Greetings, and welcome to the Simulations Plus First Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Brian Siegel from Hayden IR. Thank you, Mr. Segal. You may now begin.

Good afternoon, everyone. Welcome to our first quarter of fiscal 2022 financial results conference call. Hosting the call today are Simulations Plus' CEO, Shawn O'Connor; and CFO, Will Frederick. An opportunity to ask questions will follow today's presentation. Moving to Slide 2. Before beginning, I would like to remind everyone that except for historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. Words like believe, expect and anticipate mean that these are our best estimates at the time but that there can be no assurances that expected or anticipated results or events will actually take place. So our actual future results could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, our ability to maintain our competitive advantages, acceptance of new software and improved versions of our existing software by our customers, the general economics of the pharmaceutical industry, our ability to finance growth, our ability to continue to attract and retain highly qualified technical staff, our ability to identify and close acquisition on terms favorable to the company and a sustainable market. Further information on the company’s risk factors is contained in the company’s quarterly and annual reports filed with the Securities and Exchange Commission. With that said, I'd like to turn over the call to Shawn O'Connor. Shawn?

Thank you, Brian. We began the first fiscal year with an excellent first quarter, as both segments of our business delivered solid growth leading to total revenue growth of 16%. Our software business was up 19% year-over-year in the first quarter. And we continue to see strengths across each of our three core product lines with bookings exceeding expectations, and significant cross selling progress. From an innovation standpoint, we continued to release new versions that we will -- we believe will continue to build on our leadership positions. Our service business returned to positive growth up 13% year-over-year. This portion of our business also continued to grow its backlog recovering from the pandemic impacted challenges of the second half of last year. Diluted EPS grew at a faster pace than revenue up 25% from last year driven by mix and the operating leverage inherent in our model. Overall, this was a strong start to the new fiscal year. As I mentioned, our software business had a strong quarter. GastroPlus revenue increased 19% year-over-year this quarter, we had 16 new 100k plus customers in the quarter, and nine new small biotechs pharma companies, CROs and incubators. This is a rapidly growing segment of the market and we are experiencing robust growth in this area. We also saw customer success with 21 upsells to existing customers in the quarter. A significant accomplishment that we announced during the quarter was the award from the FDA to enhance and validate mechanistic in vitro, in vivo correlation or IV, IVC methods for long acting injectable formulations to accelerate innovator and generic product development and regulatory assessment. This is a joint proposal with the university of Connecticut department of pharmaceutical services. And we are now engaged with the FDA on four different funded programs, validating the…

Thank you, Shawn. As you may have seen in our press release earlier today, we have expanded our financial disclosures to give a more complete picture of the business by providing adjusted EBITDA. Well, this isn't the metric we've previously provided, it has become commonplace with our companies and we felt it appropriate to provide for our current and prospective investors. Our adjusted EBITDA is currently calculated by adding back stock based compensation expense. And in the future, we'll add back any expenses related to M&A or other non-cash, non-operating expenses that may occur. We provide a reconciliation of this non-GAAP metric to net income to relevant GAAP metric in the press release announcing our results, and it can be found on our website as well. Our total revenue growth rate was 16% in the quarter. The strong growth of 19% in our software business positively impacted our mix, which was at the high end of our 55% to 60% guidance range for the fiscal year. Our services business grew at 13% and its share of the mix was that the lower end of the 40% to 45% guidance range. Our software gross margin was 90% for the quarter, up from 87% last fiscal year due to increased revenue and slightly lower cost of revenue. Our services margin was 60% down from 64% last fiscal year due to increased salaries and an increase in lower margin services projects, including training and international workshops in China and Brazil. Our total gross margin increased slightly year-over-year to 78% as a result of the improving software revenue mix. We continue to enjoy a diverse mix of software revenue in the quarter with solid growth across our entire product portfolio. For the quarter, GastroPlus represented 54% of our software revenue, MonolixSuite was 21%, ADMET…

Thank you, Will. In conclusion, this quarter demonstrates improved momentum relative to the end of fiscal 2021. Our bookings generally exceeded expectations. We grew revenue double-digits for both software and services, and we expanded our services backlog, supporting future growth. Our investments in business development are paying off, helping us to capture market share, expand to new regions and more effectively cross sell solutions across our installed base. Recent successful releases of new software and service achievements demonstrate our scientific leadership. Overall, we are well-positioned for continued organic growth. Additionally, strategic M&A remains an important path to augment our organic growth and with a strong balance sheet and a growing leadership position in the industries we serve, we continue to evaluate potential acquisitions. With that, I'll be happy to take your questions. Operator?

