Simulations Plus (SLP) Q3 2025 Earnings Transcript

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DATE

• Monday, July 14, 2025 at 5 p.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer -- Shawn O'Connor
• Chief Financial Officer -- Will Frederick

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RISKS

• A $77.2 million noncash impairment charge related to prior acquisitions resulted in a net loss of $67.3 million and a diluted EPS loss of $3.35 for Q3 FY2025 (GAAP).
• Organic revenue declined 3%, with services revenues down 13%, due to market headwinds, decreased client spending, and a significant client cancellation impacting near-term revenues by approximately $2 million.
• Adjusted EBITDA margins for the fourth quarter of FY2025 are projected to decline to the mid-to-high 20% range, driven by a sequential step down in revenue and only partial realization of cost savings.
• Management revised FY2025 guidance downward, citing continued delays in service bookings and persistent uncertainty in the biopharma funding environment.

TAKEAWAYS

• Total Revenue: $20.4 million, up 10% in the third quarter, including a $2.4 million contribution from the Proficiency acquisition; Organic revenue declined 4%.
• Software Revenue: Grew 6% and comprised 62% of total revenue, driven by 8% year-over-year growth in Admet Predictor, 4% year-over-year growth in GastroPlus, and 3% year-over-year growth in Monolix Suite; QSP/QST software declined 39% year over year off a strong prior-year comparison.
• Services Revenue: Increased 17% to represent 38% of total revenue, with medical communications as the main driver; however, PKPD services declined 9% year over year, PVPK services revenue declined 10% year over year.
• Adjusted EBITDA: $7.4 million or 37% of revenue in the third quarter, compared to $5.6 million or 30% in the same quarter last year; Adjusted diluted EPS was $0.45 compared to $0.27 last year.
• Backlog: Backlog reached $20.7 million, up from $20.4 million in the second quarter and $15.7 million year over year, partially driven by the medical communications business acquired in Proficiency.
• Software Renewal Rates: Renewal rate was 84% based on fees and 71% on accounts; trailing 12-month rate was 89% on fees and 78% on accounts, both below historical averages.
• Gross Margins: Total gross margin (GAAP) declined to 64% from 71% last year, with software gross margin at 80% (previously 88%) and services gross margin was 38% (previously 41%).
• Cash Position: Ended the quarter with $28.5 million in cash and short-term investments, no debt, and stated “strong free cash flow.”
• Revised Outlook: FY2025 total revenue is now guided to $76 million-$80 million (9%-14% growth), with Proficiency and the medical communications business expected to contribute $9 million-$12 million; adjusted EBITDA margin projected at 23%-27%, and adjusted diluted EPS between $0.93 and $1.06 (non-GAAP).
• Strategic Developments: Implemented a company-wide reorganization from a business unit to a functional operating model, with associated layoffs expected to yield $4 million in annualized cost savings beginning in the fourth quarter and full impact expected in the next fiscal year.
• Artificial Intelligence (AI) Initiatives: Management detailed plans to integrate artificial intelligence capabilities across GastroPlus, Admet Predictor, and Monolix Suite, including the “GastroPlus GPT” chatbot and automated workflow enhancements.
• Market Headwinds: Noted ongoing client consolidations, budget constraints, delayed project starts, and reductions in government funding, resulting in project delays and pressures on both software renewal rates and services sales.
• Impairment Charge: A $77.2 million noncash charge was recorded to align the value of acquired assets with near-term market expectations for the clinical operations and medical communications businesses.
• Significant Client Cancellation: A single services client terminated contracts tied to two drug programs, impacting near-term revenue by approximately $2 million, with most of the effect in the fourth quarter and some in the third.
• New Investment: Announced investment in NeuroCore to enhance software offerings for clinical trial design and execution.

SUMMARY

Simulations Plus (NASDAQ:SLP) reported mixed operational results for Q3 FY2025, as inorganic revenue gains from acquisitions were offset by organic decline and profitability was burdened by a substantial noncash impairment charge. Management responded to ongoing biopharma sector headwinds with reorganization, targeted cost reductions, and a focus on building AI-powered solutions across core software platforms. Guidance for the remainder of FY2025 is lower, reflecting client budget tightening, increased project delays, and pressure on both software renewals and services bookings.

• Will Frederick said total revenue increased 10% to $20.4 million, including a $2.4 million contribution from the Proficiency acquisition.
• CEO O’Connor referenced, “a significant client cancellation during the quarter due to unfavorable outcomes in their drug programs that impacted near-term revenues by approximately $2 million.”
• O’Connor explained the revenue “step down” and margin pressure in Q4 as a function of embracing that revenue step down on the top line, and while we're making our expense structure more efficient, Q4 FY2025 revenues impact those margins.
• O’Connor also confirmed operational streamlining, stating, “the reorganization and the actions we took in terms of our expense structure ... represented an annual cost savings of $4 million.”
• Frederick noted the “total gross margin for the prior year quarter was 71%, with software gross margin of 88% and services gross margin of 41%. The decrease in total gross margin was due to a $2 million increase in cost of revenues.”
• Management lowered the FY2025 outlook for both revenue and adjusted EBITDA margin, citing persistent uncertainty in biopharma spending, despite a healthy service backlog and ongoing AI-driven product innovation.

