Q3 2024 Earnings Summary
- Certara's software bookings increased by 28% year-over-year in Q3 2024, with organic software bookings growing by 25%, demonstrating strong performance across all three tiers of customers.
- The company achieved a high software net retention rate of 110% year-to-date, indicating strong customer retention and expansion, supported by adding new logos and successful M&A activities.
- Certara's strategic focus on expanding its biosimulation capabilities, including the acquisition of Chemaxon and investments in Certara Cloud, is enhancing their product offerings and facilitating cross-selling opportunities, positioning the company for future growth.
- Certara is experiencing weakness in its regulatory services business, particularly with Tier 1 customers, leading to a contraction in bookings and negative organic growth in services. This weakness is offsetting gains in other areas.
- The company has revised its 2024 guidance downward due to challenges in the regulatory services market and end-market volatility, removing expected seasonality and indicating potential difficulties in achieving growth targets.
- Certara expects the challenging end-market environment to continue into 2025, with a lengthening of time to close projects and continued hesitancy among large pharma and smaller biotech customers, which may impact future revenue growth.
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Regulatory Services Divestiture
Q: Why doesn't regulatory services fit in your strategy?
A: Certara is reviewing strategic options for its regulatory services business, which generates about $50 to $55 million in revenue with margins comparable to a traditional CRO, around 20% to 30%. The growth of this business has diverged from our core biosimulation focus, especially after recent biosimulation-focused acquisitions , prompting us to consider divesting it to concentrate on our expanding biosimulation platform. -
Guidance Revision
Q: Why lower guidance despite strong bookings?
A: We revised our 2024 guidance due to market volatility, particularly in regulatory services with Tier 1 customers, leading us to remove expected Q4 seasonality. Although bookings are strong, especially in software, longer decision-making processes and challenges in regulatory services impacted our visibility. -
Chemaxon Acquisition Impact
Q: What's Chemaxon's revenue contribution and outlook?
A: Chemaxon is expected to contribute about $5 million in Q4 revenue, consistent with its annual revenue of about $20 million, with 90% from software. We expect Chemaxon to grow in line with our software business, and although its margins are currently below Certara's, we aim to align them with our corporate average by end of 2025. -
Demand Environment and Outlook
Q: How is demand from Tier 1 and biotech clients?
A: Demand is stable with a healthy sales pipeline, but we're seeing longer decision times, indicating some hesitancy. The end market remains challenging, and we expect these challenges to continue into next year. -
Improvements with Tier 1 Customers
Q: What's changed with Tier 1 customers from Q2 to Q3?
A: We saw stability and some improvement in new business activity with Tier 1 clients. Biosimulation services showed strong performance, while regulatory services faced contraction. -
Resource Reallocation Impact
Q: How is shifting resources to software driving growth?
A: Our software net retention rate is 110% year-to-date. We're seeing good renewals, expansions, new logos, and M&A driving consistent software performance. Strong software results correlate with biosimulation services growth, although regulatory services remain weak. -
Exposure to Small vs. Large Molecules
Q: Are you expanding biosimulation for large molecules?
A: Our tools cover both small and large molecules, reflecting pharma trends. As biomolecule research has increased over the past 10 to 15 years, our involvement with large molecules has also grown. -
Certara Cloud and Customer Interactions
Q: How are Certara Cloud strategies affecting customers?
A: Certara Cloud serves as a platform across our products, lowering IT costs and simplifying access, which helps foster software growth. It eases implementation and upgrades, aiding our marketing efforts. -
Bookings vs. Revenue and Guidance
Q: Why doesn't good bookings translate to visibility?
A: The guidance revision is due to removing expected Q4 seasonality, not issues with bookings. Market volatility, especially in regulatory services, impacts revenue timing. -
Demand for Biosimulation
Q: What's driving demand for biosimulation?
A: Demand is driven by sustained investments in biosimulation, regulatory acceptance, and cost-saving advantages over clinical trials. Biosimulation lowers costs and is favored by regulators, increasing its adoption.
Research analysts covering Certara.