[Operator Instructions]. Our first question is from Francois Brisebois with Oppenheimer.

Thanks for taking the questions and congratulations on a very nice quarter here. The first question I had was just, your quarter here that you reported ended in November, a lot of people are announcing quarter is here for fourth quarter and calendar year ending in December and in December, we've had a lot of fun with this Omicron variants. So, I'm just kind of wondering on your end, in terms of guidance, it was a strong quarter. Can you just talk about maybe how you have seen the variant effect different parts of your business, if at all, at this case?

Obviously, the results in terms of our booking sales revenue drive were great in the quarter ended November. So I can't point to any omicron impact in that timeframe, which built up since that point in time in December and here into January. And I think we're waiting to see what the impact is, back to a year and a half ago, with other peaks of the virus we saw slowdowns in terms of our client companies and they're hiring and the need for more software, more licenses impact in terms of FDA processes and the speed which clinical trials were concluded. Some of that impact may be yet to be seen here in the few months coming months but to date not a lot of impact in terms of November.

That's helpful. And then maybe help us understand, last time there was an issue, and you guys have rebounded very well from -- on the services side in terms of -- in relationship to the pandemic, but I just wanted to make sure we understand here that what happened is it wasn't that there was not necessarily enough backlog, but was it just the timing of the cancellation as a certain products and it was difficult to get the backlog involved? Or what was the reason, again, for the service issue?

The primary source of the problem, Franc, was the number of delays in cancellation and holds that came up during the quarter and especially in the third quarter, right towards the end of the quarter, the last half of the quarter, which didn't allow us to reach into backlog and other projects forward to move our staff to other engagements of the projects that would maintain the lower revenue there. Our backlog is a mix of projects that some can be moved forward, many can't be moved forward because it's waiting on -- project is waiting on data that comes from the client or a CRO on the conclusion of the clinical trial. So if that backlog is bigger, as we talked to before, then there's more probability, more opportunities to move some of those projects forward. Our backlog was short and the number of cancellations in that third quarter were significantly above what our normal experience is. It happens. It happens every quarter. But the 9 that we incurred in the third quarter of last year, was well above what would be considered normal. We've seen cancellations this past quarter, but they were not as significant or as numerous, and therefore, it didn't impact us quite a significant one.

Okay. Great. And then maybe lastly, at a high level here. We talked about -- it's interesting, this is quite a kind of a change here. The use of biosimulation is progressing with the FDA. Can you just talk about the acceptance of biosimulation with the FDA? And whether or not that's accelerated by the pandemic? I understand it makes a lot of sense to save time, especially with the EUA that you guys were involved with. But have you run into the issue where because of the pandemic, the FDA is so busy that maybe they're not ready to accelerate biosimulation as much as you thought? Or does it make a ton of sense and they're all on board?

If anything, we see the impact in terms of their processes around the review of drug candidates and submissions. No impact certainly in a negative way on their endorsement and use -- their own use of modeling and simulation and endorsement of the industry's usage can areas of expanding application of biosimulation techniques, their acceptance, bioequivalents, waivers, et cetera, continue to expand. So pandemic can be impactful in terms of the flow or workflow but certainly it doesn't slow the rapid adoption of biosimulation and supporting that from the FDA. Impact through this process, modeling and simulation techniques have been used in some of the COVID treatments available that have been in the review process and in their core more opportunity to expand its application into 2 areas, vaccines, et cetera.

Our next question is from Matt Hewitt with Craig-Hallum.

