance product capabilities.

Pro-ficiency acquisition: Expanded capabilities into clinical operations, doubling TAM and leveraging predictive analytics for clinical trial management.

Investment in Nurocor: Enhances efficiency and automation in pharmaceutical clinical development, complementing Pro-ficiency software.

Strategic reorganization: Transitioned to a functionally driven operating model, consolidating teams for improved efficiency and collaboration.

Workforce streamlining: Aligned workforce with current needs, improving cost structure and operational efficiency.

AI-driven initiatives: Rolling out AI integrations across product suite to enhance capabilities and maintain competitive advantage.

Focus on clinical operations: Commitment to long-term growth in clinical operations, leveraging AI and predictive technologies.

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Risk or Challenges

Revenue Decline in Key Areas: Organic revenue declined 4%, primarily due to lower QSP/QST software revenue and a decrease in biosimulation services revenue.

Market Headwinds: Pro-ficiency training platform and Medical Communication services were significantly impacted by market headwinds, disrupting clinical trial initiations and tightening commercialization budgets.

Client Cancellations: A significant client cancellation during the quarter due to unfavorable outcomes in their drug programs impacted near-term revenues by approximately $2 million.

Delayed Projects: Delays in contracted projects pushed Services revenue out to future quarters, affecting near-term project flow.

Biopharma Market Challenges: Large pharma faces patent expirations and Inflation Reduction Act pricing pressures, while biotech companies experience reduced capital availability. Additional challenges include tariffs, favored-nation pricing policies, and budget reductions at the NIH and FDA.

Services Revenue Sensitivity: Services revenue has proven more sensitive to market volatility, with a slowdown in bookings and delays in contracted business.

Client Consolidations: Client consolidations and site closures negatively impacted renewal rates for key software platforms like GastroPlus and MonolixSuite.

Impairment Expense: A $77.2 million noncash impairment expense was recorded to align the book value of assets to their near-term market value.

Operational Reorganization Risks: The transition to a functionally driven operating model and workforce streamlining may pose risks in execution and client service continuity.

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Guidance & Outlook

Revenue Guidance for Fiscal Year 2025: Total revenue is expected to be between $76 million to $80 million, with Pro-ficiency contributing between $9 million to $12 million. Year-over-year revenue growth is projected in the range of 9% to 14%.

Software Revenue Growth: Software revenue growth is anticipated to be in the range of 5% to 9% for fiscal year 2025.

Services Revenue Decline: Services revenue is expected to decline in the range of 9% to 13% for fiscal year 2025.

Adjusted EBITDA Margin: Adjusted EBITDA margin is projected to be between 23% and 27% for fiscal year 2025.

Adjusted Diluted Earnings Per Share: Adjusted diluted earnings per share is expected to be between $0.93 and $1.06 for fiscal year 2025.

AI-Driven Initiatives: Simulations Plus plans to roll out a series of AI-driven initiatives across its product suite, including a cloud platform for AI integration, AI-enhanced GastroPlus release, and portfolio-wide AI rollout for tools like ADMET Predictor and MonolixSuite in the next fiscal year.

Market Conditions and Fiscal Year 2026 Outlook: Assuming current market conditions persist, modest improvement in fiscal 2026 compared to fiscal 2025 is anticipated. The company plans to provide fiscal 2026 guidance when reporting fourth quarter results.

GastroPlus AI Enhancements: The next GastroPlus release will include AI-driven features such as Assessments Plus, Orchestrator, and GastroPlus GPT, aimed at improving modeling workflows, automation, and user efficiency.

Clinical Operations and Medical Communications: Despite market headwinds, the company remains committed to long-term growth in clinical operations and medical communications, leveraging AI technologies to enhance clinical trial efficiencies.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What is driving the margin erosion in the fiscal fourth quarter?

