Certara Stock

Good day, and thank you for standing by. Welcome to the Certara Third Quarter 2026 Earnings Conference Call.

[Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jay Liu, Investor Relations at LifeSci. Please go ahead.

Good morning, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have Jon Resnick, Chief Executive Officer; and Faiz Mohammed, Interim Chief Financial Officer. Earlier today, Certara released financial results for the quarter ending September 30, 2026. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements, and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying presentation titled Third Quarter 2026 Financial Results for additional information, which you can find on the company's Investor Relations website. In the remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of today, November 5, 2026. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Jon.

Thank you, Jay. Thank you all for joining today. When I hosted my first earnings call in February, I shared with you my initial impressions of Certara that we have an extraordinary business, one that is strategically critical to the future of drug development. On that February call, I also shared that 2026 will be about improving the ways we operate, reinvigorating growth and setting the business up to realize its full potential. What followed was attention to a focused strategy and targeted portfolio of businesses, placing customers at the center of everything we do and a dedication to execution and operations. Over the past 3 quarters, we have completed the divestiture of the regulatory medical writing business, reorganized our business around how customers buy our software and services and brought in key talent to strengthen our commercial and product leadership teams.

We have also moved quickly to embed AI across our offerings and our operations and to define a multipronged strategy to accelerate growth. There's more work to do, but we are executing against that plan. Turning to Q3. I am pleased to say the business is showing signs of strengthening. Revenue for the quarter was $94.9 million, up 4% year-over-year on a continuing operations basis. Adjusted EBITDA was $30.2 million, up 6% from the prior year with a 31.8% margin, consistent with the operational actions that we have started to implement. Today, we announced the appointment of Grant Peterson as Chief Product Officer.

Grant previously served as CPO at Conga and before that, the CTO at DocuSign. Grant's mandate is to focus our portfolio investments on accelerating growth in both existing and new products, guided by customer input and the broader technology ecosystem. Turning to software. In Q3, software revenue grew 11% to $48.8 million, our first double-digit organic software growth quarter in 2 years. Software bookings were $46.9 million, up 15% year-over-year. Software now represents more than half of our revenue. Notably, we are seeing growth across all of our core products with momentum and opportunity for continued expansion. For Phoenix Cloud, we have now moved nearly 10% of all accounts to the cloud. We expect future growth to be fueled by additional cloud conversion of our strong pipeline and adoption of our new AI offerings. For Pinnacle 21, we recently expanded a multimillion-dollar relationship with a strategic partner. This is a good example of the adoption path for advanced tier modules of P21, MDR, Data Exchange and CRF creator.

For Simcyp, we continue to see a high level of engagement from our customers and the scientific community as well as historically strong renewal rates. Our annual Simcyp consortium meeting brought together our major customers in London to share insights, advanced modeling techniques and shape the future of Simcyp software. We have previously shared the product and operational benefits powered by AI. We are also leveraging our AI expertise in drug development to deliver an integrated AI platform that works across the drug development cycle. We believe our AI platform approach and direction will have the potential to fundamentally change how our clients can adopt the breadth of Certara solutions. Our early AI focus is to deliver our products as agentic component that can be integrated into customer workflows.

Our AI path includes an MCP-enabled data integration platform that allows customers to access Certara's software and proprietary data. We will continue to expand how we use AI to accelerate and broaden the delivery of our scientific content and applications. In 2027, we expect these new capabilities to further contribute to the growth and positioning of Certara. These transformations have the potential to drive increased adoption, integration and sales of our existing technology in 3 ways: by deepening software value to our customers and the connected development cycle, by creating new opportunities to engage with executive level decision-makers and ultimately, by introducing software plus services as integrated solutions to accelerate better decisions, whether dosing, trial design or go/no-go determinations.

Now moving to services. Service revenue was $46.1 million, down 2% year-over-year. Service bookings were $45.6 million in the quarter with a trailing 12-month services book-to-bill of 1.15. Over the past 2 quarters, we have divested noncore offerings, aligned software and services to take advantage of the flywheel, rebalanced our engagement model back towards specialists and greatly expanded our customer outreach. The potential impact of these steps will take time to show in our numbers. Still, we have seen some incremental improvement. Services revenue grew sequentially in Q3 by 3.5%. Certara's scientific talent runs deep with over 400 scientists holding advanced degrees, many of whom are recognized leaders in their fields with extensive peer-reviewed publications. Our experts play a critical role in shaping innovation and making biosimulation accessible to our customers in drug discovery and development. Our leadership position is evidenced by the work we do for our customers. Most recently, we supported a top 10 European pharmaceutical client with a model-based meta-analysis applied to obesity treatment trials. This novel quantitative approach allows the client to optimally position the Phase III asset in a crowded field across different mechanisms and endpoints. We worked with a U.S.-based biotechnology company to predict the first-in-human starting dose for its in vivo CAR-T candidate using our QSP CAR-T model, optimizing safety and efficacy for the asset. We partnered with a U.S.-based company that is licensing a novel compound from China. We are building models that connect early and late phase studies to enable a Phase III FDA submission using Chinese and U.S. data aimed at reducing redundant studies and accelerating the U.S. filing path.

Finally, we are supporting a U.S. biotechnology company that is advancing the assets other developers set aside for rare pediatric cancers. Our teams use modeling and simulation to bridge existing clinical and nonclinical data to pediatric populations, allowing sponsors to make critical path decisions with more precision. At Certara, we are strongest when we bring together all of our assets. In Q3, one of our major partners benefited from this approach, which contributed to their achieving a major milestone. In this example, a biotech partner developing a novel oncology agent received approval under priority review for cancer with historically few treatment options. This partnership spanned 4 years in more than 2 dozen Certara software and service solutions. We began working with this team pre-IND and supported their clinical pharmacology organization all the way through a successful NDA, including drug interaction modeling, Phase I and Phase II PK analysis and cardiac safety strategy. This exemplifies what differentiates Certara. When our software, science and regulatory expertise are integrated across the development path, partners get continuity and confidence, and we become embedded in how they make decisions. We see significant opportunities to replicate this model in the wider customer base, and we are organizing our strategies and our resources behind this approach. To capture opportunities like this, we are reimagining Certara's commercial organization.

Our new CCO is moving quickly to transform our customer engagement. This transformation isn't just about selling with greater intensity. It's also about changing who we sell to and how we sell to them, leading with our science and innovation as we bring the full suite of our capabilities to our customers. We are putting greater sales and marketing resources against segments like biotech, midsized pharma, CROs and expanding our commercial footprint globally. To better reach midsized and biotech customers, we have developed outreach that leverages refined criteria, such as therapeutic areas or modalities where our proven case studies are directly and immediately applicable. For example, our success using modeling to support regulatory filings for GLP-1 therapies has resulted in increased outreach to other customers working in that therapeutic area. We're engaging in emerging biotech early before they scale. In September, our Boston Biotech Forum drew 90 attendees from more than 70 companies. This programming is part of a larger campaign to deepen our relationships in this important sector. APAC is relatively small for us today, but we see outsized growth potential. With this in mind, we have begun expanding in Asia with roadshows in China, Japan and Korea. This approach has quickly brought us into contact with potential stakeholders in the region, notably including a delegation from the Korean government. We've also accelerated several operational improvements, including pricing reviews, incentives alignment, integrating our scientific experts into the sales process, a dedicated customer service function and enhanced product training.

We have a distinguished history of sustained global regulatory relationships. We also continue to be at the forefront of certain important advances adopted by regulators. This quarter, the FDA competitively awarded Certara contracts at CDER for its DataFit program and CBER for its CASA-CV clinical data validation programs. The FDA has relied on Pinnacle 21 since 2011, and these awards extend that relationship at both centers. The FDA also engaged our Simcyp team on a 3-year research contract to advance biosimulation of dermal products. Certara is helping new approach methodologies or NAMs move from concept to routine use. Our scientists work with global regulators and industry consortia to define what credible NAM evidence looks like. We advance our modeling technologies and work with customers on early use cases that test where these approaches can support regulatory decisions now and in the future. The regulatory environment continues to evolve to favor MIDD adoption. In September, the FDA issued a direct final rule replacing the term animal test with nonclinical tests across its regulations. Operation TrailBlazer is moving to execution with the FDA's expedited IND pilot now open. ARPA-H launched its SURPASS program on September 30 to fund simulation-driven adaptive trials and the trend is global. ICH M15, the first harmonized guideline for MIDD, is now effective. Collectively, these recent regulatory developments point towards greater use of modeling and simulation across the development life cycle, which is where our platforms, including Certara iQ and Simcyp are focused. In closing, 2026 is playing out in line with expectations. We are making progress against our priorities. There is more work to do, and we remain focused. With that, I'll turn the call over to Faiz. Faiz?

Thank you, Jon. Before I review the quarter, a reminder that my comments are on a continuing operations basis. Results from the regulatory and medical writing business, which we divested on May 8, are reported in discontinued operations and our bookings results also exclude that business. As Jon said, the third quarter demonstrated meaningful progress against the priorities we set earlier this year. Revenue increased 4%, led by 11% growth in software and adjusted EBITDA margin improved to 31.8%, up more than 370 basis points from the second quarter. The quarter reflects continuing momentum and the initial benefits of the operating actions we implemented in the first half. Turning to the income statement. Total revenue for the 3 months ended September 30, 2026, was $94.9 million, an increase of 4% year-over-year. Total bookings in the third quarter were $92.5 million, an increase of 4% from the prior year. Trailing 12-month bookings were $409.2 million, an increase of 2%. Software revenue was $48.8 million in the third quarter, an increase of 11% year-over-year, driven by strong retention and continued growth across our major portfolios. Trailing 12-month software bookings were $202.4 million, up 8% year-over-year. The results reinforce the underlying demand for our software portfolios. Services revenue was $46.1 million in the third quarter, a decrease of 2% year-over-year. Trailing 12-month services bookings were $206.8 million, a decrease of 2% compared to the prior year, with a trailing 12-month book-to-bill of 1.15. As Jon discussed, the transition to our specialist-led services model will take time to translate fully into bookings and revenue. Our focus remains on strengthening commercial execution and converting the pipeline. Turning to profitability. The third quarter cost of revenues were $31.4 million, down 6% from $33.4 million in the third quarter of 2025 despite revenue growth of 4%. The decrease in cost of revenues were primarily due to a $1.6 million decrease in equity-based compensation expense, a $0.4 million decrease in professional and consulting expense and a $0.3 million decrease in equipment and software expense, partially offset by a $0.5 million increase in employee-related costs. Operating expenses for the third quarter of 2026 were $61.1 million compared to $58.1 million in the prior year period, an increase of $3.1 million. The increase was primarily driven by a $4.8 million reorganization, severance and executive recruiting costs. Adjusted EBITDA for the third quarter of 2026 increased 6% to $30.2 million compared to $28.6 million in the prior year period. Adjusted EBITDA margin for the quarter was 31.8%, up from 31.5% in the prior year period and from 28.1% in the second quarter. The sequential improvement in margin reflects the operating actions we took early this year as well as continued discipline across the business. The improved cost structure provides additional flexibility to invest in AI, cloud solutions and new product offerings while maintaining our focus on profitability.

Turning to earnings. GAAP net income and earnings per share are both impacted by nonrecurring items. The third quarter net loss from continuing operations was $3.6 million compared to a net loss from continuing operations of $4.8 million in the prior year period. Income before income taxes improved by $2.7 million year-over-year. That improvement was partially offset by a $1.4 million change in income tax expense. We recorded a $2.4 million tax provision this quarter compared to a $1 million tax provision in the third quarter of 2025. Adjusted net income for the third quarter of 2026 was $13.5 million compared to $13.8 million in the prior year period. Diluted loss per share from continuing operations was $0.02 compared to a loss of $0.03 in the third quarter of 2025. Adjusted diluted earnings per share for the third quarter of 2026 were $0.09 compared to $0.09 in the third quarter of 2025. Moving to the balance sheet. We ended the quarter with $214.9 million in cash and cash equivalents, up from $184.1 million at the end of the second quarter. The increase in cash primarily reflects $30.7 million of cash from continuing operations, supported by strong collections and working capital timing and approximately $9 million of proceeds related to the divestiture. As of September 30, 2026, we had approximately $293 million outstanding on our term loan and $100 million available under our revolving credit facility. Our liquidity remains strong and provides flexibility to support our strategic and capital allocation priorities.

Turning to our revenue outlook. We are narrowing our 2026 full year revenue growth range to 2% to 3%. We continue to expect software revenue growth to be above this range. For services, we continue to expect it to be at or below the low end of that range as we work to convert our pipeline into bookings and revenue. Turning to our margin outlook. Our previously communicated full year adjusted EBITDA margin outlook was 29% to 31%. Based on our performance through the first 9 months of the year, we believe this remains an appropriate margin range for the fourth quarter. Our third quarter adjusted EBITDA margin of 31.8% reflects favorable software mix, continued expense discipline and the savings now running through our cost base. We expect these benefits to support profitability in the fourth quarter, while recognizing that quarterly margins may vary based on revenue mix and timing. Finally, we are updating our full year 2026 adjusted EPS to $0.31 to $0.34, reflecting greater visibility into our full year performance. Fully diluted weighted average shares are expected to be in the range of $155 million to $157 million. And we are modeling an effective tax rate in the range of 25% to 30%. Overall, the third quarter represented an important step forward. Software growth remained strong, adjusted EBITDA margin improved meaningfully and the actions taken early this year are beginning to produce a more efficient operating model. We remain focused on maintaining operating discipline, improving services execution, investing in our highest priority initiatives and delivering value to our shareholders. With that, we will open up the call for questions. Operator, can you please open the line?

[Operator Instructions]

Your first question comes from the line of Kevin Caliendo with UBS.

This is Tucker Remmers on for Kevin. Can I first ask about just can you parse out the improvement in software revenue and bookings between just demand environment improving and then the steps you've taken to enhance Certara's offering? And was it the larger Tier 1 and 2 customers responsible for the software growth? Or is it really the Tier 3 customers that have benefited from stronger biotech funding of late?

Tucker, thanks for the question. So I think to start with, I think like others, I think the end market looks strong. There's -- I think seen across the industry, I think we're seeing the same thing here. From a software standpoint, we saw a strong performance across customers, across tiers and across products. So it's tough to discern a specific trend in one way or another. So I think execution certainly is part of the story. And if we look across businesses and across layers, I think we executed pretty well.

Yes. And then if I could follow up quickly. I think you previously targeted $10 million of cost savings. Can you talk about where Certara stands on that? And have you identified any further cost-saving opportunities?

Yes. We didn't give specific numbers this quarter. I think last quarter, we talked about exceeding $12 million or $13 million of run rate cost savings. I think that has continued to grow. So we've done some of the margin improvement that you saw in Q3 is directly -- a direct result of some of the actions that were taken, particularly in May and June last year. I'd say just as a management philosophy and as an approach to this, this is not a one-off. We're continuously looking at the organization for opportunities to do things smarter, to do things simpler, to do things more efficiently as we invest in areas of higher growth. So it's a continued and always an area of focus.

Next question comes from the line of Michael Cherny with Leerink Partners.

This is Dylan Finley on for Mike. Congrats on the quarter and really around the software growth inflection. You called out 11% organic growth. Maybe if you could give us some context behind the inflection here, drivers to the upside. How ultimately do you see the sustainability of this type of double-digit growth?

So thanks for the question, Dylan. There's -- the nature of our business happens to be a little bit diverse. We have different types of software and different types of things. Some of them are ratable, some of them are on-prem. So there's always a little bit of bumpiness quarter-to-quarter in terms of timing of different elements. It's never going to be kind of one-for-one smooth just given the mechanics that exist. We do believe, and I think we went to lens in the opening statement to talk through what we saw as some of the expansion path and growth on our existing products. We also increasingly, as we move into next year, we'll also see opportunities for new products for growth. So we think that this is pretty durable. It may bounce around from quarter-to-quarter. It may move just based on timing of some of these elements. I'm very focused on trends like trailing 12 months. You referenced the 11% bookings number. I think I've historically cited also the 0.8% trailing 12-month number that was at Q4 versus where we sit today. So I think those trends are good. It will bounce a little bit quarter-to-quarter, just depending on the mix of assets and other things. But we're seeing good execution. We believe we've got good path to move things forward across the portfolio.

And then I just wanted to quickly hit on your APAC comments. Last quarter, you talked to your first Simcyp win in China. This quarter, you called out APAC again more broadly as an appealing opportunity. Is this taking the same toolkit and offerings you have here domestically and in EMEA, importing it over there? Is this a near-term opportunity that you think you can capitalize on? Or is this more of a longer duration?

Yes. No, it's a good question. Look, if you look across our revenue mix, you can see that Asia Pac footprint is not as large as the rest of the business, which is a little bit disconnected to some of the larger trends we see in R&D where we see a large amount of total spend shifting to the region. We believe there's a number of our offerings, which are incredibly relevant for both -- for Japanese, Chinese and Korean companies who are looking to move into the United States. We also think locally within markets, there's unique opportunities for our software and services. Some of it will be very consistent with things that we do today, depending on the nature of the request. Some of it will be slightly more tailored to local opportunities or meeting local budgets. So there's a mix between the 2. This is not a 2026 Q4 thing. The initiatives have already started. The teams are already out in Tokyo and Seoul and across China, we're also ramping the team. It's really going to be a '27 growth impact.

Next question comes from the line of Dave Windley with Jefferies.

Jon, in the years before you joined, the company made several acquisitions that skewed the mix a little bit more toward software. In the prepared remarks, I thought you made a comment that was very definitively integrating software and services and going to market with that combination. I wondered if we could kind of zoom out a little bit and hear your philosophical view about the relative importance of software and services in the portfolio and how you're going to market with those 2?

Yes. Dave, nice to hear from you. So look, I see the 2 as we think about our future, incredibly complementary to what we do. I see opportunities for us to grow on both sides of the business, both improving and enhancing our existing products through new product launches through that connection layer that you referenced. I also spent some time today outlining some of the work that we do on the service side. We do phenomenal work, and we have phenomenal people within this organization. who help to really support clients in unique ways. So through a better execution model, I think there's a lot more growth on that side of the business. Look, you'll see this business kind of meet its customer where it needs. A customer has sophisticated clin pharm groups and is able to execute and wants to license our software, we'll be there to meet and match that with top-notch products that are used by power users and others within the organization to execute studies. For other customers who need support through incremental experts or program management, we're also there to match them and work with them. This business, I think the case studies that we referenced in here today really show that we're at our best when the 2 come together, and we're able to work with our technology and partnership to solve those strategic issues. My expectation, as I signaled though, would be if you -- as long as you think of the business in those 2 segments, software will continue to outpace services as a growth player, but there is a very nice flywheel effect and complementary elements to the way we can support clients across the 2.

That's helpful. My second question, follow-up question gets into your Chief Product Officer hire announcement and the attempts to or the goals to move clients toward a portal engagement experience, ratable software, kind of all the things that go along with that and what kind of a picture of the journey on that? How much have you gotten clients to move toward more of a cloud-based product engagement experience and then the CPO's job to accelerate that?

So super excited to have Grant as part of the team. He's got a very distinguished background. Really, I'd say he's the right person at the right time given his unique experience, operational discipline and his ability really to move quickly. What we've asked him to do really is twofold. One, help us optimize our existing portfolio, help us with our in-line products, our current products, help get the most optimize our road maps to optimize performance, really bring the customer voice deeply into it so that we can satisfy the unique needs and the expansion paths that are within that. And two, we'd like to be best -- you mentioned inorganic path historically. We'd like to be a best-in-class product developer on our own with new products and other things. And so we have a number of plans that we're looking at into '27 and things under development. The ask for Grant is really to help the execution of that in the most impactful way we possibly can in the most cost efficient and return on investment way that we possibly can. So that's Grant's role.

I think as we look across the business, and I'm always reticent to get a number of the number, in my mind, something a little bit north of 50% of our product portfolio is cloud versus on-prem today. It's maybe slightly more than that. We obviously laid out a migration path for Phoenix, which will be -- which will take that number up pretty consistently over the next few years. And we also talked today about the integrated AI platform, which we've kind of talked about in the past a little bit, but we give a little bit more specificity about how that will work in a complementary way with our current data and products. But this will allow clients to do from their own frontier model with their preferred agents will be able to tap into our software and data in a consistent way. We view that in the near term less as a stand-alone platform or portal where they have to buy an incremental assets or integrate into a particular product. But as a lift to all of our products where they become more accessible, you can move data around in a more consistent way and you can get more power out of what you're doing. So we're pretty measured in terms of what you can do today in the near term, in the midterm against that, and our plans are getting clearer and clearer in terms of growth opportunities.

Next question comes from the line of Brendan Smith with TD Cowen.

Congrats on the quarter. Maybe one more kind of on the revenue mix here. I know you mentioned some of the work you guys are doing kind of internally on your go-to-market strategy for services. But I think especially this quarter, we've been seeing some evidence across the sector of pharma and biotech spending starting to recover pretty meaningfully, which seems like you're seeing pretty clearly in software. So I guess, is there anything you're hearing even qualitatively in conversations with customers to help us just understand the gap in their interest in software versus services right now? Is any of that maybe being driven in one way or another by kind of the customer adoption of AI/ML on their side? Or just anything else that we should be aware of potentially kind of driving their relationship with the Certara platform?

Thanks, Brendan. No, look, I don't think there's any end market distinction. I mean I've said it before, and I'm very solution-oriented moving forward on this. I think this is -- our service performance is really a result of changes we made from a go-to-market standpoint and from an operational standpoint a couple of years ago. We've rectified and changed a number of those. We put the specialists back into market. We've changed our focus. We've changed our incentive. That's going to be the thing that's going to drive this. The work that we do is outstanding. The demand for our work is incredibly high. We just need to have our teams out in front of the right people, having the right conversations in the right ways. That business will continue to progress and get stronger as we move forward. So I don't see I don't see a structural difference between the demand between the 2. It's really our ability to go out and execute and our ability to go out and talk to the right clients about the right issues. So no, I think that as these changes kind of bed in, we're now in -- have completed or now in the second quarter of making those changes, we'll start to see that translate into revenue growth on the service side as well.

Got it. Okay. And then maybe one actually on the NAMS work. I know you gave some good color there, Jon, on some of you guys have been doing there. Can you maybe just expand a bit more on some of the work you've been involved with regulators? I think you mentioned the pilot study now being live with FDA. I guess is Certara involved with that pilot NAMS study? And maybe even bigger picture, I guess, if that's successful, how do you guys think about the potential incremental opportunity there just from a commercial revenue standpoint? Any color on how we should be thinking about that?

Yes. Look, I think one of the points we wanted to emphasize today was we're actively involved around the world with regulators, both as kind of thought partners and its clients. And there's been a lot of fantastic movement, as we've talked about before, in regulations helping to expressing an interest in a number of NAM fronts and experimental and more diverse approaches. So we are working formally and informally with regulators and with clients directly on exploring how these use cases will be received by the regulators, how they interpreted. And there's kind of what I define or describe as a diffusion curve where you initially kind of see the science exists where you can start to develop new methods to do something, you get regulations out. You get a couple of innovators who are trying to get proof of concept on that once those use cases get worked out and accepted by regulators, then you have the ability to drive greater acceptance and greater awareness across the industry. I'd say we're kind of between Phase II and Phase III for a lot of those NAMs where regulations are out, clients are starting to experiment. We're partnering with them on those innovative use cases. And when you start to get the impact of those use cases and the regulators around the world accepting that, then you're going to start to see greater diffusion. So that's where we are. Yes, we're an active player on all fronts there.

Next question comes from the line of Craig Hettenbach with Morgan Stanley.

Katie Bennorth on for Craig. Just to double-click on AI, what tangible proof points can you point to on how it's impacting your business today? And what does the road map look like?

Sure. Thanks, Katie, for the question. So a few fronts. Look, as we kind of think about it as I think about it multidimensionally. If I go back to kind of the January, February, March time frame, the suite of initial questions that we got were really focused in on how does AI change your kind of competitive positioning. I think we've worked carefully with you and with the market and understanding that both our software that's kind of deeply embedded on the regulator side, the scientific judgment, the regulatory use cases really creates a nice position for us to continue to grow and be sound as you kind of think about the underlying proposition of the position. We've talked a lot around some of the operational acceleration we've got internally in terms of ability to drive processes more efficiently to start to streamline some of the work steps for our service execution, the acceleration of our development time lines in terms of increasing functionality and increasing product value that we're creating. We've seen pretty dramatic increases. I've shared a lot of those percentages and actual impact statements in the last earnings call. Where we're also talking today is about a go-forward strategy, where we're working hand-in-hand with clients early on from a Lighthouse standpoint around some of these kind of broader AI initiatives that we think will be a lift to the overall portfolio in the next 18 to 24 months, we see progress against all dimensions.

Great. That's helpful. And when you look at the 2 business unit segments, MID3 and ACE, what area are you seeing the strongest momentum today? And where do you see the greatest long-term upside?

Look, I think the rationale behind cutting the business in the 2 ones, they're both very strategic client issues. One, how do you run trials differently? How do you adopt modeling, how do you bring it throughout your entire life cycle? Huge TAM, huge opportunity for us, one Certara is known extraordinarily well for where we feel very good about opportunities long term. That organizational construct has really brought a lot of our resources together and it has us thinking much more strategically about external engagement, driving awareness, innovation. So it's been super helpful construct. On the ACE side, it's really around acceleration of data and acceleration of evidence. Again, another priority of regulators around the world and clients, how do you kind of streamline those processes to help move from data to evidence in a much quicker way. Another place that we're naturally positioned. We have a number of products that are playing across that kind of data management and evidence continuum. In terms of growth in the quarter, I think we are seeing growth pretty fundamentally across all of them. As I mentioned on the software side and even true on the service side, all of our businesses are kind of moving forward at pretty consistently at a good pace. So hard to choose between the 2 of them. One is probably a larger addressable market than the other, but I think we're on the right track strategically and operationally on both.

Next question comes from the line of Matthew Hewitt with Craig-Hallum.

Maybe first off, just to follow up on Brendan's question earlier. Regarding the advances on the regulatory side of things, do you see that as becoming maybe a '27 tailwind? It sounds like customers are looking at use cases now, but do you see that becoming more of a driver next year? Or do you think that it might take a little bit longer given that we're still kind of working through some of the details?

When you think of NAMs, it's not one. There's lots of different things that are happening in the market and different regulators are working at different paces on this and international bodies. So it's kind of tough to answer. And it's not just regulations, it's also -- there are different rate and pace for different modalities and different approaches. So the overall diffusion curve will vary based on a number of factors. We do already see in '26, a lot of work where clients are experimenting with different approaches and we're leading on use cases. As you start to think about that a bunch of these getting mature, it will take time. But we're working on things in '26. We'll continue to work on things in '27 and moving forward from there. Trying to characterize -- I mean, this is -- there are dozens of different approaches with very different answers across modalities and therapeutic areas and questions, and they're all kind of moving at their own pace. I think it's all net beneficial to us. We're well positioned to sit at that intersect between what regulators are looking for and how clients are trying to adapt to some of those things. But it's hard to give a general answer to it. They're all going to kind of move at their own speed and pace.

Understood. And then maybe a second question regarding the Phoenix Cloud conversion. Where are you with that? And how much of a headwind is it? Obviously, when you go from on-prem to hosted, you go to this ratable model, it creates a bit of a near-term rev rec headwind. And I'm just curious how much of an impact you're seeing there? And when do we kind of cross over and start to see the benefits of this?