Congratulations on the good start to the year. First up, it's kind of a two-pronged question. But we've heard a lot about the great resignation that occurred late in the year, actually, Q3, Q4 a lot of people switching jobs. And I'm curious what impact, if any, that has had on your customers? Have they seen that type of migration from 1 company to another? And how does that -- how has that impacted your sales? And then separately, at Simulations Plus, where does your hiring sit? Have you been able to find some good people to fill roles as you continue to grow?

Well, the first part of your question in terms of the activity in the industry and our clients, I don't have a measurement as to comparison to prior time is volume. My sense is that itself like it is in a lot of industries out there that movement of staff is more active now kind of as we came out of earlier phases of COVID, as we began some of our client companies began to step back in terms of remote working, a number of drivers in terms of the movement there, some impact in terms of the flow of new sales must come from that as they're losing people and/or searching for other people. Generally, quite frankly, it's a positive thing for us. When a can of the Simulations Plus moves from company A to company B, oftentimes that creates a new sale opportunity for us, both on the software side as that individual is a custom to using the tools at their prior job and they need them in a new position as well as on the service side. They are in a position to control the acquisition of service engagements deliver those acquire them from consulting firms like ourselves. There have been a fan of our team previously, then that often translates to a new opportunity at the company that they've moved to mostly a positive impact. It also in the company that is losing people, creates opportunity where they need to continue to meet deadlines and may create a need to go outside to Simulations Plus to get work done that they might have otherwise done in-house. So overall, it tends to be a bit of a positive. In terms of its impact on our own environment, this has been for a long time a very competitive marketplace for talent. Historically, demand has exceeded supply in general for computational biologists and scientists that work in this field and it continues through today. And we have pretty good historical retention rates in terms of our employees. It's not 100% retention. There are people that we lose from time to time. Often, it is a consultant that may have come out of a post-doc environment into a company like Simulations Plus and without any pharma, direct pharma experience wants to go -- get that experience into their resume. And in fact, they then become even better consultants down the road with that experience on the resume, and we look forward to them coming back at some point in time. On the recruiting side, we have a very competitive market, but we've generally been able to keep pace with our hiring plan, but it is a very competitive market and something that we pay close attention to because it is the lifeblood of the business or scientific staff and their contributions, both on the software side as well as the consulting side, key ingredient of our success.

That's really helpful. I guess reaching out or kind of touching base on the Asia Pacific region, where you are making a little bit more of an effort there. Where do you see that business going given, I guess, kind of the market there has been growing robustly for the past few years. And I'm just curious, can that become 10% of revenues in a couple of years? Where do you see that going over the mid and long term?

Yes. Generally, the Asian market in total is -- has been contributing about 15% of our revenue. And so we've got a good presence there historically with the GastroPlus ADMET Predictor products and especially in Japan, where that long-standing relationship with our distributor there. has driven very good revenue growth for many years. Our expansion into other areas in terms of Korea, China, India, those marketplace is a little bit less developed for ourselves, and we see more opportunity, expect more opportunity there. And finally, I'd say that actually in Asia, while it is fast growing, it was probably the most disrupted through the COVID and their start stops in terms of business activity was probably more impactful there than anywhere geographically. That said, we've -- on the Monolix side, added a new independent Chinese distributor for the Monolix product several months ago and the start-up period of time, we reached the end of it as began this past quarter with the first licenses through the new distributor and very recently put the Monolix product into the portfolio of products that are Japanese distributor reps for us in that marketplace. So expect some uptick there on the Monolix side, which has done some business, but not proportionately appropriate for their overall mix of business. We expect that to be a good growth area for Monolix. And in general, will contribute to at that 15% level or I think a little bit better than that as we move forward.

Our next question is from Dane Leone with Raymond James.

And congratulations on the results. Maybe you could provide a bit more color in terms of the competitive share gains that you quote with Monolix Just where those share gains are coming from, what the competitive products are? And then, could you just -- you get asked this question a lot, just your view of how active you can be in organic growth and acquiring other businesses either in the service or software side over the course of 2022?

