Simulations Plus (NASDAQ:SLP) reported its fourth-quarter earnings for fiscal year 2024, surpassing Wall Street expectations with an earnings per share (EPS) of $0.17 against a forecast of $0.14. The company's revenue reached $18.9 million, slightly above the anticipated $18.77 million. Following this announcement, SLP's stock rose by 4.43% in regular trading hours to $30, though it experienced a 1.28% decline in aftermarket trading.
Key Takeaways
- Simulations Plus exceeded EPS expectations with a $0.03 positive surprise.
- Total (EPA:TTEF) revenue increased by 18% year-over-year, reaching $70 million.
- The company maintains a strong financial position with no debt and $20 million in cash.
- Aftermarket trading showed a slight decline of 1.28%, indicating cautious investor sentiment.
- The company continues to expand its market reach with significant product and acquisition developments.
Company Performance
Simulations Plus demonstrated robust performance in fiscal year 2024, with total revenue growing by 18% year-over-year. The company reported significant gains in both its software and services segments, with software revenue increasing by 12% and services revenue by 26%. These results underscore the company's strong execution and strategic focus on expanding its market presence.
Financial Highlights
- Revenue: $70 million, up 18% year-over-year
- Q4 Revenue: $18.9 million, a 19% increase
- EPS: $0.17, exceeding the forecast of $0.14
- Gross Margin: 62% overall ( Software (ETR:SOWGn): 84%, Services: 30%)
Earnings vs. Forecast
Simulations Plus reported an EPS of $0.17, beating the forecast of $0.14 by $0.03, a 21.4% positive surprise. This performance aligns with the company's recent trend of exceeding market expectations, bolstered by five upward EPS revisions in the last 90 days.
Market Reaction
Following the earnings announcement, Simulations Plus' stock price increased by 4.43% during regular trading hours, reaching $30. However, the stock experienced a 1.28% decline in aftermarket trading, suggesting a cautious investor outlook despite positive earnings results. The stock remains within its 52-week range, with a high of $51.22 and a low of $27.07.
Outlook & Guidance
For fiscal year 2025, Simulations Plus projects total revenue between $90 million and $93 million, with organic growth expected at 10-15%. The company anticipates Proficiency, its recent acquisition, to contribute $15-$18 million. Adjusted EPS is forecasted at $1.07 to $1.20, reflecting continued confidence in its growth strategy.
Executive Commentary
"We're very pleased with our 2024 performance and our results reflect strong execution in both our software and service segments," stated CEO Sean O'Connor. He highlighted the Proficiency acquisition as a key driver in doubling the company's total addressable market to $8 billion, significantly expanding market opportunities.
Q&A
During the earnings call, analysts inquired about margin pressures in the services segment and the strategic rationale behind the Proficiency acquisition. The company addressed challenges in software renewal rates and outlined its pricing strategy and expense management efforts.
Risks and Challenges
- Continued margin pressures in the services segment could impact profitability.
- Mixed indicators for 2025 and slower growth in the Asian market may affect future performance.
- Maintaining high renewal rates in the software segment is crucial for sustained growth.
- Economic uncertainties and potential market saturation pose ongoing risks.
- Integration of acquisitions and achieving projected synergies remain critical challenges.
Full transcript - Simulations Plus Inc (SLP) Q4 2024:
Conference Operator: As a reminder, this conference call is being recorded. It is now my pleasure to introduce Lisa Fortuna from Financial Profiles.
Ms. Fortuna, you may now begin.
Lisa Fortuna, Investor Relations, Financial Profiles: Good afternoon, everyone. Welcome to the Simulations Plus 4th quarter and fiscal 2024 financial results conference call. With me today are Sean O'Connor, Chief Executive Officer and Will Frederick, Chief Financial Officer and Chief Operating Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at www.simulations plus.com.
After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward looking statements that involve risks and uncertainties. Words like believe, expect and anticipate refer to our best estimates as of this call and actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. With that, I'll turn the call over to Sean.
Please go ahead.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Thank you, Lisa. Good afternoon, everyone, and thank you for joining our Q4 fiscal 2024 conference call. Our team delivered strong results in 2024. Total revenue increased 18% year over year and 14% on an organic basis excluding the Q4 contribution from Proficiency. The organic growth rate was above the 10.5% growth rate we achieved in fiscal 2023 and at the high end of our guidance provided at the beginning of the fiscal year.
Full year diluted EPS of $0.49 exceeded the high end of our guidance range of $0.46 to $0.48 Turning to key highlights of the year. As an industry leader in biosimulation software tools, we continue to improve our competitive edge during fiscal 2024 with major upgrades across our platform supporting PBPK, PKPD and drug discovery. Our release of GPX in May significantly enhanced our flagship GastroPlus PVPK platform with advanced models, refined algorithms and integrated machine learning technology. GastroPlus plus X greatly enriches the user experience with an intuitive interface, streamlined workflows and faster processing. In May, we released Monolix Suite 2024.
