Greetings, and welcome to the Simulations Plus Fourth Quarter Fiscal 2023 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 Tamara Gonzales from Financial Profiles. Thank you. Ms. Gonzales, you may now begin.

Good afternoon, everyone. Welcome to the Simulations Plus fourth quarter and fiscal 2023 financial results conference call. With me today are Shawn O'Connor, Chief Executive Officer, and Will Frederick, our Chief Financial Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations page at www.simulations-plus.com. After management's commentary, we will open the call for questions. As a reminder, information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect and anticipate refer to our best estimates as of this call. There can be no assurances that these will actually take place. So our actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the Company's quarterly and annual reports and filed with the Securities and Exchange Commission. With that said, I will turn over the call to Shawn O'Connor. Shawn?

Thank you, Tamara. Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and fiscal 2023 results. We delivered strong revenue and earnings results for fiscal 2023, and I'd especially like to acknowledge our team's impressive execution on building strong customer relationships. Our team's effort and dedication throughout the year while navigating a challenging environment helped to drive growth and demonstrated the strength of our customer-centric business model. Conditions in our market remain similar to what we have spoken to over the past several quarters. We continue to see a slowdown from small biotech customers who have been impacted by funding scarcity that has in turn affected renewal rates in this segment. Purchasing from large pharmaceuticals also remains delayed, driven by macroeconomic uncertainties and conservativeness. That said, these challenges were offset by our ability to up-sell and to pass on price increases throughout the course of fiscal 2023, helping us to achieve our guidance targets for both revenue and adjusted diluted earnings per share for the fiscal year. The underlying fundamentals of our market are resilient. As such, we believe the slow pace of investing in modeling and simulation that we have seen over the past few quarters will eventually reverse given tremendous needs in drug development and the essential need for pharmaceutical companies to find faster, more efficacious ways to bring drugs to market. We anticipated these challenges last year when we provided our fiscal 2023 guidance for revenues to grow 10% to 15%, and we met that guidance, delivering 11% revenue growth for fiscal 2023. Based on early anecdotal customer feedback we have been receiving, we are cautiously optimistic as we enter fiscal 2024. We are cautiously optimistic as we enter fiscal 2024, as we have seen a slight uptick in biotech funding…

Thank you, Shawn. We had another strong quarter with total revenue increasing 33% to $15.6 million, with software revenue up 59% and services revenue up 8%. Software revenue represented 60% of total revenue for the quarter. For the fiscal year, total revenue increased 11% to $59.6 million, comprised of a 12% increase in software revenue and 8% increase in services revenue. Software revenue represented 61% of total revenue for the year. Total gross margin for the quarter improved slightly to 78%, benefiting from strength in the software segment. Software gross margin increased to 89% from 86% last year, while services margin decreased to 62%, primarily due to the addition of ImmuMetrix. Total gross margin for the fiscal year was flat at 80%, with software gross margin at 90% and services margin at 65%. With the addition of ImmuMetrix, our overall gross margin may be impacted for fiscal 2024 compared to fiscal 2023. Now, turning to software for the quarter. GastroPlus represented 54% of software revenue. Monolix Suite was 15%. ADMET Predictor was 21% and other software was 10%. For the fiscal year, GastroPlus represented 54% of software revenue. Monolix Suite was 19%, ADMET Predictor was 19% and other software was 8%. For the quarter, our customer renewal rate declined to 85% based on fees and to 80% based on accounts. Also for the quarter, average revenue per customer increased to $88,000 from $65,000. For the fiscal year, our customer renewal rate declined to 92% based on fees and to 82% based on accounts. Average revenue per customer for the fiscal year increased to $126,000, up from $110,000 last fiscal year. While the lower renewal rates are primarily driven by non-renewals from smaller biotech customers, one resulting benefit we are experiencing is an increase in average revenue per customer. Shifting to…

