Simulations Plus' Q1 FY26 Earnings Call Contradictions: Shifting Narratives on Revenue Guidance, Renewal Rates, AI Strategy, and Service Revenue

Date of Call: Not provided in transcript

Financials Results

• Revenue: $18.4M, decreased 3% YOY
• EPS: $0.13 adjusted diluted EPS
• Gross Margin: 59% compared to 54% in the prior period
• Operating Margin: None provided

Guidance:

• Total fiscal year 2026 revenue expected between $79-$82M, YOY growth between 0-4%.
• Software mix expected between 57%-62%.
• Adjusted EBITDA margin expected between 26%-30%.
• Adjusted diluted EPS expected between $1.03-$1.10.
• Q2 revenue anticipated to be approximately $21-$22M.

Business Commentary:

Here is the analysis of the earnings call transcript, extracting key themes with data-supported trends and their underlying reasons.

• Service Revenue Growth and Budget Outlook:

  • Services revenue increased 16% year-over-year in Q1, driven by a strong contribution in med-com services (medical communications). Commercialization services grew 42% for the quarter and 191% on a trailing 12-month basis. Ending backlog increased 18% to $20.4 million.
  • The uptick in service revenue reflects clients beginning to flush budgets from prior year proposals into contracts for 2026, with accelerated year-end spending observed. This activity indicates a more favorable budget environment, suggesting constrained spending may be easing. Improved macro factors (MNF pricing agreements, subsided tariff threats) contributed to this optimism.

• Software Revenue Mix and Seasonal Cadence:

  • Software revenue decreased 17% year-over-year in Q1, representing 48% of total revenue. The full-year software mix guidance remains 57%-62%. The Q1 software contribution was seasonally lower, with the largest software quarters typically in Q2 and Q3 due to renewal seasonality.
  • The year-over-year decline in software was impacted by a tough comparison against a strong Q1 last year and ongoing market conditions affecting discovery and clinical ops software. While services are currently growing faster, the full-year software mix guidance is unchanged, as software spending is expected to follow services as client budgets fully open.

• QSP Software Licensing and Market Dynamics:

  • QSP (Quantitative Systems Pharmacology) software revenue was lumpy in Q1. While overall QSP software revenue came in as expected, there was a difficult year-over-year comparison due to multiple therapeutic model licenses recognized in the prior year's Q1. The business is expected to grow on a full-year basis.
  • Interest in QSP models remains very high, and the space is a fast-growing area of biosimulation. The licensing model involves a base platform subscription plus perpetual licenses for specific therapeutic models, which can lead to quarterly variability.

• Client Consolidation Impact and Headwinds:

  • Consolidation among large pharma was a headwind for software renewals in the back half of fiscal 2025, contributing to less than 100% renewal rates. No significant impact from consolidation was noted in Q1 fiscal 2026.
  • The guidance for fiscal 2026 does not show a major expected impact from consolidation, as current industry activity involves large pharma acquiring assets from smaller biotechs, which are typically not large software licensees. This contrasts with the prior year's challenges.

• AI Integration, R&D Investment, and Product Strategy:

  • AI features are being integrated into core platforms (e.g., GastroPlus) with favorable customer response. This is supporting more aggressive pricing in some cases. R&D expense was 16% of revenue in Q1, up from prior levels, due to a reorganization that reallocated some services personnel to product development.
  • The increased R&D investment is part of a strategic shift to accelerate the development of an integrated product ecosystem. This expense is expected to average around 15%-17% of revenue for the full year. The company's focus remains on the drug development vertical within its existing franchises.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • CEO states 'positive trends we cited last quarter continued to present themselves' and 'very optimistic given the activities of late.' CFO reaffirms guidance, and management highlights 'robust activity' in proposals and service revenue, with 'encouraging' uptick in spending.

Q&A:

• Question from Matt Hewitt (Craig-Hallum): Could we get more color on how positive macro factors like Most Favored Nations and lower tariff risk are impacting customer budgets and allocation towards modeling/simulation?
  Response: Stabilizing macro factors are leading to more robust proposal activity and accelerated year-end spending, with services revenue performing strongly and indicating an opening in constrained spending.

• Question from Matt Hewitt (Craig-Hallum): Why was DILIsym QSP software soft this quarter? Is it a one-off or waiting for FDA guidance?
  Response: QSP software revenue was in line with expectations; the softness was due to a difficult year-over-year comparison after selling multiple therapeutic models last year, but interest remains high.

• Question from Christine Raines (William Blair): Given strong services performance and soft software, what is the expected software mix cadence for the remaining quarters and what will catalyze a step-up in software?
  Response: No change to full-year software mix guidance of 57%-62%; software typically strengthens in Q2 and Q3 due to renewal seasonality, and service uptick may indicate future software demand as budgets open.

