Simulations Plus Earnings Call: Growth, Impairment and Caution

Simulations Plus ((SLP)) has held its Q1 earnings call. Read on for the main highlights of the call.

Simulations Plus Balances Solid Full-Year Growth With Tough Quarter and Cautious Outlook

Simulations Plus’ latest earnings call painted a mixed picture: the company delivered healthy full-year organic growth, better adjusted profitability, and a bigger services backlog, all supported by a debt-free balance sheet and strong cash reserves. Yet these positives were overshadowed by a weak fourth quarter, margin pressure in key software lines, a sharp noncash impairment that swung the company to a large GAAP loss, and cautious guidance that signals near-term headwinds even as management bets heavily on AI, cloud, and an integrated software ecosystem for long-term upside.

Full-Year Revenue Growth Driven by Both Software and Services

Fiscal 2025 revenue rose 13% year over year to $79.2 million, with growth coming from both sides of the business. Software revenue climbed 12%, indicating continued demand for the company’s modeling and simulation platforms, while services revenue grew an even faster 15%, highlighting expanding project work with pharma and biotech clients. For investors, the double-digit top-line increase confirms that the company’s core offerings remain relevant despite pockets of softness.

Adjusted Profitability Trends Remain Positive

On an adjusted basis, profitability moved in the right direction. Adjusted diluted EPS increased 8% to $1.03 from $0.95 a year earlier, and adjusted EBITDA rose to $22.0 million, representing 28% of revenue compared with 29% last year. While the EBITDA margin slipped slightly, the company still operates at attractive profitability levels, suggesting that underlying earnings power remains solid even as it invests in product development and structural changes.

Backlog Expansion Underscores Services Demand

The services business showed encouraging visibility, with ending backlog up 28% year over year to $18.0 million from $14.1 million. Management expects at least 90% of that backlog to convert to revenue within 12 months, a key signal of near-term revenue support from contracted work. This growing pipeline offers some cushion against softer quarters and indicates sustained client demand for the company’s consulting and project-based services.

QSP and Monolix Lead Product-Level Momentum

Product-level performance was particularly strong in strategic offerings. Quantitative systems pharmacology (QSP/QST) software revenue grew 22% in the quarter and 26% for the full year, underscoring momentum in this advanced modeling segment. The Monolix suite delivered 3% growth in the quarter and 14% for the year, while ADMET Predictor increased 5% for the year. These figures suggest that the company’s more advanced and differentiated products are gaining traction, which could support pricing power and stickiness over time.

Balance Sheet Strength Provides Strategic Flexibility

Simulations Plus ended the fiscal year with $32.4 million in cash and short-term investments, no debt, and positive free cash flow. This clean balance sheet gives the company meaningful flexibility to fund internal growth initiatives, sustain R&D, and pursue selective M&A without stressing the capital structure. For shareholders, this liquidity position helps buffer near-term volatility and keeps optionality open for strategic moves.

Unified Operating Model and Tech Roadmap Target Long-Term Upside

Management reported completion of its transition to a unified, client-focused operating model, aimed at improving cross-selling and customer experience. On the product side, the company released GastroPlus 10.2 and laid out FY26 portfolio-wide updates emphasizing cloud scalability, interoperability across tools, and AI-driven services. A planned investor-focused event is intended to showcase this roadmap. Together, these steps signal a deliberate push to build an integrated, AI-enabled ecosystem that could support higher growth and deeper client engagement over the long term.

Client Base, Revenue per Client, and Renewals Show Mixed Signals

The company finished FY25 with 311 commercial clients and an average revenue per client of $143,000, reflecting a solid, diversified customer base. The full-year renewal rate was a healthy 88%, but quarterly renewal rates dipped to 83%, with management pointing to client consolidations and more scrutiny at the module level. While renewal metrics remain in the mid-to-high 80s, the recent pressure indicates customers are tightening budgets and reevaluating software footprints, a trend investors will want to monitor.

Fourth Quarter Revenue Decline Highlights Near-Term Pressure

Against a strong full-year backdrop, Q4 results were notably weak. Total revenue fell 6% year over year to $17.5 million, with software revenue down 9% and services revenue down 3%. The quarterly softness stands in contrast with the full-year double-digit growth, suggesting that client spending and project timing turned more cautious toward year-end. This dynamic feeds directly into management’s restrained near-term outlook.

Large Noncash Impairment Drives GAAP Net Loss

A major headline for this fiscal year was a $77.2 million noncash impairment charge, which pushed the company to a reported net loss of $64.7 million and a diluted loss per share of $3.22, versus net income of $10 million and EPS of $0.49 last year. While the impairment does not impact cash, it marks a meaningful reset of the balance sheet and highlights that previously acquired assets were valued too aggressively relative to current expectations. For investors, this underscores a stark gap between GAAP results and the still-profitable adjusted metrics.

Software Margin Compression Weighs on Profitability

Software gross margin compressed to 79% for the year from 84% previously, mainly due to increased amortization of developed technology and higher amortization tied to the latest GastroPlus release. Total company gross margin came in at 58%. While these investments support future products and capabilities, the margin pressure indicates that accounting charges and product mix will be key factors in determining how much of top-line growth converts into bottom-line earnings.

Q4 Weakness in Proficiency and Select Services

Certain product and service lines were notably soft in the fourth quarter. Proficiency software revenue fell 63% year over year in Q4, though on a full-year basis it was up 206% due largely to acquisition timing. Some services lines also saw sharp quarterly declines: QSP services dropped 50% and PVPK services fell 10%. These swings highlight the inherent lumpiness of project-based work and suggest that some newer or more specialized offerings are still ramping and subject to client budget cycles.

Renewal Rate Pressure and the Impact of Client Consolidations

Management acknowledged that quarterly renewal-on-fees was under pressure due to client consolidations and more granular scrutiny over individual modules. With the quarterly renewal rate at 83% versus an 88% rate for the full year, the company is navigating a more demanding procurement environment. While the long-term renewal record remains solid, this tilt in customer behavior aligns with broader cost-cutting trends across the life sciences sector, potentially muting near-term software growth.

Guidance Signals Flat to Low Growth and a Soft Q1

Looking ahead, management reaffirmed fiscal 2026 guidance that points to limited near-term growth. Revenue is projected between $79 million and $82 million, implying roughly 0% to 4% year-over-year growth, with software expected to represent 57% to 62% of the mix. Adjusted EBITDA margin is guided to 26% to 30%, and adjusted diluted EPS is forecast at $1.03 to $1.10, assuming a stable operating environment. The company expects Q1 revenue to come in about 3% to 5% below the prior-year quarter and sees an effective tax rate of 12% to 14%. Management also expects at least 90% of the $18 million backlog to convert to revenue within a year and underscores that its $32.4 million in cash and lack of debt provide resilience and potential upside if client spending improves.

In closing, Simulations Plus’ earnings call showcased a company with solid underlying growth drivers, strong cash and no debt, but also real near-term challenges. Full-year results in software and services, particularly in high-value platforms like QSP and Monolix, were positive, and backlog growth supports future revenue. However, a weak fourth quarter, margin compression, a sizable noncash impairment, and cautious guidance all point to a more volatile and uncertain near-term path. For investors, the story centers on whether the company’s strategic investments in AI, cloud, and an integrated ecosystem can translate into faster, more durable growth once the current headwinds ease.