Good day and thank you for standing by. Welcome to the Certara Second Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, David Deuchler, Please go ahead.

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 June 30, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements with the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. For a list and description of the risks and uncertainties associated with Certara's business, please refer to the Risk Factors section of our Form 10-K filed with the Securities and Exchange Commission on March 15, 2021. We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also in the remarks or responses to questions, may mention some non-GAAP financial measures. Reconciliations of adjusted EBITDA, adjusted net income, adjusted EPS and certain other non-GAAP financial measures to the most directly comparable GAAP measures are available in the earnings release, which is available on the company's website. The conference call contains time-sensitive information and is accurate only as of live broadcast today, August 5, 2021. Certara disclaims any intention or 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 will turn the call over to William.

Thank you, David. Good afternoon, everyone. Thank you for joining Certara's second-quarter earnings call. Andrew and I will start with prepared remarks and then we will take questions. I'm very pleased with how the Certara business performed in the second quarter of 2021 as we continue to successfully execute on our strategic and financial plans. In the quarter, we continue to grow our position as a global leader in biosimulation by delivering strong financial results. Revenue in the second quarter grew 15% compared with the second quarter of 2020 as we achieved another record quarter of revenue. Adjusted EBITDA grew 1% compared with the second quarter of 2020. Adjusted EBITDA growth was impacted by higher profitability in 2020 due to reduced SG&A spending during the height of the COVID pandemic, in addition to increased public company costs in 2021, which did not exist same time last year. Bookings growth in the quarter continued both in software and in services, with software bookings up 8% year-over-year and services bookings up 7% year-over-year. Because there are quarter-to-quarter fluctuations in our bookings, we believe looking at trailing 12-month bookings growth is a more accurate way to evaluate our business development activity. Total company trailing 12-month bookings is up 26% year-over-year. Overall, we are pleased with our year-to-date performance, which is ahead of the expectations earlier in the year. In keeping with our goal to expand the use cases of biosimulation and grow adoption of our end-to-end platform, earlier today, we were thrilled to announce the acquisition of Pinnacle 21, the largest acquisition in our history, for $310 million in cash and stock. Pinnacle 21 is a privately held company with industry-leading data standardization software for pharmaceutical clinical data. Their SaaS-based solutions are used for managing compliance to the CDISC standards and increasing preclinical…

Thank you, William. Hello, everyone. Before getting into the second quarter, I would like to touch on the financial highlights of our acquisition of Pinnacle 21. As William highlighted, we are excited to start work with Pinnacle 21 and integrate them into Certara. The company is a strong financial fit and subject to close, the deal is expected to be immediately accretive to Certara's revenue, growth and adjusted EBITDA. We expect Pinnacle 21 to contribute $30 million to $31 million of revenue in 2022, growing at approximately 30%, not including the effects of purchase account. Now, to Certara's results. Total revenue for the three months ended June 30, 2021, was $70.1 million, representing year-over-year growth of 15%. Software revenue was $20.1 million, which increased 12% over the prior-year period as a result of solid second-quarter bookings, the early renewals in Q1 and expansions on renewals. Software bookings were $19.4 million, which increased 8% from the prior-year period and the aggregate renewal rate was 90%. Year-to-date software bookings grew 15%. The growth in the quarter and year-to-date was driven by our biosimulation software, Simcyp and Phoenix. Services revenue was $50 million, which increased 16% over the prior-year period. The growth in services revenue was driven by growth in the biosimulation offerings. Services bookings were $55.7 million, which increased 7% from the prior-year period. Year-to-date, services bookings grew 21%. Total cost of revenue for the second quarter of 2021 was $27.5 million, an increase from $20.6 million in the second quarter of 2020, primarily due to increases in employee-related costs resulting from headcount growth and stock-based compensation. Total operating expenses for the second quarter of 2021 were $37.3 million, an increase from $26.9 million in the second quarter of 2020. The components of operating expenses are as follows: sales and marketing expenses…

Thank you, Andrew. In summary, Certara had a strong second quarter and announced a very exciting acquisition in Pinnacle 21. 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 will open up the call for questions. Operator, can you please open up the line.

[Operator instructions] Our first question will come from the line of Dave Windley from Jefferies. You may begin.