Thanks for the question. I think we outlined today that we've now crossed -- approaching the 10% range for total customers, which was a little bit ahead of where we were expecting to get in the first year. Pleased with that progress. I think we have ambitious plans for next year for accelerating that. You're exactly right. It's great for -- it helps to accelerate bookings. It's the right thing for us long term to be able to modernize the offering and to bring more value through the AI modules that we have. There is going to be -- there is a little bit of a revenue headwind that exists with it as you kind of start to do some of those conversions. I don't have the exact number, but it's -- but you're right, the actual revenue growth is a little bit story. We're doing probably slightly better if you take into consideration the impact of the cloud conversion.

Next question comes from the line of Jared Haase with William Blair.

It's Christine on for Jared. You mentioned you've been implementing a pricing review as part of your strategic actions. Can you talk a bit more about this in terms of where you're seeing potential pricing misalignment prior? And any changes to your contracting structure you contemplate?

Sure. Thanks for the question. Look, I think price is something that we're spending a lot of time considering. We haven't really done a lot to change anything on our pricing approach. As a company, we have multiple different approaches in market today. So the work we're doing is really trying to understand how do we make our assets accessible, how do we try to make our -- how do we try to make the value propositions clear to the extent that over time, we'll be migrating to multiple products being used, how do we help incentivize and encourage clients to use our software together and also to move it earlier into the life cycle and across the entire life cycle. So when we say we're strategically reviewing things, we're really looking at this from a more client-centric way in terms of how do we optimize its use on that side of things. Our focus on contracting has really been for simplification, how do we kind of standardize terms, how do we standardize contracts across our clients, really improving operational effect and is making it easier to do business with us.

Got it. Makes sense. And while you're not giving 2027 guidance, hoping you can help us think through the puts and takes for next year. Currently, the Street is forecasting around a similar growth rate next year as your updated 2026 guidance. But wondering if based on your backlog and visibility, if we should be more thinking of an acceleration and maybe if mid-single digits is in reach.

We're going to hold off in terms of providing guidance until later in the year at this point. So I got no incremental updates to provide. I think you can draw conclusions from some of the improving software performance and other things of what we're looking at. But I'm not, at this point, going to provide any further guidance.

Next question comes from the line of Luke Sergott with Barclays.

Great. I just kind of wanted to dig in on the full year guide, and you guys had such a big step-up here in 3Q and then the guide implies kind of a step down there and from 4Q. Just wanted to see if there's any pull forwards or any reason for the decel that's implied in guide from a top line perspective?

Yes. Look, I think we were just honestly being consistent. I think we've said the same thing all year, and we're staying within that same range in the quarter. let's see where things kind of net out. We're doing an awful lot operationally to change the company. We're doing an awful lot of new leaders and new approaches to do things. We're just being measured in our approach to providing this. There's no new news in that, except for kind of raising the lower end of what we're doing here. So there should be no news. And we're going to keep working hard to keep performing. But there's nothing -- there's no one-timers. There's nothing exceptional. We're just being really consistent with what we said quarter-to-quarter-to-quarter.

Okay. And then from a follow-up, a lot of noise, I guess, like a lot of noise there from the medical writing takeout. But as we look at the gross margin improvement you guys have done, even ex that, we kind of calculate maybe like 150-plus basis points benefit from getting rid of the medical writing, but like still a really significant step-up there. If you guys can just talk about what you've been doing there to improve that side of the equation?

From a -- yes, I'm trying to -- I'm not sure 100% how to back into the analysis that you did. I was just asking. Look, I think there's a couple of things on margin we're doing. One, I think in the quarter, obviously, software at 11% is going to provide a better overall gross margin. Margins across the 2 are healthy, but software margins are even healthier. So to the extent that, that's running at 11%, you're going to see some contributions there on the GM side. And then if you go down -- you drop down a line below that, we did do a major shift in employees in RIF in May and June, which went to work -- sorry, went into place in July. I think you're starting to see some of the contributions from that playing out as well into EBITDA.

Final question comes from the line of Sean Dodge with BMO.

This is Chris Charlton on for Sean here. Maybe going back to Jon's comments on the targeted outreach approach with small and midsized biotechs and the therapeutic or modality component of this. Can you just share some more detail on how the commercial approach differs between large pharma versus small biotechs and how this fits into the broader go-to-market realignment?

Yes, sure. So as part of our new commercial model, we've really rethought both who we're selling to and how we're selling. We have tremendous opportunity in market. We know that. We're not a huge company. How do you allocate your resources in the most effective way to have the best conversations. What's essential to us is really kind of finding those companies that are going to benefit the most from our offices -- our offerings and our capabilities. So what you'll see us doing is focusing a little bit more on that mid-segment and a little bit more on biotech segment. They're good clients with high need, need both our services and software offerings. We can be incredibly targeted. We know which products -- which modalities are going to benefit most from mechanistic modeling. So we can be incredibly focused on those companies and have our scientific teams and our teams out engaging those groups. We still are working very closely with Tier 1 clients. They're the bedrock and foundation of our business. We have great existing relationships with them. We're helping just to diversify in terms of building into those other -- that other segment. And we can be, as we outlined, incredibly targeted in how we pursue this, and we can build kind of differentiated relationships like the one that we talked about. The other thing we talked about on the commercial side was geography. We do see a lot of upside putting more weighting on our team into Asia, Japan, Korea and China specifically, where if you look at our overall revenue, it's a relatively small percentage relative to the market.

So those customers -- we also do see very good partnering relationships on the CDMO and CRO side. So we're also dedicating teams on that. So our go-to-market model, you asked the question, how does the go-to-market model change? It's a different touch on each of those different groups. Their needs are a little bit different. We're building teams internally that are capable of kind of handling those relationships and engaging it essential for us that everybody on our team is out. We've leaned out a lot of sales management and overhead from our organization, and we're really focused on content-based engagement across all the different segments.

This will conclude our Q&A session. I will pass it back to Jon Resnick for final comments.

Thanks, everyone, for joining today. I appreciate the opportunity.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Certara Second Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Jay Liu, Investor Relations at LifeSci. Please go ahead.

Good morning, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have Jon Resnick, Chief Executive Officer; and Faiz Mohammed, Interim Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended June 30, 2026. A copy of the press release is available on the company's website.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements, and actual results may differ materially from those expressed or implied in the forward-looking statements.

Please refer to Slide 2 in the accompanying presentation titled Second Quarter 2026 Financial Results for additional information, which you can find on the company's Investor Relations website. In their remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on the company's website.

Please refer to the reconciliation tables in the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of today, August 4, 2026. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

And with that, I will turn the call over to Jon.

Thank you for joining today's call. Before I get into our results, I want to highlight the appointment of our new Chief Commercial Officer, which we announced earlier this morning. This reflects our commitment to a new, more impactful go-to-market approach, which I'll cover in more detail shortly.

The second quarter was about executing on our commitments. Overall, we are pleased with our progress. We are transforming Certara into a company we believe is capable of delivering sustainable double-digit growth. We still have work to do, but we are on the right path. We are executing against our plan. Our foundation is strengthening and the macro market conditions, biopharma spending, clinical trial starts and new regulatory guidance continue to be in our favor.

I'll start with our top line financials, then move to our strategic and operational priorities, our client impact and finally, how we are leveraging AI. Top line results in the quarter were in line with expectations and guidance. Overall, revenue growth was modest at 1% with software revenue growing 4% and service revenue declining 3%. On software, our renewed focus on driving new growth is building momentum.

Normalizing for the Chemaxon acquisition, trailing 12-month bookings grew 7% exiting the first half, up sharply from 0.8% exiting 2025. Overall, software revenue now represents 53% of our business versus 40% just 2 years ago. Service bookings lagged in the quarter with a book-to-bill of 1.07. Services bookings were impacted in part by the carve-out of our regulatory and medical writing business. In the quarter, we also began implementing several changes to the broader services go-to-market model, which we will continue to refine.

Leading indicators are positive. Our pipeline grew 27% year-on-year exiting the quarter, which we anticipate translating into revenue growth in the back half of 2026. Today, we are reaffirming our guidance range of 0% to 4% for full year revenue growth. Shifting to the key actions we have taken to improve our ability to drive growth. In February, we outlined bold initiatives to more sharply focus the organization on its ability to deliver. And in Q2, we continued implementing them. Maybe divestiture was our first step in sharpening our strategy, rebalancing Certara while improving our overall financial predictability and strengthening our software services flywheel.

We have reprioritized our product portfolio to focus on key growth areas and adjusted our road maps to accelerate AI. Our reorganization around 2 business units, Model Informed Discovery and Drug Development, or MID3, and Accelerated Clinical evidence or ACE, is expected to better align our business to how customers consume our products and our services.

We have taken steps to streamline our cost base. In May, we executed a reduction in force focused predominantly on overhead, impacting approximately 5% of our global employee base. This action, combined with other steps towards operational excellence is expected to result in a run rate savings of approximately $13 million. These reductions allow us to address some of the stranded costs from the divestiture and accelerate our investments in innovation.

We're also redesigning our commercial go-to-market engine to tightly integrate sales and marketing in support of the business units. This is expected to activate growth across all segments, extend our partnership models and drive adoption of new customer use cases.

As part of that, I'm excited to announce Julien Perrier as our new Chief Commercial Officer, effective August 1. Julien brings nearly 2 decades of international commercial leadership across global biopharma, technology-enabled scientific services and AI-driven biotechnology. Most recently, he was CEO of an AI-powered diagnostic company.

I'm also pleased to announce that Eric Jahn has been promoted to CIO. Eric will be critical in enabling our global scalability and optimizing internal AI systems to drive growth.

Now turning to our unique value proposition and how it translates to customer impact. Certara sits at a rare intersection, regulatory and scientific leadership, proprietary software and AI. We serve more than 2,600 customers in over 70 countries with nearly 160,000 daily users of our software. The ecosystem we sit in amplifies our positioning. Regulators are accelerating model-informed approaches into policy. This quarter, HHS launched Operation TrialBlazer to speed up early-stage clinical trials and the FDA issued new guidance backing quantitative systems pharmacology or QSP modeling for first-in-human dosing.

In July, ICH M15 took effect at EMA, giving U.S. and Europe a shared standard for model-informed drug development for the first time. Certara is at the forefront of helping shape these policies. Our scientists are in direct dialogue with agencies on how modeling can optimize trial design and strengthen evidence. Their leadership is evident in the numbers, 62 peer-reviewed publications this quarter alone, spanning AI and machine learning, rare populations and the cutting edge of science. That science shows up directly in the products and services our customers buy.

In the quarter, every one of the 13 novel therapies the FDA approved came from a Certara client. One was for Eli Lilly's orforglipron, the first once-daily non-peptide oral GLP-1 therapy for obesity. Certara's Simcyp Simulator supported the drug-to-drug interaction labeling and helped characterize how slower gastric emptying affects dosing.

For patients, this means a therapy that can be taken any time of day and no longer requires the inconvenience of self-injection. This product was approved in just 50 days, the fastest new molecular entity approval since 2002. We saw the same pattern in rare disease where our clinical pharmacology and pharmacometrics teams partnered with a biopharma company on the evidence package behind the FDA's approval of a new therapy for rare autoimmune condition with historically few treatment.

And in oncology, Certara Scientists partnered with Memorial Sloan Kettering to build a virtual patient model on our QXP platform for CAR-T therapy in multiple myeloma, individualizing treatment and optimizing trials of novel combination therapies.

Our software business is seeing strong momentum from AI and the movement to the cloud. Phoenix, our pharmacometrics modeling platform has won 30 cloud implementations this year across client segments. Phoenix is one of our core launch points for integrated AI capabilities.

Additionally, we grew our footprint globally this quarter. Our first major Simcyp win in China, expanding engagement across the Middle East and in Japan, a full modeling collaboration, delivering a first-in-human dose estimate through Certara IQ, our AI-powered QSP platform. Speaking about AI, we believe AI accelerates how we deliver customer value. With 25 years of accumulated scientific and operational data, deep scientific judgment, proven algorithms and software embedded in the workflows of both clients and regulators.

Certara has exactly what it takes to optimize how AI benefits the regulated environments we serve. Generic AI tools don't have the same level of specialization and cannot provide the accountability l that Certara can.

Let me highlight 3 examples from the quarter to illustrate how AI is helping us drive revenue growth and margin efficiencies. First, we are embedding AI across our product development and operations teams to drive speed and efficiency. Up to 85% of our new code is now AI-assisted. And we are seeing a 65% year-on-year increase in the rate of development per software engineer. We are connecting our internal systems and automating workflows across our functions. Agents are cutting cycle times by as much as 90% in areas like legal and IT. And our sales teams now get daily automated signals from our AI platform to drive prospecting and pipeline.

Second, AI is enabling new customer use cases, powering new workflows and enhancing our existing software products. The integration of D360 and Chemaxon Design Hub will enable scientists to connect experimental data, scientific hypotheses and candidate compound design into a single workflow.

Our next-generation platform will allow customers to leverage our software products alongside Frontier AI models, including NVIDIA's BioNeMo agent toolkit. We are enhancing functionality across several products, including Phoenix Cloud, Pinnacle, CertaraIQ, D360 and CoAuthor. As an example, CoAuthor, which has been used in more than 400 regulatory submissions, now provides nearly 600 AI agents, driving 40% productivity increase in drafting quality control documents and over 90% accuracy summarizing complex databases.

And third, AI agents are now making our scientific services more productive. Proprietary scientific Agentic workflow is accelerating delivery steps by up to 80% for certain tasks. This allows our scientists to spend more time on activities that require human judgment. Importantly, our scientists remain at the center of every decision, creating an accountability layer that AI alone cannot provide. This protects the trust, reproducibility and auditability our customers and regulators depend on.

In closing, today, we are focused on growth and instilling operational discipline into our business. We are aligning the organization behind our strategy, resetting our operational model and rightsizing our cost base. Our sights are also set on the future. Certara is well positioned to drive transformative growth, defining the science needed to accelerate drug development. With a broad customer base, deeply embedded software, we believe we are uniquely situated to lead MIDD adoption and growth that will meaningfully impact our customers and the patients they serve.

With that, I'll turn the call over to Faiz, who will go over the financials. Faiz?

Thank you, Jon. Before I review the quarter, my comments on continuing operations include final adjustments relating to the divestiture of the regulatory and medical writing business. Our bookings discussion also excludes this divestiture. Through the close on May 8, that business contributed $19.2 million of revenue and $7.5 million of adjusted EBITDA, both in discontinued operations.

Turning to the income statement. Total revenue for the 3 months ending June 30, 2026, was $93.3 million, representing year-over-year growth of 1% on a reported basis. Total bookings in the second quarter were $98.3 million, which increased 1% from the prior year. Trailing 12-month bookings were $405.4 million, increasing 3%.

Software revenue was $48.8 million in the second quarter, which increased 4% over the prior year on a reported basis. Growth in the quarter was driven by strength in Simcyp, Phoenix and Pinnacle 21. Software bookings were $50.7 million in the second quarter, which increased 9% from the prior year period. Trailing 12-month software bookings were $196.4 million, up 8% year-over-year.

Services revenue was $44.5 million in the second quarter, down 3% versus the prior year period on a reported basis. Services bookings in the second quarter were $47.6 million, which declined 6% from the prior year period. Trailing 12-month services bookings were $209 million, down 1% compared to the prior period. Total cost of revenue for the second quarter of 2026 was $35.1 million compared to $34.3 million in the second quarter of 2025.

Total operating expenses for the second quarter of 2026 were $58.3 million compared to $50.4 million in the second quarter of 2025, an increase of $7.9 million. This increase was primarily driven by the absence of a $5.7 million favorable contingent consideration adjustment in the prior year period. Adjusted EBITDA for the second quarter of 2026 was $26.2 million compared to $27 million in the second quarter of 2025.

Adjusted EBITDA margin in the quarter was 28.1%. This decline is largely attributed to stranded costs related to the divestiture, which I will discuss in a moment.

Wrapping up the income statement. Note that GAAP net income and EPS are both impacted by nonrecurring items. Net loss from continuing operations for the second quarter of 2026 was $6.1 million compared to net income from continuing operations of $1.5 million in the second quarter of 2025. The change primarily reflects the absence of a $5.7 million favorable contingent consideration adjustment recorded in the prior year period, a $2.9 million unfavorable swing in currency expense and a $2.2 million increase in reorganization costs, partially offset by a lower income tax expense.

Adjusted net income for the second quarter of 2026 was $12.5 million compared to $12.7 million in the second quarter of 2025. Diluted loss per share for the second quarter of 2026 was $0.04 compared to diluted earnings per share of $0.01 in the second quarter of 2025. Adjusted diluted earnings per share for the second quarter of 2026 were $0.08 compared to $0.08 per share in the second quarter of 2025.

Moving to the balance sheet. We finished the quarter with $184.1 million in cash and cash equivalents. As of June 30, 2026, we had $294 million of outstanding borrowings on our term loan and $100 million availability under our revolving credit facility.

In the second quarter, we repurchased $17.4 million in shares, which completed a $100 million share repurchase program previously authorized by the Board. In the third quarter, our Board approved a new $50 million share repurchase program, reflecting our continued confidence in the business and our disciplined approach to capital allocation.

Turning to our outlook for the remainder of the year. We continue to expect 2026 revenue growth in the range of 0% to 4%, which translates into full year revenue of $367 million to $382 million on a comparable continuing operations basis. This reflects the impact of the divestiture of our regulatory and medical writing business we announced on May 8. We anticipate full year software revenue to be at or above the high end of the 0% to 4% range for the year. We have greater visibility into the software business than we did last quarter as we continue to see a shift from desktop to cloud-based product mix.

In services, we expect full year to be at or below the low end of 0% to 4% range. As Jon mentioned, we remain focused on improving performance in this part of our business.

Turning to margins. We expect full year 2026 adjusted EBITDA margin in the range of 29% to 31% compared to 30% to 32% range we provided in May. This change reflects the impact of the divestiture of our regulatory and medical writing business and is not related to the underlying performance of our remaining business.

As we noted last quarter, the divestiture generated approximately $17 million of adjusted EBITDA in 2025, excluding unallocated overhead costs. A portion of that shared infrastructure remains with us, while the associated revenue does not. The reduction in force we completed at the start of the third quarter offset a meaningful portion of that impact, and we expect margins to improve through the second half as those savings are realized.

Factoring in the divestiture, we now expect full year adjusted diluted EPS from continuing operations to be in the range of $0.31 to $0.36 per share. Fully diluted shares are expected to be in the range of 155 million to 157 million, and we are modeling an effective tax rate of approximately 30%.

With that, we will open up the call for Q&A. Operator, can you please open the line?

[Operator Instructions]. Our first question is from Craig Hettenbach with Morgan Stanley.

So Jon, it's now been kind of a couple of quarters since you realigned kind of the sales and go-to-market strategy. Just would love an update on kind of what's working to date and then just some of the milestones or things to watch out for to execute on that.

Great. Thanks, Craig. So yes, it's been a couple of quarters. I joined in January. The changes that we've made to the go-to-market model really have come into effect in Q2 and beginning and have fully been rolled out in July, obviously, with the announcement of the new Chief Commercial Officer today. So we're still, I'd say, in kind of early innings in terms of rotating the model itself.

I've talked a lot about some of the kind of leading indicators I pay attention to on the software side of the business, we shed a lot of light on things like ARR and kind of future revenue. We're seeing really good kind of future indicators around that with revenue accumulation. That's been a focus from a go-to-market standpoint on net new sales in addition to renewals.

The services side has been a little bit different. It's been a focus on getting our specialists and our experts back out into market and changing -- making some of the changes to the model that was put into place in '24 and 2025. That is early change days, but is yielding positive indicator. I look at things like pipeline creation, which I highlighted in the earlier remarks, which are up, what, 28%, 29% year-on-year, which is a positive indicator around it. So still have work to do.

The end market, we believe, is incredibly strong. We've made changes both to the software and to the service side and to the overall kind of engagement model that we have. We've got Julien announced today and tracking where I think you'd expect to be on the positive leading indicators.

Got it. And then just a follow-up. You had announced a partnership with NVIDIA a few weeks ago. Considering they've been very active with many life science companies in terms of various partnerships. Is there anything you would call out that's most unique for Certara in terms of what you're looking to do with NVIDIA and how you think about the business implications?

Yes. So there are a couple of dimensions to the partnership. We talked a little bit about it earlier this morning. First of all, we've been talking increasingly about what we call kind of next-generation platform. Our next-generation platform is how the software offerings that we have within this business will interface with some of the frontier models and some of the existing more generic kind of AI models that exist out in the market.

The NVIDIA partnership in part is around that point, allowing the NVIDIA agents to be an interface with our software system.

The second area that we've been focused on and we've communicated externally over the last few months is really around new use cases like things like discovery, where some of the high throughput potential will allow us to accelerate time lines and turn through more data to provide, more data to get earlier indicators to help support earlier decision-making. So those are the 2 dimensions I'd point to. You'll certainly hear a lot more for us -- from us in the time coming. NVIDIA partnership, obviously, is great.

I think the biggest thing for a company like Certara, I think it's a signal of a different type of partnering relationship and a different type of role in the ecosystem. to my knowledge, it's the first major kind of technology partnership, and there are several other discussions as well as we kind of look to take the next step with how we're used broadly by our customers.

One moment for our next question that comes from Brendan Smith with TD Cowen.

Actually, I just wanted to ask quickly about net retention rate. I think we noticed in the filing, it looks just down a bit sequentially and maybe year-over-year. So I'm wondering if there's any nuance there in the quarter we should be aware of or any kind of customer feedback you've been hearing just in Q2?

And then I guess, you mentioned, Jon, in your prepared remarks, you kind of rightsizing the company to get to that sustainable double-digit growth. I guess, do you have a time frame in mind over which you hope to kind of hit that? And I guess just from a go-to-market strategy, like what do you see as kind of the most important inflections to really supercharge that? Is it like new product rollouts the cloud-based monetization? Just kind of any thoughts on that would be great.

Yes. Thanks, Bernie, and thanks for the question. So on NRR, I don't -- no, I don't think there's any particular issue with NRR. Absolute renewal rates of the organization were up in the quarter, actually slightly ahead of our expectation. There's a little bit of kind of time effect that goes in. There's a little bit of a mix effect between kind of ratable and on-prem work that happens that has some changes in the timing of different things that they're hitting. But there's nothing that I'd speak to that is unusual or out of expectation.

I think on the whole on software, we're pretty happy with where we sit and pipeline looks good. So it's a focus on continuing to execute, continuing to get the that renewal business through and continuing to get net new sales. That's what the team is incentivized and what the team is focused on.

In terms of -- and your second question, look, I continue to say what I've said pretty consistently since I joined, which is the end market is strong. Our products are exceptional. We have market-leading products across multiple dimensions.

What we historically have done less well is execution around it. We're in the process of making significant changes to way this organization works, lining up places in the right direction. I'm taking a very midterm view in terms of that -- when that inflection point will fully be able to be realized.

We're doing the things that we need to do in terms of setting the portfolio for long-term growth, making the investments, changing the P&L models and the operating models, changing the go-to-market incentives and the go-to-market model, changing the CCO to ensure that we're positioned to be sustainable and to have the structured platform to grow off. So I don't think there's any one thing that needs to happen.

I think we've taken the hard steps over the last 6 months to put those building blocks in the right places. I'm pretty pleased with the progress we're making. Obviously, today, with the announcement of the new CCO and the new go-to-market model, we talked about the leading indicators around ARR and pipeline creation on the services side, we need execution against that. And I think that will be the thing that will be the early sign for you in terms of inflection.

One moment for our next question that comes from Luke Sergott with Barclays.

This is Jake on for Luke. You mentioned breaking into China for the first time. I was wondering if you could talk about the significance of that, maybe your exposure in the region and the broader opportunity that you see there.

Okay. Thanks, Jake. So yes, so I think one of the things we would like to emphasize in -- yes, one of the things that we'd like to emphasize as we think about this business is it's truly a global business. It's truly an international business. When we talk about regulatory trends, I think there's a bias and a tendency to focus on the FDA. But things like ICH M15, if you look at the standards that are happening, these are really global effects. And a big percentage of the pharmaceutical population biopharma world is obviously here. But we are quite bullish on the opportunities in both Europe and Asia.

If we look at those 2 geographies, those are both attractive growth opportunities for us. And as I kind of sat down and started to do some new planning with our new CCO, those are clear growth options and priorities for us. We have a foundation. We've built businesses out there over the last few months platforms for teams out there. We see a lot of potential -- growth potential.

I think what you're seeing there in China, Japan, the Middle East is these are not huge contributors to our overall business, but we think on the whole, these are going to be outsized growth potential for us as we continue to focus on international opportunities.

Our next question comes from the line of Michael Cherny with Leerink Partners.

Maybe if I can tie back to the question regarding the NVIDIA partnership. As you think about this partnership maybe in construct of the broader offering, how are you measuring timing on returns? And how are you measuring your broader partnership functionality capabilities as you also work to reposition the go-to-market strategy?

Okay. Thanks for the question. So NVIDIA partnership is obviously an important enabler. I think, as I said, as I mentioned before, I think you'll be hearing other things from us in the coming weeks and months in terms of other partnerships. Look, I think we all recognize that this is a fast-moving ecosystem that we all need to -- that we need to play in multiple dimensions.

And I think what you're seeing from us is a modernization of the way we're thinking about this, a relevance of the way that we're thinking about the way our software and our systems can be consumed by clients based on where they sit in a really kind of client-centric way. We haven't put any time line out against the individual products. We talked a little bit about the next-generation AI platform and the functionality and capability that builds, but we haven't yet provided any guidance in terms of timing for impact.

But we certainly look at that as an opportunity to -- as we start to look out over the near to midterm as an opportunity to continue to build, continue to find new ways to serve our clients to figure out new ways for them to do new types of science and to consume our software in new and more innovative ways.

Got it. And just one more follow-up regarding the divestiture. Obviously, capital available. You did some buybacks. I apologize if I missed this. Within the guidance, is there an assumption on any incremental share repurchases and/or plans for capital deployment with the capital cash balance available to you?

There is no outlined plan of execution. We did highlight the Board has authorized an incremental $50 million in potential buybacks. Our stance on capital allocation hasn't changed. We are incredibly disciplined in terms of what we do. We focus on a combination of long-term strategic opportunity and what the best use of that cash and capital is.

But I think you can take the signal of the incremental authorization in terms of where we see some attractiveness here. But there's no time line against it, and there's no outline execution path, just clearly that there's an intent to continue along that path of some buyback.

Our next question is from Jared Haase with William Blair.

This is Christine Rains on for Jared. Hoping you can speak to your expected back half cadence for revenue overall and for software versus services and overall EBITDA given the moving pieces here.

Thanks, Christine. So look, I think the key thing is our guidance is unchanged. We're continuing to call out the exact same range that we highlighted we were going to call out at the beginning of the year.

In terms of second half cadence, I think although we don't guide on sub offerings anyway, I think the pattern that we've seen over the first half of the year with software outperforming services is certainly a pattern we expect to continue into Q3 and Q4.

The big factor for us as we start to move into Q3, I talked a little bit about some of the leading indicators. The software indicators on the ARR side are very positive and give us a high degree of confidence on that side. Services, if you go back to kind of basics first principles on this, build up the pipeline, convert that pipeline, move to backlog into revenue burn. Our leading indicators on this are that pipeline creation. And so we're feeling good with the changes that we made.

The rate and pace at which that converts, obviously, will drive potential upside on that services line. But our fundamental guidance hasn't -- has not moved, hasn't wavered at all from the range that we put out. And we expect a pattern that we saw in the first half of the year to continue in the second half.

Great. That makes sense. And just double clicking on the EBITDA margin puts and takes for the rest of the year, specifically asking given the risk in 2Q, but lower margin guidance at the midpoint. And also if we should think about margin ending this year as a good jumping off point for next year?