This release included integrations, presets and other upgrades that make the software easier and faster to run, allowing scientists to spend less time on programming and more on exploring models and simulation results. In July, we released Admet Predictor Version 12, our machine learning chem informatics platform in support of drug discovery. The release included enhanced models with greater predictive accuracy and expanded high throughput pharmacometrics capabilities amongst other new features. During fiscal year 2024, we continued to supplement our organic growth with strategic acquisition accomplishments. We completed the integration of our June 2023 acquisition of Pimeonetrix.
The combined scientific resources and therapeutic area coverage positions us as a clear leader in the fast growing area of quantitative systems pharmacology, the 57% growth in fiscal year 2024. This June, we acquired Proficiency, the largest and most significant acquisition in our company's history. The transaction doubles our TAM to $8,000,000,000 and significantly expands our market opportunity. This addition enhances our ability to support clients across clinical operations, medical affairs and commercialization. Our comprehensive suite of innovative solutions now spans the entire drug development continuum and uniquely positions us to drive growth and profitability.
Next (LON:NXT), I'll spend a moment on the macro environment, which we realize is an area of particular focus for the financial community. Spending environment for pharma and biotech has been cost and funding constrained for a 2nd fiscal year. Current leading indicators, including pharma budgets, clinical trial activity, funding activity and others provide a mixed bag of metrics for the next year that suggest a potentially improved environment compared to the last 2 years. We continue to observe a wide range of activity levels among our clients, many who are engaged in their internal calendar year 2025 budget preparation process. Although we are encouraged by some positive initial budget discussions for 2025, we are entering the year with cautious optimism.
Our guidance for fiscal year 2025 is based upon current market conditions continuing, but we will be prepared to take advantage of any improvement in our client spending during the year. Turning to our software segment. Software revenue grew by 12% for fiscal year 2024, 9% on an organic growth basis. Software revenue grew by 6% for the 4th quarter and decreased 6% on an organic growth basis. Kim Informatics business unit revenue grew 6% for the year and 1% in the 4th quarter.
During fiscal year 2024, we have grown the number of clients utilizing the AIDD module to 15 of our total installed base of 110 Admet predictor clients. Physiologically Based Pharmacokinetics or PBPK business unit, revenue increased 7% for the year and decreased 8% in the 4th quarter. GastroPlus continues to grow well despite some renewal slippage in the 4th quarter and ongoing softer growth in the Asian markets. Clinical Pharmacology and Pharmacometrics or CPP business unit, revenue grew 18% for the fiscal year and 20% during the quarter. Monelix continues to increase its market share and displace its main competitor as the PKPD platform of choice.
Revenue in our quantitative systems pharmacology or QSP business unit grew 7% for the year, yet decreased 67% for the quarter. As a reminder, quarterly results can be lumpy for QSP software based upon the high ticket price per license and a smaller pool of end users. Revenue in our Adaptive Learning and Insights or Ali business unit was $1,100,000 for the 4th quarter, generally in line with our expectations. Revenue in our Medical (TASE:PMCN) Communications or MC business unit was $100,000 for the Q4, also in line with our expectations. Turning to our services segment.
Services revenue grew by 26% for fiscal year 2024, 21% on an organic basis. Services revenue grew by 39% for the 4th quarter, 21% on an organic basis. We're pleased with this result given client cost constraint measures typically impact external service budgets as clients may eliminate project work or delay execution in tighter funding environments. Performance was especially strong in our CPP and QSP business units. CPP business unit revenue was strong, up 19% for the fiscal year and up 28% in the 4th quarter.
USP business unit revenue grew 57% for the year and 32% in the 4th quarter. DBPK business unit revenue decreased 5% for the fiscal year and 6% for the 4th quarter. We continue to encounter client source data delays impacting the initiation of contracted projects in this space. Medical Communications revenue was $1,100,000 in the 4th quarter. This contribution was less than anticipated due to higher revenue recognized in the quarter prior to our acquisition as well as some project timing delays.
Turning to an update on Proficiency. As a reminder, Proficiency provides experience and content simulation developed with AI technologies to enhance clinical trial success, data analytics and medical communications, both in the regulatory approval process as well as post approval commercialization. Ultimately, these activities support increased confidence in regulatory success for our clients. In addition, proficiency meaningfully expands our customer return on investment by helping them achieve accelerated clinical trial cycles, reduce protocol deviations, reduce cost of clinical trial operations and improved market awareness. The combined product and service portfolio results in offerings across the pharma value chain.
Software offerings from Proficiency include Proficiency Performance Management, an adaptive learning platform that uses lifeline simulation and detailed data tracking to increase recruitment, retention and protocol compliance during clinical trials. In simulations of complex real world scenarios, learners are asked to make decisions and practice implementation of the trial protocol. The data generated provides insight into areas of the trial protocol that are unclear to healthcare practitioners, enabling clarification and further education prior to the start of clinical trials. Panoramic KOL Insights is a platform for key opinion leaders research in the life science industry. It provides current information about influential industry leaders, which can be filtered by criteria including, but not limited to therapeutic expertise, professional affiliations and geographical location.
We're pleased to report that the integration process is tracking ahead of plan across all fronts. As previously announced, we formed 2 business units, Adaptive Learning and Insights to carry forward with our clinical simulations business, led by Jenna Rouse and Medical Communications, led by Murray Alpert, who do address medical affairs and commercialization support for our clients. On the sales and marketing front, our combined go to market strategies and lead generation are underway. We expect these efforts to contribute to business development opportunities. Together, our scientific and technological capabilities are expected to deliver enhanced product and services, which further benefit our clients.
