Simulations Plus's Earnings Calls Reveal Contradictions on Renewal Rates, Revenue Growth, and Immunometrics Contributions

Date of Call: None provided

Financials Results

• Revenue: Q4 $15.6M, up 33% YOY; FY $59.6M, up 11% YOY
• EPS: Q4 GAAP diluted EPS $0.03 (net income $0.534M), down 44% YOY; Q4 adjusted diluted EPS $0.18 vs $0.06 prior year. FY GAAP diluted EPS $0.49 (net income $10M), down 20% YOY; FY adjusted diluted EPS $0.67 (high end of $0.63–$0.67 guidance)
• Gross Margin: Q4 total gross margin 78%; Q4 software GM 89% (was 86% prior year), services GM 62% (vs 65% prior year). FY total GM 80%; FY software GM 90%, services GM 65%
• Operating Margin: FY operating margin 15% (impacted by M&A costs, Immunetrics compensation and impairment). FY adjusted operating margin excluding those items would be ~21%. Q4 had an operating loss of $0.3M (would have been ~22% of revenue excl. specified charges)

Guidance:

• Revenue for fiscal 2024 expected to grow 10%–15% to $66M–$69M.
• Revenue mix expected: software 55%–60%, services 40%–45% (Immunetrics increases services weight).
• Diluted EPS guidance $0.66–$0.68 (a 35%–39% annual increase); reflects higher expected effective tax rate.
• Effective tax rate for fiscal 2024 expected 20%–22%.
• Guidance set on a status-quo market assumption.

Business Commentary:

* Revenue Growth and Market Conditions: - Simulations Plus reported revenue growth of 11% for fiscal year 2023, with software revenue increasing 12% and services growing by 8%. - The growth was driven by upselling and price increases, offsetting slower purchasing from small biotech and large pharmaceutical clients due to funding scarcity and macroeconomic uncertainties.

• Software and Services Segment Performance:
• Software revenue increased 59% in Q4 and 12% for the year, while services grew 8% both in Q4 and annually.

• This performance was attributed to the renewal harmonization initiative and new product launches like GastroPlus and ADMET Predictor, despite challenges from small biotech nonrenewals and M&A activity in client bases.

• Impact of Contract Harmonization:

• Simulations Plus completed its customer-centric contract harmonization process, which led to greater visibility into revenue streams and stabilized seasonality across quarters.

• This process improved predictability, though there will still be occasional occurrences of harmonization as upselling activities occur.

• Guidance for Fiscal 2024:

• The company expects revenues to increase 10% to 15% in fiscal 2024, with software contributing 55% to 60% and services 40% to 45%.
• This outlook assumes a status quo market environment and anticipates contributions from the Immunetrics acquisition, without significant market upturns.
  
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management emphasized meeting fiscal 2023 guidance (11% revenue growth), strong margins (FY GM 80%), increased backlog (+25% to $20M), cash/short-term investments $115.5M and described the outlook as "cautiously optimistic" while guiding to FY24 growth and EPS improvement despite a cautious market.

Q&A:

• Question from François Brisebois (Oppenheimer): Why is guidance set at 10%–15% next year and what revenue/milestone contribution do you expect from the Immunetrics acquisition?
  Response: Guidance assumes a status-quo market; Immunetrics provided pipeline/backlog momentum but minimal Q4 revenue; it could materially boost FY24 if earn-out targets are met (management referenced ~$5–6M/2023 and ~$8M/2024 targets) but the company is conservatively pacing contribution.

• Question from François Brisebois (Oppenheimer): What was the contract renewal harmonization process and why does its completion improve revenue visibility?
  Response: Harmonization consolidated multiple license renewal dates for large accounts into single focal dates, smoothing seasonality; the program is largely complete so future quarters should not see the same renewal timing disruption.

• Question from Matthew Hewitt (Craig-Hallum): How should we think about cadence in fiscal 2024—will Q1 be a step down with recovery later in the year?
  Response: Yes—Q1 is expected to be the lowest quarter (historical and amplified by prior harmonization); Q2–Q4 should be relatively comparable in absolute dollars, producing a more consistent growth cadence across the year.

• Question from Matthew Hewitt (Craig-Hallum): Can you break out how much of the increased backlog is from Immunetrics versus organic bookings?
  Response: Backlog is now segmented by business unit; Immunetrics contributed but only a handful of accounts—most of the backlog increase came from a record quarter of PK/PD bookings.

• Question from Matthew Hewitt (Craig-Hallum): Are you seeing early cross-selling wins between Simulations Plus and Immunetrics customers?
  Response: Early traction is mainly selling Immunetrics' QSP capabilities into Simulations Plus' larger client base; cross-selling into Immunetrics' small client list is limited given its small size.

• Question from David Larsen (BTIG): GastroPlus added new customers and upsells yet revenue declined sequentially—what drove that?
  Response: Quarter-to-quarter software revenue depends on which renewals fall in the quarter; harmonization altered seasonality and a few nonrenewals (M&A, biotech and CRO exits, and cancelled QSP programs) reduced Q4 GastroPlus renewals.