Yes. So firstly, on margin, let me just clarify. I think what you see is not a lowering the midpoint, but a change to reflect the new composition of the business. The business last year, if you look at excluding the regulatory carve-out that we did, the regulatory medical rating carve-out was a 30% margin business, 30.2% margin business. So coming out of the divestiture and kind of repositioning for the rest of the year, the change is in line with the math of that new business, also factoring in some of the stranded costs that we signaled in the last call that exists.

So it's not, I would say, a change in guidance more just a reflection of the discontinued ops new profile of the business. I would point as you move forward, obviously, the stranded cost component is something that we're actively working on within out of the cost structure. We're also trying to free up capital to focus in on AI and some of the new offerings that we're intent on pushing into market.

The operational excellence activities that we highlighted, the $13 million in run rate and the RIF, which is mainly focused on overhead were to really address both those points. Obviously, the run rate won't impact fully in the second half of the year. That run rate by definition will be into out years. But the intent of that is to protect and to highlight margins and ensure that we're in a good position to hold within the margin and to achieve the margins that we're outlining today.

Our next question from Sean Dodge with BMO Capital Markets.

This is Tom Kelliher on for Sean. Jon, can you talk about the lag between an improving biotech funding backdrop and when that typically starts to translate into demand on both the software and the services side?

So the majority of our impact tends to have a slight lag. We're not doing a lot of work in the earlier stage discovery. Our stuff starts to click in as that discovery starts to translate to development and the early stage development work moving towards first in human. So there tends to be a lag.

As I've said pretty consistently, and I'll say it again, I think we're not dependent on biotech funding or market health at this point. This is an execution component, getting our teams out in front of -- there's plenty of market for us to go out and get. And our focus has been on making the changes that we need to make to our engagement model and to our commercial model to fully capture that opportunity.

So yes, like technically speaking, there's a little bit of gap between when things get funded in terms of where they are in the stage of development, and you can see where we kind of click in. But for Certara's recovery story and Certara's inflection story, this is much more about execution, getting out in front of the existing clients, getting out in front of new clients and not dependent on biotech funding in the near term.

Okay. That's helpful. And then just a clarification on the cost savings. Is some or all of that $13 million incremental to the $10 million? I know you had like a cost avoidance plan you talked about before. Is this completely separate...

Yes, it's the latest update. Yes, we signaled that we would be putting this in place as we kind of look to address the stranded costs in the second half of the year and to obviously change the cost base, so we continue the path of investment and disciplined operating management. So the $13 million is an increase over the former identified plan. So the $13 million is the latest view of run rate savings. We continue to push and continue to do it and we'll continue to -- we'll look to optimize to free up capital to spend on things that are going to drive a return for investors.

Our next question is from Matthew Hewitt with Craig-Hallum Capital Group.

I'm curious if with -- there's been a fair amount of consolidation, both in pharma and biotech as well as one of your peers is getting acquired. And I'm curious if there's any type of disruption that, that creates from a customer perspective, if there's a merger or acquisition occurring, does that kind of slow time lines to getting deals done with the competitor getting taken out? Does that create an opportunity for you? Maybe while they're distracted, you're able to get in and maybe win some new business?

Thanks, Matthew. There's -- look, I don't -- again, there's plenty of market for Certara. There's no -- we're not going to point to acquisitions of small biotech companies. Obviously, I saw the same FT article you did this week around potential mega mergers, those are a long ways away. There's plenty of market for us. We're -- our focus is execution. Our focus is on commercial operations and getting out in front of our customers. So I'm not going to worry too much about that trend.

I understand the rationale for the question, but there's plenty of opportunity for us to continue to grow and accelerate our footprint.

In terms of competition, I'm probably not going to comment on that. Look, I think our job is to serve our clients with excellent work, is to lead with science. It's to put the best proposals and the best delivery and the best software in front of our clients, and that's where we're going to focus. So look, this is within our control, not within someone else's acquisition control. This is fully within our ability to execute.

Our next question comes from Scott Schoenhaus with KeyBanc.

Jon, I wanted to focus on your pipeline commentary up 25%. Can you give us some more color there on what's driving that more services versus software? Is it more smaller SMB or biotech or larger pharma?

And then with the new commercial -- Chief Commercial Officer, how are you thinking about executing on this pipeline? Is there a mandate to get this converted more quickly? Any color would be appreciated.

So look, I focus internally on kind of 2 or 3 metrics. I focus on ARR accumulation on the software side, which continues to build and continues to be very positive. So our software business, we believe, continues to be healthy with a focus on new software continues to be a significant piece of that pipeline.

The biggest single change, though, is on the service side. I have been vocal about the -- my difference of opinion on the way that you should be moving this business forward. I believe the market that we roll -- the go-to-market model that was rolled out within Certara 2 years ago, which focused on more of a generalist model was not the right model that we need to focus more on kind of specialist scientific engagement.

We need to get our scientists out in front of the market more directly. They're the lifeblood of this business. And so we've done a series of things internally to rotate and get the scientists back out in front to hire more of the PhD-led sales teams for -- to get those folks back out in customers. And that's really where you're seeing the biggest spike in pipeline. You're seeing a rejuvenation of that model of that model of engagement leading to a much higher percentage of scientific service in the business, which is exactly what we're positioned to do. So that's the big kind of change that we've seen year-on-year and as for the disproportionate chair.

The rate and pace of burn, the time in which we call that inflection point in terms of moving from low single-digit growth into something stronger, obviously, is the rate and pace of that burn. And so that's what we're focused on in the rest of 2026. Yes, obviously, with Julien coming in and a new integrated sales and marketing effort, this is going to be a very different approach, much more data-driven, much more segment-driven, much more targeted. We've built a bunch of AI to help enable our sales teams in a different way. We've got a much different view about getting our scientists out in front of customers in front of conferences, et cetera.

So look, we're optimistic about it. With change, obviously, you always have to signal a little bit of caution. You don't want to get too far over your skis in terms of your ski tips in terms of when you make the call. But yes, this is going to be more focused on operations and implementation of the go-to-market model that we've been changing over the last 6 months.

One moment for our last question that comes from Joe Vruwink with Baird.

I wanted to ask about the updated guidance for the year. And sorry if I'm missing something obvious here, but I understand regulatory is now in discontinued ops and that ended up being $19 million. I think the guidance range moved down by about $26 million. What's just the delta between those 2 numbers?

I'd have to -- so I don't think that's the case. We'd have to go back and walk through your math. The only change that you saw to our top line guidance range, we've said pretty consistently that the business will grow in the 0% to 4% range over the course of 2026. The discontinued operations from the carve-out of the regulatory business, that profile of business in 2025 was $367 million. So if you put the 0% to 4% on top of that, you get to the $367 million to $382 million.

So I think it probably is the timing in which you're taking in -- we are reporting out completely without regulatory medical writing where we're moving the Q1 and the first half of Q2 numbers from our ongoing compares. So I think that's probably the math issue, but we can work through it with you offline.

Okay. And then obviously, there's a lot of just draft guidance and discussion on what's going to be the right approach to models and what's going to be the right approach to data and what the regulators accept. Does that create any hesitancy on the part of customers for maybe how they want to engage with Certara, where they engage with Certara?

I kind of see it as the opposite. Look, there's a handful of very established use cases, and Certara is the go-to player for those are very established use cases, where the things that we've talked about in the last couple of calls is the acceleration of all the new regulatory use cases that are coming out, the maturity of regulators worldwide in terms of not just taking the standard use cases on MIDD, but really trying to transform, whether it's NMEs or QSP or some of the other kind of international standardization that's coming.

What we believe -- and by the way, we're actively involved in discussions with regulators worldwide, scientists within Certara are journal editors for the major publications on this front. What we believe is that there's a time lag between when regulators establish a framework and when these start to get built into regular practice. You're seeing that.

The number of questions that we are getting is going up exponentially in terms of how do you manage through this. It takes a little bit of time, particularly for the newer use cases to translate from, hey, there's scientific methods to now there's regulatory pathway, regulatory acceptance to it until when the adoption occurs, that's the rationale for us getting our scientists back out there. That's what they're more science-led is to help drive that transformation and the adoption.

So I don't see it as a point of distraction for our clients at all. In fact, I think it's a huge opportunity as they start to adopt this into their practice, and we're going to help be partners with them and guiding them in that direction.

All right. This will conclude our Q&A session. I will pass it back to Jon Resnick for final comments.

Thanks, everyone, for joining. Look forward to some of the subsequent follow-up phone calls over the next couple of hours. Thanks, everyone.

Thank you for participating in today's conference, and you may now disconnect.

All right, folks. Thanks for joining us. Dave Windley with Jefferies Healthcare Equity Research. We're here at Jefferies 2026 Global Healthcare Conference. And on the Wednesday afternoon, glad to be joined by Certara and the team's Johns. Jon Resnick newly joined -- recently joined CEO; and John Gallagher, the company's CFO. So, thanks very much for being here. Glad to see you and great to have you.

Jon Resnick, I wanted to start us off with a question on the realignment of the company, which I thought was interesting and maybe intuitive for a guy like me after the fact, but I might not have thought of it myself. So, talk about your MID3 and your ACE, I think you're calling it, realignment of the segments and what implications that has.

Okay. Well, thank you, Dave, for having us here today. It's great to be with you. So organizationally, we did announce some changes. It's been a pretty active first few months within Certara. I started January 1. We've been very focused strategically on how we set ourselves up for broader growth opportunities. So, I spent a lot of time talking to customers around what's on top of their minds to regulators in terms of trends and growth trajectory and then did a fair amount of work with our internal teams trying to understand where some of the distinctive opportunities exist. So, in essence, our mission within the company is to disrupt clinical trials or transform clinical trials, clinical development for good.

And so, what we wanted to set up around was kind of these 2 kind of strategic growth engines that would provide a fair amount of runway to get going. So, the first one is ACE. ACE is around accelerating clinical evidence. And if we look at both the EMA and the FDA, and we look very squarely at what our clients are struggling with, it's how do they manage data from protocol to submission, how do they improve efficiency, how can they unlock data quicker with our Phoenix and our Pinnacle assets and CoAuthor and Global Summit.

We have a range of things that are already there in play. We're looking at a range of other transformative things that can help accelerate it. MID3 is a thing that we're probably best known for, which is model-informed drug development. And through this, we call out discovery as well, which is an area where we've made significant investment, and we think of an opportunity for growth. To simplify MID3 is really around kind of transforming the way clinical development is done. It's moving away from traditional approaches and using computational biology and biosimulation to accelerate the rate and pace of execution.

So, on the -- maybe you could help distinguish for me because for the time that I've known the company, Phoenix and Simcyp get talked about as pretty close brothers or sisters. But you're calling Phoenix more of an evidence asset and not a modeling asset. Maybe distinguish for me.

Yes. It's a well-studied question. So, Phoenix actually has 2 components to it. It's got a piece which is a computational engine, which is very tied to kind of PBPK analysis. I'm sorry, PK/PD analysis, PopPK, which is a computational engine. It also has a broader application suite, which has more to do with data management and computational mechanics. So, it actually plays both those apps. So, we are going to be linking the PopPK scientists and those teams more directly with one application, but the bulk of the Phoenix customers will be working through the data management side.

Got it. Okay.

But from a client standpoint, look, these are 2 growth engines for us. We also have taken steps to ensure that if you're a smaller company or a mid-sized company, you are looking more broadly to transform. These aren't 2 independent [threads]. These are 2 engagement paths, but we can look holistically and.

So, it wasn't that far off. It does have a leg in [indiscernible] it sounds like.

Both, it sounds like. Yes, there's 2 distinct applications.

Right. Okay. And then from an alignment standpoint, maybe we could drill into this a little bit on kind of an operational vector and a sales vector. So, operationally first, does much change in terms of -- you've aligned these businesses into these 2 categories? How much operationally changes as a result?

There's -- look, historically, this has been spread out among a number of different groups. But my biggest objective and goal was creating clarity, strategic growth and accountability. So, this should dramatically simplify our operations over time. There's some realignment of our go-to-market teams so that there could be more specialty-led engagement. There should be more subject matter expert or scientist engagement directly with our clients who are looking for that type of engagement as opposed to general engagement.

And from an operating flow standpoint, there should be a range of kinds of simplification. We're going directly to the businesses to talk about everything from sales execution to thought leadership and innovation to delivery execution. So, there's much more clarity in front. There's a little bit of change, a little bit of shift that happens any time you move an organization around, and that creates a little bit of dust, but we're certainly focused on how can we drive midterm significant growth in this business, and this should position us better for that.

And we view it -- just to add on to that, too, we view it as an opportunity to unify some of our disparate operations. So, we were able to take this as a chance to unify, which is also sort of the backbone of some of the operating metrics that we've been looking at that are going to help drive growth for the organization as we look toward the second half of this year.

Got it. Okay. I'm going to hold that and I'm going to place a hold on that. John, I may come back to that. On the sales alignment, Jon Resnick, you touched on this. Maybe let's drill in on that a little bit more and help us to understand in your efforts, the goal to stimulate midterm growth, do you think of that as new logos, new users within current accounts? -- same people, but using more products. This is kind of an esoteric space for a lot of us, and we don't understand exactly how biosimulation works and who does it. So, help us understand how you get more people to use your products.

Yes. It's a thread of a question. You've asked me a couple of times. Yes, yes, yes. So, look, there's a $230 billion addressable clinical trial market. It's a massive number. And if we think about the way clinical programs have been run, it hasn't fundamentally changed that much over the decades. We see huge tailwinds coming from regulators in terms of their openness to new approaches. We've seen things like drug-to-drug interaction and kind of dosing optimization become pretty standard in the pack for biosimulation.

We see significant opportunities to expand beyond things like drug-to-drug interaction and move into pediatrics and pregnancy and lactation and organ impairment, et cetera. There's lots of new applications that regulators are certainly open to, and we're partnering with regulators around shaping. To your specific question about how do we drive this? I think one of the key things here is going to be scientific to scientific engagement. When we lose, we don't necessarily lose to competitors. We don't necessarily lose on price. We lose because our clients opt to do traditional approaches.

So, for us, this highest single indicator of success is can I get our -- or can we get, I should say, our scientists out directly engaged with the decision-makers across different companies. And through our realignment, can we have those strategic conversations in a way in which the client brings the problem, and I'll take the MID3 example. We now have our PopPK teams, our QSP teams and our PBPK, all of our initials in one spot and our technology in one spot where we can say, look, there are multiple ways to help you.

So, we believe that it should lead to new use cases. We believe that it should eventually lead to handoffs within our organization to bring new offerings within those new logos and new opportunities as we continue to drive regulatory innovation.

And so practically speaking, does that show up as you put these scientists together in a room and a client clinical pharmacologist has an aha moment that they've known Simcyp and they're using Simcyp. But if I staple on that's kind of my layman's terms, but if I staple on something QSP or if I use your QSP consulting, that complements what I was already doing? I'm trying to bring to life how these conversations evolve.

Yes. So, depending on the product, depending on the therapeutic area, depending on the situation they're facing, their needs may change. And where our scientists were distributed throughout the organization, they had different kinds of go-to-market cycles. This will allow us to go in and engage directly in what's the challenges you're facing as you move forward. The problem might be a PBPK problem. It might be something that's more of a PopPK question or a QSP question.

There are different disciplines that now working together will be able to drive it. We're also, from an incentive standpoint, removed the barriers, which would keep the technology working independently and the services independently. And then we're now playing too much more of a flywheel effect where the scientists and the technologists will be working together hand in hand. So yes, it's going to be a client, what is your #1 challenge and then how do we bring the best of Certara to ensure that we provide you, whether it's a technology product or a service product or a different model, the best answer to meet your challenge.

John Gallagher, coming back to you as promised, you talked on the call about cost avoidance, cost outs or cost avoidance. And you mentioned a minute ago, these unifying disparate operations, which sound like those things could intersect. Can you elaborate on that a little bit?

Yes. One of the important things we want to do is keep the investment in R&D that we've talked about, and you saw show up in our Q1 expense numbers intact while we simultaneously get some cost out of the organization. So, to your point, Dave, we continue to go after about $10 million of cost out, and we believe that we can make the investment in R&D and take that cost out, mainly through some of the efforts that we're trying to find efficiencies in the organization that might be in the cost of sales, certainly in G&A. We've looked at sales and marketing. We've certainly had a lot of spend increase in sales and marketing over the last few years. And we see that more growing at the rate of sales at this point.

So, there is opportunity as we look at operating efficiencies and we look at commercial go-to-market and execution changes, what comes with that is some unification of some of the back-office functions.

Okay. Let's talk about AI a little bit. So, it's a big question. It's a kind of existential threat concern in investors' minds for some at least. It seems to me that through the consortia that you work with the history of the company, you have some access to and ownership of some pretty deep and valuable data assets that are supposedly the lifeblood for what AI needs to run on. How do you see Certara contributing to benefiting from operating in this kind of post-AI new world?

So, I think firstly, we agree with you. In terms of -- look, the frontier models are going to be excellent in terms of creating reasoning and logic. There is a whole lot of work that needs to be done within the vertical stack around the actual last mile of execution. And Certara's capabilities, data in part, but also 2-sided market penetration, workflow embeddedness, thousands of publications that we've done over time, domain expertise, the ability to make the connection between the scientists and experts all provide a very unique position to help reinforce that vertical stack.

So, we're incredibly focused on not only enhancing things that we have today, existing products that we have in terms of creating new modules and accelerating what we do to embed AI capabilities, but also thinking more broadly about native AI products and how we play into this kind of frontier ecosystem, whether it's through unification of our core products or through identification and APIs into broader work, we believe that there's a range of options open to us, and we're strategically pursuing a few of them.

Okay. You hit there at the end on where I wanted to go next, which is more specifically how AI kind of infiltrates your business model. We had a conversation with quantitative sciences person at a pharma not too long ago that really offered that using AI to, say, replicate a Simcyp didn't make a lot of sense. And instead, AI to perhaps organize the data or visualize the data on the back end, the output on the back end was more likely to be valued added to what existed. I guess does that comport with how you think about the world? Where does AI add quick value, I guess, I'll call it.

Yes. It's definitely consistent with the way we're looking at things. I think in the last earnings call, I told the story of Simcyp certification with the EMA. It was a 2-year journey. It's not only getting approval or certification through the EMA, you actually have to work with 25 member countries. You had to walk through 20 years of history. So, the execution model attached to it is not easily attainable. There's an awful lot of work.

So, I agree with that individual's assessment that it would be tough to replicate, and I think it would be inefficient for anyone to replicate. I think where we're focused and where clients are asking us to go is how do we take that know-how on the regulatory end of things and help to leverage that and unify it into other things that we're doing to help inform other decision-making at other decision points along that chain. So, how do we take the know-how that we have at the point of regulatory submission and inject that earlier and earlier into the life cycle so that we can help optimize the assets that are being developed.

Got it. You also touched on one of yours -- in your prior answer about identifying product areas. So, one of the early ones the company acquired, by Vyasa brought in some AI capabilities, I think quickly developed CoAuthor, which that's something I can actually -- I think most of us can wrap our heads around like I can take -- I can ask AI to write me a document or write me the draft of the document. That one I can understand. What other product area -- so kind of up, ground-up product creation with AI do you anticipate or are you looking at?

Yes. And that's going to become a harder and harder question to answer because it's very difficult to increasingly delineate between products that have kind of -- that don't have -- that have and don't have AI capability because it's being injected into everything that we do. So, to answer your question around kind of native AI products, we have Certara IQ, which we've talked about a lot, which is in the QSP space.

We have CODEx, which is a data component that we're using. We have D360, which is being replatformed. We have some cloud-based initiatives that are kind of native AI. Our existing products have -- like most software organizations, we've completely rethought the way we're building and engineering products. We've got huge acceleration in our roadmaps and huge acceleration in our software development.

So, Phoenix, as an example, has built a whole range of reporting capability, which is in our cloud version, which is AI-centric. So, increasingly, it's going to get harder and harder to pinpoint because it's being injected into everything we do. I think where you're going with it beyond is kind of the near term is also where does this go long term? And that's the existing play. The Vyasa play has been -- acquisition has been incredibly good in creating that entrepreneurial kind of AI-first mindset within the organization. We have asked him and we formally announced that Dr. Chris Bouton named the Chief AI Officer in the last earnings call. His mandate is not only to kind of transform the organization around kind of the AI native approach and more of this agile entrepreneurship, but also to work on what is kind of the biggest initiative we have, which is this kind of unifying asset that will allow our software products and our technology products to communicate with each other at the data layer more holistically.

So, tangible example, I mentioned Simcyp before. Simcyp, which has this regulatory kind of grade power for submissions, how do we get earlier indications into discovery? So, how you're making gate decisions whether to fund a product or not fund a product, do we get inputs from the PBPK analysis into things like Chemaxon? So, Chris is heading up an initiative that will be -- what's looking specifically at how do you optimize and unify across the data layer of our underlying technology products.

Interesting. Okay. Let's move into more typical questions on demand. How would you characterize what you're seeing from customers in the market and perhaps if they're different across tiers, highlight that?

Yes. I mean, look, the overall end markets are in good shape, right? The biotech funding environment with the exception of a little blip we saw yesterday has been positive. So, that's a tailwind. The overall spent environment by big pharma, we think, is also in a good spot. We have seen volatility in our results, right? We have -- we've seen software down in Q4, up in Q1 and vice versa with services.

So, the look-through on that is really to focus on TTM -- so you have got to look at trailing 12 months bookings, and that gives you a better sense of where are we seeing stabilization and where would we expect to see some acceleration. On the acceleration side, of course, through our Q1 results, we saw an increase in TTM software, and you saw that show up also on the revenue line with a 7% revenue growth in software in Q1, which was above our expectations and now has us thinking that the plan for the year is a bit better in software, as we said on the Q1 call.

On services, on the other hand, when you look at the TTM bookings on services, even though there's been a lot of volatility when Q4 way up Q1 was down. The look-through on that is low single digits. And we said that there'd be some choppiness in the first half of the year on services. And the way that we look at the plan right now, it continues to be playing out in line with our expectations.

Okay. Jon Resnick on the -- so you focused on the sales force instead of having one overarching sales force, you're pushing sales into the 2 segments that we talked about earlier. What indicators are you looking at to show that, that change is driving traction short of the bookings that you're going to tell us? And are you seeing movement in those indicators?

Yes. So, there's 2 metrics that I have the team predominantly focused on. One is ARR on software, which will be a much better predictor, which is something we are working on as a team to be able to provide externally as kind of a future indicator of where we are. So, I've got a team focused on new software and new software sales. We've changed the incentive structure to reinforce this. And we're -- Q1 obviously was a super strong result on that side of things. We have continued momentum on that side. So, that's been -- not beneficial, and we have [rallying cries] daily, weekly around that metric with internal targets around where we'd like to be by the end of the year.

On the services side, our focus is going back to a little bit of basics around kind of opportunity generation and pipeline generation. So, we've flipped it around, both broke the disincentives for teams across teams to work together. And secondly, have put a handful of programs in place to get the scientific teams back into market and directly engaging with subject matter experts from peer-to-peer level.

My dominant focus on that right now is pipeline generation opportunity assessment, which is where -- not a metric that we provide externally, but we're extremely pleased with what we've seen over the last 6 weeks since we started to roll that out. That won't be an immediate result. That's not a Q2 impact going back to opportunity generation, but it's the kind of thing that will lead to long-term sustained growth, and we'll maintain our focus on that side of things.

On the call -- on this last topic, on the call, you, I think, highlighted in general terms, some execution challenges that led to softer services bookings in 1Q. Can you describe what those were, what you've alleviated?

I can. And we're still -- these things don't get done overnight. They're cultural. And I kind of joke, it's always difficult. It's always easy to come into a company and to kind of point out things that have changed that you would have done differently. Look, I think kind of akin to what you said before, which is we broke unintentionally a lot of that peer-to-peer engagement from scientists to scientists, what leads to that innovation, what leads to that growth.

We launched a commercial model and kind of shifted commercial function and shifted responsibility for sales to that function alone. So, you had a sales side, a demand generation and a delivery side. I've been around here for a few decades now and have seen that model doesn't work long-term. So, what we've done is we've asked the business leaders, again, to get directly involved in opportunity generation, have equal accountability to the commercial team for that generation. We've got the scientists directly involved and are increasingly rolling out models that incentivize and encourage them to talk to clients and to work directly with their peers and folks they got their PhDs with and folks they see at conferences, which will help to kind of neutralize that. And also, some of the incentive programs themselves, we're making sure that those are market standard and reward the behaviors that we want to see.

And to get in front of your next question, the stuff doesn't happen in a day or a week. It takes a couple of quarters to burn through, but we're really happy with what we're seeing so far.

Good. Fantastic. Let's -- topically, let's move to kind of molecular modality as opposed to small molecules, large molecule pipeline is clearly moving toward large molecules. There's a bunch of biosimilar launches coming out as well. How do you view the product portfolio as positioned as the pipeline shifts to a more dominant large molecule environment?

So, you asked this to me in the last call, and I didn't have my answer, so I'm ready if you're interested.

Excellent.

So, look, I think the historical perception that Certara is a small molecule, I think, is less relevant today. These aren't -- it's hard to kind of pull apart definitively. But roughly speaking, about 60% of our business is small molecule, about 40% is large molecule. We have a range of products which are pretty agnostic to small or large, the Phoenixes and the Pinnacles and that suite of things is completely independent.

Simcyp, which historically, you think of as a small molecule is probably 30% large molecule today, 70% small molecule, things like QSP, which is something we've talked a lot about as a new emerging regulatory area and scientific discipline is almost exclusively, if not exclusively, a biologic area. Things like D360 and Chemaxon also have had a lot of innovation and have now certainly much more large molecule focused. The change in things like monoclonal antibodies and ADCs also has opened up a biologic is not a biologic. So, there's clear opportunities for us to execute and change modules and already have built functionality to address some of that in peptides, nucleotides.

Got it. Super. In terms of regulatory environment, guidance in March, FDA, guidance in March is encouraging faster biosimilar development through a number of mechanisms, including analytical modeling approaches that seem like they point in your direction. Are you seeing any engagement around that?

We are. Look, since I joined, announcement after announcement literally plays into Certara's strength, right? Whether they're industry setting bodies, EMA, FDA announcement after announcement is really encouraging and incentivizing increased adoption of these mechanisms. What we've noted over the last couple of months and years as the regulatory stance becomes clear is the frequency and the volume of inbound requests. There's always a little bit of a lag between inbound requests and people changing the way that their doing studies that they've always done. We outlined a little earlier all the areas from NAMs to pregnancy to pediatric where we see incremental opportunities.

We think as you move forward, the demand for this is only going to increase. I think us getting our scientists back in front of customers and kind of leading that direct peer-to-peer engagement is going to be critical in faster adoption as well as direct continued leadership and engagement with regulatory bodies.

I'm going to wrap it here. Coming back to you, John, Gallagher on operating costs. We touched on this a little bit. You started that answer with which we want to keep our R&D budget R&D commitment in place. I think we [sized] that at about 10% to 11% of sales now. Is that -- should we think of that as a percent of sales type commitment? And is that the right range to think about?

Yes. That range is in the right spot because if you think about it, yes, we're putting investment there, but we're also finding efficiencies. We talked about AI. AI can be used within our teams, not only within the R&D team, but in the finance team, the HR team, the IT team. So, we do believe we can find some productivity using AI tools ourselves as a partial offset to some of the investment that we've been putting into the R&D line item. So, I think what you described as 10% or 11% of sales is a good placeholder when we look at this year.

Okay. And then conceptually, Jon Resnick, the -- I mean, innovation for Certara has come through both R&D investment but also acquisition of capabilities. Certara has been pretty acquisitive. Is that a path that we should expect to continue?