Hi. Good afternoon, gentlemen. Thanks for taking my question. I wanted to ask about your staffing and labor environment. I think you talked about a 5-ish percent increase in labor. I'm wondering how you're hiring activities are progressing, what kind of competition for labor in the markets that you need to add perhaps both functionally as well as geographically? Thanks.

Thank you, David. Appreciate the question. Well, I think any CEO in a business like ours would always have to say that you wake up thinking about getting good people in the business and we do. We are basically on our plan for hiring for the year, so I would say that we're competing well and we're doing well. I think Certara is viewed as a good place to go for careers. So – but every day, we're out there trying to find out more of the software and drug development experts. And I think as we go forward, we'll continue to compete well.

And are there differences between – for example, your competitor talked about some difficulty in hiring in the regulatory area. Are you seeing that? Are there differences in relative tightness of the market between your biosimulation versus reg and market access?

Well, I'm not – I won't comment on what the competitors said, but in general, as the activity in the pharmaceutical industry has picked up, there has been a greater demand for people like regulatory writers and a few skills like that, but Certara is not the – we're not a huge fraction of the industry by headcount. So the kind of the top-quality people that we want to attract here, we've still been very, I think, very fortunate to be able to do that. So we haven't seen – we haven't – how do I say this? I mean, look, it's never easy to get good people, but we're competing well and we're hitting the size of the workforce that we expected to have at this point in the year.

Got it. Great. That's great. In terms of the CDISC data validation and streamlining, can you perhaps paint a little picture for us in terms of how this dovetails with the projects that you're called in to do. Is this a really tight cross-sell? Is it predominantly applied to clinical trial data? Or is there even some standardization for analysis of real-world data that would go into that as well? I'm just trying to understand a little better how it fits.

Yes, that's a great question. So we have known about Pinnacle 21 and certainly about CDISC for a long time. So we participate – we're platinum members of the CDISC organization. We've been there for a long time. And obviously, because we help our clients submit their data and the regulatory filings to the FDA. We're part of the industry effort to get everything compliant with that. What we see in this is an opportunity for further data standardization that will help Certara as a whole. So the FDA like – the FDA basically was one of the big proponents of the CDISC. And my view of that is because – when you standardize data, you make it a whole lot easier to do the types of analysis that you want to do to ask questions about that data. So the FDA would like, obviously, to ask questions about the data that's being submitted and when they get it in a format that's recognizable, it makes it a whole lot easier. But we see an opportunity as we go even farther to think about if we can standardize more of the data that's coming in the clinical phase and the preclinical phase. And as you also pointed out even in the market access phase, then the whole industry benefits. It makes to adopt tools like biosimulation if the data we get is in a standard format. And so we think that this is a best-in-class solution that enables kind of a bigger trend that we think is going to play out in pharma over quite a long time.

Very interesting. Thanks for the answer. I'll give it to the floor.

Thanks, Dave.

Our next question comes from the line of Michael Ryskin from Bank of America. You may begin.

Thanks for taking the question. I want to pick up exactly where Dave left off sort of on the Pinnacle 21 offering and how it fits in with your old business. Just curious if you could talk a little bit in terms of customer overlap. Obviously, you talked about how software tools are being used by them by the 22, I believe, of the top 25 pharma customers. Can you just talk a little bit more about the tail there? Do you see a lot of cross-sell opportunities? Are there any revenue synergies you're accounting for or sort of just help us bridge the math between your comments on being accretive to the adjusted EBITDA margin?

Yes, I can start and then Andrew can comment a little bit about the margins. So they obviously – since they have 22 of the top 25 and we have many of those same customers, there is a significant customer overlap, but there's also a lot of opportunity for cross-selling and also combining with our products. There's an opportunity for us to consider adding to our tech-enabled services by doing services with the Pinnacle 21 software. There's an opportunity to combine it with some of the software we have. There's a product we have called Integral that works – that's a clinical data repository that's compliant with 22 CFR Part 11. And so combining a compliant data repository with validation software makes a lot of sense. And we think that there's a lot of opportunity as we add our sales and marketing capabilities, which we're investing in, as we go along in the year, to Pinnacle 21 to continue to expand its adoption and reach through the global pharmaceutical industry.

Okay. And on the...

And do you want me – Go ahead. Sorry.

No, go ahead, go ahead.

No, please go ahead. It's fine. I think we covered it.

