Good day, ladies and gentlemen. Thank you for standing by and welcome to the Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your speaker host, 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 September 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 within 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, management 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 recent earnings press release, which is available on the company's website. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 9, 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 third 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 third quarter of 2021 as we continue to successfully execute on our strategic and financial objectives. In the third quarter, we continued to grow our position as a global leader in biosimulation by delivering strong financial results. Revenue grew 23% compared with the third quarter of 2020. Adjusted EBITDA grew 28% compared with the same period a year ago. In the third quarter, we set a new record for the number of new customers. We experienced strong double-digit revenue growth across all geographic regions, including North America, Europe and Asia Pacific. Overall, we're pleased with our year-to-date performance which has been ahead of our expectations forecasted earlier in the year. In early October, we announced the closing of the Pinnacle 21 acquisition, consistent with our previous expectations for our fourth quarter closing. The integration is going smoothly and early feedback from employees and customers has been positive. As a reminder, Pinnacle 21 is an industry-leading data standardization software platform, used by the biopharmaceutical industry and regulatory agencies for managing compliance with the CDISC standards. Pinnacle 21's advanced SaaS-based solutions are used by the U.S. FDA and Japan's PMDA to validate all incoming clinical submission data. The FDA recently awarded a 5-year contract to Pinnacle 21 for software and related services for the Datafit program. The Pinnacle 21 team is now part of our biosimulation and regulatory software business. As a newly combined entity, we see opportunities for expansion within existing customers and landing new customers worldwide. The Pinnacle 21 enterprise software is complementary to Certara's existing software and technology-driven services,…

Thank you, William. Hello, everyone. Before getting into the third quarter, I'd like to touch on the financial highlights of our acquisition of Pinnacle 21. As William stated earlier, we are excited to work with the Pinnacle 21 team, and the integration is off to a smooth start. Pinnacle 21 is a strong financial and cultural fit with Certara, and the transaction is expected to be immediately accretive to our key financial metrics. As previously discussed, we are currently forecasting Pinnacle 21 2022 revenue to be in the range of $30 million to $32 million, exclusive of purchase accounting adjustments. We are currently forecasting revenue of approximately $6 million in the fourth quarter of 2021 out of an expected full year pro forma revenue of $23 million to $24 million, exclusive of the purchase accounting adjustments. To that point, we will have a purchase accounting adjustment reported revenue related to Pinnacle's software deferred revenue in the fourth quarter and throughout 2022. The impact of the deferred revenue valuation adjustment is expected to be in the range of $4 million to $5 million in the fourth quarter. We also expect the Pinnacle 21 acquisition to have adjusted EBITDA margins modestly higher than the Certara corporate average in the fourth quarter of 2021 and look for them to expand in calendar year 2022. Now to base Certara results. Total revenue for the 3 months ended September 30, 2021, was $73.9 million, representing year-over-year growth of 23%. Year-to-date bookings were $229.2 million, up 12% year-over-year and up 15% on a trailing 12-month basis. The general business environment for bookings was slow during the first 2 months of the quarter, but the recent trends in pipeline for the fourth quarter position us well to achieve our guidance to maintain high visibility. After October results,…

Thank you, Andrew. In summary, Certara had a strong third quarter, highlighted by our robust financial results, operational performance, and we hit the ground running in Q4 with the acquisition of Pinnacle 21. Our Certara team continues to focus on our commitments to customers and to delivering 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 open up the line?

[Operator Instructions] Our first question coming from the line of Dave Windley with Jefferies.

I wanted to ask on Pinnacle 21. You kind of alluded to appreciate the guidance numbers there. And taking from those, you alluded to margins above your corporate average in the fourth quarter and then expanding in '22. Could you talk a little bit about that trajectory of expansion? What investments do you believe you need to make in that platform, if any? Is that something that your existing sales force can sell, things like that would be helpful?

Thanks, David. I appreciate the question. I'll start and then maybe Andy wants to chime in on this. So largely, the -- it's a pretty healthy company that's growing nicely. We believe that our sales force is capable of offering this more broadly to our customers than Pinnacle 21 was doing before we bought it. So we are making some investments in sales training and expanding our sales force a little bit to accommodate for additional revenues that we're putting on their plate there. But overall, we think there's a lot of opportunities to expand the product set a bit and to tie it in a more integrated fashion to some of our biosimulation products and some of our regulatory products. I don't know, Andrew, do you have any comments you want to bring up about the growth?

No, I would just comment that the EBITDA margins this year will be modestly higher than the Certara overall average EBITDA margin. We expect those margins to expand next year. It's a function of the complementary businesses and synergies not related to additional investments. So leveraging our broader range of resources we have for sales and marketing, et cetera.

Okay. And then I'd love for you to touch on maybe provide a little bit more color about the cadence of the bookings environment in the third quarter. I'm sure other people are going to ask about that. I'll ask a little more specific. You've talked about your biologics simulator and kind of carving that out and making that available on a more stand-alone basis. Have you seen adoption on that yet? Is it still too early? Or is it still too early? And is that big enough or important enough to cause some of your clients to pause and evaluate that biologic simulator as an alternative to what they're already doing?

