Simulations Plus ((SLP)) has held its Q3 earnings call. Read on for the main highlights of the call.
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The recent earnings call for Simulations Plus revealed a mixed sentiment, with both positive strides and notable challenges. The company reported revenue growth, partly due to acquisitions, and improvements in adjusted EBITDA. However, organic revenue saw a decline, and the services segment faced significant hurdles. The introduction of AI and cloud initiatives was a positive note, but the overall sentiment was dampened by large noncash impairment expenses and a significant client cancellation impacting revenue.
Revenue Growth Including Acquisition
Simulations Plus reported a 10% increase in third-quarter revenue, reaching $20.4 million. This growth was bolstered by a $2.4 million contribution from the Pro-ficiency acquisition, highlighting the company’s strategic expansion efforts.
Adjusted EBITDA Improvement
The company saw an improvement in adjusted EBITDA, which rose to $7.4 million, accounting for 37% of revenue. This marks an increase from the previous year’s $5.6 million, or 30% of revenue, indicating better operational efficiency.
Software Customer Renewal Rate
The software customer renewal rate on a trailing 12-month basis was 89% based on fees and 78% based on accounts. This reflects a stable customer base, although there is room for improvement.
AI and Cloud Initiatives
Simulations Plus is advancing its technological capabilities by focusing on cloud platform development and integrating AI-enhanced features into its products, such as GastroPlus. This move is expected to drive future growth and innovation.
Organic Revenue Decline
Despite overall revenue growth, the company experienced a 4% decline in organic revenue. This was primarily due to reduced QSP/QST software revenue and a decrease in biosimulation services revenue, posing a challenge to the company’s organic growth.
Significant EPS Loss
The company reported a diluted EPS loss of $3.35, which was significantly impacted by a $77.2 million noncash impairment expense related to prior acquisitions. This highlights the financial strain from past investments.
Services Revenue Challenges
Services revenue faced considerable challenges, with cost constraints from clients leading to a slowdown in bookings and delays in contracted projects. This segment’s performance is crucial for the company’s overall success.
Software Renewal Rate Drop
In the quarter, the software customer renewal rate dropped to 84% based on fees and 71% based on accounts. This decline suggests potential issues in customer retention that need to be addressed.
Client Cancellation Impact
A significant client cancellation during the quarter, due to unfavorable outcomes in drug programs, impacted near-term revenues by approximately $2 million. This underscores the volatility and risk associated with client-dependent revenue streams.
Forward-Looking Guidance
Simulations Plus adjusted its full-year 2025 guidance, now anticipating total revenue between $76 million to $80 million. Adjusted EBITDA margins are expected to range from 23% to 27%, with adjusted diluted earnings per share estimated between $0.93 and $1.06. The company remains committed to its long-term growth strategy, particularly in the clinical operations space, leveraging AI technologies despite market headwinds affecting client spending.
In summary, the earnings call for Simulations Plus presented a mixed picture, with positive developments in revenue growth and technological advancements offset by challenges in organic revenue and client retention. The company’s forward-looking guidance reflects cautious optimism, with a focus on leveraging AI and cloud technologies to navigate market challenges and drive future growth.