Simulations Plus, Inc. (SLP) Q4 2022 Earnings Report, Transcript and Summary

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 year. These results reflect significant achievements by our company and my outstanding colleagues at Simulations Plus. We demonstrated our leadership in Model-Informed Drug Development with enhanced product offerings, expanding collaborative partnerships with industry and regulatory organizations, and saw robust attendance and participation in our MIDD conference this year. We successfully executed on business development strategies, enhancing our client facing capabilities, increasing our cross-selling results, and extending our geographic presence globally. It was a very good year for Simulations Plus. Our software business generated 18% annual growth, driving record software and company gross margins. GastroPlus declined 8% for the fourth quarter and increased 15% for the fiscal year. Typically our lowest quarter for GastroPlus, we saw a changing renewal timing dynamic in the fourth quarter, which I will speak to in a moment. We signed six new commercial clients in the fourth quarter and made seven upsells. GastroPlus was also referenced in 14 peer reviewed journals during the quarter, supporting our progress in making modeling and simulation mainstream in drug development. Two weeks ago, we introduced version 9.8.3 of GastroPlus unveiling key enhancements. Most importantly, the release includes improved reporting templates for interactions with Monolix and new validated NAFLD and NASH disease populations with options to inform NAFLD DILIsym software. These enhancements maintain GastroPlus’ position as the industry’s leading physiologically based biopharmaceutics and pharmacokinetics modeling platform. Further establishing the powerful interoperability [ph] of the products in our software portfolio. MonolixSuite revenue increased 55% for the quarter and 36% for the fiscal year. We continue to see a strong renewal upsell and new customers for this platform. We signed seven new commercial clients during the quarter. We continue to believe that MonolixSuite is taking market share in established markets and expanding its addressable market geographically in China and Japan. ADMET Predictor revenue increased 15% during the quarter and 14% for the fiscal year. We added five new customer – commercial customers and had eight upsells in this quarter. I’d also note that we’ve issued 245 licenses in 53 countries as part of our University+ program. Integrating our software into educational facilities and making it part of advanced academic programs, feeding the market of next generation modeling and simulation professionals to drive future demand. Fourth quarter capped off a good recovery in our services business with 13% growth and finishing the year with a backlog of $16 million, 22% greater than the end of last year. PK/PD revenue increased 3% in the quarter and increased 4% for the year. Operationally, we continue to see rising consultant utilization rates in higher project pricing yields. QSP/QST revenue increased 29% for the quarter and 9% for the year. Fourth quarter growth was tied to the reacceleration in bookings during the first half of the year, combined with high CRO pass-through revenue and support of client projects both of which are positive signals for growth in fiscal 2023. During the quarter, our DILIsym services division released ILDsym version 1A, quantitative systems pharmacology modeling software. The development effort leading up to this release was sponsored by a leading biotechnology company that is used ILDsym to inform planned clinical trial design. ILDsym targets potential treatments to reduce the progression of ILD in patients with systemic sclerosis and underserved condition. We believe ILDsym can contribute to a better understanding of underlying disease mechanisms using the predictive power of software to accelerate treatment development and leading to new standalone treatments or combined treatments that could halt or reverse ILD progression. PBPK revenue increased 84% this quarter and 48% for the year. Our project count and backlog continued to grow up 41% and 83% respectively compared to last year. This performance reflects deeper implementation of PBPK modeling into new use cases, an increase in the perceived value of these projects and its impact on drug development cycles. Overall, our services backlog continued to grow increasing 22% during the quarter compared to the prior year. As a result, we entered fiscal 2023 with strong momentum. Moving to our fiscal 2023 outlook and guidance. Our revenue outlook for the fiscal 2023 remains consistent with our long-term organic growth rate of 10% to 15%, which translates to $59.3 million to $62 million. During fiscal 2023, we anticipate changes in the seasonality of our revenue, especially with regard to our software revenue renewals. This results from two dynamics. First, our focus on cross-selling has been successful with a growing number of clients licensing multiple platforms, which have expanded through internal R&D efforts and acquisition. In support of this effort, we are standardizing our renewal, pricing and discounting policies to make it easier for our clients to acquire multiple offerings. When this occurs, our clients often desire to align multiple renewal dates, cross license products into one synchronized renewal date. This in fact benefits us