I was going to – my other question was going to be sort of on the fiscal year guide raise. 2Q results came in just sort of nominally ahead of our expectation, I think, a broad consensus. But yet you had a nice little second bump to the fiscal outlook. I'm just wondering what's giving you confidence in that. Is it the trailing 12 months net bookings you're talking about or something you're seeing in the markets? Just give us a little bit of a flavor on what brought about the guide change.

It's a combination of the – we still see a positive market environment for the products that we're offering. The TTM bookings, but also if you narrow it down to the year-to-date bookings, put us in a position to raise the guidance with a high level of confidence. The slight shift, in terms of seasonality from the first half to the second half and we discussed a little last time that we were expecting – we had strong commercial performance on the regulatory side, but we're going to have a stronger second half in terms of revenue conversion there, kind of gives us an uplift and we have visibility into that.

Okay, thanks. I'll get back in the queue as well.

Our next question comes from the line of John Kreger from William Blair. You may begin.

Thanks very much. Bill, can you just talk a little bit about activity levels that you're seeing and just kind of reflect on the wins that you had in the quarter. I'm curious if you're seeing any shift in mix across either client type or the type of services that they're trying to access.

No – well, I'd say that the trends that we talked about earlier in the year are continuing. So we're seeing sort of mid-teens growth in our pharmaceutical customers and somewhat higher growth in our biopharma – in our biotech customers. But that's a trend that's been going on, not just this quarter, but for some time. It's a result of the fact, I think we're a little bit – as I think we talked about earlier, we're probably a little bit less penetrated in the overall biotech market. And there aren't a lot of biotechs out there. The overall market is growing pretty well. I think there's a lot of activity in the pharmaceutical industry, not just Certara. But you can see across the industry, there's a lot of trials going on. And certainly, R&D activity is quite healthy and there's a lot of investment capital going in to new biotechs as well.

Great. Thanks. And then – I'm sorry, I didn't mean to cut you off. Are you still going?

No, please go ahead.

Okay. Second question related to COVID work. Should we assume that COVID is still contributing to your top line at all? And as we think about the second half of the year, will that kind of skew the comparisons at all, given, I think that was a little bit of a contributor last year in the second half?

Yes, I'll take the first part and then I'll ask Andrew to comment a little bit on the costs. So certainly, as we were in second quarter last year, our costs, like travel costs, went quite low as they did and some of them will slowly come back. On the other hand, we've also gained efficiencies. So I think we're intending to offset most of that as we go forward in the year. But Andrew, do you want to comment on that?

Yes. We saw the benefit of the SG&A costs really in the second quarter last year, but we shifted investment in the latter quarters. I think you can see that in the adjusted EBITDA margin trends for last year. This year, we factored in a resumption of travel expenses into our plan. So it's all incorporated into our expectations for the year.

Okay, thanks. And then one last one, Pinnacle 21. When that closes, can you hit the ground immediately with cross-selling and sort of playing into your broader platform or is there – should we assume there's a period of time where you've got to do the software integration before you can really get the full benefit?

So I think that there's a significant opportunity in – immediately to add to the sales and marketing capability of Pinnacle 21 using Certara's capability, which is larger – and we just have a very broad customer base. And then over time, we'll do what you talked about. It would obviously take a little bit of time to do software integration. So we think there's both short- and longer-term opportunities here with this company.

Okay, great. Thanks.

Thanks.

Our next question come from the line of Vikram Purohit from Morgan Stanley. You may begin.

Great. Thanks for taking my question. I just had a quick one on geographic expansion. You previously discussed an interesting opportunity in China, so I just wanted to see if you could update us on how that's progressing and what some of the next milestones are there to grow your presence in that part of the world. And also, I wanted to see if the broader emergence of the Delta variant has had any impact to your plans to expand in China or anywhere, ex U.S., that you may have previously found interesting.

Yes. So we're continuing to hire in China. We think it's a long term. It's a good opportunity for us. I think we're – Andrew can comment on what we're reporting for – by region. We're expanding our business there, although it's still a relatively small base. To your question, though, about COVID, it's certainly difficult to expand as fast as we want to give the difficulties of travel in and out of China. If I have to handicap us, I'd say, we're doing pretty well, but we probably will be ahead of this if it was over. There's still a lot of activity there. There's a lot of demand. It's just makes it just a little bit harder since you can't send people back and forth quite as easily as we used to. I think that's a little bit of color on your question. Andrew, do you want to comment on our growth in China?