INDUSTRY GLOSSARY

• QSP/QST: Quantitative systems pharmacology/quantitative systems toxicology — computational modeling to predict drug effects and safety.
• PVPK: Physiologically based pharmacokinetics — simulation of drug absorption, distribution, metabolism, and excretion in virtual subjects.
• PKPD: Pharmacokinetic/pharmacodynamic — modeling the relationship between drug concentrations and their effects in the body.
• Gross Margin: The percentage of revenue remaining after deducting cost of goods sold, reflecting operational profitability at a product or segment level.
• TAM: Total addressable market — the maximum revenue opportunity available if a product or service achieves full market penetration.

Full Conference Call Transcript

Shawn O'Connor: Thank you, Lisa. Good afternoon, everyone, and thank you for joining our third quarter fiscal 2025 conference call. Third quarter revenue came in slightly above our preliminary range communicated in June. Final results showed revenue growth of 10% to $20.4 million, including a $2.4 million contribution from the Proficiency acquisition. On an organic basis, revenue declined 4% primarily due to lower QSP, QST software revenue and a decrease in our biosimulation services revenue. Diluted EPS loss was $3.35, which included a $77.2 million charge noncash impairment expense related to prior acquisitions. Compared to 15¢ last year. Adjusted diluted EPS was $0.45 compared to $0.27 last year.

Adjusted EBITDA was $7.4 million or 37% of revenue compared to $5.6 million or 30% of revenue last year. A year ago, we acquired proficiency to expand our capabilities into the clinical operations space to leverage our science and technology capabilities and the use of predictive analytics to support our clients' ability to better manage a critical contributor to clinical trial failures. The acquisition doubled our TAM, and positions us well for future growth. In clinical operations. Where the opportunity to improve outcomes with better use of predictive technologies is recognized as an important area potential improvement in drug development.

The proficiency training platform, and medical communication services have been significantly impacted by market headwinds that disrupted clinical trial initiations and tightened commercialization budgets. These are similar in nature to the headwinds encountered in our biosimulation market. As a result, our outlook for these revenue sources for fiscal year 2025 and into fiscal year 2026 decreased and we took what we believe was a prudent and conservative step to align the book value of these assets to their near-term market value. We are deeply committed to our clinical operations and medical communications businesses, and their long-term growth outlook. The clinical operations space is rich with opportunities to combine science and new AI technologies to deliver significant clinical operational efficiencies.

Remain bullish on this opportunity and believe the proficiency platform will provide the appropriate path to extend our footprint with new and current customers when the market stabilizes. And the technology acquired in the proficiency acquisition allows us to more quickly advance the introduction of AI applications across our full portfolio of software platforms. Reinforcing our commitment and belief in the opportunities presented in the clinical operations space, Today, we issued a press release announcing our investment in NeuroCore. Which offers a software platform designed to improve efficiency, reusability, governance, and automation. For pharmaceutical companies through the digitization in the clinical development phase.

It is highly complementary to our proficiency software and is a straightforward extension of our presence in clinical trial design. With NeuroCore, we are further enhancing our capabilities to provide a more seamless and data-driven approach to trial execution. Which reflects our ongoing commitment to clinical trial design services. As most of you are aware, the biopharma market has been difficult for the past several years. Large pharma is facing headwinds such as patient expirations, and inflation reduction act pricing pressures, while biotech companies have seen a significant pullback in available sources of capital. These challenges have been further exasperated by the threat of tariffs, savored nation pricing policies, and significant budget reductions at the NIH and FDA.

Combined, these market headwinds have created more uncertainty and further constrained biopharma spending. With solid revenue growth in the first half of our fiscal 2025, I think it's fair to say that our team has generally executed well through some choppy market conditions. Our software revenue, while impacted, has continued to grow well. However, our services revenue has been more significantly impacted by the cost constraints implemented by our clients. We encountered a slowdown in our services bookings in the third quarter that will affect near-term project flow. Additionally, more delays in contracted projects push services revenue out to future quarters.

We also experienced a significant client cancellation during the quarter due to unfavorable outcomes in their drug programs that impacted near-term revenues by approximately $2 million. Taken together, these factors had a substantial effect on our third quarter performance. And they'll continue to flow into our fourth quarter and fiscal year 2026. This lower-than-expected services revenue contributed to the downward revision of our full year 2025 guidance, that Will is going to cover shortly. Moving to our software revenue. Our software business continued to perform well, given its role as critical infrastructure and drug development programs.

Software revenue grew 6% in the quarter, mainly driven by our Admet Predictor solution and modest growth in our GastroPlus and MonolixSuite platforms. Partially offset by a decline in our QSP, QST, Bio simulation platform. Our discovery cheminformatics platform, Admet Predict, grew 8% year over year and 4% on a trailing twelve-month basis. At the end of the quarter, we released ADMET Predictor 13, our flagship machine learning modeling platform, for the design, optimization, and selection of new molecules during various stages of drug discovery, with improved features in the areas of first to invent advantage, elevated predictive power, and enterprise-ready automation.