as well in terms of the efficiency of license administration and business development support. Second, we have seen beginning in the second half of fiscal 2022, an elongated buying cycle on the part of our clients that includes the renewal of existing software licenses. This seems to be tied to budgetary reviews and tighter cash management on the part of the industry in response to the economic environment. While these dynamics may impact renewal timing, we expect our annual renewal rates to be in line with historical trends even if some renewals move between quarters. We expect to achieve our overall yearly revenue outlook of 10% to 15% revenue growth guidance, despite this changing seasonality. From a quarterly perspective, we expect Q1 revenue to be about 20% of full year revenue and Q2, three and four to be more evenly distributed for the remaining 80% of revenue. Similar to fiscal 2022, we expect higher software growth rates to shift our revenue mix. We expect software to represent 60% to 65% of revenue with services making up the remaining 35% to 40%. With fiscal 2023, we’re adding diluted earnings per share to our guidance. We expect to achieve diluted earnings per share of $0.63 to $0.67, which translates to 5% to 10% growth. Fiscal 2023 will be a year in which we invest in people. The market for modeling and simulation professionals is competitive, and we expect to invest in employee growth, recruiting and retention to support our continued success. Our expected growth is in the areas of revenue generating scientific and business development staff. The net impact of these investments is expected to be increased operating expense levels in fiscal 2023 as we digest these incremental costs. However, over the medium to long-term, we expect see a return to higher levels of operating leverage and margins as we deliver on our long-term organic revenue growth targets of 10% to 15%. And finally, concerning M&A, we continue to evaluate opportunities to expand our software portfolio and service offerings. Our guidance does not include the impact of any M&A activity that might transpire in fiscal 2023. Let me now turn the call to Will to discuss the financial results.

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 rate for commercial customers was 95% based on fees and 88% based on accounts, which continue to be in line with historical rates. Average revenue per customer is down compared to last year, but remains in line with historical trends. As we continue to expand our customer base into smaller biotech companies, we’ll see downward pressure on the average revenue per customer. Shifting to our services business, our fourth quarter services revenue breakdown was 42% from PK/PD services, 25% from QSP/QST services, 22% from PBPK services, and 11% from other services. Our full year services revenue breakdown was 45% from PK/PD services, 27% from QSP/QST services, 21% from PBPK services, and 7% from other services. Other services consist primarily of regulatory services we provide our customers to help them meet global regulatory compliance and quality requirements, reducing the number of information requests and accelerating their drug product development. We also provide comprehensive learning services focused on modeling and simulation training with a variety of options to help our customers succeed. Regarding key services metrics, total services projects increased 8% this fiscal year compared to last year, and backlog increased 22% from $13 million last year to $16 million. Now turning to our consolidated income statement for the quarter. Total R&D costs for the quarter were $1.7 million or 14% of revenue compared to $2 million or 20% of revenue last fiscal year. R&D expenses for the quarter were $0.8 million or 7% of revenue compared to $1.3 million or 13% of revenue last year. Capitalized R&D for the quarter was $0.9 million or 8% of revenue compared to $0.7 million or 7% of revenue in the same period last year. As mentioned last year, we saw increases in operating expenses for the fourth quarter of fiscal 2021, as a result of switching from a semimonthly payroll to a biweekly payroll and a true up in the fourth quarter with an additional payroll period. R&D expenses as a percentage of revenue also fluctuate each quarter, depending on the amount of capitalized work performed, ranging from about 35% to 55% of total R&D costs. SG&A expense for the quarter was $7.6 million or 65% of revenue compared to $5.6 million or 57% of revenue last year. The increase in SG&A expense was primarily due to increases in personnel costs driven by increased headcount and salary increases due to competitive wage pressure and a tight labor market, increases in travel costs as COVID-19 restrictions have been removed, allowing for more in-person conference attendance and increases in the cost of cyber and D&O insurance. Income from operations increased 299% to $0.7 million and operating margin was 6% compared to 2% last year, reflecting the leverage in our business model. Income tax benefit was flat from last year at $0.1 million, while the effective tax rate decreased from negative 74% to negative 8%. The fourth quarter is the quarter we true up our annual tax expense, and similar to last year, the benefit this quarter reduced our effective tax rate for the fiscal year. Net income increased 215% to $1 million compared to $0.3 million last year. Diluted earnings per share