That's not the near-term priority. The near-term priority is around getting the organic investment clean. I mean, I think as John noted, we've seen significant increase in our investment over the last couple of years. The question I had coming in here is what is the return. So, we've put a lot more discipline into the process, and we expect to get a lot more return. I've outlined a number of those concepts. There are a range of other ideas we haven't got into today are things that we're moving forward.

So, we think there's plenty of organic space to run. If something made sense, which was an opportunity to accelerate a near-adjacent market or to do something, we wouldn't not do it, but it's not the priority. The priority is getting our team cranking and as much return as we can possibly off the investments we already have.

Excellent. That brings us to time. Thanks to the audience for your attention and attendance of the conference, and I hope you have a good rest of the conference.

Thank you, David.

Thanks for joining us. My name is Ryan Halsted. I am the health care technology and distribution analyst with RBC's healthcare research team, and we have Certara up next. And I am pleased to be joined by Jon Resnik, CEO; and John Gallagher, CFO. Certara is a tech-enabled drug development company. So welcome.

Thank you, Ryan. Nice to be here. Thank you for the invite.

So John, I wanted to start with you. You've been in the CEO seat now for 5 months. And just wanted to get some perspectives from you on -- about the company since you joined, anything that surprised you or anything that's changed?

It really only been 5 months. So I don't know if anything surprised me per se. I think there are some areas where maybe I underestimated just how strong of a franchise it was. I mean, specifically around kind of scientific leadership, the deep kind of regulatory expertise, methodological leadership, the closeness between the relationship, between the companies and the work that they do with regulators. I knew that was a core part of the value proposition, but it's really truly in the DNA.

Maybe the second area, and maybe this is a little bit of a surprise is around the portfolio itself. But there are a number of things that the company is known for, a number of kind of market-leading assets. But as you dig a little bit deeper within the company, there is just this absolute set of jewels that exist built on the deep expertise that's been accumulated over the last few decades and the kind of unrivaled suite of capabilities. There are all of these opportunities to deploy our expertise in different ways with a little bit of nurture, a little bit of product development and a little bit of evolution. There's no shortage of areas to go.

Well, maybe following along with your background and joining Certara, I noted, come from a large CRO with experience with real-world evidence technology and integrating that within clinical research. Just curious, how are you kind of leveraging that experience and knowledge and expertise at Certara and bringing that to its opportunity set?

Yes. I spent over 2 decades at one of the larger CROs, had a range of roles over time. I think the real-world one is an interesting one. I think it's pretty intuitive for you to pick up on that.

On its face, trading and running a business on real-world evidence versus a business more in the model informed discovery and drug development space seemingly different. The similarities in the analogs between the 2 are pretty remarkable.

I ran the real-world business early 2010s. And I think the state of maturity, I'd say, both from a regulatory framework standpoint, regulatory acceptance from a technology standpoint and a democratization standpoint were a pretty similar situations.

Real world in the 2010s was a very new concept that was -- had a ton of promise. Regulators are asking a lot of questions about how they could get -- how they could deploy it more frequently and more accurately to save clinical trial expenditures to prove up to make trials smarter.

And the MIDD, MID 3 world is very similar. It's this unbelievable set of computational and biosimulation capabilities. And the regulatory frameworks and the regulatory agencies themselves are just catching up with the range of things that can be done.

The second thing, when I picked up the real-world business 15-plus years ago, it was a very isolated science that had very specific groups, epidemiology, biostat health economics, ups researchers, very specific groups that worked on it. And the value that was untapped over the course of a long period of time was kind of democratizing those capabilities in a different way and allowing the commercial teams and the early discovery teams and the clinical trial teams to take advantage of the full depth and breadth of real-world evidence within life sciences.

And I see the MIDD story is a very similar one, which is today, is a core power science used by a handful of pharmacoeconomics groups and PBPK groups and groups who are highly specialized. But the power of what the platform creates really can be democratized and it can be used early in discovery to make good decisions. It can be used in clinical trials to make good inclusion, exclusion decisions and there are a range of other applications. I see a ton of similarities in building off the set of experiences from that time.

That's great. Hopefully, we'll get -- gain some more insights on the regulatory pathway as we look further out kind of adoption and acceptance of that technology. Maybe transitioning to AI in drug discovery. Certainly, I think there's an appreciation of the opportunities there, but also there's a perceived threat of disruption that has passed a pall on many stocks that touch on this arena. But just curious, how are you thinking about Certara's competitive position against these new emerging AI technologies that may or may not be disruptive?

That's -- okay, where to start on this topic. So first of all, I'd say, look, we view AI as a huge enabler for the business across the board. This is something 3 and 5 years, 3 years from now, we will be known as a market leader in the space, and it will accelerate everything that we are doing.

The raw -- first of all, from an underlying fundamental standpoint, most of the money that's going in today is going in a little bit deeper into discovery, which is going to drive more compounds to market, which is going to help to accelerate the frequency and the volume by which MIDD itself will be demanded.

And as we think going forward about the opportunities that exist for us, we've got this long legacy, literally decades of working on successful products, hundreds of products that have included -- that have worked with Certara and have informed their label. We've got thousands of scientific publications, hundreds of PhDs that work within the company. We've got some of the leading software products in the world that are fully embedded.

And if you think about those core enablers, that's really a capability that we've created over time. That's one to build off in the AI space. It embeds us within workflows. We're working on billions of kind of data transactions. We have computational knowledge and kind of scientific depth of application that is second to none. You have this relationship between the technology, which is in the day-to-day workflow, not only of our clients and regulators, but also in us, in what we do.

So you have this kind of expert in the loop. All of that creates this amazing foundation to take the next step with this, which is to identify a bunch of the workflow that exists to help build new applications, to help create a powered future, which will do exactly what we were talking about earlier, which is kind of democratize the use across the full life cycle, accelerate the insights, power the way that this type of research can get done.

That's great. You mentioned AI, you think could have the impact of generating more new drug candidates and faster. That's certainly a conversation that I've been having with investors recently, this idea that could be seeing a much greater influx of clinical drug development and a pipeline of new candidates. Just curious, following up on that comment, where do you think we are? And what inning do you think we are in terms of AI and drug discovery that's going to drive volume?

Super early innings. I mean I think we're just scratching the surface for what can be deployed. You've seen an exponential increase over the last few years, but we're still doing super, super early days on this.

Look, as I said before, I'm encouraged. Most of the big press releases that are out there today are around kind of product identification and product early-stage discovery components, which to me will just accelerate the market. The more products that are developed, the more opportunity there is for us to bring kind of our domain expertise and knowledge around the way products computationally work in humans.

So we're super early in this. We're going to see explosion over the next 5 to 10 years. And as I said, it's going to be a huge accelerant for core MIDD, which is a perfect complement to a lot of the investments that's going on today.

Right. And maybe on the -- your investments in AI, I think you mentioned on your last call, investing in the next-generation platform. Can you talk about some of those strategic initiatives in terms of those investments? And how are you measuring success? Or how are you going to measure success?

Yes. I mean I think we're already investing. So it's not -- we're already adding AI functionality just like everything within our portfolio. In fact, the fastest-growing products within this quarter, our AI native products are very specific. So we're seeing huge acceleration.

We're working through the identification. A lot of our next-generation workflow, our QSP and PBPK road maps are loaded with this. We're already sitting in our clients' infrastructure and their workflow and our ability to kind of power them to do more quicker is core to what we do.

You mentioned the next-generation platform. I think what we see and what we've already kind of built and already actively engaging clients on is this opportunity to play the role. The big models will be fantastic at kind of creating foundations and no one is competing with the big model companies in terms of their ability to build out the general models. But the layer between, which is kind of this regulatory intelligence layer or what we're calling a clinical and scientific intelligence layer really needs someone with the deep expertise like a Certara.

I talked through the capabilities and the platform before, which creates a lot of distinctive capabilities. Just to give you kind of one example of why you need this kind of last mile and this AI infusion from this last mile. We have one product, Simcyp, which is a market leader in terms of helping to support label for things like drug-to-drug interaction, pediatric trials and increasingly in pregnancy and other things. It's the only product that's certified by regulators, we think, certainly in Europe and maybe in the world to do this type of task.

And if you think about the process to get this regulatory validated asset approved, it took 2 years. Not only did you have to get approved by the EMA, you had to get it approved by the 25 member countries as well. You had leading scientists out actively engaging. And this know-how is embedded into our workflow and increasingly will be into our kind of AI scientific and clinical discovery. It's a perfect complement to what exists out there in some of the structural models to bring that last mile into development and really make sure that regulated space gets the credibility, the validation, the transparency it needs.

Maybe just taking a step back, I wanted to touch on the broader customer demand landscape and environment. Would be curious what you're seeing in terms of just demand for either discovery or preclinical work more generally? And just any particular areas of strength that are worth highlighting amongst your customer segments or types of customers?

Yes. Look, I think overall, we see what others are reporting. We see market health. If I look at core things like funding, I look at biotech funding, I look at new trial starts, I look at -- we talked about some of the AI discovery and increasing kind of pipeline size, all those are really positive metrics that we track. I also look at regulator engagement.

And over the last few months, we've seen several regulator tailwinds from our standpoint, either pushing NAMs or accelerated clinical trial execution or clarifying some of the role for model-informed drug development. All of those are tailwinds as well.

So from a market standpoint, certainly, we see it after a couple of rough years over the last couple of years, certainly improving. And based on the volume of questions and engagements and inquiries we're getting from clients, we see robust market, which is just strengthening and increasing -- any time you do something that pushes regulatory boundaries or kind of changes -- that takes changes in current practice, it takes time. But the amount of questions we're getting about how to do things differently certainly incredibly encouraging demand signal.

That's great. Maybe before -- I wanted to get into the regulatory landscape in a second. But before we move on from this topic, just I think much has been made about the biotech funding environment. It's been pretty healthy. Companies able to access capital in various ways or realized exits that give other companies confidence and perhaps maybe spend.

How should investors think about how that funding can translate into your business spending in the areas that will drive your business from like a timing perspective? Is this something that is still a quarter -- a few quarters out in terms of trickling down into actual spend?

So historically, we've looked at that. So timing of positive funding and what the pull-through is on our customer tiers, especially Tier 2 and Tier 3 customers. And it generally takes about a quarter. By the time the funding -- so you see the funding environment get better, capital allocation decisions are happening inside of these biotechs. And of course, our commercial team is targeting those that are getting funding.

And now, as Jon was just saying, overall, it's a tailwind for our biotech customers, which will fall into that Tier 2 and Tier 3 category. We saw strong performance in Q1 in both of those categories in software. And we commented that there's some execution points that are going to help us on the services side and this overall market backdrop is going to be -- is going to aid that effort as well.

And the thing I'd add is that our business model itself is set up to be flexible based on the different segments. We have the ability to sell only software technology where clients are looking just to do the technology. We have the ability to sell technology with wraparound expert services, and we've realigned the business to ensure we fortified that. And then third, on the biotech side, where they won't have kind of large scientific teams and know-how, we have the integrated capability to run entire programs for them. So as that funding improves, those real full-service opportunities are very much what we're building towards.

Great. Okay. Well, I wanted to move on to the regulatory landscape. You mentioned wanting to see increased acceptance of things like NAMS. And obviously, there are some changes at the FDA, but I think we were talking a little bit about this earlier. I'd like to think that the FDA will continue to be a supporter of things like NAMS. So just wanted to get your thoughts. What are you looking for from the FDA in terms of that further support and acceptance of NAMS?

Yes. I think I've learned a long time not to kind of forecast regulatory agencies too much. It's a different -- it's certainly a difficult one to do. I don't see -- look, these are long-term trends. They make sense. As our computational capabilities, as our AI capabilities accelerate, our ability to understand the human body more and more, these are the right things to be building not only for -- there's a lot of drivers in NAMS, efficiency and speed and time and the time to market is a worldwide issue.

I know there's a lot today of U.S. positioning versus China. We've seen a lot of money moving to China. So there's lots of incentive for regulators in U.S. and Europe to accelerate time lines and speed to market. So I think these trends are somewhat immutable. The rate and pace at which they're accepted may vary from administration to administration and regulator to regulator, but I don't see the fundamental trend of accelerating. It just -- it makes too much sense.

I was talking to one of our toxicology leaders yesterday. I mean you see huge opportunity to do avoid a ton of bioequivalence trials and you do a lot of tox simulation. I mean there's just so many applications there as we push more into QSP and really mix in not only the understanding of the human biology, but real-world data and other things. It's just so much to know and there's so much inefficiency the way the trials are executed.

So I think the day-to-day kind of ups and downs of things are probably less relevant than the long-term trend, which will be to deploy these things more and more often.

Okay. Great. I think you set forth a goal of driving double-digit growth. So as you're thinking about the business plan for 2026, how should we think about the time frame to achieving the double-digit growth? And what are kind of the next key milestones to be on the lookout for?

Yes. So let me -- I'll do it strategically, and then I'll turn it to you, John, for some of the guidance on this. But look, we've taken -- in the first 100 days, we've done some pretty significant reorganization of the company. We set it up around 2 major growth hypothesis growth stories, one around what we call MID3, which is model-informed drug discovery, which every drug development, as you know, we've also added discovery to that as well to drive that kind of longitudinal connection across the pipeline. We've put all of our scientists and our technology systems together to create kind of that expert-based flywheel and really accelerate that business, both in terms of engagement with regulators, thought leadership, but also software build.

And then the other side, we created a new group called ACE, which is accelerated clinical evidence. And the way to think about that is truly around the digitization, particularly around data and acceleration of the data can be generated and can help accelerate from protocol all the way to submission.

So those are 2, we think, very nice growth platform, very consistent with what the regulatory bodies around the world are looking for in terms of accelerated execution, accelerated time to market. So we're excited about the room that, that creates for us.

We're also strategically also looking -- I mentioned the platform before that we've created with all these decades of experience and the know-how and the workflow and the IP and everything that sits on top of it. The other thing we're looking for is a whole range of growth areas. Those growth areas are things where we can deploy our core expertise like our drug-to-drug interaction capabilities. You can apply those to clinical trial simulation. You can apply those earlier into discovery. Is there opportunities to do something like that in the clinic? And there's a whole range of ways that you could go.

So we're pretty bullish about the long-term opportunities for growth, a combination of execution and kind of untapping some of these opportunities on [ that ACE ] front.

Yes. And so the building blocks to get there, if you look at the quarter, we did -- on the software side, we did 7% revenue growth on the quarter for software. So that was above our expectations. And then we said that software -- given the visibility that we have for software for the year, we think the software business will perform at the top or even above the top end of the range. And there are some execution changes as we described as well as just better visibility through the deferred revenue that we think will accelerate the ARR as we exit the year, and that's going to benefit the growth rates in 2027 as well. So on the software side, we feel good about that.

On services, we talked about execution. There's some operational, there's commercial changes, all of which are execution-oriented with a backdrop of favorability. The market is better than what we've seen. We talked about capital markets funding being better. Overall, we think the backdrop for pharma spending is better. And as we make these operational changes, then we're expecting to see some acceleration there.

So that's the setup for -- that's the setup is -- better visibility in software, exiting the year with a stronger ARR and making some operational changes to services, all under the backdrop of a better market environment.

Great. And sticking with you, John Gallagher, with the final question, just -- you've maintained healthy margins. So as you're thinking about accelerating growth, anything you would add in terms of how you're thinking about the margin profile?

I mean we're being disciplined, right? We've done that before. So we hit the top end of our margin guidance last year. And during a time where we were managing through some volatility, I'd say that if you look at the quarter, we put a 30% margin. It's at the bottom of our range. But we did cite some choppiness in the first half. We think that will resolve and accelerate into the second half. And we're taking cost actions, too. We just divested the regulatory business, which does come with some stranded costs that we're dealing with in the first half of this year. But we're taking costs out. We're seeing some revenue acceleration in the back half, and that's going to help us stay inside the range.

Great. Well, I think that does it for time. Thank you, Jon and John, for joining us.

Thank you for having us. Appreciate it.

Thanks.

Good day, and thank you for standing by. Welcome to the Certara First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, David Deuchler of Certara. Please go ahead.

Good morning, everyone. Thank you all for participating in today's conference call. On [indiscernible], we have Jon Resnick, Chief Executive Officer; and John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2026. A copy of the press release is available on the company's website.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements, and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying materials for additional information which you can find on the company's Investor Relations website.

In their remarks and responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on the company's website. Please refer to the reconciliation tables in the [ accompanying ] materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 11, 2026. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of information, future events or otherwise.

And with that, I will turn the call over to Jon.

Good morning. Thank you all for joining today's call. Since we last spoke, I have crossed over the 100-day mark at Certara, and I continue to be incredibly impressed by many things within the company. We are differentiated by our world-leading scientists, institutional knowledge, regulatory leadership and our fit-for-purpose technology that is embedded in customer and regulators workflows.

Our clinical intelligence capability is the logic built into our technology, [indiscernible] science and join on what our experts know our interactions with regulators over decades, and with thousands of drug development successes and failures have taught us. Certara products and services are integral to the drug development process and increasingly scalable to the use of AI technologies. Having exited the listening and learning phase, my attention is transitioned to helping Certara reach its full potential.

First quarter performance was in line with our expectations but does not reflect the company's potential. I am focused on driving long-term durable growth across the organization by reshaping our business and portfolio strategy, while instilling increased organizational and operational rigor. Today, we will discuss our markets and outline the steps we are taking to position the company for long-term success before wrapping up with our first quarter performance.

Let me start by updating you on our end markets. Across the board, customers are increasing investment in AI and tech-enabled drug discovery capabilities. Today, there are over 200 AI design molecules in clinical development, up from just a few 10 years ago. [ Eli Lilly ] has partnered with NVIDIA to build a dedicated AI lab, and Roche [indiscernible] is launching a hybrid cloud AI factory to scale their discovery and development efforts. Amazon has also announced the [ BioDiscovery ] product through AWS. Additionally, OpenAI and [indiscernible] have announced LLM for life science.

Expansion of the use case in AI is consistent with Certara's approach using analytical techniques, embedded in customers' workflow to accelerate the drug discovery and development processes, while reducing the reliance on living subjects. As AI-driven drug development helps the industry deliver more molecules and innovation, demand will increase for Certara's core business, model [ inform ] drug development or [indiscernible], as customers race to turn drug candidates into approved treatments for patients.

Accelerating data analytics processes becomes more important than ever, as the decades-long goal of reducing drug application time line comes within reach. In February, the ICH released [ ICH M15 ], providing guidance of the general principles for model-informed drug development, which establishes an overarching set of principles for the acceptance of MIDD applications by regulators globally. In March, the FDA published guidance on the general consideration for the use of new approach methodologies, or [ NAMS ] and drug development.

And more recently, in April, the FDA announced a major initiative to implement real-time clinical trials. A shift to eliminate the delays that have historically slowed regulatory decisions. As FDA leadership is set, the agency has been conducting clinical trials the same way for decades, where key data signals and lag time have delayed regulatory decisions unnecessarily, which has slowed down drug development time lines. These tailwinds present a clear opportunity for Certara to tackle historically arduous drug development processes.

Certara has an incredible legacy. We believe we are unrivaled in MIDD today because of what was required to build it. We have more than 2 decades of published scientific literature, 2,600 customers around the world have run over 10,000 projects, and have more than 160,000 users, our technology, including the FDA and Japan's Pharmaceutical and Medical Devices Agency. Pinnacle 21 has been used to validate more than 36 trillion data points in support of over 500 approved treatments. And we are a team of world-class scientists and are proud to have 10 scientists recognized in [indiscernible] top 2% of the world's most cited scientists.

This is not a position that can be replicated overnight. It is the product of decades of scientific rigor, regulatory trust and deep customer partnership that many underestimate. For example, the qualification of our Simcyp software for the prediction of drug-to-drug interactions and the EMA required 2 years of engagement with participants representing all 27 member states. Our most experienced [indiscernible] worked directly with EMA reviewers to evaluate 25 years with data, code and process documentation to gain approval from the EMA. To our knowledge, Simcyp is the only mechanistic modeling software qualified in Europe at this critical level.

Building on this legacy, we have developed and continue to invest in category-leading products that are truly distinguished in the market. Maximum Simcyp, Pinnacle 21 and Phoenix are purpose built, validated and deeply embedded in the workflows of the world's leading drug developers and regulators. What makes these valuable to our customers is the cutting-edge science, proprietary data, intellectual property, thousands of validated biological parameters, unmatched computational precision and auditable transparency that regulated science demands.

As we move the company forward, there is a window of opportunity for us to drive value from connectivity across our clinical intelligence capabilities. We are building an AI integrated platform that sits on top of and complements our existing portfolio. This next-generation platform will give researchers the ability to interrogate Certara's full body of knowledge across products, data sets and scientific expertise to get accurate, trusted answers to increasingly complex questions. We have created an AI-native team, allocated the investment resources needed for this effort and are engaging [indiscernible] customers.

Our annual Certainty Conference in Boston illustrate our scientific and technological leadership and provide clear evidence that our customers are looking for us to innovate. In front of more than 400 attendees, we showcased the latest in MIDD and AI-enabled technology capabilities for more than a dozen products, leveraging demos and user groups to collect valuable feedback.

Moving to delivery. Let me share a few highlights from the quarter. Our technology and scientific experts supported numerous drug approvals. One notable example was a complex generic of [ tazarotene ], a dermal product used in the treatment of acne and [ psoriasis ]. Certara's PBPK in silico modeling data was accepted in lieu of a clinical endpoint bioequivalent study. This is only the second time ever that PBBK modeling has been used to enable approval of a generic drug in lieu of running clinical trials.

In another example, Certara also demonstrated the real-world impact of MIDD and regulatory success for the leukemia therapy, [ asciminib ]. Simcyp supported the evidence generation journey and approval with the FDA accepting the PBPK modeling results in lieu of clinical studies for at least 10 human trials, significantly reducing development time and cost. Certara scientists published nearly 100 peer-reviewed papers this year, spanning dose optimization, pediatric development, virtual bioequivalence and next-generation MIDD frameworks, which align with the recently published [ ICM M15 ] guidance focused on the multidisciplinary principles of MIDD. [indiscernible], a publication co-authored with the FDA and [ MHRA ] scientists highlighted the expanding role of MIDD in pediatric drug development, showing PBPK as potential to reduce time lines and costs for pediatric trials by informing dosing, study design, extrapolation and label extension while reducing unnecessary studies in children.

In addition, one of Certara's leading scientists, or as the Editor and Chief, Clinical Pharmacology and Therapeutics Journal, a position she took over from another leading Certara scientist. We had several technology advancements in the quarter with AI increasing the productivity of our developers and the value of our technology. There were multiple new releases of our software, including a new version of D360 to help discovery scientists accelerate therapeutic peptide design and optimization, new functionality in Pinnacle 21 to accelerate clinical study start-up, and extended reporting functionality in Phoenix Cloud, and the release of Simcyp with expanded simulation and virtual bioequivalence capabilities.

To capitalize on these opportunities and prepare to scale we are taking several decisive actions. First, we're focusing our business and accelerating long-term growth by exiting medical rating. Second, we're reorganizing and aligning the company around two distinct growth areas. MIDD and discovery, which we call [ MID 3 ] and accelerated clinical evidence, which we call [ ACE ]. Third, we're creating a stronger center of gravity for AI across the company. formalizing leadership with a Chief AI Officer and increasing investment in our next-generation Certara platform. Fourth, we're extending our capabilities and reach with strategic collaborations and partnerships highlighted by NVIDIA and [indiscernible] Sciences. Fifth, we're reviewing opportunities to leverage our existing clinical intelligence capabilities into new use cases. And six, improving execution and efficiency.

Focusing on the first action. On Friday, we closed the divestiture of the regulatory writing and medical writing business to Veristat. This transaction allows us to sharpen our focus in areas we have defined competitive and scientific advantage, results in a nearly [indiscernible] alignment between our expert services and our technology, where our value proposition is the strongest, improves the predictability of our revenue and unlocks approximately 150 basis points of incremental growth in 2027 and beyond.

Second, we are reorganizing the company into two groups to accelerate growth and better service our customers. [ MID 3 ] and [ ACE ]. Within MID 3, we have merged our technology and expert services into one organization, creating a flywheel for technology, innovation and customer engagement. ACE's mission is to reduce data time lines doing the full life cycle from design through and beyond submission, while maintaining or improving quality at every step in the process. Both groups will be supported by a Chief Product Officer reporting to me, who will oversee product development across the organization. We are engaged in an active search for this position.

Third, we have appointed Dr. [ Chris Button ] as our Chief AI Officer, further evidence of our commitment to drive innovative solutions that turn decades of cross-program scientific and regulatory intelligence, in the market-leading AI integrated capabilities. Chris also serves as our Chief Technology Officer and led Certara's AI implementation efforts. In his expanded role, Chris will drive the acceleration of Certara's next-generation platform.

Fourth, we are taking [indiscernible] approach to partnerships. In April, we entered into a strategic collaboration with NVIDIA to apply accelerated computing and AI to Certara's next-generation platform. This partnership will reduce manual, time-intensive steps and ship biosimulation from sequential processes to parallel iterative workflows. This is particularly important for Certara's computationally intensive applications. We've been hard at work at this collaboration and we'll communicate more details soon.

We've also expanded our commercial collaborations, most notably through a new relationship with [ Alta Sciences ] of forward-thinking integrated [ CRO/CDMO ]. Together, we are advancing it model first fully integrated and resource-efficient approach to early drug development that accelerates the path to proof of concept for biotech innovators, investors and pharmaceutical companies across the globe. These collaborations will strengthen Certara's underlying technology and enable us to bring value to new customers.

Fifth, after completing a review of our portfolio and market opportunities, we've identified several new potential use cases that build up our clinical intelligence capabilities. For example, clinical trial simulation and asset evaluation to name just two. We are actively evaluating investment opportunities in these areas. There is excitement across the organization about these opportunities.

Finally, we are taking decisive steps on the operational side of the business to drive efficiency, accountability and growth. We have deployed focused SWAT teams to address needed cultural shifts, simplify processes, accelerate technology development and improve execution. We are aligning sales and marketing to our new structure to clarify accountability and drive customer centricity. We are taking a data-driven approach to leveraging AI to better target and identify opportunities.

Multiple efforts are underway to both review and optimize pricing, but also to explore more structural changes to how clients consume our solutions. We are also updating incentives to drive the right behaviors and encourage cross-functional collaboration. And we're also rationalizing internal spend to shore up our cost base and maximize investment efficiency.

Let me turn to the first quarter results. The team's focus on technology resulted in improved performance over the second half of 2025, particularly in MIDD. This is a good start for the year, but we need to see consistent performance. Services performance in the quarter was mixed, after an extremely strong Q4. The operational and commercial changes I outlined earlier are designed to address these gaps. It will take time to achieve our long-term operating goals and it's important that we make the right decision for Certara's long-term growth and success now.

With that, I will turn the call over to John Gallagher to walk you through our first quarter results and guidance.

Thank you, Jon, and hello, everyone. Total revenue for the 3 months ended March 31, 2026, was $106.9 million, representing year-over-year growth of 1% on a reported basis. Total bookings in the first quarter were $115.3 million, which declined 2% from the prior year period. Trailing 12-month bookings were $479.2 million, increasing 5%. Software revenue was $49.7 million in the first quarter, which increased 7% over the prior year period on a reported basis.

Growth in the quarter was driven by Simcyp, Phoenix and Chemaxon. Ratable and subscription revenue accounted for 57% of first quarter software revenues consistent with the prior year period. Software bookings were $48.7 million in the first quarter which increased 20% from the prior year period. Trailing 12-month software bookings were $192.2 million, up 8% year-on-year. The software net retention rate was 106 in the quarter. Looking at our software bookings performance by tier, we saw performance at or above plan across all 3 customer tiers, which was nice to see following a mixed fourth quarter performance.