Our PVPK biosimulation platform GasFer Plus, increased 4% year over year and was flat on a trailing twelve-month basis. Revenue growth for GastroPlus was below expectations as it was impacted by client consolidations and some site closures that resulted in lower renewal rates. Our outlook for GasLog Plus remains strong, in anticipation of the next upgrade later this year with enhanced AI capabilities. Our PKPD simulation platform Monolix Suite, grew 3% year over year, and 18% on a trailing twelve-month basis. This platform was also impacted by a client consolidation this quarter but otherwise, it has continued to grow in the high teens.

Our QSP QST biosimulation platform declined 39% year over year and grew 7% on a trailing twelve-month basis. The year-over-year decline was driven by very strong third-quarter 2024 revenue. We have always communicated the lumpy nature of QSP software revenue. And while the revenue contribution was down this quarter, it was positive on a trailing twelve-month basis. Our clinical operations platform, proficiency, contributed $400,000 in revenue for the quarter and $4.4 million on a trailing twelve-month basis. Although a small contributor to software revenue, new licenses for this training platform have slowed along with the flow of clinical trial solutions.

As we've previously mentioned, demand for services has proven more sensitive to market volatility and came in below our expectations. Services revenue, which represented 38% total revenue, grew 17% in the third quarter. Primarily driven by solid performance in medical communication and grew 27% on a trailing twelve-month basis. PVPK services revenue declined 10% year over year, and declined 13% on a trailing twelve-month basis. PKPD services revenue declined 9% year over year and grew 6% on a trailing twelve-month basis. This is the service solution where we encountered the client cancellation that I noted before. QST revenue declined 22% year over year and 1% on a trailing twelve-month basis.

Medical communication services revenue was $2 million for the quarter, and $7.3 million for the trailing twelve-month period. Overall, we have a healthy pipeline of serving service projects. But the pace of contractual commitments slowed during the third quarter. Further, some contracted businesses business in our back has been delayed to future quarters. We ended the quarter with backlog of $20.7 million up from $20.4 million in the second quarter and up from $15.7 million year over year. We have always been a very client-centric company. And before I turn the call over to Will, I wanna discuss the actions we've recently initiated to better serve our clients going forward.

And to position us as their partner of choice based on our innovative solutions that meet their current and future needs. And for operational efficiencies that keep us competitive in the marketplace. Last month, we implemented a strategic reorganization transitioning from a business unit structure to a functionally driven operating model. We also made key leadership appointments to enhance client engagement and elevate our sales and marketing capabilities. These actions mark the final phase of a multiyear transformation aimed at streamlining operations, unlocking synergies across teams, and concentrating our resources on the most promising growth opportunities. We believe the new organizational structure will also foster greater collaboration through centralized product and technology development.

Contributing to accelerated delivery of software enhancements, platform integration, and AI advancements. Two tangible examples of the benefits from this reorganization. First, by consolidating our product management and software development teams, into a single functional organization, We've achieved greater consistency in development improved efficiencies, and accelerated delivery of enhancements across all our platforms. This structure enables us to continue advancing the scientific enhancements of each of our products while maintaining our leadership position. Key development opportunities such as AI functionality, optimized cloud infrastructure, and enhance product interoperability will be more effectively executed through our unified software team. Second, the integration of our services group reflects the increasing value of our diverse modeling service solutions.

Which are often combined to support complex client projects. Our clients frequently present unique challenges that require multi multidisciplinary teams, to efficiently solve their needs. And this consolidation allows us to better support them. Through this reorganization, we also streamlined our workforce which will result in greater efficiency, in our cost structure. Beyond these cost savings, we also aligned our services capacity more closely with current needs. We remain confident that we will be able to scale operations effectively as demand stabilize. These changes are expected to improve operational efficiency and better position us for sustainable and profitable long-term growth. With that, I'll turn the call over to Will.

Will Frederick: Thank you, Shawn. To recap our third quarter performance, total revenue increased 10% to $20.4 million including a $2.4 million contribution from the Proficiency acquisition. Software revenue increased 6% representing 62% of total revenue and services revenue increased 17% representing 38% of total revenue. Turning to the software revenue contribution from our products for the quarter, GastroPlus was 56%, Admet Predictor was 20%. Monolix suite was 17%. Proficiency was 3%. And QSP QST products were 4%. For the trailing twelve months, GastroPlus was 48%, MonolixSuite was 20%, ADMET predictor was 17%. Proficiency was 9%. And QSP QST products were 6%. The trailing twelve-month software revenue for proficiency only includes revenue since the acquisition in June 2024.

During the quarter, our software customer renewal rate was 84% based on fees, and 71% based on accounts. Average software revenue per customer for the quarter was $96,000 down slightly both sequentially and compared to last year. On a trailing twelve-month basis, our software renewal rate was 89% based on fees, and 78% based on accounts. Slightly lower than last fiscal year. Average revenue per customer increased to $101,000 from $95,000 on a trailing twelve-month basis. Shifting to our services revenue contribution by solution for the quarter. PKPD services were 38%, 26%. QSP QST services were 19%. And PVPK services were 18%. On a trailing twelve-month basis, PKPD services were 37%, QSP QST services were 24%.

Medcom services were 22%. And PVPK services were 17%. Again, the trailing twelve-month med comm services revenue only includes revenue since the acquisition of Proficiency last June. Total services projects worked on during the quarter were 202. And year end backlog increased to $20.7 million from $19.6 million last year. Total gross margin for the quarter was 64%, with software gross margin of 80% and services gross margin of 38%. On a comparative basis, total gross margin for the prior year quarter was 71% with software gross margin of 88%, and services gross margin of 41%.