No, I would just add that we continue to see strong growth in China and that's reflected in our geographic split. In Asia Pac, we saw 50% growth rate.

Got it. And as a quick follow-up, is there any sort of internal goal or internal bogey you have for how you would like to see the U.S. versus ex U.S. mix of revenue shift over the coming years or do you expect it to be pretty consistent with what it is now?

I think we have north of, let's say, roughly 70% of our business in the U.S. I think that as some of our investments in China and Europe pick up, we will see a little bit of a shift in terms of the overall percentage. But it won't be enormous because the way I think about it is I want our – Certara's revenue, if we're doing a good job, should kind of match the R&D footprint of the pharmaceutical industry as a whole. So I think we'll come down a little bit in the U.S. as an overall percentage, but still that's likely to be our biggest base as we go forward.

Okay, got it. Thank you.

Our next question will come from line of Vikram Kesavabhotla from R.W. Baird. You may begin.

Yes. Thank you for taking the question. I guess just first, now on the back of the Pinnacle acquisition, curious if you can give us some updated thoughts on your approach to capital deployment through the balance of this year and into 2022. And if there's any other particular areas or capabilities that you're looking to add to the platform.

Yes. I think as we were coming out of the IPO, I was asked a lot about this. And what we said was that you should expect us to do a series of – we have a history of doing little bolt-on acquisitions, which we've done a little bit. Very small ones when we see good opportunities to add to our talent base at a good price or something like that. And then occasionally, there might be something that looks strategic, which I think certainly Pinnacle 21 falls into. So going forward, I kind of think the same way. We'll do some – we'll do little bolt-on acquisitions where they look attractive. I certainly – I think our No. 1 goal right now is to make sure that we integrate Pinnacle 21 and we do a really good job growing that business in Certara and welcoming those people and growing the organization. So that's going be our main focus. So I don't feel the need to go out and do another acquisition right away or anything like that. But at the same time, we're in a growing, very interesting industry and if something important and strategic became available, we would certainly take a look at it. So there's no plans right now and frankly, just – and no real need to as we do this integration, but kind of the same plan that we talked about as we were coming out after the IPO.

Okay, great. And then maybe just as a follow-up, I'm curious, just based on the mix of software and services that you're seeing in your bookings right now, just any updated thoughts on how we should think about the growth of each of those lines going forward.

Well, we – yes, we've talked about low to mid-teens growth for software, mid- to high-teens growth for services. So clearly, the addition of Pinnacle 21, which I mentioned in the prepared remarks, is expected to grow at a rate of around 30%. It's going to be additive to the overall growth rate at Certara by approximately 100 basis points. And we'll shift the mix of software to services by about 400 to 500 basis points. So we'll see a little bit higher growth in the software relative to what I had previously stated, low to mid-teens.

Okay, great. Thank you.

[Operator instructions] We have a question from Katie Tryhane from Credit Suisse. You may begin.

Hi. Thanks for taking my question. Last quarter, you highlighted a couple of new product launches or expansions, including the version 20 Simcyp Simulator and the secondary intelligent software offering. I mean, what has the reception been for those offerings to date and how have they been performing relative to your expectation? And more broadly, how should we think about innovation and new product launches or expansions adding to growth going forward?

Yes. Thanks for the question. So to answer the questions of – to talk about the products you talked about, so Simcyp version 20 is the – is driving a lot of our current Simcyp revenues right now. Customers have adopted that quite strongly and it's opened up new opportunities to serve new customers particularly in the biotech area. Our secondary intelligence is still an early stage product. We are currently launching, I guess, what you'd call sort of the next version of it, which has expanded to the number of targets that it can cover. And we're actively marketing that. We think this is a unique product. So we've got some introduction – introductory marketing work to do to the industry, but I think we'll see some significant interest there. And then more broadly to your question, we're spending a fair amount of money in Certara on R&D. There are many opportunities, I think, to expand our product base to kind of – to hit more therapeutic areas and to take into account different technologies and ideas that are out there. So what we've been trying to do this year is just kind of highlight just how many product launches and product additions we've been focused on. Some of those will take a year or two as they kind of get introduced to this industry and they take off. But overall, I think they're kind of indicative of what we've been doing with the company a long time and how we've gotten the growth rate we've got. So we're continuing to invest in our future.

Okay, great. Thanks.

Thank you.

Thank you. I'm not showing any further questions in the queue. And this concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you.

Thank you.