Thank you, Will. I'm pleased with the results we delivered in fiscal 2023 while navigating a challenging backdrop. I'm proud of our team's accomplishments this year. We successfully implemented our contract harmonization program, which is leading to greater visibility into revenues. We grew software double digits and saw good performance from our services business with that team finishing the year with a 25% increase in our backlog. We completed our accelerated share repurchase program as planned as part of our overall capital allocation plan. We completed the acquisition of ImmuMetrix and are very pleased with how the integration is going. ImmuMetrix has a strong reputation in the immunology and oncology markets and has a healthy pipeline of activity, including new accounts sourced from our simulations plus customer base. Importantly, we achieved the guidance we provided last year by building stronger client relationships and maintaining our scientific leadership in model-informed drug development. This achievement was made possible by our team. We made critical investments in talent and added to our scientific resources to meet customer demand, while at the same time, we maintained good retention and strong recruitment. I'd like to thank all of our colleagues at Simulations Plus for their effort and dedication throughout the year. But I'd especially like to honor two people. Viera Lukacova, Chief Science Officer at the PBPK business unit for being named an AAPS Fellow, richly rewarded for her leadership in the development and advancement of PBPK. We thank her for her 18 years of service at Simulations Plus. And Amparo de la Peña, VP Pharmacometrics Services, who was recently elected to the International Society of Pharmacometrics, or ISOP Board of Directors. Our talented and esteemed team here at Simulations Plus creates value for our clients every day to help develop safer and more effective drug solutions. The spirit of innovation and energy to do more is strong. To conclude, the underlying fundamentals of our market are resilient with our growing revenues, delivering profitable growth and generating cash. We're well positioned to meet our goals for fiscal 2020. Thanks for your time today. And with that, I'll turn the call over to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Francois Brisebois with Oppenheimer. Please proceed with your question.

Hi, thanks for the question. So, just wondering, in terms of the challenging environment, obviously, biotech funding is continuing to be difficult. I was just wondering, when you talk about your guidance for next year, you mentioned that there would be status -- that's with the idea that it's at is of what's going on. Maybe the 10% to 15%, can you just remind us maybe of the ImmuMetrix and kind of the targeted milestones or revenues that you're hoping to get there? Why it keeps the guidance in the 10% to 15% range on the revenue side for next year? Thank you.

Yes, sure, Frank. Yes, the marketplace itself, we always have a very good data flow at this time of the year as our clients are in that budgetary cycle running towards the end of the calendar year budgets for next year when you put together always get a good witness test in terms of the market twofold, one in terms of those calls that we get in terms of budget spend before the end of the year and as well quoting processes for inclusion in budgets next year. In both regards, I say we've gotten some good input positive frequency of those conversations taking place. Certainly, when you look back and compare it to last year, it's more active, more positive than it was last year, but not enough to kind of look forward and say that the market has changed. So status quo comments in the context of our guidance is that we kind of look out to '24 and build our guidance based upon status quo, a similar sort of market environment with biotech funding being where it is, it has been in the last number of quarters and cautiousness in terms of large pharma budgets into 2024. ImmuMetrix has been a great addition. And certainly in the short window of time that they've been on board, biggest impact in terms of the pipeline, being able to take their expertise, their customer base in immunology and oncology models, free them on board, certainly brought some backlog into the picture. Most positive has been the embraced out of our customer base in terms of presenting the new capabilities in those therapeutic areas to them and that's build the pipeline disproportionately QSP business at this point in time. So that provides you good momentum going into next year. Minimal contribution…

Okay. Great. And then just maybe to remind everyone that the harmonization of the contracts and renewals, can you just remind us what that process was and how we're coming to the end of it and why that helps get clarity on revenues going forward?

Sure. Sure. No, the harmonization process was a process that mutually our clients and from our perspective, we saw benefits from taking those clients that over the years have accumulated multiple licenses within a single platform or multiple licenses across the multiple platforms of our three primary software products, GastroPlus ADMET predictor in Monolix and working with them to consolidate those differing license renewal dates across an entire year in some cases and identify a focal date to bring them together so that all of the renewal activity would be within one time frame. Mostly larger accounts, obviously, those that have multiple licenses. And that had an impact last year, an impact of pushing renewal dates around our seasonality, which has typically been low first and fourth quarter revenues and high second and third quarter revenues. As you look back over this past year that resorted itself into an even lower first quarter, but then more evenly dispersed on an absolute dollar basis, second through fourth quarter. And so through 1 year's cycle time of renewals, we've achieved that harmonization across most of our large accounts. there'll still be more of those events that take place next year. And other accounts may reach that threshold where can we harmonize, but it won't be the number of accounts that destructed the seasonality in '23 in the future in '24. So I think we set ourselves into a new seasonality pattern that will hold in '24 and beyond.

Thank you. Our next question is from Matt Hewitt with Craig-Hallum. Please proceed with your question.

Good afternoon and thank you for taking the questions. Maybe first up, and maybe you touched a little bit on the harmonization. How should we be thinking about cadence in fiscal '24. Should we anticipate maybe a little bit of a step down here in Q1 just with some of the holidays and whatnot, maybe the services revenues are a little bit lower, but then kind of bouncing back up and more of a flattish the remainder of the year in line with your revenue guidance for the year? How should we be thinking about the cadence?