The decrease in total gross margin was due to a $2 million increase in cost of revenues, of which $1.1 million was related to software-related costs and $900,000 was related to service-related costs. Turning to our consolidated income statement for the quarter. R and D expense was 6% of revenue, compared to 7% last year. Sales and marketing expense was 13% of revenue equivalent to last year, G and A expense was 30 per 30% of revenue, compared to 41% last year, and total operating expenses, including impairment ex excluding impairment expense, were 49% of revenue compared to 61% last year.

Total operating expense for the quarter includes a one-time noncash impairment expense of $77.2 million based on evaluation assessment we made to align the book value of our assets to their current market value. Income tax Income benefit for the quarter was $6.7 million compared to income tax expense of $800,000 last year, and our effective tax rate was 9% compared to 19% last year. Net loss for the quarter was $67.3 million compared to net income of $3.1 million and diluted EPS loss was $3.35. Compared to diluted EPS of 15¢ last year.

Adjusted EBITDA for the quarter was $7.4 million or 37% of revenue, compared to $5.6 million or 30% of revenue last year and adjusted diluted EPS was 45¢ compared to 27¢ last year. The reconciliation of non-GAAP financial metrics to the relevant GAAP metrics is in our earnings release and on our website. Turning to our balance sheet. We ended the quarter with $28.5 million in cash and short-term investments. The decrease in total assets this quarter reflects the noncash impact of the impairment charge. We remain well capitalized with no debt and strong free cash flow to execute our growth strategy.

Moving on to our revised outlook for fiscal year 2025, we now expect total revenue to be between $76 million to $80 million and proficiency to contribute between 9 to $12 million. Year-over-year revenue growth in the range of 9% to 14% software mix between 55 to 60%, Adjusted EBITDA margin between 23-27%, and adjusted diluted earnings per share of between $0.93 and a dollar 6. I'll now turn the call back to Shawn.

Shawn O'Connor: Thank you, Will. We faced new challenges in the third quarter. Which recalibrated our outlook for the balance of fiscal 2025. At the same time, we remain optimistic about the long-term prospects for biosimulation growth and the use of AI predictive analytics in clinical operations. Our positive long-term outlook is underpinned by growing demand for more efficient drug development, an area where our platforms and solutions deliver clear value. The regulatory environment is also increasingly supportive. Of in silico methods as demonstrated by the FDA's recently announced roadmap to reduce animal testing through the adoption of new approach methodologies.

Additionally, the FDA commissioner has publicly endorsed the use of AI in drug development highlighting its potential to enhance both speed and efficiency without sacrificing safety and efficacy. Just this week, the NIH announced that the biomedical agency would no longer award funding to new grant proposed solely relying on animal testing. Since it remains unclear when the market will stabilize, we believe that we have taken necessary actions will allow us to operate effectively efficiently. Serve our clients until the market dynamics improve. As in prior years, we will provide our fiscal 2026 when we report fourth quarter results. Assuming current market conditions persist in the near term, we generally anticipate modest improvement in fiscal 2026.

Compared to fiscal 2025. We anticipate exiting fiscal year 2025 with relatively flat organic revenue growth. With software revenue growth in the 5% to 9% range and services revenue decline in the 9% to 13% range. Between now and when we provide fiscal year 2026 guidance, we will have the benefit of understanding the ongoing impact of market headwinds as well as input from clients as they undertake their calendar year budgeting cycles. Looking to the future, Simulations Plus is rolling out a series of new AI-driven initiatives across our product suite as part of our commitment to innovation.

Key upcoming developments include cloud platform development, Our expectation is that this platform will become the con connective tissue linking artificial intelligence across our solutions seamlessly embedding AI-driven insights and automation. Into each of our new products. Each of our major products. Our AI-enhanced GastroPlus release anticipated later this year. Will debut integrated AI assistance? Accessible via a cloud platform This will augment users' modeling workflows with intelligent guidance and real-time predictive analytics. Demonstrating the first step in our cross-product AI integration. Specifically, our next GastroPlus release will include assessments plus, a model and copilot that offers instant assessment and recommendation, for compounds and simulations.

Its expert-driven guidance is built on real scientist input and is engineered to avoid hallucinations. It ensures experienced modelers could it ensures experienced modelers consider potential model optimizations and empowers newer users to quickly gain competency in model building and the multiple disciplines that underpin PVPK. Orchestrate. An automation package for complex and time-consuming workflows. Once set up, users can build, modify, execute, and visualize modeling projects and results with a single click. Using R scripts, Python code, and more. Streamlining tedious tasks, minimizing errors, and accelerating data processing to free up time for researchers to engage in deeper analysis and innovation.

In Gesser plus GPT, an AI-powered chatbot that provides con conversational style real-time answers and support for technical and operational questions. Extracts information from unstructured data sources for effortless setup of GastroPlus input files and reports. The foundational OpenAI large language model-driven program. It's available twenty-four seven and enhances users' modeling proficiency. And efficiency. And finally, portfolio-wide AI rollout. Following the GastroPlus update, we plan to introduce additional AI integrations into our flagship tools such as Advent Predictor and monolith suite. In the next fiscal year. Each integration is aimed at enhancing product capabilities and delivering greater value to our clients. Through improved productivity deeper data insights, and streamlined decision support.