Now turning to services revenue, which was $57.2 million in the first quarter, down 4% versus the prior year period on a reported basis. We saw mixed results in our MIDD services business in the quarter, reflecting the operational dynamics Jon mentioned earlier, which was compounded by softness in regulatory services. Services bookings in the first quarter were $66.6 million, which declined 14% from the prior year period. TTM services bookings were $286.9 million, up 2% compared to the prior year. After a strong fourth quarter, we saw softer performance from Tier 1 customers in MIDD services during the first quarter.

Total cost of revenue for the first quarter of 2026 was $41.6 million, a slight increase from $41.5 million in the first quarter of 2025. Total operating expenses for the first quarter of 2026 were $111.2 million, an increase from $98.4 million in the first quarter of 2025, primarily due to a $7.4 million increase in the change in fair value of the contingent consideration related to the [indiscernible] acquisition. Adjusted EBITDA for the first quarter of 2026 was $31.7 million, a decrease from $34.8 million in the first quarter of 2025. Adjusted EBITDA margin in the quarter was 30%.

Wrapping up the income statement. Note that GAAP net income and EPS are both impacted by nonrecurring items. Net loss for the first quarter of 2026 was $8.8 million, compared to net income of $4.7 million in the first quarter of 2025. Reported adjusted net income for the first quarter of 2026 was $14.5 million, compared to $22.2 million for the first quarter of 2025. Diluted loss per share for the first quarter of 2026 was $0.06, compared to earnings of $0.03 per share in the first quarter of 2025. Adjusted diluted earnings per share for the first quarter of 2026 were $0.09 compared to $0.14 per share in the first quarter of last year.

Moving to the balance sheet. We finished the quarter with $149.5 million in cash and cash equivalents. As of March 31, 2026, we had $294.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Last year, our Board authorized a $100 million share repurchase program. We have repurchased approximately $82.6 million of stock since that authorization, including $40 million during the first quarter of 2026.

Today, we announced the closing of the regulatory writing and Medical Writing Services divestiture. As a reminder, in 2025, these businesses generated $50 million of revenue and approximately $17 million of adjusted EBITDA, excluding unallocated overhead expenses. During the first quarter of 2026, they contributed approximately $13 million in revenue, and we expect to recognize approximately $5 million from them in the second quarter. Going forward, we anticipate our revenue mix to be approximately 50% software and 50% services.

With that in mind, we are updating our full year 2026 guidance to reflect the divestiture as follows. We now expect 2026 reported full year revenue to be in the range of $395 million to $405 million, including the $18 million I just referenced related to the divested business. This outlook reflects full year growth of 0% to 4%, excluding the divested business in both periods, and is consistent with our prior growth expectations from the call in February.

We expect first half revenue growth to be closer to the low end of the 0% to 4% range, while the second half is expected to be at or above the high end of the range. We anticipate full year software growth to be at or above the high end of the 0% to 4% range for the year, with first half closer to the midpoint and second half above the high end of the range. The software outlook contemplates higher visibility compared with last year, and we are optimistic about opportunities for newly introduced products.

In Services, we expect full year growth to be towards the low end of the 0% to 4% range with first half at or below the low end of the range, improving to the high end during the second half of the year. We see the Tier 2 and 3 end markets improving through the course of the year following a strong capital raising environment through April. Generally, compared to the guidance provided in late February, this more detailed revenue outlook reflects modestly improved software performance and modestly lower services outlook, which we attribute to some of the execution dynamics Jon referenced in his remarks.

We anticipate full year 2026 adjusted EBITDA margin to continue to be 30% to 32% range, including contribution from the regulatory writing and medical writing business. First half margins will be modestly below this range, and second half margins will be closer to the higher end of the range. Margin performance through the year reflect higher revenue growth in the second half of the year, as well as improved operating discipline across the organization following the divestiture. We expect adjusted EPS in the range of $0.35 to $0.41 per share for the full year. Fully diluted shares are expected to be in the range of $157 million to $159 million, and we are modeling effective tax rate of about 30%.

With that, we will open up the call for Q&A. Operator, can you please open the line?

[Operator Instructions] Our first question comes from Scott Schoenhaus with KeyBanc.

So Jon, you mentioned this next-generation AI platform that you guys are developing. Maybe walk us through the opportunity here, the monetization. Is it more a function of [indiscernible] drives engagement utilization on the software piece? Are you taking ASP up? Maybe walk us through the dynamics here to bridge us to this opportunity.

Thanks, Scott, for the question. Yes, we're extremely excited about what is ahead of us here. First of all, before I get into the detail on the platform itself, I mean, [ AM ] more broadly, we've taken a step change in terms of our readiness. We're focused on things like product development, which is the platform, scaling capabilities across the organization, people and talent, you saw the announcement about Chris, and overall kind of corporate governance of it.

Obviously, we talked historically about the great position we believe we have. And my comments a few minutes ago, I think you heard that foundation, those capabilities that we have over the decades, it's created a real exciting position in terms of embeddedness in client workflow, codification of science validation, auditability, transparency. In essence, closing that kind of last mile in a regulatory sciences market, our view and our expectation is that there's a spot in a place where Certara's capabilities, know-how and expertise will fit in very well as a complement to what's out there today.

So the platform -- and I don't want to go into too much detail on exactly what we're doing because I do know that there are others who are listening to this call as well. But it's, in essence, building on these exact capabilities, it is an effort for us to unify many of our products and our know-how under a single environment. It will allow us to take all the, kind of, independent know-how and the independent applications we have and answer questions across the life cycle. And it's going to create unique business models for us as we move forward.

In terms of your question around kind of guidance and how should we think about it. I think for 2026, as we indicated, we're out talking to [indiscernible] clients we're out engaging in this. This is a thing that's now in active discussions. So I wouldn't think too much about near-term modeling. I think what we'll do is provide more guidance towards the end of this year about how you should think about this relative to our conventional software portfolios, we think more on platform into '27 and beyond.

And then my follow-up is the strong software bookings you had this quarter. You mentioned a lot of new product releases. Maybe help us parse out where you're seeing the strongest demand into that bookings strength this quarter on the software side?

So I think software was strong pretty much across the board this quarter. We obviously, [ off ] the soft trailing 12-month number that we saw at the end of last year, we put a lot of focus on it. Really got underneath it with our sales teams, but the incentives and products and plans and have done a lot of work in Q1 really to [indiscernible] together. But it's pretty consistent in Phoenix Cloud, had a good quarter as a very good pipeline. We're extremely excited about the transition there and the growth.

Simcyp had a good quarter as well, core kind of PBPK offerings. Pinnacle, which is, as we said before, has ebbs and flows, a little bit when new trial starts, and it's going to be a little bit slower than it has been in the past years, actually slightly outperformed expectations in the quarter. So I think everything performs at or above expectations.

Our next question comes from Brendan Smith with TD Cowen.

Congrats on the progress. Maybe just a bit of a follow-up on one of the previous questions. But I guess can you speak a bit more specifically to the new customer mix you're seeing year-to-date? I know you mentioned pharma really leading more into AI, which we continue to see kind of across the board, but also maybe some impact on Tier 1 customers.

So I guess, first, just wondering how the new software adds within pharma compared to maybe new customer adds within smaller emerging biotech. Just any trends to call out in those relative buckets?

Yes. Brandon, we were pleased, obviously, with the rebound that we saw with software on the quarter. So to your point, across all customer tiers 1, 2 and 3. We saw pretty significant acceleration in the bookings. We saw a good achievement on the revenue with 7% software revenue growth on the quarter.

I'd say as it relates to specific within the tiers, we saw Tier 3 customers and Tier 2 customers leaning in on -- as John mentioned before, we saw a strong performance in Phoenix as well as in Chemaxon. I'd say in the Tier 1 category. We had another good quarter on Simcyp. So that's the overall highlights of the customer tiers in the quarters. But they came above expectations on the quarter, which was good on the heels of some choppiness we saw in Q4.

Okay. Got it. And then maybe just a quick follow-up. Just kind of talking about the [indiscernible] efficiencies you mentioned. I know it's being an internal target for kind of helping drive margins. But can you maybe help us understand kind of through that lens, the structure, even of the NVIDIA collaboration really what that looks like and how we should think about the impact over the next couple of quarters there?

So you mentioned execution first. Look, there's a range of initiatives in play. I mean, obviously, today, we're announcing. Well, some reorganization where we do have done the divestiture. There's also been some -- a lot of broader work on operational cadence and execution and cost base. So we're moving incredibly quickly, certainly at a rate in pace, which I'd expect to set up the business for a long term. So we can go through some of those mechanics, if you want later.

But the NVIDIA partnership, I think our general mindset on these things is let's not throw out splashy press releases [indiscernible] things, [indiscernible] of substance. We've been working with NVIDIA for the last couple of months through an MOU and through a signed partnership agreement really to define ways of scaling speed at which you can execute on particularly some of the more complicated simulations, allowing more democratization. The belief is if we can speed some of the core QSP and PBPK offering we can allow for much broader use with an organization we can get quicker, reads on what's going on earlier and kind of meet the expectation that discovery of preclinical users of the applications.

So we're excited about it. We'll come back with more details on how to think about it exactly in terms of product development and how to think about it in terms of kind of joint join efforts here and its impact in terms of our thinking about overall operational efficiencies.

Our next question comes from Luke Sergott with Barclays.

I just want to talk about the reorg there that you guys are talking about across the 2 segments. And is it more about just the consistency, or stability that we could see from software versus services? Because it seems like 1 quarter, one of the segments is really strong and then at the expense of the other and then vice versa? And just what you guys are doing to build in some consistency and more sustainability here going forward between the two?

Yes. I've had the same observation. There's been a lot of inconsistency in back and forth over the last few quarters that we clearly put a lot of focus on software this quarter. We got a strong software results. So I think our approach moving forward is, obviously, to try to get that balance right. So there's a number of things.

First of all, the exiting of the regulatory medical writing business will help. That's been an extremely lumpy business on the service side. A result and mix of business will be much more mixed between services and software on an ongoing basis, which will give much more predictability into what we do. The exit of the regulatory business, which wasn't really tied to our core software business. As I said last quarter, we do best when our technology and services are integrated, and what we've effectively done on the MIDD business here, [ MID 3 ], is we've brought together all of our kind of expert services and our technology to [indiscernible] that flywheel effect. So there should be more stability when those two businesses [indiscernible] able to [ route ] around it.

We're also taking some steps with our sales teams and our commercial organization to better align specialty engagement on that side that should drive more predictability. I wouldn't say we've completely solved the riddle, but we're -- we see the same pattern. And obviously, we're focused also on creating the incentives in the organization that [indiscernible] both of those segments moving at the same written pace.

Great. And then I guess with regards to that kind of -- when you think about the guidance and the back half step up here. You had a really big bookings -- bookings have pretty good on the services side. So like when is the timing of there when we see that flow through? And if you could just help us out with the pacing on that services ramp through the year?

Yes. So it -- services bookings take a couple of quarters to pull through. One of the focus areas that we've had over the last quarter has been on backlog conversion. And we saw good -- despite the choppiness and softness we saw on the bookings side for services, we did see very good backlog conversion, and we expect to be able to continue that through the course of the year.

So backlog is going to help support the revenue achievement, especially in the back half of the year here with the with the bookings that we posted in Q1, along with the bookings that we're posting now. What we're seeking to do is drive an inflection point through the execution on ensuring we're filling up that backlog, and that's some of the focus area that we have right now.

Our next question comes from David Windley with Jefferies.

I wanted to ask on the references to execution and go-to-market challenges that impacted the first quarter. Think you -- Jon, you touched on those as kind of a high level, but I wanted to understand better, was that caused by a lot of the realignment that you talked about and just kind of the intensity of that during the quarter? Or what, in more detail would you use to describe those execution and go-to-market challenges that impacted the first quarter?

Well, first of all, I'd say, David, there's a legacy model that was in place. So a lot of the changes that we're making, I think, are meant to enhance it. I'm pleased by the progress we made on the software side, there was a real focus there, and you could see the results of that focus on that side of things. I think overall, what we're looking to is just more consistency across the teams. And we're focused on that in a few areas.

One, how can we make sure we're optimizing expert-to-expert engagement across the business. A lot of these -- a lot of -- a lot of the engagement that happens here is scientists to scientists. We want to make sure we're putting that foot forward.

Second area that we're focused in on is extending partnerships. We mentioned [indiscernible] relationship. That really, I hope, signals and reflects a different approach to -- partnering in a different approach to go into it in different ways. Our offerings are incredibly strong in terms of being complementary to what a number of players have out in market. So there are a number of scale players, whether their venture capital players or whether they're CROs that we are very good potential partners for. So a renewed focus on partnership and how we can drive through.

We've leaned in much heavier on targeting approach, continuing to focus on Tier 1. There's a number of clients in the Tier 2 space that we're working on building out new relationships and extending where the overall integrated tech service proposition fits very well. We've layered in a number of kind of AI initiatives to help drum up more opportunities to drive more growth across the business.

So look, we're doing a number of things. I don't necessarily [indiscernible] create some churn as you'd expect. And we got Reg business in and Reg business out those. Things do have an impact. But our goal here is to set up a business that's going to be growing in line with our expectations and our shareholders' expectations over time. And that's going to be taking some short-term tougher decisions that are going to lead to that longer-term growth.

Got it. Appreciate that. My follow-up is around biologics, in particular, I think there's been some effort over multiple years to refine, or augment some of the software platforms, maybe in particular, Simcyp be amenable to or to better address the large molecule market. I wondered if you could comment on the progress there and what specific client traction the software in general, but again, thinking primarily Simcyp [indiscernible] getting on the biologics side?

Yes, it's a great question. The -- I don't have the data points in front of me, and I can provide them in a subsequent discussion. There's obviously been a lot of focus on that point internally as I've gotten ramped up. We are -- we do see not only in Simcyp but QSP, which is kind of the extension beyond that, which brings in more to biological components. We do see growing percentage of our business on outside of the oral components, which you get into peptides and a whole range of other things. There is a range of other things. There's a ton of need for both of these.

I don't -- I was actually asking over the weekend for quantification of a percentage of each of them. I don't have it to hand right now, but we're looking. There is strong growth as you look at the net new offerings that we're building. They are equally as relevant to the chemical and to the large molecule side. So I can provide a follow-up when we speak next with a little bit more color on it. But we are focused on extending the applications into that large molecule base.

Our next question comes from Michael Cherny with Leerink Partners.

Maybe if I can just circle back on the strategic AI expansion that you noted earlier. [ Jon, either John ], as you think about the investments you're making, the reorg you're doing internally, how are you balancing the need to ensure appropriate returns versus the spend levels? We hear so many stories about AI spending at [indiscernible] What is the risk -- the up-down dynamics that you're pursuing to make sure that the investments you're making are the right ones?

Yes. Yes, good question, Mike. We -- well, what we've undertaken this year, you've seen R&D spend in the quarter continued to increase, and we've said that we're deliberately making investments. What with Jon's onboarding one approach that we've changed to ensure that we're getting the return on that capital invested is starting to look at, we call it a portfolio view, or looking at business cases around what we're investing in and when the revenue is going to come on that.

So Jon talked about some changes to the organization. Jon talked about some of the platform investments that we're making. And -- but I'd tell you that we're taking a disciplined approach toward the investments that we're making this year in R&D and looking at when the return is going to come, i.e., when is the revenue going to start to show up for that? Which, as you understand, many of the investments that we've been making in 2026 will start to show up in 2027.

And I'd add just a little bit to -- the good news about this portfolio is that it's built on, what I described as kind of clinical and scientific intelligence already. If you think about the fundamental business, 10,000 projects, thousands of published articles, the regulatory know-how, the entrenched workflow, 160,000 users. I mean, there's a lot of, I think we said 36 trillion data points, in Pinnacle since record. There's a lot of know-how and unique data and unique applications that exist within our 4 walls.

So the investment itself doesn't have to be in building out that capability and the ability to create the infrastructure. Investment is on top of it in terms of turning that unique capability and that unique insight we have is something that's going to be broadly available on a more systematic basis to work within a client's ecosystem. So that's one.

Two, I'd also say that I think we signaled that -- I think we understand where our fit will be in here relative to some of the other model providers and other work phone agent providers in market. And so we're very comfortable with our perspective in terms of being able to partner with in this ecosystem. So NVIDIA is one good example of of kind of where we're going with some of that. We also have a number of other discussions going on around how [indiscernible] be as effective as possible and as target as possible, and do some of this in a [indiscernible] fashion so that we can get the return that we're expecting.

And just one quick additional question. I apologize if I missed this. With the divestiture now completed, what's the plans for use of capital raised?

Yes. So on capital allocation, I mentioned in the prepared remarks, we bought $40 million of shares against our authorization in Q1. So share buyback continues to be a focus and a capital allocation vector for us. What I'd also say though is we've got a good track record of tuck-in M&A and looking at the pipeline there is also something that we're evaluating. So we didn't specifically highlight Mike, that we would do one or the other. But both of those are now areas where we've been deploying capital successfully over the course of the last year.

Our next question comes from Jeff Garro with Stephens.

I wanted to ask about the new [ MID 3 ] and ACE categories. And just to start, if you could spell out in a little more detail the products that fit in each area, and what we should expect in terms of metrics or commentary on those categories going forward?

Sure, absolutely. So MID 3 is going to be our core model-informed drug development and discovery, applications that will house not only the technology assets, things like Simcyp and CertaraIQ, but also the full range of expert-based service capabilities that we have. [indiscernible], PBPK. So it would be, kind of a one touch up there. Accountable and responsible for building up the regulatory footprint and the scientific footprint, and offering development on that side. A good mix between that flywheel effect between technology and expert based services.

The other side ACE. ACE is going to be focused on solving a lot of the data problems that exist within -- which is probably underlying best [indiscernible] some of the recent FDA trial acceleration commentary. That will include things like Phoenix and Pinnacle, and [ co-op ] there and go to submit and some other things that we have within our 4 walls, which are really focused in on kind of solving the data on the flow problems and helping to accelerate the rate and pace at which data can be turning that into evidence for submission.

Excellent. I appreciate that. And the follow-up on that topic. Curious about how the going market evolves with these categories. Any way you can frame kind of, how big of a change is this going to be for your go-to-market teams? And then how should we think about the time line of making those operational changes? And finally, any expectation you would set on expected impact from these go-to-market changes?

So I've mentioned a couple of times. I think the predominant focus here from the management team is how are we going to build this business to get to that double-digit growth that everyone externally expecting, and that we believe is 100% possible. So as you're kind of making of all of these changes, you may have a little bit of churn in the near term, but these are being set up for long-term opportunity, maximization and long-term growth.

What -- the changes that we're making -- that we've announced today and that we're moving forward are really what I would characterize as more alignment based changes than kind of fundamental restructuring of our commercial organization. We've taken our -- we had historically had [indiscernible] last couple of years, there's been a centralized sales organization that operated independently from the businesses. One of the changes that we've made is basically to align the portfolio teams that are selling the products within MID 3 or ACE with the actual businesses. This will shorten feedback from clients. It will create more accountability within the business. It will help -- help us with the product innovation and ensure that we have focused hubs for sales and product execution.

So look, I don't think we're -- we've quantified near-term versus long-term churn attached to this. But again, our expectation is that this will set up this business to have the type of growth that you want over the midterm, and that's the goal of these changes and it's the goal of strategic moves that we're making.

Our next question comes from Craig Hattenback with Morgan Stanley.

Can you touch on just the visibility in the software business, the expectation for a stronger second half, including any differences you see by customer tier over the course of the year?

Yes, Craig. The visibility -- so we mentioned the visibility on software for a stronger second half is better this year than what we saw last year. The main reason for that is -- if you look at the deferred revenue, the deferred revenue balance is higher, meaning the ratable software business that we've sold is in hand and it's going to start to build as we as we move through the course of the year.

The other thing I'd point out on certainty for a second half ramp is it's more of a ramp in growth rate than it is in dollars. If you look at the actual dollars, and if you were to look at that at the top end of the range, then it's a pretty modest increase in the amount of revenue dollars, but the comps ease as we get into the second half of the year, and therefore, the growth rate at [indiscernible] will be reflected higher. Those are a couple of the key reasons why the first half, second half story on software. And of course, the performance in the quarter gave us some confidence as we move through the year.

And customer tier, you said was kind of broad-based in Q1. Is that the expectation as you move through the year? Or is there anything you would call out by customers here?

Yes. I think across the good growth, exceeded our plan expectations across the customer categories. I'd say that was most pronounced in Tier 2 and Tier 3. That [ outperformance ] Tier 1 was a strong contributor for sure. But we've got some tailwind from funding environment at this point. And we think that as we move through the year, that's going to help us in the Tier 2 and 3.

Great. And then just my follow-up question on, kind of, the AI dedicated team. Just as you're thinking about allocating capital in the business, are there parts of the organization where you're finding efficiencies in terms of where you're shifting spending? Can you give any color around that?

Yes. Yes. We are. You probably remember in the prior call, we mentioned cost avoidance. We're still working through that. And our margin guidance that we gave here today would be reflective of improvement as we move through the course of the year. So the answer is, yes, we are reallocating. We are making trade-off decisions and that's happening on the operating side as well as in R&D investments.

And I think unsurprisingly, similar to others, we're seeing massive acceleration improvement as well as productivity is way up. The amount of [indiscernible] teams are able to generate the productivity of what we're doing is dramatically increased. So quite pleased with the accelerated road maps and the acceleration of capabilities that comes along.

Our next question comes from Sean Dodge with BMO Capital Markets.

Maybe just the partnership you mentioned with [indiscernible]. Is this anything more you can share on how that works? [ With the opportunity ] is there anything about the economics of it? And then just is it just software you're providing there? Or is there going to be services that are part of the [ Alta Sciences ] partnership, too?

Yes, we're excited about this. So I mentioned before, I think as a company, our portfolio lends itself very well to a range of partnerships. We're highly complementary to a number of scale market players here, and I think this is something we'll continue to push on.

This relationship is [indiscernible] obviously just announced this past week, there is genuine alignment between the teams around acceleration of trial opportunities to completely rethink early-stage execution in different ways. [indiscernible] is a unique [ 1 or 2 ] who has a set of integrated lab, animal human CDMO capabilities. So they have the opportunity to come from an early stage. Really kind of connect a lot of the things that we do on the modeling side. Everything together, we'll also be able to do some disruptive things with data and help close some of the loops and data and accelerate data flows.

So we'll be working with them over the next couple of weeks and months in terms of defining not only kind of opportunities to engage customers with very high customer overlap already, which is the starting spot. But identifying opportunities to better integrate technology and service workflow across the two organizations to the benefit of our clients.

Okay. And then on the software side, and more specifically on the upsells you referenced in the quarter, can you give us an example or two around what is an upsell, would have been kind of some of the more common ones lately. Have those been pretty consistent across all client peers? Or have you seen kind of more one or the other?

Yes. We -- effectively, that's reflected in the net retention rate. So we did [indiscernible] on the quarter, which was an inflect higher than where we've been over the last few quarters, which was which is good. What does that mean? I mean in the Tier 1 customer category, those are all already our customers. So an upsell would basically be some kind of expansion. We're taking more seats. We're selling more functionality in the Tier 2 and Tier 3, and particularly in the Tier 3 category, then that's the opportunity to add some new names or some new logos.

But we also have a huge 2,400 total customers -- customer base. So any kind of upsell is that land and expand strategy that you've heard us talk about in the past, which is really working the existing customer base and making sure they're aware of the breadth of product offerings that we have, and that would fall into that upsell category.

Yes. If you recall, in the last call, we talked a lot about price as particularly pricing discipline as a lever. And we've looked at this on 2 or 3 dimensions. We've looked at this on an operational level, which John just referred to look at our net contract values, look at our existing upgrade path and potential, which is a tactical plan we have in place and we've got a SWAT team who's looking at that. We've also looked more broadly set of strategic initiatives.

One of the pieces of feedback that I've received from some of our enterprise clients is that they're looking to consume more of our software that consume more of our technology in an integrated way. And sometimes the pricing structures are inhibiting to doing that. So how can we develop more enterprise-based pricing approaches that will be [ considered ] with our push more into platform engagement is another big initiative that we have as well. We think both of these will be -- will be net beneficial to our growth rates over the coming months.

Our next question comes from Matt Hewitt with Craig-Hallum Capital Group.

Just one for me. So Jon, you spoke about your partnerships, and there's been consortiums announced over the past few quarters. And you've got these relationships with NVIDIA and the new one with [ Ulta Sciences ]. I'm curious, as you look at the news flow regarding these partnerships, whether it's yours or others in the market, is the ultimate goal here to drive either adoption of simulation and modeling to accelerate that, which obviously would benefit you to create a wider moat, allowing you to not only retain but maybe grow that business even further? What is the ultimate goal? And when do you expect to see some benefits from these types of partnerships?

Good question. And maybe I can say yes and yes, you're -- I mean, I think those are both look true. Look, this -- we know success in this market is not one-offs. We live in a very connected ecosystem. There are a range of capabilities it's going to take to be successful and to grow at the written pace at which we believe we can. And so we're being focused in terms of what we think we're very, very good at, and we're doubling down and tripling down and what we're very good at, and we'll look for partnerships to fill in some of those gaps. Partnerships with technology with technology suppliers and with modeling.

Those things are complete accelerators to what we do. Commercial partnerships with at scale players like early-stage CROs in fact, perhaps others as you go along, who add scale, have large books of business as well and are working in the core kind of clinical side, which we don't have capabilities, we're not a CRO per se. Is it another -- if we can integrate that on behalf of our clients, it's win-win. It's a win-win-win. It's win for us, it's win for an [indiscernible] type partner. And it's a win for clients who will be working with because we can accelerate time lines and drive cost down for them and help disrupt conventional flows.

So look, I think it's a realization that it will help accelerate the market is also a realization that we know what we do very well and that we're comfortable in partnering with others and that they do well to help create winning scenario for our clients.

Our next question comes from Max Smock with William Blair.

Maybe just one for us quickly. You talked a lot about just interest and impact of AI on drug development. I'm curious to get your thoughts on how much interest is out there on the large pharma side from building out internal solutions actually, it seems like there's been a lot of focus on discovery. So do you expect these investments to result in solutions that are going to be competitive with your offerings in that space. And then in clinical, how should we think about the risk that large pharma [indiscernible] solutions that compete with your MIDD solutions here going forward?

Max, I just want to make sure I understand the second question. Can you just repeat that one more time?

Just around large pharma and their willingness and ability to build out solutions that compete with your offerings, whether that's in discovery or the clinical space?

Yes. Look, I generally think in the near term, where most of the productivity is happening and where most of the big splash press releases are is on the earlier stage discovery. And I think we mentioned, we see this as kind of a net positive to the market. More compounds means more demand for MIDD services.

And so look, I know there's a lot of press releases, a lot of uncertainty out there around how some of these things go. So what we are hearing on the other side of it is phone calls from a lot of these players and providers about how do we tap your capabilities into what we're building and doing started in the opening statements. And I think I reiterate again and we told the story about what it took to get Simcyp approved in the EMA, and we've been working with the 25 member companies in 2 years and the importance of transparency and important [indiscernible] in that.

We talked about the mechanics around Pinnacle and 36 trillion data points and mechanics of it. [ Talk ] about the legacy of the historical data and all the kind of unique IP that we have. It's pretty tough to replicate. I mean, this is not easy stuff. So I would see it as hugely inefficient for others to be building their own capabilities. I think it's a bit upon us to democratize it to the extent that we can make it broadly available within their 4 walls and partner with them in different ways so that the companies are getting broad application, the benefit of the capabilities that we bring.