Yes. I mean, I think that's fair, Matt. First quarter is always -- was a lower quarter last year and historically before that. Eaton has made more dramatic by the armoization process last year. So yes, revenues in the first quarter of 24 likely be in comparison to second, third and fourth quarters, the lowest quarter, second, third and fourth quarter should be relatively comparable level in terms of absolute dollars on a year-over-year comparison basis, I mean, we're comparing a link seasonality in '24 to a seasonality in '23. So on a revenue growth percentage basis, that cadence should be a little bit more consistent as we work our way through next year. So we focus on software, and that is 50% of the revenue flow. On the service side, the slowest of quarter is usually our fourth quarter impacted tremendously by the holiday in the holiday, but the summer season, both in the context of our own staff taking some time off, but our client at taking time off, which has the tendency of the slow projects project activities. That's why in the last fourth quarter, the percentage of projects were mostly fixed-price projects. Time and materials are more an interactive delivery and if the clients on vacation needs not calling up for time and material support. First quarter is usually a little slower on the consulting side, too. That's driven the holidays is a piece of that, but it's also driven by first quarter as conference our industry conferences, most significant ones take place. There's one taking place right now in Orlando. There's another in a couple of weeks, the first week of November. So service revenue is a little bit more bell-shaped curve, if you will, in terms of first and fourth quarter typically being a little bit lower.

Got it. That's super helpful. And then maybe looking at the backlog, obviously, there was a nice pop there. Some of that was a contribution from anynetrics versus -- it sounds like the rest of that was just a solid effort from your sales and marketing team. Is there any way to break out the contribution from ImmuMetrix into your backlog?

Yes. We've now broken out ImmuMetrix Society. We've not broken out the backlog historically by business unit in terms of the disciplines of PKPD and QSP and PBPK -- it was -- I can say this, it was yes, I mean that contributed batt there, we're dealing with a handful of accounts and a handful of projects. So while it's in addition, it's not the most significant, I'd say the most significant contributor there was a record quarter in terms of the bookings on the PKPD side, I think it was the largest in our history, although we did go back all the way to early records there. Very good quarter in terms of that discipline. -- number of projects that are teed up beginning in the first quarter here, but certainly in the early part, early half of fiscal '24. So the largest contributor to that backlog increase was out of the PKPD business.

Got it. And then maybe last one, and then I'll hop back in the queue. Regarding the cross-selling opportunities, it sounds like there's been a very positive reception. And it goes both ways. It sounds like both of your installed base as well as with the ImmuMetrix customers. But are you having some early success on the actual cross sales? Or is this more about building those relationships and kind of introducing them to the full product offering?

Yes. I'd say, Matt, the biggest activity is within the QSP space. in terms of the discipline or therapeutic areas, I should say, on the ImmuMetrix side, providing visibility to our customers that don't overlap with theirs, the capabilities that we now have in adding names and opportunities to the pipeline to sell ImmuMetrix models into that client base. In the other direction, ImmuMetrix comes to us with a small number of clients, less one digit in terms of total clients. And many of those are large pharma that are customers of our other platform software products, et cetera. So cross-selling into their installed base is a benefit that's not a big contributor. The biggest contributor is in the direction of bringing memetic models into our much larger client base and creating opportunities to sell those models through to that community.

Thank you. Our next question is from David Larsen with BTIG. Please proceed with your question.

Hi. Can you talk a little bit about like GastroPlus? I think you had 10 new customers, which looked very good. I think that compares to like four in the previous quarter, and it was the highest quarter, I think, of the year, maybe in the past two years and then 11 up-sells, which also looked good. But I think your revenue actually for GastroPlus maybe declined sequentially despite the large number of new customers and up-sells, can you just talk a little bit about what drove that? And is it the renewal rates based on both fees and accounts?

Yes. It's a couple of things there, Dave. One, yes, sequential quarters, keep in mind that the revenue for a software revenue for a given product or total software revenues from quarter-to-quarter because of -- it's not a -- it's a recognition entirely upfront, 12-month license revenue taken on day one. So it doesn't build upon itself. And from third quarter to fourth quarter, you're really dealing with what's the population renewals in back quarter driving that number. And so I think while the harmonization process left us in absolute dollar revenue level equivalent in the second, third and fourth quarter, I think there's a little hiking to be a little higher than fourth quarter, and that contributed there as well. as well in the fourth quarter, we saw a couple of non-renewals that impacted the renewal rate numbers that you saw were lost opportunities through M&A activity. And so that brought the fourth quarter down from where it could have been and those two acquisitions not contributed to the mix. few biotech gene on renewals and a couple of CRO non-renewals. There were a couple of QSP licenses relatively small dollar amounts, but the programs for which they will be used to just continue. So we had a few non-renewals in the fourth quarter that contributed to those renewal rates coming down. Our typical experience here, often those M&A events lead to ultimately when the two companies sort and sell out fully. Those discussions reinvigorate and could come back to us. So they are now in our pipeline, if you will, and some of that can come back to us down the line. But oftentimes, the immediate reaction once the combined organizations come together in an environment right now, what's not renewed and then we'll look at it down the road when the test level. So a few impacts from non-renewals in the fourth quarter or those numbers could have been higher.

