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    Simulations Plus (SLP)

    Q3 2024 Earnings Summary

    Reported on Mar 19, 2025 (After Market Close)
    Pre-Earnings Price$46.86Last close (Jul 2, 2024)
    Post-Earnings Price$42.85Open (Jul 3, 2024)
    Price Change
    $-4.01(-8.56%)

    What went well

    • The acquisition of Pro-ficiency is expected to be accretive to EPS in fiscal 2025, contributing positively to earnings per share despite the loss of interest income from cash used in the acquisition.
    • The company maintains its adjusted EBITDA margin target of 35% to 40% and expects margins to improve as temporary expenses subside and Pro-ficiency integration progresses, enhancing long-term profitability.
    • The improving biotech funding environment is leading to increased pipeline activity, which bodes well for future bookings and revenue growth for Simulations Plus.

    What went wrong

    • Adjusted EBITDA margins have come in below expectations, with management acknowledging that they have been operating at 31%-32% levels, below their target range of 35%-40%. This margin pressure is attributed to increased expenses, including costs associated with a significant software release and higher compensation costs due to headcount additions.
    • The company's EPS guidance has been lowered, with adjusted diluted EPS now expected to be $0.54 to $0.56, down from previous expectations. This reduction is due to higher transaction costs related to the acquisition of Pro-ficiency and the loss of interest income. The GAAP diluted EPS guidance has been adjusted to $0.46 to $0.48, reflecting these additional expenses.
    • Management remains cautious about the demand environment, noting that while market conditions have improved, these changes require time before they translate to actual bookings and revenue. They highlight that large pharmaceutical clients continue to exhibit cautious spending patterns, with most holding tight on expenditures. This suggests potential challenges in achieving higher growth rates in the near term.

    Q&A Summary

    1. 2025 Revenue Growth Outlook
      Q: How should we think about 2025 revenue growth?
      A: While we don't provide guidance until October, the biosimulation market traditionally grows at 12% to 15%. Although market improvements are emerging, we haven't seen this translate into bookings yet, so we're cautious. Pro-ficiency is expected to contribute $15 to $18 million in 2025, with potential to exceed that.

    2. Margin Outlook and Pro-ficiency Impact
      Q: Why did adjusted EBITDA margin come in short, and what's the margin outlook?
      A: Adjusted EBITDA margin was around 31%-32%, below our 35%-40% target, due to costs from a significant software release and quicker-than-expected hiring. These factors should balance out in coming quarters. Pro-ficiency will add some initial pressure but will align with our long-term margin profile.

    3. EPS Guidance and Pro-ficiency Accretion
      Q: Has the EPS guidance changed and will Pro-ficiency be accretive?
      A: Transaction costs were higher than expected, adjusting GAAP EPS guidance to $0.46-$0.48 and adjusted EPS to $0.54-$0.56. Pro-ficiency will be accretive by covering the lost interest income from the cash used in the acquisition.

    4. Market Demand and Outlook
      Q: Is the market environment improving or are you cautious?
      A: Biotech funding has improved but hasn't yet led to contracted business. Large pharma clients are mixed, with budget cutbacks causing temporary slowdowns. We're maintaining the same cautious outlook as in recent quarters.

    5. PBPK Services Delays
      Q: Are PBPK services delays leading to cancellations?
      A: Delays are due to client data readiness issues, but projects are not canceled. We hope to catch up in Q4 or 2025, though capacity could be challenged if all delayed projects resume simultaneously.

    6. G&A Costs Increase
      Q: What's driving higher G&A costs?
      A: Increased hiring and the addition of about 20 Immunetrics employees have raised G&A costs, bringing total staff to around 210. Most of the increase is in compensation expenses.

    7. Pro-ficiency Margins Improvement
      Q: How will Pro-ficiency's margins improve over time?
      A: Pro-ficiency's software margins are currently around 80% versus our 90%. They've improved significantly over the past 12-18 months through technology investments. We expect gradual improvement, reaching our margin levels as they enhance their technology.

    8. Long-term Adjusted EBITDA Targets
      Q: Is the long-term adjusted EBITDA margin target still 35%-40%?
      A: Yes, despite recent margins below 35% due to compensation increases, we're gradually moving back toward our 35%-40% target.

    9. Demand Environment and Pro-ficiency Impact
      Q: Will Pro-ficiency add to the accelerating demand?
      A: Pro-ficiency's software business is tied to clinical trial activity, similar to ours, so the same factors advancing drug development will boost their revenue growth.

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