Q1 2024 Earnings Summary
- Strong software revenue growth with a 19% increase in Q1 2024 and a net retention rate of 114%, indicating robust customer engagement and effective execution by the software team.
- The launch of Certara Cloud, a unifying platform adopted by 15 of the top 30 biopharmaceutical companies, is enhancing customer experience and fostering cross-selling opportunities, demonstrating strong market acceptance.
- Recent improvements in biotech funding are anticipated to provide benefits in the second half of 2024, potentially offering upside beyond current guidance, which does not include any tailwinds from the funding environment.
- Certara has not yet seen an inflection point in bookings despite increased biotech funding, with any potential benefits expected only in the second half of the year, introducing uncertainty. John Gallagher stated, "we haven't reached the inflection point. We don't see that in the bookings in Q1. We don't see it in the bookings [to date] in Q2". Additionally, William Feehery mentioned that any tailwinds from funding are "not included in the guidance", and they are "a little bit more optimistic for the second half".
- Adjusted EBITDA margin for Q1 2024 was 30.2%, below the full-year guidance range of 31% to 33%, due to increased expenses from integrating recent acquisitions and investments in sales, marketing, and R&D. John Gallagher noted that margins were impacted "about 200 basis points by the newly acquired companies" , and that they are executing on plans that include "investments in sales and marketing and expanding the sales force" as well as "adding software developers".
- Services bookings are stable but not showing growth, particularly among Tier 2 and Tier 3 customers, indicating a lack of momentum in the services segment. John Gallagher mentioned that "we don't see continued decline, but we also don't see acceleration and haven't hit that inflection point yet" , and that services bookings are "kind of in line on a dollar basis with what we were expecting", without significant improvement.
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Guidance and Outlook
Q: What drives the high and low ends of 2024 guidance?
A: Certara's guidance remains unchanged, expecting 9% to 13% revenue growth in 2024. To reach the higher end, they'd need factors like acceleration from biotech funding and strong software performance. Hitting the lower end would require market deterioration, which they're not seeing. -
Margins and Investments
Q: Why didn't margins expand with higher software revenue?
A: Margins were at 30.2%, below the full-year guidance of 31% to 33%, due to integrating recent acquisitions and increased investments in sales, marketing, and R&D. They expect margins to improve as revenues increase in the second half and integrations are completed. -
Impact of Biotech Funding
Q: Are you seeing benefits from increased biotech funding?
A: While optimistic about recent biotech funding, Certara hasn't yet seen an inflection in bookings. It typically takes several months for funding to translate into revenue, so any impact would occur in the second half of the year. Guidance doesn't currently include potential tailwinds from funding. -
Services Business Recovery
Q: When will services bookings improve?
A: Services bookings have stabilized but haven't returned to historic levels. Improvement is expected in the second half, but they've not yet seen an inflection point. -
Acquisitions Impact
Q: How are recent acquisitions contributing to growth?
A: Acquisitions contributed a few hundred basis points to Q1 revenue growth of 7%. Inorganic bookings were less than 2% in Q1 but are expected to accelerate throughout the year. Certara remains confident in its guidance, including mid-single-digit contributions from acquisitions. -
Bookings and Seasonality
Q: How do you expect bookings seasonality this year?
A: They typically see lower bookings in Q2 than Q1 and expect normal seasonality to continue. Last year's sharp decline from Q1 to Q2 was unusual; this year, they anticipate a more typical pattern like in 2021 and 2022. -
Sales Force Investments
Q: What progress has been made with sales force expansion?
A: Certara is expanding its sales force and made organizational changes to improve cross-selling. Early benefits are emerging, and further improvements are expected throughout the year. -
Cloud Platform Launch
Q: How is the uptake of the new cloud platform?
A: The Certara Cloud platform has been launched to unify software products. It has over 1,500 client-specific portals and is used by 15 of the top 30 biopharma companies. Uptake is proceeding well and matches expectations.