Sure, Dane. I'll go backwards in terms of the M&A question, active search out there in terms of ways in which we can contribute to our TAM in the long run by adding incremental products and services. We've got a pretty strict criteria. It's been applied in our previous acquisitions and a lot of activity there. Like earlier in the year, we commented on the fact that valuation was a challenge in the marketplace for us that has opened up a bit. It's always a challenge. It never goes away. But I think that barrier has improved. We're certainly looking at a number of potential candidates that are out there. And while unpredictable, I would hope that we are able to fines and come to an agreement in terms of an acquisition in this time frame. But it's got to be the right set and meet our criteria, both in terms of product fit and cultural fit as well as the accretive and appropriate valuation. And those opportunities do exist out there. And I'm confident that we will at some point to achieve that. First question, in terms of Monolix and our market share gain there. The LME modeling tool market is dominated by non-MM long-term early product introduction at the beginning modeling and simulation 20-plus years ago, largest installed base in that software segment. And we believe we are taking based upon our growth at 30-plus percent in Monolix that's much higher than the overall market growth rate for that product area. And therefore, must be taking our market share from the largest candidate in that space.

Our next question is from Mitra Ramgopal with Sidoti.

Congrats on great quarter. Just a couple of questions. First, I was just curious, the balance sheet is very strong. And as you're building cash, absent acquisitions, if maybe you can just let us how you're prioritizing capital allocation as it relates to the R&D or expanding sales, et cetera?

Sure, Peter. We certainly are focused in terms of the capital allocation, first and foremost on finding an acquisition opportunity to utilize those funds in that direction. R&D investment investments in our business organization or certainly investments that we're making, we are making those investments really sort of under the profile of our traditional allocation of expenses to our income statement and maintaining our profitability with them maintaining our -- doing our investments in business development and R&D within that profitability profile. And we're confident that the M&A opportunities will exist near term, and we'll translate those funds into more revenue-generating asset.

Okay. And then on targeting new customer growth to focus -- I mean most of the focus is still in the U.S., but as you look towards Europe and Asia, is the pandemic or Omicron variant have been affecting you on that front as you look to expand overseas?

Well, I think we're all hoping that this wave is a quicker way that passes. But is it impacting us now? I mean, to a certain degree, I mean, business activity and flow starts to be impacted as people shut down, depending on how drastic each geography implements their response. Generally, I think the world has gotten improved their ability to continue workflow within these environments. But it is disruptive, but we've managed our way through today without a significant impact. But we've got to wait and see. That's been the challenge of the impact of COVID throughout is it rises and flows up and down there.

Our next question is from David Larsen with BTIG.

Can you talk about the rebound in professional service revenue? What drove that? And really, what are your expectations for that line item going forward? And then with respect to Omicron and the clinical trial activity, it's sort of my understanding that Omicron it's a much shorter duration. When you look at data from South Africa, it looks like maybe 1 month compared to Delta, which was like 4 months. Like have you heard of clinical trials being stalled or delayed or shut down at all?

Sure, sure. No. haven't gotten big input where we would see the impact of that is in our delays, cancellations and holds in terms of workflow on the service side. And they came down. They still exist on a quarter-to-quarter basis, but they came down this past quarter. Now will we see an uptick that in the second quarter, more relevant in the time frame to Omicron increasing, perhaps, we're in a little bit better position to respond to that with our backlog, having grown quite significantly versus where it was midpoint of last year. So I think we'll be able to respond to that a little bit better. But no big signals as yet. And as you say, the time duration of the impact based upon South Africa experience looks to be favorable but totally this will be a little bit more short with and lesser in terms of it's impact. Service revenues in general, the 2 -- 3 sources of our service business, PK/PD, QSP QST and PBPK all stepped up in terms of their revenue growth compared to the latter part of last year. The step up to a positive service growth was really on the back of QSP and QST engagements where we grew quite significantly and grew backlog 124%. So there, the flow of both projects as well as QSP projects, both saw improvement versus the latter part of last year and that backlog pickup gives us a little bit more confidence in terms of their ability to continue to grow quite nicely and certainly much better than they did last year. DBPK business grew as well. PK/PD side turned the corner and improved in terms of their growth rate, but probably lags in terms of the increase in sales activity and backlog growth compared to the other 2, but we're seeing a pretty full pipeline right now in that area that anticipate will contribute to more success in the second quarter from their rebound. I mean overall, after a couple of quarters of negative growth service side getting to 13% growth in the first quarter is a very good sign and gives us confidence as we move into the remaining parts of the fiscal year '22.

