Greetings, and welcome to the Simulations Plus Fourth Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. Siegel, you may now begin.

Good afternoon, everyone. Welcome to our fourth fiscal 2022 financial results conference call. With me today is our CEO, Shawn O’Connor; and CFO, Will Frederick. After their portion of the call, we will open the floor to questions. Before we begin, I want to remind everyone that the matters discussed in this presentation are forward-looking statements that involves risks and uncertainties except for historical information. Words like believe, expect and anticipate mean that these are our best estimates as of this call. Still 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 acquisitions on terms favorable to the company and an sustainable market. Further information on the Company’s risk factors is contained in the Company’s quarterly and annual reports and filed with the United States Securities and Exchange Commission. With that said, I’d like to turn the call over to Shawn O’Connor. Shawn? Shawn O’Connor: Thank you, Brian, and welcome, everyone joining us today for our end of year call. I hope you’re all doing well this afternoon. After the close, we reported fourth quarter and full year revenue growth of 19% and 16% respectively exceeding our fiscal 2022 guidance of 12% to 15%. Full year diluted EPS growth was 28% and we reported an adjusted EBITDA margin of 39%, representing growth of 24% over last…

Thank you, Shawn. Total revenue growth was 19% for the quarter, comprised of 10% software growth and 30% services growth. Software and services were each 50% of revenue during the quarter. Total revenue growth for the quarter was 21% on a constant currency basis. Total revenue growth rate was 16% for the fiscal year with software growing 18% and services growing 13%. Software accounted for 61% of total revenue and services contributed 39%. On a constant currency basis, total revenue growth for the fiscal year was 17%. Total fourth quarter gross margin increased year-over-year to 77%, reflecting the higher margins in both divisions. Fourth quarter software gross margin increased to 86% from 85% last year due to leverage from the cost of revenue line. Services margin increased more dramatically to 68% from 56% last year. The lower services gross margin last year was primarily due to the revenue decline in that business. Total gross margin for the fiscal year increased to 80%, reflecting the higher software revenue mix. Software gross margin increased to 91% from 88% last year, while services margin increased to 63% from 61% last year. For the quarter, GastroPlus represented 48% of software revenue, MonolixSuite was 20%, ADMET Predictor was 23%, and other software was 9%. For the fiscal year, GastroPlus represented 57%, MonolixSuite 18%, ADMET Predictor 18%, and other software was 7%. For the quarter, our renewal rate for commercial customers was 92% based on fees and 85% based on accounts. As Shawn mentioned, quarterly renewal rates fluctuate year-to-year depending on customer renewal timing. This quarter, the decrease in the fee renewal rate also reflects the impact from foreign currency exchange rates. Average revenue per customer was flat compared to the fourth quarter last year, remaining in line with historical trends. For the year, our renewal…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Matt Hewitt from Craig-Hallum. Please go ahead.

Good afternoon, and thank you very much for the update. A lot to unpack. So I’ve got a couple questions and then I might have to come back with a few more in a bit. But maybe first up, and thanks for giving us the update on the sales and marketing headcount at 16. It sounds like you want to continue to add not only to that team, but the rest of the operations team. Where are you today maybe from a total headcount and what is your target as we exit 2023 given your plans to add headcount? Shawn O’Connor: Good afternoon, Matt. Yes, thanks for the questions. Hopefully, I’ve got two answers for you and more if you’ve got more questions down the road. In terms of headcount overall, we are at about 157, I believe is where we were at the end of the fiscal year with plans that would see growth in two areas as we go into the next fiscal year. One in terms of consultant – scientific consultants for that side of our business and as well in support of our collaborations and R&D development, so scientific staff and business development staff. I would say the business development staff growth is anticipated to be less than our overall revenue growth of 10% to 15%, but maybe the addition of less than a handful of people there. And then the consulting effort to growth in terms of scientists will follow the growth of our needs in terms of the consulting services. It’s very competitive market out there. We’re very active in the recruiting effort. The more we can hire, the more we’ll deliver in terms of service revenue.