That's very helpful. If you had to guess how much of the M&A impacted revenue in the quarter, -- is there any sort of gas or ballpark figure? Could it have been $0.5 million, $1 million? Just any sense for that?

I don't know that that's a level of sort of estimations I want to get into. You could go back and you could say, "Geez, our historical renewal of fee rates is X and it was Y in the fourth quarter probably come to an estimate there of a magnitude impactful would look forward to 24 playing out, and we might see some of that revenue come back to us.

Okay. And then in terms of price increases, any -- just any color on what you would expect to see in fiscal '24 and what you were able to realize in fiscal '23?; and then a long sort of related to that would be sort of wage inflation for your own science hits. Like do you have to increase prices in order to cover more wage inflation? Or is it a more tempered environment heading into next year? Any thoughts there would be very helpful.

No, no, good question. Top line first, in terms of price increases. As we've stated before, we were more aggressive during fiscal year '23 than we had been in the past and certainly was an environment with macroeconomic inflation down to specific market compensation increases in the industry for the scientific community in questions here, made that increased price increase, at least understandable as to its starting point, not that it didn't come with negotiation and pushback, but we yielded very well in that environment. And I think it speaks to the capabilities of our team that we put together in terms of our client base organization as well as the partnership we have with our clients. They're accepting of, hey, this is -- those increases come back and or return back to them in terms of continuing to fund a very robust delivery out of our R&D organization with higher quality or functionality down growth. So our yield was doubled in '24 versus '23. That price increase was quite as much as it typically has been in the past. As we turn to '24, a little bit different market. inflation's still present out there still though with an environment in which our clients are pretty budget constrained. And the biggest difference is that on the other side, the expense side, there's been a settling down of the marketplace in terms of the cost science is some field and the job of a that somewhat contributes to inflated compensation offers out there has settled down. And so certainly, that momentum goes away and our expectations in '24 returned back somewhere between 22% and 23% in terms of anticipated price increases as we go forward into next year; so good yield in '23 in terms of price increase more significant than in the past. Still expect a contribution from price increase as we go into '24, but not to the level -- on the expense side, I've kind of said the story, compensation in this community has settled down. And while there is naturally some merit increase that takes place from year-to-year on the stagnate salary environment, but it's nothing compared to the year price.

Thank you. Our next question is from Dave Windley with Jefferies. Please proceed with your question.

Good evening thanks for taking my question. Just a couple of quick ones, and I think bigger picture, Shawn, I'm wondering if the IRA and the changing incentives from that and the potential to kind of re-stock pipeline priorities presents an opportunity for bio-simulation to help in that restacking or re-evaluating of opportunities that our pipeline priorities that might change because of differential incentives on large or small molecule.

The world of modeling and simulation participates on both sides and actually the sort of development of the modeling applications on the large molecule or biologics side sort of second in line in terms of most of our work was in small molecule historically. And so it's a smaller base of activity that is growing quite rapidly, quite frankly, just as the investments and programs, volume of programs in biologics or lose molecules has increased. So I think as we move forward into the year, we continue to meet the demands of providing technology and capability and scientific support on the biologics side. are doing so. And I see that as a disproportionate contributor to our growth going forward.

Got it. And then in your prepared remarks, you talked about, I think it was a PBPK client example at the IND stage. And I know that I've seen parts of your company present or market at Society of Toxicology. So I know you have a role to play in that earlier stage. And I'm wondering if the difficulties for biotech, particularly large molecule to get access to nonhuman primates in that safety assessment stage, if that has percolated to opportunities for your business and simulation to try to get around that bottleneck in the supply chain?

Yes, it certainly is a capability, an issue or weakens our ability and the preset models in terms of species within GastroPlus for example, provide a tremendous impact in terms of situations where animal studies are looking to be reduced in terms of population size and the ability to turn around and predict off smaller populations into human. So yes, no, it's certainly something that's having a positive impact in terms of our communications with clients and pipeline opportunity.

At this time, there are no further questions. I would like to hand the floor back over to Mr. Shawn O'Connor for any closing comments.

Well, thanks, everyone, for your attention. Good year. On our part, feel very cautiously optimistic, I guess, is the buzzword. As we enter 2024 with some good momentum coming out of this past year and a great team on board that performed very well this past year and look forward to their continued contributions into next year. Thanks for your attention. We look forward to talking to you again soon. Take care.

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