And additionally, we have integrated our back office financial, operational, general and administrative organizations, which we expect will contribute to efficiencies and expense savings. With that, I'll turn the call over to Will.
Will Frederick, Chief Financial Officer and Chief Operating Officer, Simulations Plus: Thank you, Sean. To recap our strong 4th quarter performance, total revenue increased 19 percent to $18,700,000 including a $2,300,000 contribution from Proficiency. Software revenue increased 6%, representing 53% of total revenue and services revenue increased 39%, representing 47% of total revenue. Fiscal year total revenue increased 18% to $70,000,000 Software revenue increased 12%, representing 59% of total revenue and services revenue increased 26%, representing 41% of total revenue. Turning to the software revenue contribution from our products for the quarter, GastroPlus was 49%, Monelix Suite was 17%, Admet predictor was 18% and other products were 15%.
For the fiscal year, GastroPlus was 53%, Monelink Suite was 20%, Admet predictor was 18% and other products were 9%. For the year, our software customer renewal rate was 93 percent based on fees and 84% based on accounts, both increasing slightly compared to the prior year. Average software revenue per customer for the year increased to $129,000 Shifting to our services revenue contribution by business unit for the quarter, CPP was 36%, QSP was 35%, PBPK was 17% and MC was 13%. For the fiscal year, CPP was 43%, QSP was 31%, PBPK was 23% and MC was 4%. Total services projects worked on during the quarter were 250.
Year end backlog decreased $14,100,000 primarily impacted by 2 sources. First, there were some service contracts that slipped into September and in the 1st 2 weeks of fiscal 2025, we've already closed more than $3,000,000 of these. 2nd, we adjusted the backlog in the Q4 this year to remove open contracts that have been delayed where there's still uncertainty regarding when the customers will resume the projects. As a result, anticipated revenue from backlog within 12 months increased to approximately 90% compared to 70% to 80% at the end of last year. Total gross margin for the fiscal year was 62% with software gross margin at 84% and services gross margin of 30%.
The year over year decline in gross margin was primarily due to the reclass of operating expenses with the reorganization of our internal structure, the full year expense impact from the Immunetrix acquisition last year and the additional expenses from the Proficiency acquisition this year. Turning to our consolidated income statement for the quarter. R and D expense was 10% of revenue compared to 7% last year. Sales and marketing expense was 14% of revenue compared to 11% last year. G and A expense was 19% of revenue compared to 63% last year.
G and A expense variance was primarily due to the reclass of expenses this year to cost of revenues reflected in the reorganization of our internal structure mentioned at the beginning of the year. We also made a true up of all international services related expenses for the year in Q4. G and A expense for the Q4 also included $1,700,000 of transaction related expenses for the acquisition of Proficiency this year and included $2,500,000 of transactions related expenses for the acquisition of Immunetrix last year. The transaction expenses related to Immunetrix last year included a $1,600,000 compensation expense. Total operating expenses were 43% of revenue compared to 80% last year, primarily due to the reclass of expenses to cost of revenue this year, offset by the addition of expenses related to proficiency this year.
Loss from operations was negative 6% of revenue compared to negative 2% last year and income before income taxes was 5% of revenue compared to 0% last year. Other income was $2,000,000 this quarter compared to $400,000 last year, primarily due to a decrease in the fair value of the Immunetrix earn out liability this year. Net income for the Q4 was $800,000 or 5% of revenue compared to $500,000 or 3 percent of revenue last year. Diluted EPS was $0.04 compared to $0.03 last year and adjusted diluted EPS excluding the impact of transaction related costs were $0.06 compared to $0.18 last year. This year over year change was primarily driven by the transaction related expense add back to diluted EPS in Q4 last year being larger than the add back in Q4 this year.
4th quarter adjusted EBITDA was $4,100,000 compared to $4,900,000 last year at 22% and 31% of revenue respectively. We calculate adjusted EBITDA by adding back interest, taxes, depreciation and amortization, stock based compensation, gain or loss on currency exchange, any acquisition or financial transaction related expenses and any asset impairment charges. The reconciliation of this non GAAP metric to net income, the relevant GAAP metric, is in our earnings release and on our website. Income tax expense for the Q4 was less than $100,000 compared to income tax benefit of $500,000 last year and our effective tax rate was 2% compared to 6 74% in the prior year period. As a reminder, we true up our annual income tax estimate in the Q4 each year, which impacts the effective tax rate in the quarter.
Turning to our consolidated income statement for the fiscal year. R and D expense was 8% of revenue equivalent to last year. Sales and marketing expense was 13% of revenue compared to 11% last year, primarily due to our increased investment in sales and marketing. G and A expense was 32% of revenue, down from 47% last year. G and A expense for the year included $2,600,000 of transaction related expenses for the acquisition of Proficiency this year and included $3,300,000 of transaction related expenses for the acquisition of Immunetrix last year.