increased 400% to $0.05 compared to $0.01 last year. The revenue impact for the quarter from foreign currency exchange was $137,000, and expenses related to M&A during the quarter were $335,000, for a total of $472,000 or about $0.02 diluted earnings per share. Adjusted EBITDA for the quarter was $2.3 million, and adjusted EBITDA margin was 20% compared to adjusted EBITDA of $1.7 million or 18% margin last year. As a reminder, we calculate adjusted EBITDA by adding back stock-based compensation expenses and expenses related to M&A or other non-cash, non-operating expenses. We provide a reconciliation of this non-GAAP metric to net income, the relevant GAAP metric in our earnings release and on our website. For the fiscal year income statement, total R&D costs for the year were $6.4 million or 12% of revenue compared to $6.9 million or 15% of revenue last year. R&D expenses for the year were $3.2 million or 6% of revenue compared to $4 million or 9% of revenue last year. Capitalized R&D for the year was $3.2 million or 6% of revenue compared to $2.9 million, also 6% of revenue in the same period last year. Over the last five years, we’ve seen annual R&D expense generally range from 6% to 8% of revenue. SG&A expense for the year was $25 million or 46% of revenue compared to $20.6 million or 44% of revenue last year. Similar to the quarterly variance, the increase in the fiscal year expense was primarily due to increases in personnel costs, travel costs, and insurance costs, as well as increases in stock compensation and software licenses. A competitive advantage with our scientific personnel and operating model is that employees perform various functions depending on the business needs, contributing on services projects, software development, and sales and marketing support. We allocate personnel costs for these activities to cost of revenue, R&D expense and SG&A expense. As competitive costs for these individuals have increased and the SG&A contributions supporting revenue growth has intensified, we’ve seen operating expense as a percentage of revenue increase to the mid-50s and expect to see this level continue. Income from operations was $14.9 million, an increase of 32%, and operating margin expanded to 28% from 24% last year, reflecting increased revenue, expense management and the leverage inherent in our software and services mix. Income tax expense was $2.6 million versus $1.3 million last year with our effective tax rate increasing from 12% to 17% year-over-year. Last year, we saw a lower effective tax rate, primarily driven by the tax benefit associated with disqualifying dispositions. We expect our effective tax rate for fiscal 2023 to increase again closer to 20%. Net income increased 28% to $12.5 million, and diluted earnings per share increased 28% to $0.60. The revenue impact for the year from foreign currency exchange was $339,000, and expenses related to M&A during the year were $335,000 for a total of $674,000 or about $0.03 diluted earnings per share. Adjusted EB increased by 24% to $21 million this year, while adjusted EBITDA margin expanded to 39%. We ended the year with cash and short-term investments of $128.2 million and no debt. During the year, we made dividend payments of $4.8 million and the final payments of $3.7 million for our Lixoft acquisition, demonstrating our strong cash generation ability. We remain well capitalized with sufficient cash to support our continued expansion through internal investment and acquisition opportunities. I’ll now turn the call back to you, Shawn. Shawn O’Connor: Thank you, Will. We have strong momentum heading into fiscal 2023. As both our software and service businesses are taking advantage of a growing number of opportunities. I’m proud that we continue to deliver on our commitment to science, driving greater adoption of in silico tools to accelerate innovation and drive down costs. We are investing in internal R&D efforts to maintain and grow our leadership position and our increased scale enables us to expand our industry collaborations. We continue to enjoy strong global regulatory relationships and now have multiple FDA technology development collaborations in process. Our recent investments in sales and marketing resources are enhancing our client facing capabilities, and in fact, our business development organization now totaling sales and marketing staff of 16 is maturing and generating strong returns on those investments. Geographically, we’re focused on expanding our coverage in the EU by growing our business development and scientific consulting local presence. Increasingly, we are supporting international markets covered by distributor partners. By way of example, our new Latin American partnership is off to a strong start with solid kickoff events in the fourth quarter, including webinar and business development efforts with our distributor. We do have our challenges. We are managing through a change in the seasonality of our software renewal patterns, we operate in a competitive market for scientific talent, and the general economic environment has impacted the timing of client buying and foreign currency exchange rates. The Simulations Plus is well positioned to address each of these challenges. In conclusion, I’m very optimistic as we enter our new fiscal year. I thank you for your time and attention. I’ll now turn the call over to the operator with a question-and-answer session.