Got it. And then, I guess, with the shift that you’re seeing and the timing of renewals, it sounds like some of that is a positive as you’re able to cross sell, get everybody on the same renewal track across the offerings. But you also mentioned that there is a little bit of a disruption because of budgets and whatnot. What gives you confidence that those customers that maybe are delaying on the renewal side are going to ultimately come back and either at the same level or ideally at higher levels? Shawn O’Connor: Well, in fact, it’s something that we’ve seen as our clients budgetary cycles started already for their year-end. We’ve seen this phenomena start as early as our third quarter a little bit, but certainly in the fourth quarter we’ve seen it. And during this timeframe, we’ve not really seen too much of a drop off at all in terms of the anticipated new licenses, new customers that we would sign up. We’re actually on the service side in terms of customer count, signing up no more new customers than we have for some time. We’re seeing a lot of new names, new smaller pharma and biotech companies engaging our service organization. So we are seeing a trend of new customers closures despite the fact that discussions are prolongated in terms of renewals and licenses and so on and so forth. It’s a nasty thorn in terms of the success we’ve had in terms of cross-selling our licenses and bringing additional platforms into the hands of existing customers. And this synchronization process that is desired, understandably so, benefits both sides in terms of handling those renewals on an annual basis. But the thorn is that it changes around the timing of those renewals of the existing part of our business with that client. And so shifts things around, but we’ve, again, there not seen any changes in terms of the overall renewal rates when you look at them from a year-over-year basis as opposed to a quarter-by-quarter basis.

Got it. And I think you kind of touched on one of the other questions I had, which was maybe one of the things you’ve heard now for the past several quarters has been concerns about the health of the smaller biotech, smaller pharma companies given the environment, the funding environment that we’ve seen here the past few quarters. You called it out in your press release, you just mentioned it again, that you’re seeing some demand from those smaller biotech customers. I guess that runs somewhat counter to maybe what investors had expected given the commentary in the past few quarters. So maybe what are you seeing from those customers? And is that because the adoption of modeling software has become so mainstream that they now are adopting as well or are you bringing something unique that that is driving the business? Shawn O’Connor: Well, you’re touching on the right answers there, Matt. You got to realize there’s two dynamics going on there. Post active funding market, the number, the population of biotech companies went up. Many, many more small biotech players in the market out there. But the real driving force here is the adoption of modeling and simulation, which has historically been relatively slow on the biotech side of the profile of our target market. That is picking up the adoption of modeling and simulation in biotech in general, regardless of a small population or a growing population of biotech companies is expanding quite rapidly. That is in part contributing to the competitive nature in terms of recruiting out there as these biotech companies are hiring professional scientists in this field at a much more rapid pace and earlier in terms of their strategic plans than they have ever in the past. And so I think we are benefiting from the adoption of modeling and simulation in the biotech space, seeing more biotech customers, and yes, that population is larger as a result of the funding history of a year ago. And no doubt, some of those biotech companies may not survive in the long run as their funding runs out and they’re not able to replenish. But the impact of losing one small biotech customer versus the overall effect of adoption of modeling and simulation in the biotech segment in large far outweighs the benefit to Simulations Plus at this point in time and we expect going forward into the future.

That’s really helpful color. Thank you. I’ll hop back into queue. Shawn O’Connor: Thanks, Matt.

Next question is from François Brisebois of Oppenheimer & Co. Please go ahead. François Brisebois: Hi, thanks for the question. Question I’ll put an ask to that as well. So just – can you just on Matt’s question about the headcount at 16 that you mentioned at the end there. Can you just help us, you talk about your overall headcount around 157, but 16 that sales and marketing, is that your scientist or just to make sure we know exactly what that 16 is. Shawn O’Connor: Yes, that’s the accounts to Frank of the professional sales and marketing organization, so does not include the resource out of our scientific staff that is devoted to the business development effort. François Brisebois: And do you mention how many scientists or for consulting services that you do have right now? Shawn O’Connor: Yes, it’s not a clear deadline. It’s a process whereby most all of our – certainly more senior scientists are involved in the business development effort on a client by client basis and opportunity by opportunity basis. But they are performing an assortment of duties that include project work and business development work and so on and so forth. So we can’t – I can’t say that there’s 10 or an exact number there. We’ll refer to that process that we go through on a quarterly basis in terms of identifying the number of hours that are devoted out of the scientific staff to the business development effort, and that gets allocated appropriately. I would say, in general, the trend line in terms of are we devoting more scientific resource today through the business development effort than we were yesterday? Yes, it’s growing the number of accounts that are in the pipeline project opportunities, but we’re working today is greater…

Our next question is from Dane Leone of Raymond James. Please go ahead.