Total operating expenses were 53% of revenue compared to 66% last year. Income from operations was 9% of revenue compared to 15% last year and income before income taxes was 18% of revenue compared to 20% last year. Other income was $6,300,000 during the year compared to $3,000,000 last year, primarily due to an increase in interest income and the previously mentioned decrease in the fair value of the Indianetrix earn out liability. Net income for the fiscal year was $10,000,000 or 14 percent of revenue compared to $10,000,000 or 17 percent of revenue last year. Diluted EPS was $0.49 equivalent to last year and adjusted diluted EPS excluding the impact of transaction related costs were $0.53 compared to $0.67 last year.
Adjusted diluted EPS was lower than expected, primarily due to the lower transaction related expense add back to diluted EPS in the 4th quarter. Fiscal year adjusted EBITDA was $20,300,000 compared to $20,600,000 last year at 29% and 35% of revenue respectively. Income tax expense for the fiscal year was $2,500,000 compared to $1,700,000 last year and our effective tax rate was 20% compared to 15% last year. We expect our effective tax rate for fiscal year 2025 to be in the range of 23% to 25%. Turning to our balance sheet, we ended the year with $20,000,000 in cash and investments.
We remain well capitalized with no debt and strong free cash flow to execute our growth strategy. I'll now turn the call back to Sean.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Thank you, Will. We're very pleased with our 2024 performance and our results reflect strong execution in both our software and service segments. Also the integration of the most significant acquisition in the history of our company is progressing ahead of our expectations. Moving on to our outlook for fiscal 2025. Based upon current market conditions, our organic growth is expected to be in the range of 10% to 15% consistent with fiscal year 2024.
In addition, the Proficiency acquisition is expected to contribute $15,000,000 to $18,000,000 consistent with the range we previously provided. Our guidance for fiscal 2025 is as follows: total revenue between $90,000,000 $93,000,000 year over year revenue growth in the range of 28% to 33%, software mix between 55% 60%, adjusted EBITDA margin between 31% 33%, adjusted diluted earnings per share of 1 point $7 to $1.20 We're providing guidance on adjusted diluted EPS versus diluted EPS consistent with guidance practices for our industry. For comparison purposes, our adjusted diluted EPS guidance translates to at or above our fiscal year 2020 4 diluted EPS of $0.49 Of note, our guidance does not include the impact of any future acquisitions. As a reminder, our 1st fiscal quarter is historically our lowest revenue quarter due to the seasonality of our revenue streams. As such, diluted EPS could dip below breakeven and although diluted adjusted EPS will be above the diluted EPS level, we still expect some impact.
We anticipate higher revenues in the remaining quarters of fiscal 2025 as we have had in the past, resulting in higher profitability in the remaining quarters of our fiscal year. Our near term priorities include completing the acquisition integration, expanding cross selling opportunities, driving towards our historical adjusted EBITDA margin target of 35% to 40% and correspondingly profitability levels. We are well positioned to achieve our goals this year and remain focused on executing our disciplined growth strategy to deliver long term value to our stakeholders. Thank you for your time today. With that, I'll turn the call over to the operator for your questions.
Conference Operator: Thank you. We will now be conducting a question and answer session. You. Our first question is from Max Smock with William Blair. Please proceed with your question.
Max Smock, Analyst, William Blair: Hi, great. Thank you for taking our question. Our first one is just hoping you can give an update on staffing and services. I recall that very low attrition rates in the business have been weighing on margins. So curious if this trend has continued over the last few months and what your hiring plans look like in 2025?
Basically trying to get at when we can expect utilization to improve and how we should think about the cadence of margin progression in 2025?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. Thanks for the question. Yes, as we indicated last conference call, our back half profitability in Q3 and Q4 was impacted as we hired to our plan, but attrition that we baked into that plan was much less than anticipated and that has contributed to some pressure in terms of margins in the service business in the back half of the year, continued into the Q4. We have, since this became more visible, adjusted our recruiting plans on a go forward basis and anticipate that we'll get back in line, if you will, with the matching of the capacity and revenue streams on the service side in the first half of fiscal twenty twenty five. So a little bit of pressure in the first half of next year, but believe that improvement will be gradual and through the first half and into the second half, we should get back on track.
And it's reflected in our guidance of 31% to 33% EBITDA margin and that improvement through the course of the year.
Max Smock, Analyst, William Blair: Great. Thank you. That's really helpful. And then just one on proficiency in terms of its competitive moat. So given that we have seen a continuing trend and expectation for more trials to be run by CROs and given that proficiency doesn't sell into CROs, do you see this as limiting the size of your business opportunity in the space?
Sean O'Connor, Chief Executive Officer, Simulations Plus: No, no. I mean, the marketplace that they sell into is in support of pharma clients and their clinical trials. In association with the CROs that are out there, we are complementary to their services, competitive to those that do offer this sort of comparable, if you will, training type of capabilities, but the proficiency offering is pretty unique in terms of both its training module development and the software platform that supports it in terms of its delivery and the impact on adherence to clinical trials. So clinical trial uptick in 2025 would be a favorable indicator for the proficiency business and it sells through in a marketplace alongside CROs and competition with some CROs, but that's the same marketplace that it's been selling into and succeeding the last number of years.
Max Smock, Analyst, William Blair: Great. Thanks for the color there. And then lastly, just a quick modeling question. Sorry, if you already said it and I missed it. But how much did immune metrics and proficiency contribute to total sales in Q4?