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 than it was a year ago, two years ago. So it’s growing hard to put a exact headcount number on that, so Frank. François Brisebois: Okay. And I’m sure, you talk about how competitive it is for these scientists. I think, there’s probably going to be more and more as your software is in the academic setting, where they get to train on it. But can you maybe – because it’s so competitive, you talk about these biotechs hiring. Have you ever quantified maybe the addition of scientists in general versus the – how quickly they leave? Or is that something that you don’t quantify? Shawn O’Connor: Well, we certainly have a close eye to the situation. Our retention as an example rate is extremely high. And that doesn’t mean we don’t lose scientists. We have lot scientists to primarily industry or – and that’s been ongoing. Maybe it’s one or two scientists more this cycle round than it was the last, but not dramatically changed. The difficulty has been on the recruiting side. There are more entities recruiting the same staff that is available out there. Pharma is hiring quite aggressively, I’ve referred already to the biotech space. So the demand is very high. And I think there’s an element of post COVID job migration transition that’s taking place. I believe it’ll settle down. I’m knocking on the wood of my desk as I say that. And as we enter 2023, it’s pretty tight market right now and hope that during the course of the year things settle. François Brisebois: Got you. And do you have any people that sometimes could debatably be your best scientist that have started with you at a school and then they learn and then they go join industry and then ultimately they can come back and actually be probably better because they’ve spent time in industry? Does that happen at all? Shawn O’Connor: Common occurrence? We hire post-docs people newly mentored out of their academic programs. They get some good experience with us at some point in time. They want to see how the industry world works. They’ll take a step out and we’ve had many come back to us and their value is increased by that experience they’ve had in industry and become key contributors to the organization going forward. Sure. François Brisebois: Okay. Great. And then just the last one here on cross-selling, just to be clear, it seems like with the seasonality and the discussion around it, it seems like sometimes the cross-selling can happen between software products. Are you also seeing inevitably the cross-selling between software to services where more products, more need for services? Shawn O’Connor: Yes. Now we’ve seen an increase in our key account management scenarios where we are focused in building a much broader relationship with some of our key accounts and seeing increasing rates of consulting revenue flow there in addition to cross-selling of software platforms within that same account. So there’s a synergy taking place between the consulting group and the software group that we haven’t seen in the past or to the level at least that we haven’t seen in the past. And it’s also contributed to its accelerated by the addition of Monolix and where we did not have a PK/PD in-house platform in the past prior to Monolix. And with that being the largest segment of our service offerings, the dynamic of working clients who are consulting accounts and introducing Monolix to them leading to a sale a license or Monolix customers seeking service support now having a home to go to in our organization there as well. So, yes, cross-selling on the service side is picking up quite nicely as well. François Brisebois: All right. Thank you very much. That’s it for me.

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 for us. We’ve established some very key relationships in that market. And the opportunity for either through service or license of GastroPlus is very strong. And we’ve made that investment beginning in the back half of fiscal year 2022. So anticipate that it’s contribution in fiscal year 2023 will be very nice off of a small base. But very nice in terms of adding to growth. In the European market, hey, we started there from a several years ago without much presence there at all. We’ve grown higher by higher in terms of some consulting staff that are located in Europe. We made the Lixoft acquisition and have a presence in terms of a software development team and software application team in Paris. We’ve been growing that that footprint in Europe for a couple or three years now. And yet more to be done in terms of A, extending our presence on the consulting side of having consultants in geographies where key accounts are, be that in France, be that in Northern Europe, be that in Switzerland where there are a number of key large pharmaceutical companies, which we do work for as it passes through into their U.S. subsidiaries. But having geographic presence consultants on board will enhance our ability to grow there. And then the other area will be in regard to business development. We’ve got some business development support out of the Lixoft in Paris region. But it’s disproportionate to our revenue opportunity, existing revenue in Europe versus North America, and the potential going forward. So yes, Latin America and Europe are probably the investment opportunities with the biggest leverage, today in Asia, Japan, I believe there’s opportunity to leverage them back up to historical growth patterns that they had before COVID. China market is probably let’s continue to keep our eyes open opportunistically, keep our presence there, but in terms of near-term opportunity not something we’re counting on.

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.