A:The reorganization and actions taken to streamline the expense structure primarily impacted future quarters, not the third quarter. The fourth quarter margins are affected by a revenue step-down on the top line, despite making the expense structure more efficient. This results in guidance in the mid- to high 20s for adjusted EBITDA.

Q:Why have renewal rates on the Software side dropped significantly?

A:The drop in renewal rates, particularly for GastroPlus and Monolix, was driven by client consolidations and site closures. Historically, renewal rates have been in the 90%-95% range, and management expects to maintain these rates in the long term.

Q:Are customers becoming more comfortable with the FDA's April 10 guidance on alternative methodologies?

A:The FDA's guidance is specific to early preclinical translational activities. While it has generated significant discussion, actionable steps are still pending clarity from the FDA. Management anticipates a long-term positive impact on modeling and simulation but cautions against expecting immediate revenue impact.

Q:What is the biggest headwind impacting growth, particularly on the Software side?

A:There is no single factor; rather, a combination of uncertainties, including the funding environment, customer consolidation, and site closures, is causing clients to be cautious in their spending decisions. Management is optimizing performance in the current environment while preparing for future market improvements.

Q:Why is there a significant step-down in adjusted EBITDA for the fourth quarter despite cost-cutting efforts?

A:The revenue drop in the fourth quarter, combined with largely fixed costs and increased marketing activities, offsets the cost savings from layoffs. This results in a reduction in adjusted EBITDA guidance.

Q:When does management expect to return to the low 30% range for EBITDA?

A:Management is cautious and will provide updates after the fourth quarter results. Long-term expectations remain at 35% adjusted EBITDA, but the timeline depends on market conditions.

Q:Why is there a sequential decline in Software sales in the fourth quarter?

A:Management clarified that the revenue decline in the fourth quarter is primarily driven by Services, not Software. Software is expected to grow 5%-9% for fiscal year '25, while Services are anticipated to decline 9%-13%.

Q:What was the organic year-over-year revenue growth for the quarter?

A:Total revenue was down 3%, Software revenue was up 2%, and Services revenue was down 13%.

Q:Why is GastroPlus performing well while Monolix is under pressure?

A:GastroPlus added 12 new customers and showed 6% year-over-year growth. Monolix was impacted by client consolidations but remains the fastest-growing product, with high-teens growth on a trailing 12-month basis. The two products serve different user bases, and Monolix is also gaining market share from competitors.

Q:How did bookings and backlog perform for Services?

A:Backlog was up year-over-year, partly due to the Med Communications acquisition. However, there were delays in project start dates, which impacted bookings.

Q:Has there been any improvement in client buying activity since the end of the quarter?

A:Management has not observed significant improvement in client buying activity, citing a cautious environment and the seasonal slowdown during summer months.

Q:What was the impact of a Services cancellation on revenue?

A:A single client canceled contracts for two drug programs due to bad readouts, impacting both the third and fourth quarters. The majority of the impact was in the fourth quarter.

Q:Will there be increased R&D investment in the coming years?

A:Management plans to balance R&D investment with EBITDA improvements. AI initiatives and new product developments are priorities, but spending will be cautiously managed.

Q:What is the expected pacing of AI-related product releases?

A:Base applications like GastroPlus will continue with annual updates, but cloud-based AI functionalities may allow for more frequent updates. Adoption will depend on client IT environments and regulatory considerations.

Q:What are the financial expectations for Pro-ficiency and Med Communications?

A:The combined contribution from Pro-ficiency and Med Communications is expected to be $9 million to $12 million for fiscal year '25, down from initial expectations due to headwinds in clinical trial start-ups and a cost-constrained environment.

Q:Review of Unclear Management Responses

A:Management avoided providing a clear timeline for returning to the low 30% EBITDA range, stating they would provide updates after the fourth quarter results. Additionally, they used vague language when discussing the potential impact of AI initiatives on R&D spending and the timeline for client adoption of new AI functionalities.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

SLP Transcript

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SLP Slides

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SLP Report

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