I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good afternoon, everybody. I'm Luke Sergott. I cover life science tools and diagnostics. With me today, I have John Gallagher, CFO of Certara. Thanks again for making it.

Hi, Luke. Thank you for having me.

Under the bright lights here. So I guess to start off, can you just recap how the quarter from 4Q shook out versus what you guys were expecting? And this is more of just thinking about a jump-off point from kind of the lumpiness and the softer demand that we saw through '25. And how the first quarter as you guys are looking at it within your assumption there throughout '26 is going to progress, like puts and takes as you thought about it?

Yes, sure. Thanks, Luke. Glad to be here today. We finished the year in 2025 strong from a revenue and EBITDA perspective. I'll get into bookings in a second. But if you look at revenue, then organic software revenue, which was something that we were watching during the course of the year landed at 7% on a full year basis. That was right in the middle of our original guidance range of 6% to 8%. So that came in line with expectations. EBITDA, we had guided 30% to 32% adjusted EBITDA margin on the year, we came in at 32%. So we exceeded our own expectations as far as ability to invest in the business because you saw that, you saw R&D expense tick up during the quarters of 2025, yet we still hit the high end of the guidance, and that means we were disciplined about looking in other pockets of the P&L and making sure we could offset some of the investment that was coming in.

On bookings. Bookings were mixed in the fourth quarter. And to your point, there were some dynamics during the year where we saw spots of weakness and volatility in general. For example, in services, we saw weakness in Q3, we called that out on the November earnings call. And unexpectedly, to us in Q4, we saw a very, very strong month of December. So the month of December for services bookings came in at 17%. We think that there is an element of seasonality, some budget flush that came in. The over achievement there was broad-based. It was across customer tiers and it was across both biosim services as well as in regulatory.

So that played out a little differently than we thought. But as you look at services on a whole, though, it has been lumpy. Q3 was low. Q4 was high, some of that seasonality. And although we think that, that surge in discretionary spending in the fourth quarter is a good element as we look at stability in 2026, we still think and we've seen historically that services can be lumpy.

On the software side, our trailing 12-month organic software bookings were 1% on the year. They were down a decline year-on-year in the fourth quarter. So we did see some deceleration in software bookings and that all sets up the guidance as we look at 2026, where we said that the organization would be flat to up 4%.

Yes. And on that software, the booking side, is it -- are we even looking at the right metrics from that perspective, just when you're looking at the overall bookings? Because Is it like -- is there an ARR benefit? Or how do you guys view that internally? And does -- as you're thinking -- I understand it informed how you're thinking about the year. But just walk us through kind of what caused that step down as that only metric that we're looking at right now?

Yes. Yes. So good question. When you annualize it, it's not as acute as what you see in the fourth quarter on the TTM, which is probably the right way to think about 2025. But the fourth quarter did pull down that TTM number to only 1% on growth on the full year. So as we looked at 2026, then that's what's informing low single-digit growth across both software and services. Now why did that happen in the fourth quarter? We called out a couple of customer dynamics that we're influencing the fourth quarter bookings, not necessarily the full year, but in the fourth quarter, we saw that there was some reduction in seat licenses in Phoenix that was associated with customer reprioritization, some of big pharma reducing headcounts which invariably will hit some volume of our seat licenses in Phoenix, not totally unusual and a product of some of the headcount reductions in the Tier 1 because this softness was centered in Tier 1 customers.

But then on top of that too, we said that study counts. So our Pinnacle 21 platform is tied to study count, less so than annual seat license. And if you look back at clinical trial starts 18, 24 months ago, then there was some weakness there. By the time that gets all the way to submission, given the penetration that Pinnacle has, so Pinnacle is a broadly used software product, which is great and it provides a very sticky business for us with a very high renewal rate. But it will be impacted by study count increases and decreases over time on a time lag. So that was one of the other components that we saw impacting.

All right. And then on the Tier 1 customer base, you talked about like the lower seats there on the software side. But I feel like you earned through a lot of restructuring, the pipeline rationalization over the past like 4 or 5 years within pharma. So is this just kind of a catch-up from what we saw? Like I'm just trying to think out of the durability of like the snapback here or how you guys are thinking about that business recovery?

Yes. So yes. So as far as -- and you had asked to like what's the cadence of 2026. We had said on the call that we expect that Q1 will be on the lower end of that guidance range. So we do anticipate some trickle-through of the dynamics that we saw in Q4, but it's also related to a tough comparison. So Q1 is on a dollar revenue basis is our toughest compare of the year. So that's also a component of it.

But we do think that there's opportunity to accelerate software revenue growth during the course of the year. We launched 3 new software products in Q4 that we're very excited about with Certara IQ for QSP, we'll get into this. Certara IQ for QSP, the Phoenix cloud version and a Pinnacle product enhancement, all of which are going to -- are taking some traction to and will grow into the year. So we do see sequential increases during the course of 2026. So what you saw in Q4, we don't view that as permanent, but we did see it as a bit of a dislocation as we exited 2025.

All right. And on those launches, let's just dig in and start walking through some of them here, 3 big launches coming up. I guess from leveraging your existing sales force, are these new markets? Or are these just additional module add-ons -- modular add-ons to exactly what you have now, like break down where this -- the holes in your workflow that these are filling as you progress through the pipeline?

Well, a couple that we're really excited about that I'll talk to you about our Certara IQ, which is software for QSP and Phoenix Cloud, which is a cloud version of our Phoenix platform to get customers off the desktop and into the cloud. So the first of which Certara IQ is AI-enabled software for the QSP space. So that's quantitative systems pharmacology, which today is entirely a services practice. This is one of the fastest-growing areas, not only of Certara. It is the fastest-growing area of Certara, but it is also one of the more emerging and faster-growing areas of biosimulation in general.

And so we're very excited about having launched Certara IQ in the fourth quarter. The basis of Certara IQ is the Vyasa AI technology that we acquired back in 2022. We've been working to implement Vyasa technology throughout our software platforms. This is the first sort of [Technical Difficulty] would sort of add on. This is the first all new. This would be the first software offering in the QSP space. So we're very excited about that. And QSP, of course, is growing fast, as I mentioned, all services. So as we have that practice area at capacity, the Certara IQ software will not only help our own internal teams with the throughput and volume of projects that we can handle, but we can sell it to our customers as a software product as well.

So that's one we're very excited about. The other one I would mention is a cloud version of Phoenix. So we learned from prior versions and have added features and functionality to the cloud version of Phoenix that's out there now that includes also, again, putting in AI enhancements to induce our customers to shift from the on-premise or the desktop version and into the cloud. We launched it in Q4. We've seen very good receptivity from even our largest Tier 1 customers. So we're looking at 2026, as a year of starting to really pick up the conversion from desktop into cloud, mainly because of the features that we've added into Phoenix. So that falls more in the category of enhancement, one that we're very excited about given the conversion and the excitement that we're hearing from our customers about moving over.

Now you mentioned earlier, what's the right way to think about that software achievement. Interestingly, shifting from desktop to the cloud, there is a revenue recognition difference there, too, going from all at once revenue recognition on the desktop to ratable in the cloud version. So you'll hear us talk about the bookings and perhaps introduce ARR as a metric to start to look at how you look at the annualized progress we've made in Phoenix because a lot of the conversion that we would make this year from a revenue growth perspective will tend to show up more in 2027 than it will in [indiscernible].

Yes. I just have to ask kind of the timing there when you do these launches, you have, like you said, like the modular update on Phoenix Cloud versus the totally new market. Like how do you -- I guess from an investment standpoint on sales and marketing, how are you guys measuring the contribution here. I feel like the modular or the cloud opportunity is probably a little bit more near term where you have to actually with QSP, it's fast growing, but it's still going to take some market development time. Is that the right way to think about it?

It absolutely is. Yes. I mean, look, the Certara IQ QSP software is all new in its space. So it's going to -- it is going to take some market development, even though it's a high demand, fast-growing area of biosimulation, we still need to create the market and push adoption there, which we think is completely feasible. Like I said, we're super excited about Certara IQ software. But the cloud version of Phoenix is a little more straightforward as far as when a renewal comes due, we're in with the customer. We're having the discussion, we're showing the features and functionality, and we're already finding some early success in converting them.

Okay. You guided -- sort of the AI piece coming in. I always call it Vyasa but it's Vyasa. I think that from an overall market perspective, AI is probably going to be used as the efficiency tool. And John's predecessor, he was talking about -- William would talk about how you guys are using it. So talk about what clients are -- pharma and biotech want from an AI perspective from you guys. And how durable it is where -- or how realistic is it to think that pharma is going to run their own AI internally and ultimately displace you guys?

Yes. Yes. So we view AI as a unique opportunity for Certara, given everything that I said about some of the new products and the acquisition of Vyasa back in 2022 and the development and integration work that's happened since that time to really put that technology into the various software platforms that we just talked through really creates a competitive advantage for Certara. It's not likely -- because remember, our customers are buying our software models today based on the viability and the longevity and the data associated with the models, and they're not creating them on their own.

So as you think about moving forward into an AI area, then because of the regulatory acceptance as well as the scientific expertise, I think the scientists or human in the loop associated with AI. Then when you take the software products that have the AI built into them now as we've created the integration with Vyasa, when you take the subject matter expertise, remember, we have 400 PhD thought-leading scientists on our staff. That's the expert in the loop, if you will. And then you take the regulatory acceptance by regulatory agencies such as the FDA that have long been using Simcyp, Phoenix. They have a vast number of seat licenses. Now they're getting the new versions also, then that ecosystem is primed for our customers. It makes the ease of use with Certara rather than displacement.

Yes. Is there any part of your business that you feel like, okay, it's like that could totally be disrupted if somebody came in.

The only pocket that we've talked about that, that could see that kind of change would be in regulatory...

Regulatory...

Yes. Yes. So -- and I'm sure you're going to ask me what's the latest on that and I'll answer your question. But before we do, then -- that's one area of the business that's really right for generative AI to come in and create some secular change. Now we haven't seen that on a wholesale basis. I just got done mentioning that when you looked at services bookings performance in fourth quarter grew 17%. That was Reg, the reg business growing 17% and biosim services growing 17%. So I wouldn't say that secular change has really taken full grab quite yet. But at the same time, remember, we launched at the end of 2024, we launched CoAuthor which is generative AI for regulatory writing. And that product is continuing to ramp. And so we have offerings on both sides of it really when you look at it.

Okay. And then on the regulatory services piece, it's a great segue. So just talk about that have been under pressure for some time, and you're not the only one that had the issues there, but give us an update on how that's been progressing and what you guys have done or seeing from a demand side?

Yes. So of course, we had our new CEO, Jon Resnick, joined recently. He naturally, I think, wants to take an opportunity to evaluate what's the status is of the Reg business. And look, there are pros and cons to selling that business, we're moving that business from the portfolio. There's pros and cons to keeping that business. And I think that most importantly, he's taken the time as he should to evaluate what the best -- what the best shareholder value creation opportunity is given the pros and cons on both sides.

What are the pros to owning it?

The pros to owning it is very profit. It's a highly profitable business. So -- although we've seen revenue decline, strong bookings in Q4, we have seen revenue declines on a year-on-year basis. That's the con side. The pro side is we have shared publicly before that the regulatory writing business has a 20% to 30% profit margin. So that's a pretty rich profit margin for a Reg writing type business. And so it generates cash that's important for us to be able to invest in the organization.

Got you. Yes, that is...

As well as I just got on talking through CoAuthor too, you can envision partnerships that take place between an existing AI product that we have associated with the business and start to find synergies within the organization. So that would be the other pro to it.

Yes. And I think on -- it just kind of goes into the overall, as Jon is coming on, I talked about some of the investments that need to be made. I kind of took a little bit by surprise. I thought the bigger picture vision here was like you have all these Simcyp, you have like simulation software, some regulatory side, the writing, a lot of the onesies and twosies here of software across the clinical development pipeline, but like different markets that don't talk to each other. And I thought that bringing all this under one roof with some type of backbone was a pretty compelling story or vision over the long term. Like as Jon comes in and you guys are thinking about your portfolio, talk about ultimately, what the portfolio vision looks like and how you guys are going to either sell some stuff off or get leaner and meaner? Like just talk about what you guys think about what this should look like?

Yes. Yes. I mean the center and core to the focus is model-informed drug development or MIDD/biomulation. So we think that's the reason why people show up and are interested in Certara, and it's also the fastest-growing area of Certara. And it's -- and by the way, it's a blend of both software and services. it's both of those things, complementary to one another. And so the -- as we look forward and we think about investing, you painted a picture of various point solutions that are contracted separately. And one of the guiding principles that we have as we look forward in unifying the organization is how can we approach our customers in a manner in which they have the needs or the feedback that we receive from them.

And most often than not, it's not a contract over here, a contract over there. But there, it's that theme of unification that you were thinking of. So some of the investment that we have on the horizon here is how do you bring point solutions together into an overall solution that also enables Certara to increase the call points within our customer organizations, and can get the attention at the top of the house on how you can save time, save money and drug development, which truly is the value proposition of what Certara offers.

Yes. And I said when you talked about some of the investments, is that what you guys referring to becoming more customer-centric in the investment there? So like dig into what kind of investment you guys need to make? I feel like that, that's you have a pretty sizable sales force right now. Is this more about just [indiscernible] maybe some overlap or overlay of like some enterprise sales guys? Like just walk through what do you mean by that?

Right. Yes, the customer centricity. I mean, Jon Resnick brings with him a strong background of customer centricity. he spent a lot of his first 60 or so days at the organization, speaking directly to our customers across all tier categories, across software and services and gaining pretty good insight on what the themes and the feedback are with customers. And I think one of the key takeaways is that no 2 are alike. So our approach and how we offer our software and services in the combination of those to our customers is one of the things that we're thinking through.

Now what does that mean? And how does that translate? That we do not envision that is translating to an outsized amount of spend in sales and marketing. Remember, and we recognize we've made sizable investments in sales and marketing, it didn't catalyze the revenue growth. It's not showing up in the revenue growth yet. So we do look at that as an investment of how do we shift prioritization, how do we change incentives to align to the structure, as I described. How do we get better insights into discounting and make sure that our net pricing is working the way that we expect it to. Those are some of the operational nature of what we mentioned by investment.

Okay. And then as you think about tying that into the margin case, and you guys had pretty decent cash flow there. But from an investment standpoint, I agree [Technical Difficulty] going through this portfolio and thinking about where they should be, is the typical rule of 40 sticks with you guys? Or is that not is that not appropriate?

Yes. Yes, for sure, it is -- for sure, it is. And we view ourselves as a Rule of 40 organization. I think if you do the math and add it up, I think we're just short of that right now. And there's a reason for that, right? We've talked about investments that have brought the margin down from historic levels hovering in the low 30s rather than the mid-30s. And on top of that, we're talking about a year where we've got low single-digit growth versus where we really think the company should be in the high single digits and double-digit growth over the near to long term.

So absolutely a Rule of 40 company. I think what you're seeing right now is a product of -- we've got a bit of a transition year. We've set guidance that we think is appropriately conservative and also aligned with the trends that we saw exiting 2025. And we're making some investments that and continuing to make investments in the company that we think are really going to catalyze that long-term growth.

And on the guide, it assumes roughly about 100 basis points of contraction. Is that from the investment side? Or is that from more of a mix?

No, it's -- that's more from investment again. I guess what I'd tell you, too, is that on the call, we mentioned that we've already found $10 million of cost avoidance in the plan. So what we're indicating is that we're thinking, although we guided 30% to 32%. Last year, we guided 30% to 32%. We came out on the high end of that. We'll exercise the same kind of discipline as we march through 2026. And we do think there's cost opportunity there. So we wanted to signal that on the call.

Okay. That's great. Appreciate it. We got 10 seconds here, mostly we end up...

Thanks a lot Luke.

That's great. Thank you.

Appreciate it.

Great. Good morning, everyone. Welcome to the first session of Leerink Global Healthcare Conference. I'm Mike Cherny, the healthcare tech and distribution analyst. It's my pleasure to have with us, Certara. John Gallagher, CFO; David Deuchler, who does IR, sitting in the audience. John brought no slides, which makes me happy.

So let's just jump in. I mean, so you just reported and you had some interesting moving pieces, I would say, on your guidance and the outlook for '26. Can you talk a little bit about some of the assumptions that you have embedded both in terms of where you see the market right now and where you see Certara's execution within your client base?

Yes, sure. So we did. So we just reported on the -- at the end of February. And we were pleased with the fourth quarter when it comes to revenue and EBITDA. It was in line with our expectations, organic software revenue for 2025 came right in the middle of our original plan at 7%. So that was good on a profitability basis. We were at the high end of our original EBITDA margin guidance at 32%. So that too was in line or even above expectations as we ended the year. So all positive things. But as we looked at the bookings and some of the trends coming out of the year, there was some deceleration in software.

Our overall guide for revenue growth for 2026 is flat to 4%, and that's comprised of what we see as a -- there's an organic TTM software bookings business last year that was about 1%. There's a high correlation between bookings and forward revenue. Fourth quarter software bookings were a minus 6% year-on-year and we saw deceleration. We called out customer dynamics that were related to both the Phoenix product on some of the big pharma macro customer reprioritization that, that whole dynamic reduced some seat licenses in Phoenix. And then perhaps even more of a driver was the study count on Pinnacle 21. So study count is a lagging indicator. So slower clinical trial starts from 18 months ago. As they begin to finish, they're now hitting Pinnacle. And so those were a couple of the drivers of why software bookings were minus 6% on Q4. And that's one of the key reasons why we ended with an organic TTM software bookings of 1%.

So what that means is despite the strong finish to 2025 on a revenue and EBITDA perspective, as we looked forward, there was some -- the current trends that we were exiting the year from a bookings perspective would have the software number lower than you might otherwise expect. On the services side, we've been -- if you look at service revenue over the last 3 years, we've been a low-single-digit growth, about 3% revenue growth. Now we had a very strong month of December in services bookings, and that's good. That's actually going to be my response to your question on what the end market looks like. But -- but we have seen budget flush-type seasonality in years prior. And despite that, still end up with a low-single-digit services number.

So when you take those 2 things together, you've got a software business whose bookings and trending would indicate a low-single-digit number, and you've got a services business that's been in that range for a while now. And that, along with a little conservatism is what gets you to the 0% to 4% guide on the year. Now the end markets. So strong bookings in Q4 in services. And we view services as an area that does have more discretion by the customers. And so an uptick in services bookings is we believe it's a good indicator of at least stability in the market, if not a bit of a tailwind and we saw that with Q4 services bookings, not only in regulatory, regulatory was a spot where we saw that, but also in biosim services, which was good. So that's a positive.

But -- we also take a little bit of pause as we look at -- if you look at the quarters on services, we had a low quarter in Q3. We had a high quarter in Q4. It is lumpy when you look straight through that. TTM services bookings were about 5%. So that's important to keep in mind. So we do see -- as we look toward the remainder of 2026, we do see and expect a stable end market environment, maybe even some tailwind, and we think that there's opportunity. You touched on this, too, Mike. We think there's opportunity in execution also. So we've got a new CEO in Jon Resnick, who's come with a fresh look at the organization, and we called out for the first time that we think that not only are there end market dynamics that are impacting the organization, but there's also some things that we can change operationally and execution-oriented commercial approach, all of which are obviously within our control and something that we think we can inflect and drive change to the organization starting now.

And I definitely want to get to the new leadership dynamics. But maybe just turn back on the product side as you think through the end of the year into this year. You talked about Phoenix and Pinnacle seeing some softness. You did talk about Simcyp services being stronger. And so as you hear the demand dynamic from clients, it's no surprise that it's been a bit of a push and pull across the entire market, like how are you seeing prioritization on some solutions, knowing that, again, you did reference clearly on the call that Simcyp and regulatory services did see some nice acceleration. Is it just a matter of where the majority of your client base is in the various different prioritization? Is it a trial dynamic? Like what is it do you think that drove some of those levels of strength?

Yes. I mean customer demand for MIDD, Model-Informed Drug Development or biosimulation is strong. And you see that -- what I didn't call out as I was talking about some of the areas that drove us to a flat to 4% guide were -- the areas I hadn't called out were Simcyp or QSP or PBPK services. Those are -- Phoenix, when we look at the cloud version of Phoenix, which we've seen really strong demand for starts to bring in AI capabilities into it too as customers shift off-premise. These are all core biosimulation or MIDD offerings, where if you look at what's growing the fastest in the organization, it is QSP, Simcyp, PBPK services. So there's -- there's areas of both software and areas of services that are fast growing. And if you look at those 2 together, you would see a stronger growth profile than what you see on the company as a whole. And that's because within software, and within services, there are also some slower growers that are partially offsetting it.

So let's turn to the leadership change. You brought in Jon Resnick, aside from complicating the Johns in the organization. But brought a very different profile, commercial first, obviously, broad reach across the biopharma world. As you think about some of the initiatives that he's putting in place off the bat, how would you think about the commercial execution, call it, offensively versus defensely, i.e., where can you go and execute better versus where you had performed versus where are there opportunities where you're already building on strength within the commercial engine?

Yes. Yes, yes. So maybe the -- I'll start with the last 1 first, and then we'll come back to the operating one. What are the opportunities which are more closely linked together our software and services offerings for the customers. No 2 customers are the same. Even within big pharma. There's quite different ways that they utilize the software and the services and one of the opportunities that we see is taking a more customer-centric approach. So Jon Resnick brings with him a strong commercial background as well as a strong focus as he's joined Certara now on customer centricity. And we believe that bringing together both the software and the services in a more uniform way to address the customer feedback that we're hearing directly on an individual customer-by-customer basis is an opportunity to try to sell more of what Certara has to offer at the point where the customer wants and needs it.

So that sort of a lens as to how we're looking at it. Operationally, what does that mean? That means we need to align incentives. So the organization -- the organization's incentive programs, much like we report software and services. the reps -- including even the consultants inside the organization are mostly incentivized around wherever they happen to work and unifying the incentive structure so that there's a more seamless blend between the software offering and the subject matter expertise that goes along with it. We think is an operational opportunity for us. If you think about popular terms like human in the loop right now, Certara is a perfect example of an organization.

We are not a pure-play software company. We're not a pure-play services company. We offer software that requires a human in the loop in order to execute or deliver that software. And certain customers' needs, depending on scale, appetite, spend, profile of the organization has a different or a varying level of need when it comes to which software they need as well as which service they need to pair with it.

And then thinking about along those lines, the investments you're making, whether be it commercial, be it R&D oriented, your guidance assumed incremental investments, yet still a fairly similar EBITDA margin versus what you put up previously. So how are you thinking, especially with a new CEO about that balance of investing in the commercial organization, investing in the R&D infrastructure against still maintaining extremely healthy EBITDA margins.

Yes, yes, yes. We -- so you're right, Mike. The guide is the same as it was last year. So the EBITDA margin guide is 30% to 32%. Of course, last year, we came at the high end of that. So we have proven a track record of being able to navigate investing in R&D. You saw an increase in R&D spend last year, which was intentional as we were launching 3 different new software features or new software products in Q4 while we also maintain discipline around other pockets of the P&L to hit the high end of that guidance. Some of the prepared remarks that we made on the call were also a signal to appetite to do something similar this year. We do have to make investment. So the reason we just didn't guide 32% is we do have to make investment in the organization. It's in our -- it's primarily in R&D. It's in Model-informed Drug Development and biosimulation, to continue to roll out features and functionality. I think the AI features and functionality that we just included last year, Certara -- we'll get into these with Certara IQ, Phoenix Cloud. We got to do more of that, and that's part of the plan for this year.

So that spend that's going to go into R&D. And we're leaving room as a management team to be able to make those investments. But you can also see that there's a commitment that we're making. We said in the remarks that we've already found $10 million of cost avoidance as we look at the plan for 2026. What does that mean? That means we're making the investments that we need to make, but we're also -- just like we did last year, being disciplined about other areas of the P&L and making sure we have cost efficiencies to try to put us not only within that range, but hopefully toward the higher end of that range.

You mentioned AI. I mean I have to come back to, but it obviously wouldn't be a discussion or a conference without all things AI. So maybe just to level set for everyone because I know there's a lot of moving pieces. Where do you feel right now Certara is using AI appropriately within the MIDD world. And if you think about either your product pipeline or other planned investments, what comes next in terms of what Certara needs to be adopting within Phoenix Simcyp, any of the platforms. But maybe just walk us through the AI strategy for lack of a better question.

Yes. So the AI strategy. So we are -- we -- of course, we acquired a company called Vyasa all the way back in 2022. And we've been weaving Vyasa AI technology into Certara since that time, which we were very proud to be able to launch Certara IQ in Q4, which is that's a software, AI software for QSP or Quantitative Systems Pharmacology, which is the fastest-growing area of biosimulation. So that -- that's a very strong signal of the success that we've had in taking the Vyasa acquisition, the technology as well as now our Chief Technology Officer, was the founder of Vyasa and leading that technology through the organization. So a couple of proof points are Certara IQ, as I mentioned, for QSP, Phoenix, we have data visualization functionality within Phoenix Cloud now, and we think that's a really good inducement for customers to move off of the desktop and into the cloud version. And we've seen -- we've seen strong interest from customers.

So we feel optimistic about the conversion from on-prem to cloud for Phoenix, and that's going to bring the AI technology with it.

So if I can stop you just for a second. So can you give us a real-world example. I'm not asking for a pharma company name. But for a client that you're engaging with on Certara IQ and Phoenix Cloud, what does their spend look like before and after a sale and how much of the before was with Certara versus some other solutions versus...

Cloud as an example. So the functionality that you can get in Phoenix Cloud that's not on the desktop version are, as I mentioned, data visualization, which is basically plotting and tables that can happen instead of doing them manually. They're happening in an automated way as you would expect with AI functionality. So what customers what a customer spend profile would look like as they're buying seat licenses for the Phoenix product, and they were maybe getting it on a desktop version previously shifting to cloud. Of course, since Certara is hosting it, then we do get some price opportunity because there's more value for the customer there. And so their spend profile would tend to go up overall but the value that they're receiving is really that's what's enticing people to come over.

And why for Certara IQ was QSP the right area to invest to grow in? What about that part of your market because I've always been impressed that Certara just touches a lot of different parts of the R&D process. Was there a strategic reason you decided to expand there beyond the Vyasa acquisition? Like, how do you think about that being the right area to further build your AI platform?

Yes. Good question. So Quantitative Systems Pharmacology or QSP, as I mentioned before, it's the fastest-growing area of biosimulation. And Certara has the leading practice there. So remember, you might remember back, we acquired a company called Applied Biomath in 2023. We combined it with Certara's existing QSP practices, all services. So these are subject matter expert scientists, we combine together to create the world's largest QSP practice. So all of these consultants are delivering QSP services to our customers. But there was no software associated with QSP unlike PBPK services that have a Simcyp associated with them, there was no associated software with QSP, and so it naturally became an area to find efficiency with this world-class QSP practice area that we have to try to put software in place using AI to speed up and streamline the work that our QSP consultants can do themselves for higher throughput inside of our organization and also to be able to sell it to customers, too. So it was naturally an area given the high growth in QSP, this was naturally an area we want to invest in.

And as you think going forward, how much of what comes next in AI, stuff that you want to build yourself versus potentially partner with knowing as well that part of your value add over time has been that you have this extremely rigorous scientific knowledge base with your people. I remember joking it was Dave told me the first time we spoke, like you have people that run software because we're not smart enough to do it. So like how much of the process over time becomes that you have bots' agentic capabilities that can help complement and/or replicate those people?