And also, what is this breakdown in terms of software versus services? Asking, because based on the press, it seems like the inorganic contribution was much lower than we would have thought in the Q4. So if this is the case, can you discuss the dynamics around this?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. Proficiency's contribution came in a bit below the $3,000,000 expectation that we had. They came in at about $2,100,000 2.2 $1,000,000 revenue in the 2nd quarter, primarily in terms of the medical communication side, where our anticipation of how much of the project revenue, the service revenue from medical communications would be recognized in the quarter prior to our close of the transaction. Obviously, we don't pick up the revenue flow from those projects until close, which was mid June timeframe. So that recognition at the beginning of the quarter was a little bit greater than we anticipated.
And then secondly, yes, they were subject to some of the delays that we see across our service business in terms of some projects being pushed out. So 2.1 in terms of the proficiency contribution to the Q4. And that does not change our expectation in terms of $15,000,000 to $18,000,000 contribution in 2025. Immunetrix 4th quarter contribution, I don't have. 4th quarter is not acquisition revenue.
They had 4th quarter contribution revenue in 2023 as well as Q4 'twenty four. And our integration of that business now is pretty well complete and we're servicing those opportunities from the combined staff of our 2 organizations. So don't have a breakout of that for the Q4.
Max Smock, Analyst, William Blair: That was all really helpful. And just as you were talking, I thought for 2025, kind of a similar question on proficiency. It seems like you're counting proficiency revenue as all, inorganic, despite it kind of closing, like you said, in the Q4. So just hoping that you can help us bridge your organic versus inorganic growth expectations for next fiscal year and if you can by both software and services?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. Don't provide it other than our expectation that software will be in the range of 55% to 60% of our total revenues. Don't have a breakout in terms of software versus services, but our, let's call it, SLP legacy business, everything except proficiency, our guidance is based upon the assumption of that organic growth will be in the 10% to 15% range, similar to our guidance for last year, fiscal year 'twenty four, which was 10% to 15%, for which we came in at about 14 percent growth. And then 2025 proficiency contribution should be in that range of $15,000,000 to $18,000,000 above that.
Max Smock, Analyst, William Blair: Great. Thank you so much. Sure.
Conference Operator: Thank you. Our next question is from Matt Hewitt with Craig Hallum. Please proceed with your question.
Matt Hewitt, Analyst, Craig Hallum: Maybe first up, could you help us bridge the gap on your EPS guidance for next year? Just trying to figure out that's significantly higher than I was modeled and The Street was modeled. I'm just trying to figure out what the delta is there. Thanks.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. I think it's in the context of the 2 line items of adjusted diluted EPS versus diluted EPS. We've added adjusted diluted EPS as it seems to be the commonality with our peers so that there could be some comparability. Willy, do you want to provide some color in terms of the differential there?
Will Frederick, Chief Financial Officer and Chief Operating Officer, Simulations Plus: Sure. Thanks for the question, Matt. And I would refer to the reconciliations that we have in the press release. One of the things we did for FY 'twenty four is we've got the reconciliation of adjusted EBITDA to net income. And for the most part, we've got typical exclusions there that we've communicated in the past.
The adjusted diluted EPS to diluted EPS, we've really just taken transaction related expenses as the adjustment. And based on the feedback we were getting from folks as well as sort of comparative in the industry, it made sense to standardize in FY 2025, so for this next fiscal year. To just have the reconciliation items that are in the adjusted EBITDA be the same adjustments that are going to be for the adjusted diluted EPS with the tax impact as well. So FY 2024 was just an adjustment for transaction related expenses. FY 2025 will have a consistent approach with the way we do the adjusted EBITDA just to simplify it.
Matt Hewitt, Analyst, Craig Hallum: That's helpful. But I guess I was looking for I mean are you expecting $5,000,000 in acquisition related expenses? There's a pretty big delta from where everybody was before on an adjusted basis to your new guidance. There was a that's a pretty big step up. And I'm just trying to figure out what is the bucket that you're seeing the big increase?
I'm guessing it's M and A expenses, but I just want to make sure I'm thinking about this right.
Will Frederick, Chief Financial Officer and Chief Operating Officer, Simulations Plus: Yes. Right now, we don't have any M and A expenses assumed in the guidance. You mentioned it excludes any acquisitions. So to the extent that if you look through the EBITDA reconciliation, the big drivers there are depreciation and amortization expense and stock comp expense. I mean those combined were about $11,000,000 $12,000,000 in FY 2024 and we'll have an increase with the additional intangible amortization from the proficiency acquisition.
So total probably goes to about $14,000,000 $15,000,000 of adjustments.
Matt Hewitt, Analyst, Craig Hallum: Got it. All right. And then shifting gears, Sean, if you could provide a little bit of an update on the integration with Proficiency, particularly on the sales and marketing efforts, are those teams have they been fully trained at this point? What are the cross selling pipelines looking for? Thank you.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. We've integrated the sales and marketing personnel that came to us in the acquisition from Proficiency into our consolidated business development team have undertaken training, dissemination of presentation of capabilities to bring people up to speed in terms of our new products and services that come into fold. Out in the marketplace. We've transitioned over the last couple of years. Our sell through points historically have been the discovery department for Admet predictor and then primarily the modeling and simulation organization on the clinical side.