These AI initiatives underscore Simulation Plus's focus on applying advanced technologies like AI to drive innovation and business growth. By leveraging our new a f AI-powered features, we believe we will gain a distinct competitive advantage and expanded value proposition in the biosimulation market. This strategy not only enriches our product ecosystem, but also positions Simulations Plus for sustained growth further solidifying our leadership in model informed drug development solutions. Thank you for your time today, with that, I'll turn the call over to the operator. For questions.

Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, please press a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. And our first question comes from the line of Scott Schoenhaus with KeyBanc Capital Markets. Please proceed. Hey, team. Thanks for taking my So I guess my first question is on the implied fourth quarter fiscal fourth quarter margin guide. It comes down steeply from the margins you just posted.

And you talked about your efficiencies in streamlining the operations to get to those margins. This quarter. What is driving that margin erosion next quarter? Thanks.

Shawn O'Connor: Yeah. The reorganization and the actions we took in terms of our expense structure, Scott, primarily did not impact the third quarter. They impact the business on a go-forward basis. As we had communicated, the ref represented a annual cost savings of $4 million, and that, starts to kick in and be in the fourth quarter really impacts our next fiscal year. Our challenged in terms of the fourth quarter margins. Really is embracing that revenue step down. On the top line. And while we're making our expense structure more efficient, fourth quarter revenues impact those margins? And bring us down to that guidance in the mid to high 20s in terms of EBITDA. Adjusted EBITDA.

Scott Schoenhaus: And then on the renewal rates on the software side, you know, it stepping down to from you know, 93% to 84% on the fees and 8671% on the accounts. And I think you talked in the prepared remarks about mostly this was driven by GastroPlus' site closures. From certain accounts. Can you just give provide more color here Seems like a pretty big drop off. And, you know, what historically have you seen that floor? For renewal rates? Are we is there more risk for renewal rates to fall even further from here? Thanks.

Shawn O'Connor: Yeah. Our renewal rates, as we've said previously, historically, the renewal rate is impacted, primarily by consolidations. Site closures, combinations of our clients that result in you know, reduction of the, renewal size, and that certainly was the case in the third quarter. Consolidation of both with regard to a GastroPlus client and as well a Monolix client impact those renewal rates for those two products. You know, I don't, see, you know, others on the horizon that of great significance, but consolidations are occurring in a, you know, client base.

And, you know, as they have contributed historically, I'm sure they will in the I don't know that our experience here in the first third quarter is indicative and we've we've maintained historical rates in that 90 to ninety five. Renewal rate on fees, which I expect we will in the long term maintain.

Operator: Thanks. The next question comes from the line of Matt Hewitt with Craig Hallum Capital Group. Please proceed.

Matt Hewitt: Good afternoon. Thanks for taking the questions. Maybe first up, regarding the April 10 guidance from the FDA, my sense was initially that there was a little bit of a pause. That your customers kind of pulled back a little bit trying to understand what the new guidance was, how it impacted their business and their clinical trials and whatnot, you starting to see that come back as those customers become more comfortable with what the guidance calls for? And are you anticipating that things could start to pick up as we exit this calendar year and get into fiscal 2026 for you guys?

Shawn O'Connor: Yeah. Thanks, Matt. You know, first, I'd I'd say that, you know, the announcement by the FDA with regard to use of VAM alternative methodologies in the replacements of animal testing. You know, is one component of the, of the drug development process. And, you know, that, taking place in early preclinical translational activities with our clients. Our products and services serve the full development cycle. And so know, the announcement is, a, very specific to a certain area of drug development and, b, you know, never underestimate the, you know, the time it takes for these objectives stating goals, to be translated down into actionable steps.

We certainly it is topic I hunk a list of all of our conversations. Today with the clients that, are in that phase of development with some of their programs. But action is still at that stage of waiting for clarity from the FDA in their stated process of putting together guidelines and interacting with industry. In their development. And, you know, that's a that's a process that will take some time. Certainly, it is an indicator of momentum in terms of the use of modeling and simulation. There at that stage of development and broadly went in the sales of the use of modeling and simulations where future drug development will go and become more dependent upon silico techniques.

But, you know, measuring it right now in a quarter to quarter basis impact on revenue, probably too quick in your anticipation of its impact. Certainly, a long term impact, modeling it's in relation to continues to grow over the years through its continued adoption of not only existing applications but the creation of new applications like this will be over the long term that increase the ways in which modeling and simulation is used in the full drug development process. So great news. Certainly a topic of conversation that's quite prevalent. A lot of momentum in terms of modeling and simulation. Patients required in terms of saying its impact on top line revenue.

Matt Hewitt: Got it. And then maybe a different way of kinda looking at this, but you list off a number of different headwinds that you're facing, the funding environment, you know, customer consolidation, site closures. As you look at those what do you think has been the biggest headwind recently And what's it going to take for that to kind of ease so that you could maybe start to get back to double-digit growth, particularly on the software side?