Yes. Thanks, David. It's still early days for that product. So it was only something we announced relatively recently. We do have customers for it. So it's a real product. But we believe that there's a lot more opportunity for the product right now. So we'll see how that goes as we go forward and grow it. I don't think that -- I think customers are going to continue. I do think customers are going to continue to develop their biologics that are going to pause their programs because we have a new product. But I do think that it provides some valuable insight that can go along with Certara's general theme of reducing the time and the cost of drug development or in this case, biologics development. Again, you actually 2 questions that you asked about bookings. So maybe Andrew, you want to take that one?

Yes. So -- David, bookings -- I think we talked about it, we saw a little bit of it at the end of the second quarter. But coming out of the pandemic environment, we saw a lengthening of time to close on bookings. Pipeline remained healthy. Moving into September, we really saw a pickup. We maintained a TTM about approximately 15% through the third quarter and then following through the momentum continued into October and we expanded the TTM growth of 18% and the pipeline looks healthy for Q4.

Sorry. So 18% is the measure through October, is that correct?

Yes, that’s the TTM.

Our next question coming from the line of Michael Ryskin With Bank of America.

I want to follow up on Dave's question on Pinnacle. Just sort of talking through some of the synergies and the growth there. Obviously, a very strong profile if you look at '22. I wonder how much of it is sort of new customers or maybe different customers that are using that software versus what you're currently offering? Or is it sort of just better exposed to a particular part of the market, just curious. And then in terms of future investment in Pinnacle and adding more capabilities there, could you talk to any opportunities on that?

Yes. So look, I think -- I think last quarter when we talked, when we acquired Pinnacle 21, they had a very small sales and marketing force, it was really just 1 person, which I think, speaks to the strength of the product they have. This is something that's very complementary to what Certara does with lots and lots of our customers. So -- and obviously, we have a sales and marketing force that's quite a lot larger than that. So that's one significant opportunity for us in the near term. And we expect to see some success in that as we go into next year. The second piece of it is we do believe that there's opportunities for additional products in the Pinnacle 21 line. I'm not ready to talk about that right now. But look -- watch as we go into next year and I think we'll see some interesting developments there.

And if I heard you correctly, when you're talking about software revenue in the quarter in bookings, I thought you said that aggregate renewal soft for software was 87%. I mean you indicated retire and renewals. Could you clarify what you mean by that? Is that just renewals that were pushed into 4Q or happened earlier in 2Q? And just how often does that happen? What gives you confidence that that's not something that a software customer that went away and that's something that's still going to be there later this year?

Yes. I can take that, Bill. Specifically, we have clients who, over the years, have acquired our products at different term end dates, and from time to time, they like to consolidate their renewals into a single period. What happened was we saw that renewals that were scheduled for Q3 were combined and renewed in Q2. And this is why, if you look at the year-to-date, we're at a 90% aggregate renewal rate, and we were a little bit above the benchmark in Q2, a little bit below in Q3.

Our next question coming from the line of John Kreger with William Blair.

I wanted to come back to the staffing comment. How are you feeling about your staffing availability at this point? And are you able to sort of handle the work that you're trying to convert into revenue right now? Is there any constraint there?

Well, we've -- I think we said in the call, we've grown our head count by about 14% year-to-date. So we're actively recruiting, as you'd expect, since we're growing nicely. I'd say, overall, we're pretty busy right now, but not to the point where we're turning away work or anything like that. So I think it's a -- it's a competitive environment out there. I'm sure lots of companies have talked about it, but I think Certara has a very good proposition for employees to join us, and so we've been keeping ahead of it.

And then I don't want to steal the thunder from your Investor Day, but any sort of early comments you could give us on the '22 outlook relative to some of the longer-term targets you've talked about?

Well, Andrew, do you want to comment on that or --

I would prefer to address that in Investor Day. What we can see, though, and we've talked about is that we kind of look at a high visibility approach to forecasting. The way that the guidance came out, our organic growth rate, excluding Pinnacle 21 is closer to the high teens as opposed to the mid-teens. So we're optimistic for next year and we'll talk about guidance at the Investor Day.

Great. And maybe just one last quick one. If you think about the bookings experience you had in Q3. It sounds like it was a little light overall, particularly in services. As you look across the portfolio, does anything stand out to you in terms of type of work that was awarded, type of client? And any kind of takeaway beyond just sort of lumpiness through the summer?

Go ahead, Andrew, do you want to take that?

I was going to say, from my perspective, it was lumpiness from the summer. One key highlights that Bill mentioned earlier, is in both software and on the services side, we were derived a larger percentage of our revenue from new clients than we had historically. So the increasing number of new logos has been positive and was part of our plans going into the year, but we’re delivering on that plan. So slightly higher mix of revenue from new clients and both –

I think, overall, we just saw a lot of clients taking some vacation in July and August. So things slowed down and then they picked up as when we went into the fall.

[Operator Instructions] And our next question coming from the line of Luke Sergott with Barclays.