Previous to this year, we invested time and effort in expanding to a third touch point, the clinical management teams that consolidated group of personnel that manage a drug program, of which the modeling and simulation representative had a seat at that table. But extending our relationship into that area, I think has been one of the keys to supporting our pretty healthy service growth in a very challenged market environment, and that has been the result of identifying opportunities to impact positively a drug program that perhaps the modeling and simulation department has been already used up, has been cut, certainly cost constrained environment has made those budgets a little tighter. We opened ourselves up for our service business to be funded out of the clinical trial budget. And that I think has supported and put winds in the sale of our success on our service side during a challenging time. Long winded intro into through Proficiency's acquisition, we're now undertaking that same extension out to their touch points, which are the clinical operations team and the medical affairs team within our clients.
And so, first step in terms of engagement in the marketplace externally from the company is to start extending those networks and building those relationships into those new budget opportunities that are available to us. And that's going very well. I mean, we're 3 months into the close after the close of the acquisition, so it's a short window of time, but I think we're moving pretty well there.
Matt Hewitt, Analyst, Craig Hallum: Got it. All right. Thank you.
Conference Operator: Thank you. Our next question is from David Larsen with BTIG. Please proceed with your question.
David Larsen, Analyst, BTIG: Hi. Can you talk a little bit more about the software revenue growth on a year over year basis? I think I heard you say it was down 6% year over year organically. Is that correct? And how does that compare to
Sean O'Connor, Chief Executive Officer, Simulations Plus: your own internal expectations? And what
David Larsen, Analyst, BTIG: was that internal growth rate, specific growth rates on the software side as I flip through mine,
Sean O'Connor, Chief Executive Officer, Simulations Plus: making sure I get it right. I mean the growth rate was down in the 4th quarter, but up 12% for the year, 9% organically, right?
Will Frederick, Chief Financial Officer and Chief Operating Officer, Simulations Plus: Yes. I mean total revenue for the year, yes.
Sean O'Connor, Chief Executive Officer, Simulations Plus: So, yes, Q4 revenues were down on the software side. Really the challenge there has been was 2 fold. 1, we did have a couple of renewal slippages out past August 31st into the Q1. But our real challenge has been in the Asian market. It's not a new issue.
It's one that's really been influx since COVID, quite frankly. And a particular focus for us as we move into fiscal year 2025, we've been overgrowing, if you will, in our North America and European markets and compensating for that, but it's an area for improvement for us going forward.
David Larsen, Analyst, BTIG: Okay. And I think I see the software gross margin of around 72% in the 4th quarter. It's usually in the 90% range. So should we think about that as being like an unusual quarter because of some renewal timing and you'll get back up to that 90% range in 1Q of next year. So should we see that organic software revenue growth top back up starting in fiscal 1Q?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes, software revenue margin is impacted. I don't know that it went all the way down into the 70s. I think it was in the mid-80s. And so some impact there as we indicated earlier that the software side of the proficiency business is down towards 80 ish percent compared to our 90% -plus in terms of our existing software or legacy software products. So some impact there and the proficiency overall profitability both in terms of software as I've just described and on the service side.
We see means we're improving those as we move through the course of the year. We improved it tremendously through the acquisition in terms of rationalizing some of the overhead expenses of that business unit. It starts in the Q4 and the start of fiscal year 'twenty five with a profitability profile that on a percentage basis is a little less than our legacy model, if you will. The overall company EBITDA guidance of 31% to 33%, underlying that on the legacy side SLP probably could have been up towards that goal that we set for ourselves of 35% to 40%. But proficiency impacts that in 2025.
We believe we in the longer term into 2026, we'll get them in line with our profitability profile, but that will continue to improve to get to that level through the course of 2025. So on the software side, specifically back to your question, some impact from proficiency there. I think we'll gradually see some improvement as we go quarter to quarter through 2025.
David Larsen, Analyst, BTIG: Great. One more quick one. I think the service gross margin you reported, am I seeing this correctly, minus 4% in fiscal 4Q? And I'm assuming that that's from proficiency. And it's my understanding that proficiency is very much tied to like the clinical trial activity, basically training the folks at the site on how to basically implement the clinical trial that's in line with basically the trial master file.
So can you maybe just talk about perhaps, I don't know, the mix of clinical trials that you're supporting, for example, if there's more obesity health related clinical trials, if you're seeing a slowdown in like perhaps gene therapies because the funding environment I would think would be very good. Just any more color there. And I think you hired a couple of scientists last quarter. Are they being like are they selling? Just any more color on that, the expected lift to that service gross margin?
Thank you.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. No, a 2 part answer. I'll talk to the proficiency side of your question and then Will, maybe you can talk to the 4th quarter margin with some reclass issues there. Proficiency in terms of, yes, supportive clinical trial activity on the simulation side is its primary focus, business driver, if you will. No specialty in terms of singular therapeutic areas.