Shawn O'Connor: Yeah. The million-dollar question. You know, I wouldn't point to any single factor. It's really the plethora of uncertainties that exist that cause clients to be cautious, in, investment decisions, their spending. Decisions. And, I think we're see a shortening of the list of all those items that are on that list that contribute to, hey. Let's let's slow play and let's wait and see. A little bit. It's it's of them has their impact with specific clients. Specific programs. It's the length of that list that I think is really impactful right now.

Now as we look at, you know, our business today, we've taken some actions to know, gain some efficiencies, right size our expense run rates, and you know, not anticipate a significant uptick in the market characteristics in the near term. We'll poison be ready if they do but, you know, our view right now is let's optimize performance in this environment and work and be ready to ready to step up when the market does turn down the road.

Matt Hewitt: Got it. Thank you.

Operator: The next question comes from the line of Max Smock with William Blair. Please proceed.

Christine Rains: Hi, great. It's Christine Rains on for Max Smock. So just to start with, circling back on the previous on 4Q EBITDA margin expectations. Just hoping to get a bit more clarity here. So at the midpoint of your guide, it seems like revenue is dropping off around $4 million sequentially. But your adjusted EBITDA step down is roughly $6.5 million even though I think you're expecting around $1 million savings from cost cuts. So maybe it'd be helpful to get a breakdown of your COGS and OpEx spend as a percentage of revenue. It's help us get a handle on drivers for your margin guide for this year.

And then how you expect both to trend in 2026 given your recent cost cutting efforts?

Shawn O'Connor: Yeah. You know, I'll I'll provide an answer at a high level, and then, Will, I certainly invite you to jump in. You know, the revenue drop in the fourth quarter at an environment even with a risk and a reduction Our expense load generally is you know, linear. And while that's impacted by some of the efficiencies, fourth quarter is also a quarter in which a lot of marketing activity takes place. A number of our conferences key company, industry conferences. Occur in that quarter. And so the combination of revenue step down and expense while muted, there are expense drivers that come into the fourth quarter.

We started out the year looking to try and step up Our original guidance was pointed towards getting close, to and stepping up to the 31 to 33% range. With a significant drop in revenue. Some expense reduction has taken place, but that's still is gonna fall through. And leads to a reduction on, EBITDA. Guidance. Well, I don't know if you have anything to add to them.

Will Frederick: Yeah. I'd I'd say that Prelex. Characterizes expectation that with a revenue drop, but largely fixed costs for us, on the personnel side, although we will see some cost reductions as a result of the layoffs in May. We've also got amortization costs with intangibles that wouldn't expect to see a significant drop off. In the cost of revenues or the operating expenses Compared to, say, where we were in Q1? But with a lower revenue number, that'll flow down to both that EBITDA margin as well as the adjusted diluted earnings per share?

Christine Rains: Got it. That makes sense. And then when do you think it's a good timeline or reasonable to get back to kind of your initial guide range of low 30% for EBITDA?

Shawn O'Connor: Check-in with us when we announce our fourth quarter results. Cautiously, outlook over the fourth quarter here. Will take into consideration what we learn in terms of change of those headwinds and or discussions with our clients as they enter their budgetary cycles. And so that will help formulate, certainly, our expectations long term in a market that is allowing us to grow top line revenues at historical rates. Our long-term expectation of being able to achieve 35% adjusted EBITDA is unchanged. Question as to how quickly we can get to that point given the market conditions, that's the open question right now.

Christine Rains: Got it. That makes very sense. Just one more clarification question for us. So it looks like you're guide is calling, for a step up sequentially in 4Q for services, on the top line, but or significant, like, around 20% sequential decline for software sales. So just hoping you can help us understand this dynamic, and it seems like your commentary in your prepared remarks was more focused on services pressure, I mean, software has been relatively resilient up until now, and seems like expected going forward based on your commentary to be in 2026 more resilient?

Shawn O'Connor: Yeah. I don't I don't know that our commentary in place that profile in terms of the fourth quarter software versus services, the impact on revenue decline in our guidance as it relates to fourth quarter is driven significantly by the service side. Our software business is, you know, anticipated that you know, we'll we'll continue to grow and 5% to 90% time level for fiscal year 2025. And it's, the service side that is down nine to 13%, anticipated for the year. So I think our fourth quarter is impacted primarily by service

Christine Rains: Got it. That makes sense. I think I was just applying the, percentage breakdown that you had for, your revenue by software and maybe I was reading a little bit too much into that, but that clarity is helpful. Thank you for taking our questions.

Operator: The next question comes from the line of David Morrison with BTIG. Please proceed.

David Morrison: Hi. Can you please remind what the organic year-over-year revenue growth was in total and then also for software and then also for service, please?

Shawn O'Connor: For which period, Tim?

David Morrison: For the quarter, the organic growth rate for total revenue, software revenue, service revenue, please?

Will Frederick: Yeah. I could jump in there. So total was just for the quarter. Down 3% Software was up 2%. And services were down 13%.

David Morrison: Okay. That's very helpful. Thank you. And then when I look at the number of ads for GastroPlus in the quarter, it actually looked pretty good to me. I think you added 12 new customers for gastro. That's relatively high over the past two years, and you're I think gastro revenue growth we're we're estimating around 6% year-over-year growth for the for the quarter. That's that's fairly high relative to the past five quarters. I mean, me if I'm wrong, but it seems like the gastro business was doing fairly well. But Monolix maybe came under a little bit of pressure. Is there a difference in like, the kinds of clients you're serving between the two?