Hi, thanks for taking the questions and that has always a comprehensive review of your financial statements. Could you maybe just elaborate on your strategy in APAC and maybe China specifically, obviously that macro has changed quite a bit. Has there been a maybe a refocus into what you highlighted as maybe LATAM or EU growth opportunities outside of your current core markets geographically? Any color there would be helpful. Thank you. Shawn O’Connor: Sure, sure, Dane. Our primary Asian market historically and through to today has been the Japanese market. We have coverage as with a distributor in that marketplace that has served us well for many, many years. It’s probably been the market that was most impacted until I talked to – talked with return to China, but most impacted by COVID over the last couple of years, Japan I’m referring to. And we’re seeing that start to open back up the opportunity to travel there and support the distributor, the return to a sort of normal business cycle on the part of our clients in Japan. We’ve had relatively flat growth in Japan and see an opportunity to get that back into a growth profile. Whether it get to China, we are investing there in some distributor relationships. We’ve been precluded and still are precluded really from physical presence there in terms of support of the effort we have invested in hybrid business development activities. That markets going to be uncertain for a while yet still. The other geographies that through refer to present more of a growth opportunity for us today, certainly versus China, although I believe Japan, I wouldn’t label the same. I think Japan can get back into gear in terms of its historical growth profile. The Latin market is a very promising one…

Thank you. Shawn O’Connor: Thank you, Dane.

We have a follow-up question from Matt Hewitt of Craig-Hallum. Please go ahead.

Thanks. Yes, just one follow-up question. You spoke to some of the wage pressures that you’re seeing. It sounds like it’s more competitive in nature versus just the run of the mill inflationary pressures that I think a lot of the economy is facing. But are there some things that you can do from a pricing perspective? I think historically when you’ve introduced new GastroPlus capabilities that’s typically come with a pricing or a price increase, is there something on the pricing side that you can do to off help offset some of the wage pressures that you’re seeing? Thank you. Shawn O’Connor: Yes, sure, Matt. Yes, no, we have pricing news and updates that take place, not necessarily tied to upgrade releases, but we have an annual price change to our rate sheets that that occurs. And certainly, we can be more aggressive in that regard and have been. And yet, that is a process that plays out over time as existing licenses come up for renewals so on and so forth. And as you know, your larger clients have some negotiating capability there. Obviously, the cost side, the compensation side out of the tight market, competitive market is driving those prices up pretty dramatically. We have an ability to raise prices and are doing so. And if you look in terms of our gross margin on service, not really been impacted in a dramatic way, which is reflective of the fact that we are getting that that increased cost pass-through to our clients to a certain extent in terms of our service organization. But it is a mesh of timings that can’t be perfectly damaged to cover today’s cost increases with immediate price increases that are effective today. So if there is some impact there. But yes, we are diminishing the impact of the underlying competitive costs as best we can with some price increases as well.

That’s really helpful. Thank you.

We have a follow-up question from François Brisebois of Oppenheimer and Co. Please go ahead. François Brisebois: Sorry, sorry, just the last one here. I feel like it wouldn’t be an earnings call if I didn’t ask this, because it hasn’t come up, but I just wanted to know if there’s any additional color you could say on M&A, is it still looking for accretive companies and just any color around obviously valuations have come down a little bit or the IPO window in terms of getting funds is borderline shut down a little bit here. So any additional color at all the – from the prepared remarks on M&A? Shawn O’Connor: Yes. I’m destined to disappoint you, Frank, in terms of I don’t know that I’m going to give you anything dramatically new than what I’ve said the last quarter in terms of – yes, improved market in terms of valuations that doesn’t mean the valuations are easily resolved. Lot of effort and investments in a multitude of opportunities that are out there. And I think the new thing is that it is, we are making steps forward but we’re certainly not at any stage of they came in, which we can say that there’s anything fair, nothing to comment in terms of actual deals, but the environment I’m – I feel favorable, but we’ve got – I’ll put it in your vernacular. We’ve got some shots on goal here and we’ll get one pass the goalie eventually. François Brisebois: Okay. I had to ask.

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. Please go ahead, sir. Shawn O’Connor: Very good. Well, short and brief closing comments. I appreciate everyone’s attention and interest in the call today and look forward to reporting next time around next quarter, and have a good rest of the evening. Take care.

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