Their portfolio of past projects spans most all therapeutic areas tends to be more valued in difficult complex clinical trial protocols. We're obviously a more aggressive comprehensive training ahead of its initiation benefits protocol adherence more significantly. But there's no therapeutic area sort of concentration in terms of their portfolio of activities. Will, you want to talk about the margin?
Will Frederick, Chief Financial Officer and Chief Operating Officer, Simulations Plus: Sure. And I can answer it for the software and the services. So Q4 certainly has some true ups that we do when we look at an annual basis and we go through the audit process. 72% you mentioned for software for the quarter in Q4. That was primarily due to just the Immunetrics software impact coming in a bit lighter, but as Sean mentioned, mid-80s are where we would expect to see that going forward, used to be in the 85% to 90% range and we mentioned there'd be some decline there.
On the services side for Q4, we did look through the year. I think I mentioned it during the call. There was an adjustment that we made. It was about $2,500,000 Looking through the year for international efforts that we have with employees and services group, they're all worked through a professional employer organization or a PEO. We reclass those from G and A expense for the year into services.
We did that in Q4. So that again looking forward the total year 30% services margin as we continue going forward and leveraging the proficiency business and our business, looking for upsides with billable utilization focus that 30% to 40% range is where we'd be targeting.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Thanks very much. Appreciate it.
Will Frederick, Chief Financial Officer and Chief Operating Officer, Simulations Plus: Sure.
Conference Operator: Thank you. Our next question is from Scott Schoenhaus with KeyBanc Capital Markets. Please proceed with your question.
Scott Schoenhaus, Analyst, KeyBanc Capital Markets: Hey, team. Thanks for taking my question. I wanted to touch on the 10% to 15% organic growth outlined for next year. As we sit here today, you said your guidance contemplates levels from what we're seeing to hear today, which is clearly depressed. You had the same kind of guidance, organic revenue guidance last year.
So maybe walk us through what's expected or built into the low end of that range and the top end of that range? And maybe specifically also on like where you think the biotech end market is expected to be for next year?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. Hey, we're all trying to throw that dart and read the tea leaves in terms of are we moving forward and we certainly see some positive things. I saw the Thermo CEO spoke very positively today of market opportunity into 2025. And we see a lot of positive too. Our discussions of late in terms of our clients' budgetary processes, that phenomena of our industry in which, hey, we've got a few dollars left to spend this year.
We lose it if we don't spend it by the end of the calendar year. Some great discussions taking place right now and I want to be optimistic, but I'm also cautious. We've seen upticks in funding that have been short lived and pulled back. And therefore, our approach here in terms of guidance for 2025 is pretty is conservatively set based upon, okay, the market as it is today. The range of 10% to 15% organic growth.
Hey, we came in higher end of that range this year. I've got confidence in our organization. We've executed well in a challenging market over the last 2 year window of time and would be confident in terms of our ability to perform at the high end of that range. But guidance being what it is, we'll take a conservative approach and carry forward our 10% to 15% from last year. But poised if current market conditions do run on the uptick and start to improve this Q4 of the calendar year or into 'twenty five that we should be able to support and grow with that growth as well into next year.
But certainly, at this point in time, prudent that we take a conservative approach to setting our guidance for next year.
Scott Schoenhaus, Analyst, KeyBanc Capital Markets: Thanks, Sean. So that I'm assuming you're meaning that you have very little assumptions of a return or reacceleration on the biotech end market, given all that commentary, is that fair?
Sean O'Connor, Chief Executive Officer, Simulations Plus: I have hoped for, but from a guidance sort of perspective, let's see it see it start to accrue before we count on it happening.
Konstantin Davids, Analyst, Citizens JMP: And then as a follow-up, I
Scott Schoenhaus, Analyst, KeyBanc Capital Markets: think you mentioned in your prepared remarks, Sean, that you saw some slippage in renewals on the GastroPlus. Can you provide maybe more color on that contract? Was it a large pharma? What was the decision there to not renew or
Sean O'Connor, Chief Executive Officer, Simulations Plus: the push out of the renewal? Can you just give
Scott Schoenhaus, Analyst, KeyBanc Capital Markets: us more color on what happened there on the GastroPlus side?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. The push out, it's not a non renewal decision. It's get the paperwork through and get the documentation purchase order and I'll get that all done by August 31, our funky fiscal year here. August, a lot of people are on vacation in August and it's not an excuse, but it sometimes is often difficult to get things closed. I mean, the only challengeable one in the mix there is that in the Q4, we did have a renewal situation where we had a specific client that acquired a second company during the course of the year and in fact then as well closed one of their sites.
And so that was a situation where we had 3 renewals come up, the original company, the acquired company and within that original company, their license configuration was site based. And so in that situation, which is, you look back over our history in terms of that differential between mid-ninety renewal rates on software and and 100%, what is that difference? I mean, it's either companies going bankrupt and departing the landscape or consolidation. And so we had one of those in the Q4 results. The slippage ones are timing and aren't takeaways of our book of business, if you will.
It's only those acquisition scenarios that can be troublesome. Thanks for all that color. I really appreciate it. Sure.
Conference Operator: Thank you. Our next question is from Francois Brisebois with Oppenheimer and Company. Please proceed with your question.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Hi, thanks for taking the questions. Just 2 here. I was just wondering if you can give us a little more explanation or color around that TAM doubling that you talked about. It's not necessarily biosimulation play, but with proficiency here, how do you get to a doubling of the TAM? And then I know you're still getting this acquisition integrated, but any other color on more M and A?