Can you just sort of like, why would one grow nicely but the other would not? Gastro looks pretty good. Monolix under pressure.

Shawn O'Connor: Well, a couple of things. Let me unpack the question a little bit. You know, our software revenue generally has contributed 80% of renewals, 10% upsells, 10% new clients. Round numbers on a quarterly basis. And as you point to, yeah, our upsells, new clients, you know, that continues to flow pretty well. Those tend to be those new clients tend to be you know, introductory clients starting with a small flip footprint, so smaller dollar value, you know, clients. Upsells were good. It's in that renewal side where you know, a couple of consolidations, acquisition activity in our client base impacted us. The gastro plus and monolith. Yeah.

Monolith on this quarter, in the third quarter, got impacted by one of those consolidations. But is growing very nicely. It's our pass growing product up in the high teens. It is on a twelve-month trailing twelve-month basis will be in that ballpark for the year, and expectations are continue to be strong there. The dynamics of the two products are a little bit different in that, Monolix is MonoLex and GastroPlus are sold to two different user bases. And, so common clients but two different user groups within our clients.

Monolix, has the benefit as well as not only chasing those upsells and new logos, but is also taking market share away from the primary product in that space, nonmem. And so that is contributing to its higher growth rate compared to the you know, other software platforms, SAVNET predictor and GastroPlus. All of those applications are growing quite nicely. We're at we're in the high five to 9% range for the year. And reflects the fact that, for the most part, there's no sort of, cost constraint pullback in spending on the software side.

We'd anticipate that in better times that they'll be growing their departments more rapidly, and therefore, add to and contribute to software revenue growth that has historically been in 10% to 15% range historically. They're not growing their groups, but they're not dismantling. They're dismantling if anything comes from consolidation when clients combine. And are acquired. So, hopefully, that helps. Dave.

David Morrison: It does. And then on the service side, what was how did bookings do? I think backlog correct me if I'm wrong, but I think backlog was actually up 6% year over year. How are bookings themselves in the quarter? On a year-over-year basis?

Shawn O'Connor: Yeah. A couple of comments there. One, backlog is up year over year. We've got backlog that's sourced in the met communications business that was not a component zero contributor, if you will, a year ago at the end of the third quarter. So the backlog increase in part is due to Med Communications, the acquired business. Secondly, you know, part of the issue has been you know, the delays. We have a backlog accounts that their contractual start date, anticipated start date of that project and whatnot. Gets deferred. And that certainly was the number of delays was on an uptick in the third quarter.

So those delayed accounts, at some point, if they've been delayed or we get information that tells us otherwise, we'll we'll pull those accounts out of out of backlog. But know, we're seeing a prolonged time to initiation of project out of the out of the back accounts.

David Morrison: Okay. Last one for me. Obviously, the broader S and P 500 pulled way back on Liberation Day. And it has since come back up, which I kind of view as the tariff relief rally you know, between the May, the close of the quarter and today, which is mid July, has have your salespeople sensed any improvement in the buying activity of your clients or is it all still completely sort of cautious in nature? Because I mean, it seems to me like it's possible that you know, maybe there was a slowdown in April and May during Liberation Day, but now we're in mid July. The S and P is at an all time high.

The funding environment likely has improved. Has there been any discussion of any improvement at all, or are we still sort of in a very cautiously sort of sort of careful slow environment?

Shawn O'Connor: Yeah. I mean, we're talking about a short window of time. April and May, and we're in July. So a few months, a short window of time to see to see movement. Now I'd say that environment, continues to be cautious, we're entering summer months, which tends to slow down. Activity, for annual reasons. And, you know, while the S P has picked up, I don't know that the S and P has an indicator of communication between, you know, our Salesforce and decision making necessarily at our at our client level. Yeah.

You know, I think, you know, these things, you know, have a shock value when they get announced and maybe an exaggerated slowdown that dissipates even though the issue, be it tariffs or whatever, doesn't go away. Stock value goes away, and things start opening up. We're certainly out there executing diligently in the marketplace to find those accounts that, may have been pausing and are ready to move forward now. But I'd say it's too short of a window of time to draw any conclusions just yet. Thanks very much. I'll hop back in the queue. The next question comes from the line of Constantine Davids with Citizens. Please proceed.

Constantine Davies: Yeah. Can you just expand on the you called out a services cancellation that had a $2 million I think you used the word or words near term impact. So was that all in the third quarter? Or was this something that you'd contemplated in terms of hitting fourth quarter as well?

Shawn O'Connor: Yes, Constantine. It was a single client. With contracted services covering two drug programs. Which, you know, from a contract basis were anticipated to begin contribution to the third quarter with more significant contribution to the fourth quarter. And both of those programs had bad readouts. The client canceled the contracts, canceled their programs. And, in fact, laid off 90 per 95% of their staff. So very impactful scenario. Its impact was the majority of it in the fourth quarter, with some impact in the third quarter as well.