• Question from Christine Raines (William Blair): Did client consolidation intensify in Q1 as a headwind to software renewals, and what's the impact vs. guidance?
  Response: No major consolidation impact in Q1; the headwind was more pronounced in H2 FY2025. The outlook for FY2026 shows no significant impact from consolidation.

• Question from Scott Schauenhaus (KeyBank Capital Markets): Given improved momentum, does the cadence of guidance change, expecting less back-weighted growth?
  Response: There is some backloading in year-over-year percentage growth due to software revenue profile, but absolute dollar growth is less backloaded, with H2 growth stepping up as comps ease.

• Question from Scott Schauenhaus (KeyBank Capital Markets): MedCom outperformed beyond expectations; should Pro-ficiency comps be more conservative than 90 days ago?
  Response: MedCom refers to commercialization service revenue, which is separate from Pro-ficiency software. The strong service performance is positive, but the comp challenge remains more dramatic for Pro-ficiency software.

• Question from Matt Hewitt (Craig-Hallum): Why are services a leading indicator for software demand, and does that apply to the integrated product vision?
  Response: Services are often the first discretionary spend clients open when budgets improve, while software upsells follow as modeling departments expand, making service activity a leading indicator.

• Question from Matt Hewitt (Craig-Hallum): What was the specific P&L impact from reassigning services personnel to product development, and is it temporary? Also, any update on capitalized software development expense?
  Response: CFO stated the reorg (including RIF) improved services margins and shifted staff to R&D, increasing R&D spend to 16% of revenue in Q1 (expected 15-17% for FY2026). Capitalized software is at mid-20% of development cost.

• Question from David Larson (BTIG): Is the commercialization services strength mainly Pro-ficiency, and any color on the recovery?
  Response: Yes, medical communications (from Pro-ficiency acquisition) is the sole source of commercialization service revenue; it recovered in Q1 as client budgets improved from prior year pressures.

• Question from David Larson (BTIG): What drove the 82% decline in clinical ops software, and is it one product?
  Response: The decline was for Pro-ficiency training platform software, impacted by clinical trial startup challenges in H2 FY2025; Q1 performance was in line with expectations.

• Question from David Larson (BTIG): Is the 88% renewal rate in line with expectations?
  Response: Yes, rate has been at that level recently; a couple of late renewals slipped into Dec, but overall performance was good.

• Question from Will Frederick (TD Cowen): How is the initial AI integration rollout going, and how does it affect renewals/pricing?
  Response: Initial AI features in GastroPlus received favorable response; it allows for more aggressive pricing in base licenses, with future monetization through modules and new products.

• Question from Will Frederick (TD Cowen): Are there plans to launch new verticals/products in the next 12-18 months?
  Response: Focus remains on drug development; new verticals outside this are not planned. New product ecosystem deliverables are embedded in guidance and not significantly impactful to FY2026 revenue.

Contradiction Point 1

Q1 FY26 Revenue Guidance and Underlying Assumptions

This is a direct contradiction regarding the stability and drivers of revenue guidance. In 2025Q4, the CEO explicitly stated "underlying assumptions remain unchanged" and attributed the Q1 revenue decline to specific, known headwinds (tough comps, seasonality). In 2026Q1, discussing the same period, he attributes the revenue performance to new, positive factors (trade policy stabilization, budget flush) that were not mentioned as part of the prior guidance assumptions. This creates confusion about the basis for the guidance and whether it was overly conservative or subject to change based on new information.

How is positive commentary on MFN and lower tariff risks affecting customer budgets, and will R&D budgets be allocated more to modeling and simulation? - Matt Hewitt (Craig-Hallum)

2026Q1: The stabilization of trade policies... has helped stabilize client outlooks. This led to increased proposal activity and budget flush in late 2025, resulting in strong service revenue in the November-ending quarter. - Shawn O’Connor(CEO)

Has anything changed in the reiterated FY26 guidance? Can you clarify the Q1 guidance considering H1 Pro-ficiency headwinds? - Scott Schoenhaus (KeyBanc Capital Markets Inc.)

2025Q4: Nothing significant has changed since October's guidance... Q1 FY26 (calendar Nov) is seasonally weaker for renewals and faces tough comps from high Pro-ficiency revenue in Q1 FY25. The 3-5% Q1 revenue decline fits within the 0-4% full-year growth guide. Underlying assumptions remain unchanged. - Shawn O’Connor(CEO)

Contradiction Point 2

Renewal Rate Outlook and Underlying Factors

This involves a change in the explanation for a key financial metric (software renewal rate). In 2025Q4, the slip below 90% was explicitly linked to **client consolidations** as a major headwind, with recovery expected as those consolidations subside. In 2026Q1, the CEO describes the rate as stable and expects a rebound, but omits mentioning the client consolidation headwind entirely, which was central to the prior quarter's narrative. This is a material change in the factors influencing a critical recurring revenue metric.