Or is it just one step at a time? This was a big acquisition. Let's get this one figured out for the time being. Thank you. Sure, Frank.
Yes, I mean the TAM increment with the proficiency of the incremental $4,000,000,000 is pretty evenly split between the two markets. Our assessment of what is the market for the training activity and clinical trial space, an estimate of what is spent in that area across clinical trials, all phases, all therapies, etcetera, for specifically the training aspect of the clinical trial. And on the med com side, their marketplace is twofold. It's more predominant in the regulatory process, pre approval process and in part is well sourced in medical communications agency work that's done post approval in the commercialization process for a new drug market entry. And the business is skewed a little bit towards the regulatory process.
And so therefore, we've calculated that TAM in that same disproportionate towards the regulatory market activity there. Acquisitions are a continuous process in terms of working in the landscape and following companies that are on your radar and adding and deleting those that come and go. We've certainly devoted resources to the integration process of our most recent acquisition. But our strategy is unchanged in terms of supplementing organic growth with acquisitions. I'd say, yes, we're going to take a little bit of a breath and in terms of the vigor there, but it is not on the shelf and not active at any point in time.
And should an opportunity arise that fits our criteria there, we're certainly regarded at that opportunity. And we will continue to do acquisitions. We've gone from a a we used to get questioned, when are you going to do the next acquisition because you haven't done one. We've done one in each of the last 2 years. Our cadence is, I think, good there.
No guidance that we'll do one in 2025, but certainly the underlying activity that could lead to that is active. Thank you.
Conference Operator: Thank you. Our next question is from Konstantin Davids with Citizens JMP. Please proceed with your question.
Konstantin Davids, Analyst, Citizens JMP: Thanks. Sean, correct me if I'm wrong, this is the type of time of year you typically would look to flex price. I'm just wondering, how that would look going forward in terms of how much price you would look to increase and how would that compare to last year?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes, it is sort of our adjust the price list timeframe of the year. And our approach this year round was somewhat similar to last year. If outcome was similar to last year. Historically, that price increase can be 5% plus sort of level. Typically, you don't on yielding 100% of that large clients or in particular market segments you're looking to discount to gain footholds.
2 years ago, not last year, not fiscal year 'twenty three, but fiscal year 'twenty two, we're a little bit more aggressive. It was the start and I'll call it peak of inflationary macro environment and whatnot came back down in fiscal year 2024 and as we enter fiscal year 2025, relatively comparable to last year.
Konstantin Davids, Analyst, Citizens JMP: Great. Thanks. And then I guess just one follow-up on operating expenses. For the past few years, sales and R and D growth has kind of occurred at a clip that exceeds sales growth. Are you going to start to see a little bit more leverage in fiscal 2025 on those line items?
Sean O'Connor, Chief Executive Officer, Simulations Plus: Yes. We true, we've invested in sales and marketing and R and D. Keep in mind that this past year, the reclass where we initiated at the beginning of the Q1, beginning of the year and reclassing costs out of G and A into gross margin, some of that's gone into sales and marketing and R and D overhead costs that follow the people that are working in those line items, if you will. But certainly incremental to that, we've made investments that I think are paying off. We've when I look to the execution and success we've had in double digit growth and stepping up our growth in fiscal year 2024, that in good part is due to those business development resources that we've built And it gives us the confidence when we make an acquisition, like a proficiency acquisition that we have the infrastructure on the business development side to leverage those products and services, new products and services going forward.
So we will get more leverage, but I think we are already getting the leverage out of the business development side. And on the R and D side, a great year with delivery of significant releases across all areas of our software platform that has been delivered by that R and D group, which is supplemented with the benefit of some type collaborations with large pharma clients as well as the regulatory environment. You may have noted that we've got a recent FDA yet another FDA grant collaboration that we're engaged in. So overall, I think we made some investments there in R and D and sales and marketing. I think we're getting the benefit of it and that benefit will accrue going forward.
That said, overall, we're particularly focused in terms of getting the business back to historical profitability levels, that 35% plus adjusted EBITDA level. And I feel good in programs that we've initiated that will move us into that direction in 2025. And I think we'll have the potential to accrue benefit beyond that as well.
Conference Operator: That makes sense. Thanks, Sean. Thank you. There are no further questions at this time. I'd like to hand the floor back over to Mr.
Sean O'Connor.
Sean O'Connor, Chief Executive Officer, Simulations Plus: Thanks. Thanks again everyone for joining our call today and your interest in SLP. I'll note as well for those in terms of querying on market conditions and whatnot. We are wrapping up our participation in 2 of the most significant conferences in our at least on the biosimulation side. One is wrapping up today and another occurs in a couple of weeks.
The AAPS PharmSci 360 Conference and the ACOP Conference next month, 2 significant conferences for us and look forward to the activity that that generates. Also on the horizon are conference attendance by myself at Stevens Conference and the BTI Investor Conference, virtual conference, I believe it is next month and hope to see many of you there. With that, we'll close off the call. And again, thanks for joining us today.
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