That's fantastic, and that's encouraging. Just 1 other question for me. The EBITDA margin looked really good. Was that 42%? And then what are your expectations for your EBITDA margin both in the near term and in the longer term?

Yes, it's not a line item we give guidance on, but the business has been pretty consistent in terms of its EBITDA percentage over time, a little bit of fluctuation, but we feel very good in terms of the fast-paced growth of our software side, which contributes to I guess positive push to our profitability and EBITDA percentage. And so with the software business growing at a pace faster than the service growth, I think we could see some continued leverage resulting from that.

[Operator Instructions] Our next question is from David Windley with Jefferies.

Shawn, there's been a number of new -- a lot of new company formation in your biotech target customer base and moreover funding to those companies that are moving forward, is there a size or a maturity sweet spot where they become a really kind of -- they become kind of the perfect target for your sales force and software sales or kind of as anybody fair game? I'm wondering like how mature do they need to get before they really are ready to expend capital on your software?

Yes, good question. We saw in this first quarter some increase in terms of the biotech companies, segment of our sales as well as incubator sales, which was very pleasing to see. I think it's indicative of adoption of modeling and simulation in those early -- earliest stages, which historically hasn't been that great. When do they become a candidate for a software sale? Well, they got to have someone hired and brought on board to operate the software. So that's the revenues passed in terms of whether we send a software expertise, business development person on that type of account or a service business development for a person to the account. But we've been very pleased to see their use of modeling and simulation picking up. And that often begins with service engagements, but they are more quickly in their time lines hiring, modeling and simulation person into the group. We see to the earlier question on the call here, we see a good flow of large pharma modeling and simulation scientists stepping out of large pharma to become the department to the modeling and simulation department at earlier stage smaller biotech companies, and that's a good sign. And we're an example of where, as I mentioned before, movement of a good simulations plus user into a smaller organization creates a very positive sales opportunity for us.

Great. I appreciate that answer. Another question, kind of a slightly different access around growth is I'm wondering thinking about the phases of the molecules development life cycle. Where is the peak intensity of use of your products and maybe it's different by product? But more importantly, to the question, are there areas of the life cycle where there are use case opportunities, but the intensity of modeling is really hasn't picked up yet that you see as, I'll call it, a next frontier, although that's maybe a little too Pollyanna, but the next frontier for the intensity of modeling used to really increase?

Yes, it's a fair question. Our products and services span from discovery to submission and approval. So it's sort of anecdotal in terms of the use of our products, Discovery space is very fast growing in terms of its adoption of modeling and simulation. We're seeing a lot of new biotechs. I think that's where those start. And so there's a robust growth in that phase of development. Translation into clinic is 1 of the pain points in the drug development process in terms of being more predictive of successful candidates and improving the adding average of those that began the clinical process and succeed in modeling and simulation is a primary tool in terms of improving that adding average and selection of candidates to move into the clinic, identifying through clinical trial phases and looking for improved dosing regimens for patient populations, we're developing drugs that are a little bit more smaller markets. And that often means drugs that are applicable in smaller populations and modeling and simulation has great application in that regard. And then obviously, improving the success of clinical trials where the disproportionate amount of drug development expenditure takes place and that translates into the biggest opportunity to save money. If you take the right candidate into Phase III, you design the trial appropriately. And then as is often the case, the results of that clinical trial, how can they be fashioned in a way that improves probability of the FDA approval afterwards. So we see growth in all areas and modeling and simulations of application in each space.

There are no further questions at this time. I would like to turn the floor back over to Mr. Shawn O'Connor for closing comments.

Very good. I appreciate you joining us today and hearing our news and look forward to updating you again in a few months with our second quarter results. Take care, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.