On the Pinnacle 21 with the new 5-year contract awarded the FDA, can you give us a sense of if that is really what's taking your estimated growth next year from that mid-teens to high teens? And if not, just give us a sense of how this work is actually going to pace in? Just trying -- I want to get a sense of the durability of the -- and the magnitude that's available to you guys?

Well, Pinnacle 21 is a 5-year contract from the FDA. The FDA uses Pinnacle 21 to evaluate all of the submissions that come in for compliance with and they started enforcing compliance. So that's the tool that they use. It's not the majority by not anywhere close to the majority of Pinnacle 21's revenues, the primary source of revenues are pharmaceutical companies that are using their software well before they get to the FDA. And we believe that there's a bigger market in that area, right? So -- there's a lot of data that gets transmitted through the pharmaceutical development process as you move from clinical through regulatory. And rather than simply try to put that in CDISC format as the last step before we go to FDA. There's a lot of opportunity in terms of cost and labor savings for that to happen earlier in the process, and we're seeing customers that do that. And we believe there's a bigger opportunity across pharma to use the software in that way. So it's a very attractive product they have in Pinnacle 21. It solves a problem that exists across the pharmaceutical industry. It's not an easy problem to solve from a software perspective. So it's a fairly complex piece of software that requires a pretty good team to develop and manage it. But we don't believe it's fully penetrated in the industry, and that's probably the first step as we complete our integration of the product.

All right, makes sense. And then last one here on the guide, the implied 4Q. Can you give us a sense of the step-up here where it's coming from software versus services?

Fourth quarter software versus services? It's going to -- it's coming from both. So I do expect a pickup in the software growth rate in the fourth quarter to push it into the low teens as we had set for our goal earlier in the year. So I would say the big driver of the fourth quarter is software growth and then incremental growth in the services as well.

Our next question coming from the line of Vikram Purohit with Morgan Stanley.

So first, staying on Pinnacle 21. I was wondering if you could just remind us what the mix of that business is on a stand-alone basis across software and services? Is it primarily a software business? Or is there a meaningful services component to it as well?

Yes, 90 -- you got it.

It's -- well, what Andrew's going to say, it's 90% software at about 10% services. The services are things like training and installation --

Okay. So primarily software. Got it. And now that the transaction is closed, I was wondering if you could speak in any further detail about a couple of the more interesting areas that you're looking at for cross-selling opportunities looking into 2022?

Sorry, just in general, for Certara, is that your question?

Yes, cross-selling opportunities between Certara and Pinnacle 21?

Yes. So we -- Certara does a lot of work where we are working early on to help design the clinical strategy for a company -- for a pharmaceutical project rather. And if you integrate the data strategy in with that, you can save a lot of money for our clients down the line. So that's one very obvious thing that actually, I was on -- we were all planning on even earlier today. I think we do a fair amount of regulatory work where we are working to create and then submit the full NDA, including the BIOSTAT data. So there's an opportunity right there to combine Pinnacle 21's technology with the work we're doing for quite a number of clients. And I think we'll find other ones as we continue to go forward. Now I think the thing about Pinnacle 21 is data standardization across the pharma development process would save tremendous amounts of time and money if it was really broadly implemented. And I think a lot of our clients know this. And the easiest way to standardize around is to go with CDISC because everybody is going to have to basically comply to that when you go to the FDA anyway. So that's why we believe that Pinnacle 21 has got a lot of opportunity beyond just that final step where they're going from -- going for that middle to the FDA.

Okay. That's helpful. And then maybe one more question from my side. So related to some of the recent product updates and product launches that you've announced. I was wondering from a business cycle standpoint, could you talk to us a little bit about how long it takes in your experience for these kinds of product releases to gain some uptake and start driving new sales growth? For example, you recently launched a new regulatory writing software base case market access software was updated several months ago. So I was just curious to see how long it takes for releases like this to start generating kind of a sales lift?

Yes. So it depends on the type of software, Vikram. For a lot of our software, where we're doing a major update, for example, in Simcyp. We have an eagerly awaited list of customers who want the next features and we'll upgrade almost immediately. That's not entirely true because when -- particularly in Simcyp, if your drugs amide with a specific version, you need to stay with that. So we do have people that will -- not everybody will upgrade, but people are really pushing for new features and new modalities for that. For other products, like we talked about secondary intelligence, which is really a very innovative and new product for toxicology, that will probably take a little bit longer because we've got to go in evangelize the new market and explain how this works. So those products historically have taken a year or 2 before they build up. So it really depends. The pharmaceutical industry is pretty sophisticated, but also it's a highly regulated industry. And so you do have to demonstrate how your software is accepted by the FDA and fits with the overall process. So I think over a 2-year period is probably maybe the most typical number I can give you.

I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Feehery for any closing remarks.

Yes. Thanks for joining our third quarter conference call. As I said earlier, Certara had a very good quarter. We’re very pleased with our growth, and we’re very excited about the future opportunities that we have with Pinnacle 21 and with a lot of the technology and products that we are continuing to launch and develop. Thank you for joining, and I hope everybody has a good evening. Goodbye now.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.