• Question from David Larsen (BTIG): Any ballpark on how much M&A-driven nonrenewals impacted Q4 revenue (e.g., $0.5M–$1M)?
  Response: Management declined to provide a numeric estimate, noting one could approximate the impact by comparing historical renewal fee rates to current results.

• Question from David Larsen (BTIG): What are expectations for price increases in fiscal '24 and how does wage inflation for scientists influence pricing?
  Response: FY23 saw larger-than-normal price increases and good yield; for FY24 they expect price increases to contribute but at a more modest level (between FY22 and FY23), while compensation inflation has moderated relative to last year.

• Question from David Windley (Jefferies): Does the IRA-driven reprioritization of pipelines create opportunities for biosimulation, especially with large vs small molecules?
  Response: Modeling and simulation work spans small and large molecules; biologics (large molecules) is a growing and rapidly expanding opportunity and is expected to be a disproportionate contributor to future growth.

• Question from David Windley (Jefferies): Has limited access to nonhuman primates for safety assessment increased demand for simulation to mitigate supply bottlenecks?
  Response: Yes—modeling capabilities (e.g., GastroPlus species models) help reduce reliance on animal studies, improving ability to predict human outcomes and creating positive pipeline opportunities.

Contradiction Point 1

Renewal Rates and Client Consolidations

It reflects differing perspectives on the impact of client consolidations and site closures on renewal rates, which are crucial for revenue stability and growth projections.

What caused the decline in software renewal rates, particularly the drop in fees from 93% to 84% and accounts from 86% to 71%? Are there concerns that renewal rates could decline further? - Matthew Hewitt(Craig-Hallum)

2023Q4: The decline in renewal rates was primarily due to client consolidations and site closures, which impacted renewal sizes. - Shawn O'Connor(CEO)

What factors are causing the Q4 margin guide to drop sharply from this quarter's margins? What is driving the margin erosion? - Scott Schoenhaus(KeyBanc Capital Markets)

2025Q3: The renewal issue I mentioned earlier, the drop from 93% to 84% on fees, and from 86% to 71% on accounts, was primarily due to client consolidations and site closures. - Shawn M. O'Connor(CEO)

Contradiction Point 2

Impact of Software on Revenue Growth

It involves differing expectations about the contribution of Software to revenue growth, which is critical for assessing the company's growth strategy and financial performance.

How will the biotech funding environment affect next year's guidance? What is Immunetrics' role in achieving the 10-15% revenue growth target? - François Brisebois(Oppenheimer)

2023Q4: Software is going to be up 5% to 10%. This is off a pretty good comp. We had a tremendous year last year. - Shawn O'Connor(CEO)

What was the organic YoY revenue growth for total, software, and services in the quarter? - David Larsen(BTIG, LLC)

2025Q3: Software grew 2%, and Services declined 13%. - William Frederick(CFO)

Contradiction Point 3

Revenue Growth Expectations

It involves changes in financial forecasts, specifically regarding revenue growth expectations, which are critical indicators for investors.

How does the current environment, particularly biotech funding, impact your guidance for next year? - François Brisebois(Oppenheimer)

2023Q4: The guidance is based on status quo market conditions with cautious optimism. - Shawn O'Connor(CEO)

Can you explain the software's organic revenue growth and the decline in fee renewal rate from 94% to 90%? - David Larsen(BTIG)

2025Q2: We expect to continue to grow our organic revenue. - Will Frederick(CFO & COO)

Contradiction Point 4

Immunetrics Contribution

It involves the expected contribution of Immunetrics to revenue growth, which is a key strategic acquisition for the company.

How does Immunometrics contribute to achieving the 10–15% revenue growth target? - François Brisebois(Oppenheimer)

2023Q4: Immunetrics has contributed minimally so far but is expected to grow. - Shawn O'Connor(CEO)

How should we think about the EBITDA increase from Q3 to Q4? - Constantine Davies(Citizen)

2025Q2: Immunetrics has contributed $2.1 million in revenue. - Will Frederick(CFO & COO)

Contradiction Point 5

Software Revenue Growth and Renewal Rates

It highlights differing perspectives on software revenue growth and renewal rates, which are critical for understanding the company's financial performance and future outlook.

What's the expected cadence for services in fiscal '24? - Matthew Hewitt (Craig-Hallum)

2023Q4: First quarter revenues are typically lower due to the harmonization process and holidays. Second through fourth quarters should be more comparable, with software contributing 60% to revenues. - Shawn O'Connor(CEO)

Could you clarify the software organic revenue growth and the decline in the fee renewal rate from 94% to 90%? - David Larsen (BTIG)

2025Q2: The software organic growth was good this quarter, 8% from an organic basis, excluding the Pro-ficiency software contribution. - William Frederick(CFO)