Is the 88% renewal rate meeting expectations? - David Larson (BTIG)

2026Q1: The renewal rate has been around this level for several quarters. Historically, it's been 90%+. A couple of renewals that slipped from Q4 into early Q1 had a minor impact on the rate. - Shawn O’Connor(CEO)

What factors are affecting software renewal rates below previous years, and when might they return to ~90%? - Christine Rains (William Blair & Company L.L.C.)

2025Q4: The renewal on fee rate slipped due to client consolidations and increased scrutiny of module configurations... Improvement is expected as: (1) Consolidations subside, (2) Clients have already done their module scrutiny, and (3) More aggressive annual price increases are implemented. - Shawn O’Connor(CEO)

Contradiction Point 3

Software Revenue Growth Outlook and Year-over-Year Comparisons

This shows an inconsistency in the forward-looking narrative regarding a specific product's (Pro-ficiency) revenue trajectory. In 2025Q4, the guidance explicitly forecasted a year-over-year revenue decline for Q1 FY26, partly due to tough comparisons for Pro-ficiency. In 2026Q1, after the fact, the CEO cites the tough comparison but states that **year-over-year growth for QSP is still anticipated**, creating a conflicting picture of what was expected versus what is being reported as an outcome.

Can you explain the performance of DILIsym QSP and whether it was a one-off or due to waiting for recent FDA guidance? - Matt Hewitt (Craig-Hallum)

2026Q1: The strong QSP performance last year (multiple therapeutic model sales) created a difficult year-over-year comparison this quarter. While there was a closure this quarter, the year-over-year growth for QSP is still anticipated. - Shawn O’Connor(CEO)

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20251202-2025 Q4: The Q1 expectation of a 3-5% year-over-year revenue decline aligns with the full-year guidance. This is due to reduced renewals in Q1 and tough year-over-year comparisons for Proficiency software... - Shawn O’Connor(CEO)

Contradiction Point 4

AI's Impact on Pricing and Product Strategy

This represents an evolution in the narrative around a key product feature (AI) and its commercialization strategy. In 2025Q4, AI was a primary driver for **aggressive pricing**, which was already being implemented. In 2026Q1, the focus shifts to using positive AI feedback to justify more aggressive pricing, while also introducing a new layer of future monetization through **modules and new products**. This is not a direct contradiction but a significant expansion and redefinition of the AI value proposition and revenue model, which is a substantive change in market strategy.

How is the initial AI integration with the core platform progressing, and what customer feedback has been received? How does this impact license renewals and pricing? - Will Frederick (TD Cowen)

2026Q1: Initial AI features (e.g., in GastroPlus) have received very favorable feedback. AI is being embedded in the base model, allowing for more aggressive pricing. Future monetization will also come through modules and new products. - Shawn O’Connor(CEO)

What is the strategy for leveraging pricing flexibility, particularly with new AI capabilities? How much of the 2026 guidance is based on pricing assumptions versus new customer growth? - Brendan Smith (TD Cowen)

20251202-2025 Q4: Pricing is more aggressive this year, tied to platform upgrades, AI, and cloud capabilities. This is monetized through new modules and base platform integrations, justifying price increases. - Shawn O’Connor(CEO)

Contradiction Point 5

Service Revenue as a Leading Indicator for Software Demand

This is a substantive shift in the rationale and strength of a key business theory. In 2023Q4, service revenue seasonality was described as a bell curve with predictable lows. In 2026Q1, the narrative is more assertive, framing services as the **first discretionary budget line cut and the first to recover**, directly linking service spending to broader budget health and future software demand. This is a stronger, more causal claim than the earlier, more passive description of seasonal patterns.

Why has services been a leading indicator for software demand historically, and how does this relate to the integrated product vision? - Matt Hewitt (Craig-Hallum)

2026Q1: Services are often the first discretionary budget line clients cut when spending is constrained. As budgets open up, clients can quickly green-light service projects. Software upsells and department expansion (hiring modelers) follow this trend... The recent pickup in service bookings is a positive leading indicator for broader budget increases and eventual software demand. - Shawn O’Connor(CEO)

How should we think about the cadence for fiscal 2024, particularly in Q1 given holidays and other factors? - Matthew Hewitt (Craig-Hallum)

2023Q4: Services revenue typically has a bell-shaped curve, with Q1 and Q4 being slower due to holidays/conferences and client staff vacations. - Shawn O’Connor(CEO)