Yes, yes. Yes, yes. It's -- you heard me use the term human in the loop before. I think Certara is a very good example of that because it is true that the software that Certara sells to our customers does require a high degree of scientific expertise as well as not only acceptance by the customers themselves, but acceptance within the regulatory bodies, too. So the key value proposition that we offer is that we have the software. We have the expert in the loop scientist experts to be able to help operate that software. And then there's also regulatory acceptance on the other side of that, meaning the FDA uses our software, and they understand it. And it's the combination of those things together that really creates the competitive advantage for Certara to be in a market-leading space here.

So we tend to build on the model. So not so much partnership, you really haven't seen as much partnership. That being said, given how active the market is and how fast technology moves, we're obviously looking at forging important partnerships with leading tech organizations, and you'll hear more from us on that. But generally, the strategy for us has been the software, the subject matter expert scientists in the loop and then the regulatory acceptance on the other side.

So maybe sticking on slightly different term of market evolution is the whole concept of animal model studies and the future of animal model studies. How do you view the role of biosimulation in a world where animal model studies might become less focused on, less relevant or I know there's been some pushes to potentially get rid of them, in certain cases, where does Certara fit in, in that evolving world?

Yes. I mean we're in a leadership position there. So this is -- it's a tremendous opportunity for the whole practice of modeling and biosimulation and of course, Certara is the market leader in biosimulation. So we're well positioned for this. We're very excited about the future. We think it's absolutely the right thing to do. When you think about the failure rate of drugs and the amount of R&D dollars that are spent to bring drugs all the way through clinical studies and fail slowly and the ability for biosimulation to help biopharma companies fail faster, understand what's happening faster, make adjustments, save money, save time. We're well positioned for that.

Now the counterbalance to it is that the pharma industry thinks in decades, right? There's -- it's a long cycle time. There's risk aversion naturally. We've said that nobody is going to get fired for running a typical clinical study. And so what we're up against really is just the adoption curve here. And so it's not going to move as quickly as Certara would like it to. I think that -- but -- but clearly, the industry is going to move toward more modeling. It only makes sense to use this type of technology to shift away from animal testing. Animal testing doesn't really inform the clinical study as well as computer models do.

Is that an active part of the strategy, basically positioning biosimulation for a world where an models don't exist?

Yes, yes. And in fact, we just had a good discussion on QSP. So the areas within Certara that are most ripe to help this shift using NAMs would be would be Simcyp, PBPK services and most predominantly QSP, so we just talked a lot about how we've grown the QSP practice. We put in software associated with QSP, that area of the business is going to be the biggest benefactor of the early signs. And so some of the early signs are there. We're seeing our fastest-growing areas of the company are the areas of the company that are associated with NAMs. So there's some optimism, but we don't want to -- we don't want to suggest that this shift is all going to happen inside of a year, though, either.

I think that's probably the right assumption. Coming back to the market and your position in the market, I mean you gave some great color on product demand relative to the bookings. What are you seeing from a end-state demand from disease categories. It's been some of the prioritizations that we've seen market-wide have been on categories that like cardiometabolic where people may have gotten too far ahead of themselves and the amount of trials. Some of it is just natural failures that come to the market. As you think about the push and pull, is there anything you can call out on the end disease state that has been a point of either strength or a point of challenge?

Well, the good news for Certara is we -- our work goes where the customer goes. So like to your point, Mike, there's been shifts in focus by biopharma companies, and that happens iteratively over time. And the good news for Certara is that we do the work where the work exists. And so because of the long-standing history of the models that we have, so there's multiple organ models and then the scientific expertise that we have on our teams are diverse then wherever the focus is of the biopharma company is where Certara meets them.

And so along those lines, as you think -- you work with so many pharma companies. And as you think about what they're telling you from the prioritization side, where do you see the level of visibility on your end, given that it's a translational approach. And obviously, if your customers are uncertain that leaves uncertainty for you, like you talked about the potential for green shoots this year. I obviously don't want to get ahead of ourselves, but like how are the real-time discussions occurring there after the bookings performance? And what is -- if there were green shoots, what do those green shoots look like?

Yes. Yes. Well, we do see the market as being stable this year. I talked about some of the some of the customer dynamics in the large biopharmas are the Tier 1 customers being basically the key causal factor for some of the weakness we saw in Q4 bookings. The flip side to that is we've seen Tier 3 or the biotechs perform really, really well throughout last year. Some of that was related to the funding environment easing and some tailwinds there. We've seen recent results would suggest that's continuing, if not accelerating. So -- that's certainly a positive sign that will continue to have a tailwind as it relates to Tier 3 customers. And as it relates to Tier 1, we see stability there. We think that a lot of the volatility that have caused some of the reprioritization, headcount reductions, even the study counts that I mentioned before, is really in the past.

Now does it -- does it affect our near-term revenues associated with slower bookings? Yes, we talked through that. But overall, as we look at 2026, and we look at this year, the most notable comments we can make about the end market is that we see it as being stable, if not getting better.

We talked a bit about the commercial strategy under new CEO, Jon Resnick. You've also sprinkled in some of your M&A history. This has been a company that has been fairly successful at bolting on new technologies, new services. As you think about where you stand right now, how much appetite is there for further M&A against the backdrop, too, of the ongoing regulatory writing strategic review?

Yes. I mean we have a strong balance sheet, good cash position, low leverage. As you mentioned, Mike, we've certainly proven a good track record of doing tuck-in type deals for the organization. And we continue to scan the environment to see what potentially could be a good fit. You mentioned Reg. Obviously, Reg is still under discussion with a new CEO. Obviously, it's worth taking a look at that. So more news to come there. But that process does not stop us from looking at M&A opportunities. The other thing I'd say capital allocation-wise, too, is last year, for the first time, we added share repurchase. We have a share repurchase authorization. We executed on it, on a piece of it last year, but not all of it. We still have that outstanding. As we look at the stock price and where it sits today, then it's -- that's also a meaningful vector for capital allocation, particularly at today's levels.

Anything I didn't ask about that you think is particularly important to people. I mean, it's interesting that you guided below where the consensus expectations were, yet I think it was also setting an appropriate level to build off of. So I mean you talked about the level of conservatism, like how do you feel Certara positioned right now heading into '26 with stabilizing markets? Where are you most excited about the business?

Yes. What I'm most excited about this year is that we are making changes inside the organization related to how we operate, how we work together, how we want to incent the organization, where we're pointing it, what results we expect to get on the other side of that. And those are all things that as you listen to us speak as a company that we control. And it doesn't take a multiyear effort to inflect change there. And so I'm excited about some of the execution and operational initiatives that we have in place inside the organization that I think can hopefully set us up for a good year this year, but that being said, you have to look at the trending and you have to look at the actuals of the business. So we guided the way we did based on what those TTM bookings were telling us.

Makes sense to me. John, all right. Thank you so much for joining us.

All right. I think we're going to get started. Welcome back to the 42nd Annual TD Cowen Healthcare Conference. I'm Brendan Smith, one of the tools DX analyst here. And I am joined today on stage by management team from Certara. So to my left is the CEO, Jon Resnick. Jon.

Welcome. Thank you, Brendan.

And to my left is CFO, John Gallagher.

Hi, Brendan.

Good to see you guys. Thanks for joining us. So as with all of our other fireside chat sessions today, if you've got a question or anything, do feel free to kind of flag me or you can send me an e-mail at [email protected] and we'll try to weave it into the conversation here, but obviously no shortage of topics to discuss today.

So Jon, maybe I'll just kind of hand it to you upfront to kind of give you a chance to introduce yourself to folks from your seat, I know you stepped into the seat January 1 of this year. So you all reported last week as well. So maybe give us 10,000-foot view of how it's been so far and maybe kind of honing in the conversation, feedback to the print last week.

Yes. Sure. Thanks for inviting us here today. I appreciate it. And I'd also reiterate if there are questions, I'm happy to take them and make this dynamic. I'm on day, I think it's 61 or 62. So still new, but I think we're moving from the fact finding and asking question standpoint much more into the solutioning and how do we move this business forward. So I think March 1 is a transition in terms of the way we're approaching it.

We got through the print. And I'd say, overall, the team has been incredibly accommodating. They've been incredibly thoughtful in terms of working with me and helping me to get to understand the business in very quick speed.

What I hear from them is not only great pride around what they do day in and day out, but also an appetite to do things differently and appetite to kind of what I refer to as kind of stepping up the bar internally on our operations and our execution. And I have a team who's highly engaged and ready for the journey. We -- I think my kind of initial observation from looking on the business was what a phenomenal set of tools and gems and people kind of knew that in a sense coming in that there were all these kind of market-leading products. But as you kind of sift through the organization, you have one-off conversations.

There's just so many great nuggets of expertise and potential and capability. So I come in extremely kind of optimistic and clear eyed in terms of what where the business sits, the opportunity in front of it and what it's going to take to help move us to the next step.

Great. So maybe we can kind of start with the platform itself, right? So I think looking at all the different kind of product offerings, Certara has really put together over the past few years. What would you kind of say and point us to as kind of a couple of the ones that are the most important growth drivers for the software business, really maybe over kind of the next 2- to 3-year time horizon. And help us understand what's some of the thinking that goes behind your selection there?

Sure. So I'd point to -- there's a handful of things. Like there's a world-class team. We've got a handful of market-leading products that are well established in market with both growth potential and great capability. We have a ton of opportunity to connect assets in a different way and to really to drive a lot of innovation through it. And when I kind of step back and look at the business, we kind of contort ourselves externally to report what's the software and what's the service. What I really see is a business that performs extraordinarily well against the key thesis that I think most people are most interested in, which is that intersect between technology and expert service-based pull-through, particularly on the MIDD side, so the MIDD side of the business and the biosim side, somewhere around 2/3 of the business is in very, very good kind of financial shape has a great runway in terms of market capability, thrilled with not only the quality of the products, the quality of innovation, but also the experts that wrap around that capability.

I kind of intentionally said the service first stack, because I think this is reinforcing in execution. And I think as you think about businesses moving forward, suddenly, no one wants to be in a pure software business anymore. I don't think this has definitely a SaaS profile to it, and we're happy to sell the SaaS pieces, but what makes this business very distinct is the intersect between market-leading products and world's leading teams in terms of scientific expertise.

So I mean you mentioned earlier, as you've kind of been meeting the team broadly, you kind of felt it like probable energy to innovate here and to kind of keep things moving forward. And so I guess now stepping into the seat, really, what are your really key strategic priorities as kind of a new CEO here? And how are you planning to kind of do things differently to really maximize the opportunity for Certara?

Yes. So look, I think companies go through a cycle and Certara has done very well historically, I think getting to this point. I think one of the reasons where I was brought in is because my expertise and where I've led business in the past is probably at a different level of scale. So what I've been focused on is how can I take the different pieces and I intentionally use that word of this company with a great legacy and really start to think about it as a platform for growth on an ongoing basis. So how can I bring kind of management, scale, expertise, how can I bring a bar for operations, which is very high to the next level to help drive this company into that next phase of rapid growth.

I think, what I called out in the initial call, and I'll reemphasize here, probably 3 areas: one, strategic clarity in terms of where we're going to be investing in on an ongoing basis. We've got a robust platform of existing products and products in development. Lining up resources against those investments and where they're going to go more on the MIDD side of the business, helping to build out a more disciplined product management culture, injecting customer centricity, helping to bring that common footprint to partner, not only with the power users on the client side who are the key users, but to bring those capabilities more broadly to fit into clients need to disrupt the $260 billion of spend and 96% failure rate, some clinical trial execution, how do we bring those capabilities more centrally.

And an operating cadence and an operating management that will allow us to pull that through in a consistent measured basis.

All right. Great. So I guess while we're on the topic of kind of maximizing the platform opportunity here, let me kind of just get this out of the way and ask you about the regulatory services business. Give us a sense. Okay, so where are you at kind of in the process of understanding the future of that business? And how should we kind of think about the cadence of updates for this moving forward?

Yes. So you're not the first person to ask me that question. This is, as I understand it, day 512 since the process was announced. Look, I've been at it for 60 days. I think I came in and took a fresh look at the opportunity. And I've kind of been careful the way first of all, I'd say every banker called me when they -- December 15 when they saw the press release and said, you have to sell this business, you have to sell this business. That was the clearer refrain from everybody in the space. The entire market, all your investors want to do it. So as I said to a couple of people today, my immediate instinct is, well, they're all telling me to sell it. I'm going to keep it because that's -- everyone like to be a little bit contrary in the way that we think and the way that we challenge people. But like, I came with fresh eye.

On the pro side of the business, it is a business that delivers high profit to us despite the commoditization pressures that exist in the generative AI side of the world and some of the revenue compression, it continues to perform. We had a 1.5 book-to-bill in December in that business. So for a business that everyone says this, disappearing, it faired, I'd say, reasonably well in the quarter. The flip side is -- look, it's on the wrong side of AI-generated trend, although we're not seeing that evidence quite in clients.

I think it's more moving with cycles in the market. And as a compressor over the last couple of years, it's held back our top line growth rates, which I also know a lot of investors are looking for, I'd also echo kind of point 3, that there seems to be a message out there that it would help prove the point of strategic focus.

I don't know if you need to do it to prove strategic focus, you can redeploy the resources in a different way. All that said, at the right -- what I need to ensure and what I've been working through over the last couple of weeks is to make sure that the economic value received through any strategic review process would be commensurate with the value, I think that it provides to our business. And we hope to wind down that process in the next couple of weeks. So I said nothing in 2 minutes.

No. But, I mean, I think a lot of the running commentary around this, obviously, last year was just tough for the sector overall, right? It's not exactly an ideal seller's market in many, many capacities, right? So it feels like -- is it fair to kind of say that as some of the biotech pharma funding environment starts to at least equilibrate, stabilize a little bit this year that you have a little bit more leveraging power in some of those negotiations and conversations you're having?

I think it's coming off a 1.5 book-to-bill. I think it's subject to some of the broader rebalancing components that happened in broader pharma. I also think that it's proven itself to be more resilient to the generative AI thesis, which is dominating so much of the narrative out there than one I would have anticipated. So I do think, and it produces a fair amount of gross profit. So all those things considered, yes, we will be judicious in what we do, and I do believe it is worth a fair amount.

Okay. So maybe now pivoting to kind of the remaining core aspects of the actual software platform itself. You guys put out a press release this morning, talking about essentially Assembly, right? So maybe talk us through, first of all, what the real kind of impetus behind putting that out this morning was and what -- how we should think about that as representative of the value add that you see for the platform itself for the customers?

Yes. I've been here all morning. It was the Simcyp press release that went out today. Thank you. I'm glad you can break the news to me. So look, Simcyp continues to be a core component of our strategy. It's core to the MIDD component, working hand and fist with our PBPK services capabilities continues to, we believe, to be the market-leading product in that space.

Release cycle is periodic. This was one of the major releases, the functionality in here is very consistent with what our consortium members are asking for. So we believe it adds incremental value, incremental investment, again, in the area, which I see higher growth and higher potential, which is that core kind of biosim MIDD space. And I think what you'll see from us in terms of communication over the next weeks and months is us explaining a lot more about our portfolio, explaining a lot more about our ability to kind of scale, not only AI, but the broader biosim MIDD thesis.

So I think you're seeing a little bit of the beginning of a pattern of us getting clear messaging around the growth engines that we have within the business.

Can I ask about also because we had a pharma R&D investments panel just yesterday afternoon. And I think this conversation around kind of buy-in from FDA from regulators overall to a lot of these software platforms is increasingly kind of boiling up to the top of the conversation too, right? Just as more biotech and pharma companies in general are leaning into some of these frankly, with their own, I'd say, limited experience in many capacities, it feels that kind of buy-in from regulators is pretty critical point of differentiation that not many folks in the space actually have. So can you maybe just speak a little bit to kind of the relationship with the FDA that you have through some of your offerings? And how -- first of all, does that come up in conversations with customers? But how you're planning to kind of leverage that moving forward as a whole new kind of cadre of folks come into the space?

So, first of all, I think if you look at the environment and the general secular tailwinds in the space, I think they're very positive overall. I think if we look at the FDA Commissioners' comments over the -- both in the week of JPM and New England Journal of Medicine and NAM discussion from last year, all are very positive to what we knew. One of the questions I get a lot is rate and pace on that side of things. Like if you're putting out these big proclamations, when do we see it burn through, and pull through the business. You got to remember that I'm sure the panel up here strategically interesting, but it takes a while for change. No one -- it's difficult to break. It's break the model in which people execute. So it takes time and energy.

If I look at forward indicators like our QSP business and some of those businesses that would directly be on the innovative front. We're seeing a huge uptake on that side of the business, which to me is proof that some of this innovation is pulling through, and is kind of booming that segment of the business, which I discussed before. In terms of regulator assets and regulator relationship, we're, I think, very blessed and pleased to have relationships deep with more than 20 regulators around the world.

I think having the fact that there's trust at all levels really helps facilitate the conversation, not only between ourselves, but between the biopharma customers and the regulators. It helps also make our products to be preferred products within the 4 walls of the biopharma customers. So I don't want to speculate against -- around others in market and others, I don't think it's appropriate. But I think we're very proud of the relationships we've built over time. We think that they're distinctive. We think that they're incredibly helpful in ensuring that our clients are successful and that the easy communication between our software assets and our people and that kind of virtuous cycle is very helpful in enabling the best science to carry the day.

Okay. So maybe let's now kind of pivot to the actual earnings print and outlook for 2026, right? So on the Q4 earnings call, you kind of highlighted expectations for roughly flat to 4% growth top line revenues for 2026. Help us kind of unpack what some of the assumptions are kind of underpinning that and really contextualize this as we come out of 2025, right? What are you kind of watching for to help guide some of those assumptions?

Yes, sure. Thanks, Brendan. So we were pleased with the way that the year ended when you looked at revenue and EBITDA, then we had good revenue growth came out at the high end of the EBITDA margin guidance at 32%. So those were all positive. As we looked ahead at the guide, one thing that was notable is we did -- we saw some deceleration in the software bookings. That was due to some customer dynamics with big pharma. We talked about some seat license reduction in Phoenix. There was some flatness in Pinnacle related to the study counts. Those were a couple of the key drivers.

In addition to execution, we talked a little bit about execution, too, where we think there's opportunity to do more and do a bit better. So -- but we did see some deceleration in software. So that was one angle to look at how do we approach in 2026, TTM software booking is about 1%, that would lead you down a path that would get you to low single digits for 2026. Despite all of the good initiatives that we've got underway, and with Jon's presence here, there's some execution oriented topics that we're going to work through.

On the services side, if you look back at the last several years, then it's basically been about a 3% grower in revenue growth on a year-over-year basis, we had very strong bookings exiting the year. So Q4 services bookings were 17%. That was across both biosim services and in REG. So we were pleased to see that acceleration that happened really in the month of December, and we think that it's a good signal of discretionary spend at our customers.

And we also saw it come across customer tiers, including Tier 1, where we've had some challenges during the course of last year, but at the same time, it was a seasonal Q4, which is typical for the business. And so as we looked ahead, looking at low single digits for both software and services made the most sense.

Can I also ask, I know around this time-ish last year, the FDA puts out the conversation around NAMS. Brands is kind of left, right and center amongst you guys and a lot of your colleagues for a lot of last year. And I think there's -- to your point, it takes time to move the direction of the ship in many respects, right? But you had mentioned that you had started to feel a number of new inbounds from customers directly related to some of these NAMS initiatives. So help us understand like, first of all, what's kind of the status of a lot of those conversations? Are you still continuing to see a steady kind of cadence of new inbounds tied to that? And then how should we think about potential inflections in revenue tied specifically to some of those initiatives?

Yes. So maybe I'll start. And the -- so what we said when that came out, a couple of the key areas to look at that we pointed to areas of Certara that we already had in place would be Simcyp, performance on Simcyp as well as the QSP business, or Quantitative Systems Pharmacology. Both of the -- both Simcyp and QSP had really strong years. So despite what I just said about some of the bookings exiting the year and how that leads us to a low single-digit growth led by a couple of other products, Simcyp and QSP really had great years. QSP is the fastest-growing area of our business right now. And so the undercurrent of what's happening related to NAMs, albeit we'll have a longer tail to it, I think, than anybody really wanted. We are seeing the areas of our business that are touched by NAMs are growing the fastest, including last year and expectations as we look ahead in '26.

And I'd also point out additionally, look, that's not the only area of regulatory expansion. By that, I mean, I think there's a lot of core use cases around things like lactation and pregnancy and organ impairment and pediatrics, which also create a lot of potential opportunities for us to do things differently as being the biopharma segment to do things differently and to drive evidence in different ways. So it's not just the NAM piece. So I'm equally as bullish on some of those opportunities.

Okay. So maybe kind of moving back just to my questions on guidance for this year, too. So you also guided to 30% to 32%, I think, adjusted EBITDA margin, right, which kind of does imply a potential step down a little bit from FY '25 margins of about 32% or roughly in that same vicinity. So how should we kind of think about the margin profile of the business over the near term? And is this something that there's potential inflection points as kind of the broader market starts to recover a little bit more in the back half of the year? Like how should we just kind of think about the evolution of that for the business.

Yes, yes, yes. Yes. So -- last year, we were pleased. We were 30% to 32% last year. That's also this year's guide. As you pointed out, it does imply a little bit of a step down since we ended the year at the high end of that range at 32%. We were pleased with the ability last year to be able to invest, yet also still manage through some of the cost structure and find efficiencies. You heard us in the prepared remarks last week, say that there was $10 million of cost avoidance outside of the 2026 plan that Jon and I are already looking at. So I guess what I'd say is this is another investment year, meaning we need to put more money into MIDD to catalyze the growth into the future, and those investments need to happen.

If you just looked at it on the surface, that would imply a step down. But we have a track record of being able to manage to the higher end of that, and we're already looking at cost measures that in the form of the avoidance that we mentioned in the prepared remarks, to try to manage through both investing in the pockets of the business where we need to invest, but also recognizing that some of those investments hadn't paid off in the way that we would expect them to and look to get some of the cost out of the structure, too.

Got it. And I think maybe tied to this, I wanted to ask a little bit more about kind of the AI fold into a lot of the existing platform offerings, right? So how should we kind of think about the impact of some of the new AI-powered launches, whether that's Certara IQ, AIDD, Phoenix Cloud. On kind of near-term revenue opportunity there? And maybe what are some of the levers to really drive that kind of through pricing increases? Is it kind of through wider customer adoption maybe for folks who are looking for that to kind of get over the finish line? Like what's that kind of look like now over the next 12, 18 months?

The well -- so we can talk AI. But just in general, we think that there are a number of opportunities both on existing products and new products. AI being a core capability. So look, overall, there's a couple of things we're super excited about Phoenix Cloud, which really launched last year, saw a number of kind of Tier 1 clients go. We have a good healthy pipeline into this year. So I think extension, the Phoenix team has also been very innovative in terms of embedding AI into its core functionality.

You mentioned Certara IQ, which is a QSP technology, which is an AI-based technology as well, which is going to help accelerate growth and whether that bleeds through on the tech side or the service side in the first full year, we'll see. My gut is that it's going to probably drive faster on the service side before it pulls through to technology in the next 12 months, but it will be embedded. Across the range of our other assets, there's large-scale AI investment. It's not something that we've talked about. And I'd say more Horizon 2, there's a range of integration platforms and broader capabilities, which I think you'll be hearing a lot more from us in the coming weeks and coming months about the role that those can play.

Now impact on 2026 versus impact on the out years, a lot of what's already been in the hopper is going to influence 2026. So I'm thinking less about revenue and more about kind of AAR impact in net new sales in the second half of this year into '27 on that side of things. But I think we remain super positive thinking that this is a very big opportunity for us to accelerate growth.

So maybe just in the last few minutes here. John, I'd love to kind of get your thoughts now, maybe zooming out just a little bit. We've talked a lot about kind of operational side of this and like growth drivers and guidance impact here. But again, we have this Pharma R&D panel discussion yesterday. And it's a type of the conversation we have quite a bit like pharma and biotech are deploying more and more money into their AI budgets. Realistically what that means can be a topic for another day, but ultimately, what the impact of that will be on their kind of willingness and interest to partner externally and to kind of leverage some of these licenses from folks such as yourself. So can you kind of speak to how you envision some of this playing out over the next couple of years as they start to feel some of the impact of their own internal investments and what that ultimately kind of means for stand-alone guys who have been here doing the work?

Yes. It's -- yes, it's a great question. So it's a slightly different spin than the question that's being asked over and over again around just AI disruption. The -- first of all, the first thing I did was not talk to the investor community. I kind of said this to you the other day as well.

I literally spent time with as many clients as I possibly could. That's what I did in my first 2 months. I talked to demo and got deep into all of our products. I talked to our product team, I talked to our product teams, I talked to our operating teams, and I talked to our clients. And I asked this exact question. How do you anticipate us being used? How do you anticipate this changing in the future?

The uniform example -- the uniform answer I got from clients was we are looking for you to help us innovate on top of your stack. That was the uniform answer. We're not looking for incremental pieces or bringing -- we're looking for you to help identify and help bring more capability into what you do. Now, that said, you can couple that comment with, okay, but Lilly just announced a massive deal with NVIDIA over the last couple of days that they're going to spend billions of dollars building out chips and do everything else.

Now I can -- I'm not going to speak specifically about Lilly, but I can assure you that when those announcements are happening, there are phone calls -- when there are announcements like that, there are phone calls to Certara happening at the same time, which is how do we take advantage of the technology and the innovation that you have and all the know-how that you have and help plug it into our new investments. And if you think about kind of the continuum of where the majority of these investment dollars are going, it's really in the earlier-stage discovery components, which is not an area that we have a high amount of exposure to. It's a little bit more on the needle in the haystack, which we welcome, because we feel like we're really good at kind of optimizing those assets as it moves closer to preclinical and helping to ensure that it gets to human quicker and through the regulatory process faster.

So we believe that we'll be an important stakeholder in those discussions as they make their own investments. I've also been around this market long enough. I'm now 30 years in this space to see enough in-sourcing and outsourcing trends and capabilities. It's great that they're building up their own capabilities. It doesn't make sense for the entire industry to build up their own distinctive capabilities. They still rely on external experts who can scale and know-how can look cross-sectionally, across it. We need to make some operational changes to be able to play both at the power user standpoint and to tap into those conversations at scale, but that's what we're prepared to do. .

All right. So maybe just in the last minute then. When you -- as you're kind of looking now ahead to '26 -- back half of '26 into 2027, how should we think about kind of the most important, lack of a better phrase, kind of catalyst for Certara, whether that's kind of new offering launches, new rollouts, updates in between earnings prints that we should be kind of paying attention to, to get a sense of like the trajectory of the business now.

Let's take first stab and post.

Yes, yes. Yes. So a couple of areas to focus on there. One would be, Jon mentioned it before, it's the cloud version of Phoenix. So we're excited about the conversion in front of us on taking our Tier 1 customers and then ultimately, our Tier 2 and Tier 3s also, but it's really being led by Tier 1 customers converting to the cloud version of Phoenix. And that is -- that's an area, where we've already seen good customer engagement. We get a few of our key customers on board, which we have, and we're expecting that during the year, we're going to see strong conversion there.

The other area I'd highlight too would be QSP, so look for us to talk about developments in QSP, both in the services that we deliver, but then also the Certara IQ software, AI-enabled QSP software, and we expect both our consultants to be able to use that, but also be able to sell it to our customers. Those are a couple of the areas that we're expecting to be catalysts of growth during the year, and moving into next year as well.

So I agree with everything John said. The only thing I would say is that we're currently benchmarking KPIs and metrics that other companies print on and what they communicate. I don't think the service versus software, bookings and revenue number is the best indicator of what we do and how we're growing. So we're looking at a range of other metrics that will get us, I think, more clarity. So I think we'll be able to answer your question a little bit better. Our software business probably should be looking at ARR over time. We've kind of done discussion today around the growth in the Biosim and the MIDD business for some of the others. There's other ways to be thinking about this business, I think, which will box us -- will stop this kind of box into the service for software.