Constantine Davies: Got it. And then, you know, Shawn, you alluded to a number of AI initiatives, new product initiatives. You know, some of the cloud initiatives as well. And, you know, you look at r and d expense, and it's it's running, you know, well below $10 million a year. And I know you're not giving guidance for next year, but I guess as you think generally about sort of the AI cycle we're in, which is going to be multiyear, the FDA initiatives around animal testing, You know, should we just start to think about you know, more R and D investment over the next several years relative to where you've been?

Just wondering if you can give us a little color on that. Thank you.

Shawn O'Connor: Yeah. Opportunities abound, or very excited about what is in both the near term offer in terms of our gas surplus release anticipated late summer with some pretty impact AI functionality, to give you little bit of the marketplace. And beyond that, into next fiscal year, both the extension of that into our, other platforms, and the opportunities for its ongoing development more broadly. So opportunity abounds. Does that mean increased R and D expenditure next year? Hey. We're committed in balancing both previous questions in terms of getting our EBITDA adjusted EBITDA back up into 30 plus into a longer term expectation of 35%. And opportunities to spend more in r and d.

And we will cautiously balance those two. Opportunities as we move forward. The productivity on the AI side of the r and d team is high. It's been complemented with the technology that, underlies the proficiency platform. Which provides, provided us has provided us a accelerated, ability to deliver utilizing that technology to support the cloud top platform and delivery of AI functionality into GastroPlus. And subsequent way down the road at particular in Monolex as well. So pretty exciting times on the on the technology side. How that impacts r and d. It'll be a balancing act between EBITDA improvements and the needs on the R and D side.

Operator: The next question comes from the line of Jeff Garo with Stephens Inc. Please proceed.

Jeff Garro: Yeah. Good afternoon. Maybe a couple follow-up from me on the AI topic. Want to ask if we should expect product development, product release pacing in line with historical product releases and adding new features and capabilities with regular updates or will it be more discreet? On the eight AI front? Then also wanted to ask about any gross margin implications we should think about with AI and with you know, some of the cost related to usage there? Do you move to a more transactional model? Thanks.

Shawn O'Connor: Yeah. I mean, I'll I'll I'll work backwards. You know, impact on margins. Know, we are know, a couple of things both on both on the revenue line and on the cost side On the revenue side, we're looking at know, pricing configurations, for this increased functionality. And, how we can optimize, both the expansion in upsells and new clients, but also a step up in terms of renewal improvements. So there should be some contribution there. On the expense side. Really, the banner is on the service side where AI capabilities in our operational group can lend to improvements in terms of the cost to perform projects and anticipate we'll see some opportunity there.

The pricing structure, are we gonna move to a more transactional sort of perspective? You know, not on the near term horizon? Our clients really are not demanding that. We may provide some of these solutions in a situation more transactional with this, but a movement to a transaction based SaaS model is still deep in the horizon. For our customers, and that's really driven by their desires at this point in time. Hope that answers your question, Jeff.

Jeff Garro: Yeah. Then the first part of it was around pacing of releases, kind of regular updates or more discreet.

Shawn O'Connor: Yeah. I think, you know, yes and no. Our ability to deliver more frequent updates, is certainly a driver in terms of our new products and technology organization. Our clients operate in a regulatory environment, and they're desire is primarily to, not be updating frequently. So the base application, Casper Plus or Monolix, It's, you know, releases on an annual basis. It's their need and their investment desires on updating in term in site their IT operations. To the extent that we provide some of these in the cloud that are more accessible outside their SOP environment, we may be to be able to deliver those, you know, more quickly paced during the course of the year.

And, you know, intend to be able to do so. Whether our clients will be able to in their environment and their IT infrastructure and cost and planning capabilities, whether they're adopting more rapidly or not, we will we'll we'll see. Certainly, give them the opportunity to Understood. I appreciate that.

Jeff Garro: And I wanted to hit proficiency and see if you had any updated financial expectations for FY 2025. Any color you might be to provide on the large per proficiency engagement that was expected to start in the back half of the year that you had discussed last quarter? Thanks.

Shawn O'Connor: Yes. That engagement was in the medical communications side of the business, and, and that has proceeded It was impacted a little bit you know, delayed in part on the commercialization side by the client. Not canceled, but delayed, but that, project has, has initiated. Overall, as we indicated in our guidance, $9 million to $12 million contribution from both the proficiency platform and the med communications business. Certainly down from our expectations at the beginning of the year, but again, driven by the same factors, headwinds in terms of slow start up clinical trials, and cost constrained environment.

Jeff Garro: Got it. Thanks for taking the questions.

Operator: Thanks, Thank you. This concludes the question and answer session. And I'll turn the call back to Shawn O'Connor for closing remarks.

Shawn O'Connor: Thanks again, everyone, for joining our call and, your interest in SIMPLUS. In the next few months, we'll be attending some important industry events. Including the Controlled Release Society annual meeting, which started today. And the American Chemical Society national meeting, in August. For the financial community, we'll be attending the KeyBanc Annual Technology Leadership Forum in August and the Wells Fargo 2025 Healthcare Conference and the Morgan Stanley annual global Healthcare Conference both in September. Hope to see, many of you there. Appreciate you joining the call, and look forward to talking to you again and updating you, at the end of the fourth quarter. Take care, everyone.

Operator: This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.

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