There's a number of new more nuanced way. So we look forward to kind of socializing some of those over the next couple of months and finding new ways to communicate the value and growth.

Awesome. Okay. Well, with that, I think we are at time. So thank you all for listening in, and thank you guys for joining us. It's always a pleasure.

That's great. Thank you so much for having us.

Good day, and thank you for standing by. Welcome to Certara Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Deuchler, Investor Relations. Please go ahead.

Good morning, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have Jon Resnick, Chief Executive Officer; and John Gallagher, Chief Financial Officer.

Earlier today Certara released financial results for the full year ended December 31, 2025. A copy of the press release is available on the company's website.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements, and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying materials for additional information which you can find on the company's Investor Relations website. In their remarks and responses to questions, management may mention some non-financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on our company's website. Please refer to the reconciliation tables and the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 26, 2026. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

And with that, I'll turn the call over to Jon Resnick for opening remarks.

Good morning, and thank you all for joining today's call. I want to begin by thanking the Certara team for the warm welcome to the organization. I am also grateful to the Board of Directors for their trust and support. I've spent the last 30 years working at the intersection of health care policy, science and technology. where I've built and transform data technology and services businesses within the life science industry.

Joining Certara on January 1, I am genuinely excited by the opportunity ahead. As the new CEO coming in with fresh eyes, I've approached the first 50 days plus with 1 priority, listening intently and learning from our stakeholders. I have spent most of my time speaking with customers and engaging directly with employees at all levels. These discussions have been invaluable. The conversations have reinforced the inherent strength of this organization and also highlighted where we must operate differently to unlock our full potential. Everything I have seen and heard of firms 3 things. First, there is a compelling market opportunity to transform how the life science industry drives innovation across research and development.

Second, regulators worldwide are actively embracing technological solutions to accelerate drug development, reduce costs and shorten time lines. And third, Certara is uniquely positioned to lead in this evolving market. With our AI-enabled technology, data and our motto informed drug development platforms, which are deeply embedded in industry workflows and utilized by regulatory bodies. This presents an extraordinary opportunity. To capture it, we must sharpen how we operate, focus our investments and execute with greater discipline and urgency. Our historic performance does not reflect the full potential of our market.

Later in this call, I will outline our plans to improve. My conversations with our customers have made one thing clear to me. Our customers want us to drive innovation and play a larger, more strategic role. The pharmaceutical industry is spending more than $200 billion per year developing drugs with overall time lines now hitting 10 to 15 years. Now more than ever, our customers are looking for partners who can reduce total development costs, accelerate time lines, improve decision-making and respond to new regulatory requirements.

AI, biosimulation and other in silicon methodologies are expanding the relevance of Certara's offerings, validating our value proposition and opening new opportunities for us. Regulators are more favorably disposed to the use of new methodologies today than at any point in our history. Agencies are providing clear guidance and advances model informed and computational approaches and are actively encouraging the use of new approach methodologies to modernize drug development. Just recently, Dr. Martin Makary, the United States FDA Commissioner noted that computational modeling can provide more insightful perspectives on experimental design and animal testing alone. In his words, now a computer can look at a drug and actually make better predictions.

Additionally, in a recent New England Journal of Medicine article, the commissioner outlined a framework where only 1 pivotal trial would be required for approval. This creates an opportunity for developers to rethink and improve clinical trial designs and reduce overall time lines. This is what Certara is built for. It underscores the relevance of our platforms and services. Certara's credibility has been built over decades. Our 430 PhDs and MDs have directly contributed to hundreds of drug approvals. Worldwide, we have more than 2,600 customers and 23 agencies using our technologies. I see this foundation of one of Certara's greatest strengths and a powerful platform for which to lead in this expanding market.

At the same time, we have not sufficiently converted that credibility into the level of growth, the opportunity warrants and that I believe we should and can deliver. In fact, over time, Certara's business should be able to drive double-digit growth. There are 3 potential explanations for this disconnect. First, the true potential and market acceptance of AI-enabled technology data model inform drug development has yet to be achieved.

Second, external market conditions created market headwinds and/or third, internal execution gaps have impacted results. There are probably elements of all 3 of these at play. Let me address the market acceptance point, and then I'll return to discuss planned operational improvements. Through our work, we are seeing accelerated adoption of MIDD use cases earlier in research, expanded use cases across preclinical development and strategic applications in clinical and regulatory settings. Allow me to highlight a few recent examples that have delivered measurable impact for our clients.

First, a top 10 pharma company use millions of quantitative systems pharmacology simulations or QSP, to prioritize 28 drug candidates against 26 unique targets. This predicted the drug target combinations with the highest likelihood of clinical success, demonstrating how our QSP technology has the ability to drive dramatic productivity gains in the R&D workflow. Second, an innovative biotech company use model-informed approaches to justify a first-in-human dose, 50 to 100x higher than what would be supported by standard methodologies. This change enabled the earlier selection of a more clinically relevant dose, which was the basis for a successful Phase I trial.

Ultimately, this molecule was acquired. And in rare disease, MIDD opens up new avenues for developers to reach underserved populations. For example, in Pompe disease, we created virtual populations to evaluate the efficacy of a novel compound versus the standard of care and predictive clinical outcomes in these virtual patients. These examples illustrate the broader point that aligns with our mission and the opportunity ahead of us. MIDD is growing.

Now let me turn to our broader technology and services offerings and share a few perspectives. While Certara continues to benefit from a strong legacy as a market-leading software provider, it is clear that we must sharpen our execution to fully capture the opportunity ahead of us. Our 4 core franchises remain highly differentiated, deeply embedded in customer workflow and integral to decision-making across the development life cycle. Importantly, clients affirm to me that there's a limited risk of AI-driven disintermediation. Instead, they are looking to Certara for leadership to advance AI model inform development, creating new avenues for us to add value and strengthen our strategic position. At the same time, despite stepping up our R&D investment and product enhancements and new products, we have not yet converted that investment into sustained organic growth. To address this, we are taking targeted actions to accelerate our sales and strengthen our go-to-market approach and to focus our portfolio with greater discipline.

Now moving to our services business. I've been impressed by the caliber and depth of our scientific expertise and the longevity of our relationships. Our specialized services address our customers' needs and advance their goals delivering value both independently and in combination with our software. Certara's tech-enabled services continue to be a core part of our growth strategy and a critical enabler of MIDD adoption. When our consultants deploy our software and customer engagement, it surfaces new use cases and build stickier customer relationships.

This expert in the loop helps to create an innovation flywheel. Certara grows faster when our software products are integrated with our scientific expertise. As with our software business, our services execution has room for improvement. Ultimately, we need to enhance our engagement with customers and more proactively match the right solution to our customers' needs.

Lastly, we are in the final stages of the strategic review of our regulatory writing and operations business and expect to conclude that process in the near term. Coming in, it was important that I take the time to thoroughly evaluate all the options and ensure we are pursuing the course that best maximizes long-term shareholder value.

Moving on to operations. Over the last several weeks, I conducted structured reviews with business leaders, reviewed P&Ls and go-to-market plans and met with nearly 100 employees. I went deep into our product portfolio. The talent and scientific capability inside Certara is exceptional. But as I've alluded to above, I am equally clear-eyed about the opportunity to grow and to improve. We want to operate with greater focus. We must build with clear priorities and reliable execution. We must engage customers more proactively, and we must create a culture of accountability and financial discipline.

Simply put, to grow faster Certara must run differently. And as CEO, I intend to lead that change with urgency and clarity. We are moving forward with 3 strategic priorities. First, we are developing a more focused corporate strategy and product portfolio, anchored in customer needs, scientific rigor, innovation and disciplined investment. We will accelerate AI integration and double down on core R&D technologies and MIDD.

Second, we will continue to put customers at the center with deeper engagement and greater senior level involvement. We will leverage our feedback from our customers to inform product road maps, AI initiatives and service priorities. This will lead to improved commercial performance and improved revenue growth. Third, we are raising the bar operationally sharpening pricing, improving delivery and driving higher returns from our investments in sales and marketing and R&D. We will leverage AI to increase efficiency and scale our operations more effectively. Already, we have identified a path to approximately $10 million in cost avoidance relative to the initial 2026 plan.

Our team will hold one another accountable for delivering on these improvements. We believe that these changes will reposition Certara for sustainable, faster growth, and I look forward to updating you on our progress. 2026 will be a transition year as we bring change to the organization and strengthen our focus. In this context, we are guiding to flat to low single-digit revenue growth, which reflects both market conditions and the operational improvements we plan to implement. Our balance sheet and cash flow generation remains strong. We intend to be strategic with capital deployment, including executing against our existing share repurchase authorization which we view as a compelling long-term investment at current levels. Our focus will be to reinvigorate growth at Certara and drive shareholder value. With a sharper strategy a customer-centric operating model and unflinching execution discipline, we would expect a faster growing, more predictable, mission-oriented and more valuable company.

With that, I'll turn the call over to John Gallagher to walk you through the 2025 results and our 2026 guidance.

Thank you, Jon. Hello, everyone. Total revenue for the 3 months ended December 31, 2025, was $103.6 million, representing year-over-year growth of 3% on a reported basis and 2% on a constant currency basis. For the full year of 2025, total revenue was $418.8 million, representing year-over-year growth of 9% on a reported basis and 8% on a constant currency basis. Total bookings in the fourth quarter were $155.2 million, which increased 7% from the prior year period on a reported basis. Trailing 12-month bookings were $482.1 million, increasing 8% on a reported basis. Software revenue was $46.4 million in the fourth quarter, which increased 10% over the prior year period on a reported basis and on a constant currency basis.

Growth in the quarter was driven by MIDD software and Pinnacle 21. Ratable and subscription revenue accounted for 61% of fourth quarter software revenues, down from 63% in the prior year period. For the full year, software revenue was $183.3 million, which grew 18% on a reported basis and on a constant currency basis. Chemaxon contributed 2.9 million to reported software revenue in 2025, making full year organic software growth 7%, which was in line with our plan. Ratable and subscription revenue accounted for 61% of 2025 software revenues, down from 65% in 2024 due to the impact from Chemaxon, which is mostly term license software.

Software bookings were $56.1 million in the fourth quarter, down 6% from the prior year period. Fourth quarter software bookings were lower than our expectations compounded by both external factors and execution challenges. Customer reorganization and reprioritization, slower clinical trial completions and weaker pipeline conversion of new and renewal software contributed to the bookings result. Trailing 12-month software bookings were $184.3 million, up 9% year-over-year. The software net retention rate was 107% in the quarter and 105% on the year, consistent with our plan.

Looking at our software bookings performance by tier, we saw strong performance among Tier 3 customers in the fourth quarter and throughout the full year. Tiers 1 and 2 were slower in the fourth quarter, offsetting strength in Tier 3.

Now turning to services revenue, which was $57.3 million in the fourth quarter, down 1% versus the prior year period on a reported basis and on a constant currency basis. For the full year, services revenue was $235.6 million, which grew 3% on a reported basis and on a constant currency basis. Services revenue in 2025 includes regulatory writing revenue of $50.4 million, which compares to $54.7 million in 2024. Technology-driven services bookings in the fourth quarter were $99.1 million, which increased 17% from the prior year period. TTM services bookings were $297.8 million, up 8% as compared to the prior year. In the quarter, we saw double-digit growth in MIDD services bookings with growth led by Tiers 2 and 3. For the full year, MIDD services bookings grew 8%. Regulatory writing bookings grew in the high teens versus the fourth quarter of 2024, driven by solid bookings across all customer tiers.

For the full year, regulatory bookings grew in the mid-single digits. I would like to point out that we did experience better-than-expected spending commitments from our customers during the month of December, which helped drive higher-than-expected overall services bookings for the quarter. Total cost of revenue for the fourth quarter of 2025 was $39.2 million, an increase from $38.3 million in the fourth quarter of 2024, primarily due to higher employee-related costs and an increase in capitalized software amortization.

Total operating expenses for the fourth quarter of 2025 were $63.6 million, an increase from $56.1 million in the fourth quarter of 2024, primarily due to higher employee-related expenses due to our investments in research and development. In 2026, our operating plan contemplates discretionary investments in research and development, related to product development initiatives as well as minor investments in G&A and cost of sales. As Jon mentioned in his remarks, we have identified upwards of $10 million in cost avoidance in 2026 versus the prior planning.

Adjusted EBITDA in the fourth quarter of 2025 was $32.5 million, a decrease from $33.5 million in the fourth quarter of 2024. Adjusted EBITDA margin in the quarter was 31%, in line with our expectations. For the full year of 2025, adjusted EBITDA was $134.5 million, an increase from $122 million in the prior year. Adjusted EBITDA margin was 32%, consistent with 2024. Wrapping up the income statement. Net loss for the fourth quarter of 2025 was $5.9 million compared to net income of $6.6 million in the fourth quarter of 2024. Reported adjusted net income in the fourth quarter of 2025 was $14.9 million compared to $24.7 million in the fourth quarter of 2024.

Diluted loss per share for the fourth quarter of 2025 was $0.04 compared to earnings of $0.04 per share in the fourth quarter of 2024. Adjusted diluted earnings per share for the fourth quarter of 2025 was $0.09 compared to $0.15 for the fourth quarter of last year. During 2025, Certara repurchased approximately 3.3 million shares for $43 million.

Moving to the balance sheet. We finished the quarter with $189.4 million in cash and cash equivalents. As of December 31, 2025, we had $295.5 million of outstanding borrowings on our term loan and full availability under our revolving credit facility.

Now I would like to walk you through our guidance for 2026. We expect total revenue to be in the range of flat to 4% compared with 2025. We anticipate our end markets will remain stable and better execution will drive improving revenue growth throughout the year. We expect Q1 to be closer to the low end of the revenue range related to a tough comparison to the prior year and subsequent quarter acceleration related to new initiatives during 2026 as well as easing compares to year-over-year.

We expect to achieve adjusted EBITDA margin in the range of 30% to 32%. As I mentioned earlier, our 2026 operating plan contemplates discretionary investments, which will be managed according to our commercial performance throughout the year. Adjusted EBITDA margin is expected to be lower in the first half of the year and will increase during the second half. We expect adjusted EPS in the range of $0.44 to $0.48 per share for the full year. Fully diluted shares are expected to be in the range of $160 million to $162 million, and we are modeling an effective tax rate of about 30%.

With that, we will open up the call for Q&A. Operator, can you please open the line for questions.

[Operator Instructions] Our first question comes from the line of Jeff Garro from Stephens.

Maybe start with one for Jon with your first call here. And I appreciate all of the remarks in the prepared comments about your approach going forward and a strategy for the company. I was hoping you could share a little more of your external perspective on what attracted you to Certara? And maybe more in particular, how you view the differentiation of Certara's software products and talent on the services side as something that can really be leveraged going forward?

Great. Thanks, Jeff, very much for the question. Yes, as I said before, it is great to be here. As you commented, it's been a pretty intensive 56, 57 days. I've gone as deep as I possibly could go capacity-wise, a couple of months really trying to understand pretty much exactly what you're asking about here, gone deep into kind of each of our products, probably 100 conversations, I talked to dozens of customers really trying to get a good feel for exactly how we do stand back here as a business.

I was attracted to come here pretty simply. I look at it and I look at the external marketplace, the amount of opportunity that this here, this company sits on the right side of kind of every trend, performance $250 billion per year. And and what I'll call inefficient allocation of R&D spend and they're driving demand for efficiency, regulator acceptance, and you have this company that sits there with so many assets and so many tools and such a phenomenal track record. It just struck me as an undervalued gem in this space. With tons of potential upsides and tons of potential opportunity to grow and to build that this market continues to evolve.

As I go through some of the different products, you said services, with services and software, I'd say that, first of all, on the software side, the software, I found the products to be incredibly differentiated. As you talk to customers, it's amazing how deeply embedded each of our major assets are in their workflow. These are -- there's decades of team who've grown up using Phoenix and using the capabilities that exist to do their job every day. There's a high degree of dependence on the asset. So they're not only market-leading, but just incredibly well entrenched. Equally, I think our relationships exist with 20 regulators around the world who are also using the assets. So you have this highly entrenched set of workflow used by regulators and used by the life science industry and in this kind of highly scrutinized space where documentation and validation and transparency are essential areas where they have incredibly high track record of.

So a very strong proposition. And the services side, IC is incredibly reinforcing. As I noted in my opening remarks, -- we're strongest when the technology software products and the services work hand-in-hand. This ability not only to have market-leading computational capability and work capability, but to be able to wrap the world's leading scientists in QSP and PBPK and QSS around those capabilities makes it an enduring proposition.

Excellent. Really appreciate that. And to follow up, I want to ask how a platform approach, cross-selling, integrating and automating workflows between software products factor into more customer-centric go-forward strategy. I thought those were kind of prior focus items. And maybe didn't hear as much of those in the script, but you're also speaking at a high level. So I want to you hear more on whether or not those are kind of encompassed or to what extent those are encompassed in the go-forward strategy or whether there's some kind of deeper shift.

No, I don't think you heard a radical shift in strategy. You have to kind of operate at the rate and pace at which your customers operate here as well. There's kind of -- as you look at the industry, there's kind of twofold here. There's kind of the power users who are sitting levels of organizations who we serve with distinction and pride every day, and at the levels of the organization, they're looking to drive kind of more innovation and more cross section, but that's a slow process. So our focus is going to be twofold. -- continue to serve the users who use this every day, who sit here and rely on this to do their function, and to build out a range of functionality and engagement at that more senior levels to start to work through some of those more longitudinal approaches to accelerate first in human, to accelerate regulatory time lines.

We feel like we can tap into both of these with distinction. And no, our strategy won't change. It's both going to be to develop those product enhancements that the core expert teams are looking for and to look to stitch together a lot of the assets in differentiated ways to play to ensure that the same capabilities that are happening late in clinical development can move into preclinical and into development itself.

Our next call from is coming from Michael Cheney from Leerink Partners.

Jon Resnick, welcome to the company. Maybe if I can just get into the guidance a little bit. Obviously, we all saw the bookings dynamics, and then the revenue guidance, in particular coming in below where your trend rate has been. As you think about the 0% to 4%, can you kind of give us a little breakdown of how much of it is, what you're seeing in the market? How much of it is flow through to bookings? And is there any -- at least in terms of the prioritization of revenue, strategic pullback on anything that's embedded in the specific '26 revenue guidance?

Mike, yes, as it relates to the guidance, I think about it in 2 components. One is services. Last several years, services revenue has been in low single-digit growth. Although we had a very strong fourth quarter on services, which came with a surge in the pipeline in the month of December, which wasn't necessarily expected, but it's certainly a good indication of health in the end markets, and we do expect stable end markets as we approach the guide. But nonetheless, services performance has been low single digit. And then when you combine that with a software business that had some deceleration in bookings in the fourth quarter, remind you, Software revenue in the fourth quarter grew 10%. Full year organic revenue was 7% right in the middle of the plan for the year.

So we were pleased with that performance. But we did see some deceleration in the software bookings in the fourth quarter. And so when you take that combined -- and the tight correlation between bookings and the revenue going forward, combined with the services in the low single digits, but total company expectations for 2026 in the low single digits, hence the flat to 4% growth.

And along those lines relative to the software bookings, it seems like data points around all things type of clinical trials have been at least from a qualitative perspective more positively than negatively skewed. You talked about some dynamics on decision-making, but also some dynamics on execution. Can you dive a little bit more into what encompassed the composition of the software Tier 1 bookings and the arrow that got in the deck specifically tied to what was, call it, on your side versus what was market-oriented?

Yes. Yes. So I mean on the market side, you saw big pharma reprioritizing head count reductions, slowness, as you said, those customer dynamics have an impact on, for example, Phoenix licenses. We also saw study counts down a bit, which when you look at a product like Pinnacle 21, which is which is certainly penetrated the market very fully. The studies are down, we're going to see a little bit of softness there. So those are a couple of the the points around market -- but execution also is, like you said, is a key component here, too, where we have pipeline visibility, and we didn't convert as much as we should have. in the fourth quarter. And so that's why we did call out the element of execution.

And Michael, thanks for the welcome. It's John Reznik. I again, it's wonderful to kind of look at things as very kind of fresh is and cleanup. First of all, in general, I think our view on the market is that it is strengthening, I think, consistent with what others are reporting. I was pretty encouraged by the December services bookings. From my standpoint, services tend to be a more discretionary item, which ebbs and flows over time. And independent of some of the slowdown that we saw last year or 2 years ago, that seemed to be a really good indicator for us of some opening and perhaps a leading indicator of more spend into '26.

The other thing I'd say on licensing, in particular, for things like with Pinnacle, there tends to be a little bit of a lag. You're still going to pay for the reduction in studies from a couple of years ago. I think we're all looking at the same data that licenses starting to come back up. And as that starts to rise, you'll start to see some improvement in Pinnacle as well tied to studies -- sorry, type of study. So as a number of studies that starts to late-startlift, you'll start to see stronger performance, but there's a little bit of a lag time between the 2. So look, I think as we enter 2016, I think we're cautiously optimistic similar to what I heard other peer companies and observers talk about things, a lot of the trends seem to be moving in the right direction in that December discretionary spend number is one certainly I maintain on and asking the team to work hard on the execution side.

Our next question comes from the line of Luke Sergott from Barclay's.

this is Anna Kruszenski, on for Luke. It would be great to hear more about which areas you see the most opportunity on AI enablement? And specifically, how are you thinking about the balance of investing in AI capabilities to support a more innovative portfolio versus leveraging the productivity gains to drive more near-term margin expansion?

This is -- I missed the name upfront.

This is Anna Kazinski.

So look, I think that's a great question. So AI, in general, is a huge change agent here internally. And I think we think about it in a couple of different dimensions. If we think about our software side of the business, AI is being actively embedded into all of our core assets. A good example would be Phoenix, where a bunch of bunch of modules and increased functionality are all AI-driven consistent with the way we're approaching like the other businesses. We have a handful of products that have been launched in the last -- end of last year and will be launched early this year, which also are highly kind of AI-driven products, which we're excited about, one, which was launched last year, it was Satari, which is in the QSP space, which is a very fast driving area for us, heavy kind of AI backbone to it. We're really optimistic about not only the product side there over time, but also the intersection between that and our services. We also have a number of things. There was an earlier question about pitching together. We have a number of stuff that aren't exactly offerings, but things that help stitch together stuff and more of a true kind of AI native way, which a groundbreaking and innovative.

So there's a lot of things happening on the core kind of product side, which we'll be taking a close look at and accelerating as you'd imagine, there's equally as much going on opportunities on the core execution side. So on the software development side, huge push over the last 6 weeks, 8 weeks really to make sure we're using best-in-class process running out tools, accelerating our internal time lines. That will be an ongoing effort and initiative this year to accelerate our internal bills and to ensure that we're moving at rate and speed and with a high degree of efficiency.

More broadly, on the AI side, there's a range of opportunities we see to enable our services business to help fix some of our operations infrastructure. So it will be a major push internally that we believe will drive both short-term and midterm productivity and efficiency enhancements.

That was so helpful color. And then 1 follow-up. You talked about the efforts underway to revamp the commercial organization. Just curious what do you see as the lowest hanging fruit here? And then any initiatives that will require a heavier lift.

Yes. Great. Thanks. So the look -- on the portfolio side and the go-to-market side areas and some of the typical team looking at the same data that you guys are looking at, which is our investments over the last couple of years have gone up pretty steadily, and the translation organic revenue growth hasn't materialized. So as a new leader in this business, you start to ask a bunch of questions about the shape of those investments and how you can start to optimize them, we will be focused both on the portfolio and go to market. On go to market, I think there's a couple of different dimensions of it. we talked about customer centricity, 1 key piece. How do we optimize the relationships that we have and really bring the best of the issues that they're facing into our organization so we can respond to them most effectively.

There's elements of pricing and contracting and kind of just core kind of operational elements that we have. There's an organizational focus around getting a number of our executives out in front of in front of the clients and having kind of that second order, second level nature conversation. I'm a big believer in in targeting and AI-driven productivity around kind of sales initiatives and sales efforts. And so how are we doing in terms of kind of automating our initiatives and making sure we're having the right conversations with the right people at the right time. Obviously, then there's a range of other questions in terms of do we have the right people in the right places. -- we've got a diverse portfolio with a combination of services and kind of tech services and pure SaaS offerings, which all have slightly different service offerings.

So how do you kind of rationalize across those 3 to make sure that you're you're optimizing it directly with customer. low-hanging fruit will be things like pricing and customer centricity initiative and targeting and incentives, things that you'd expect. And then more medium term, really looking to transform some of the types of relationships we can have with those clients.

Our next question comes from the line of Scott Schoenhaus from KeyBanc.

Welcome Jon Resnick. I guess a follow-up to that question in fourth quarter software bookings as you look to sort of automate the process and put these price incentives in, how much of that pipeline is very can be converted over the next 90 days? And then when can we see a bookings reacceleration on the software side?

Scott, so the pipeline conversion piece on the execution side here, we don't -- you heard in the prepared remarks, we don't necessarily see that coming back in Q1. We indicated that Q1, we expect to be at the lower end of the overall flat to 4% revenue growth guidance range. Some of that's due to a tough compare to the prior year. And then we're expecting to see some acceleration in the subsequent quarters. Some of it due to increased conversion and visibility and then some of it because the comps get a bit easier as we move through the year, too.

And as a follow-up on the regulatory writing business grew nicely in the quarter. just your thoughts there on the divestiture, the timing of it and maybe what's embedded in your services growth guidance under the goals for rating side?

Yes. Let me tackle the first question. So I appreciate a number of you have been asking about this for a long period of time. I have the luxury of 50 days or so to take a look at it. It's a -- it's a bit of a riddle here, right? So you have business has clearly been compressing year-over-year, which you'd expect, I guess, along with market trends or you kind of saw some of the dislocation in pipeline or an IRA and some that rebalancing over the last couple of years, you'd expect that business to decline. You saw that sharp increase in book-to-bill, 1.5 book-to-bill in Q4. And you have to remember, at its core, it's a pretty profitable offering.

So the first thing I did when I joined and we were active in strategic review was really look at the options on the table to ensure that we were, a, fully evaluating, for example, the contribution to that profit margin, those paid dividends in terms of our ability to invest in MIDD and invest in some of the other areas of high growth. So I wanted to make sure we had a a good hard look at that and that any potential options that we have take into consideration, not only the strengthening of that underlying business but the contributions that it makes on a bottom line basis. That said, I think we're in the final stretches here, we should have a resolution answer for you in the near term. it's something that I think everyone on this side wants to move forward with, and we're well on our way to have a clear answer for you very quickly.

Our next question comes from the line of David Windley from Jefferies.

Jon Resnickd, good to talk to you, Live and John Gallagher to you again. On the software sales, the software bookings, is the pipeline conversion there a reflection at all of customers perhaps hitting the pause button as they evaluate how AI might influence how they use tools like this? David, good to talk to you. And I have an answer t

David, good to talk to you. And I have an answer to the question you asked me on my first day here, when we talked directly. The -- look, I don't hear that. As I said, I spent a lot of time talking to talking to customers. And I asked this question very directly to every single one. And I tried to get to all of our major accounts in multiple levels in terms of the way that they were they're thinking about their technology stacks and the role that we see as Yes, is there an industry-wide set of questions about where they're going to make investments, how are they going to make investments as it does cause some paralysis on the client side.

Yes, clearly, we see that across segments and across different components. I don't think that's the issue here. nobody who I spoke to is it's thinking within that context. I think what you ended up having here is just a little bit of issues around that lag on the Pinnacle side with studies the newness of some of the new products that we have and the time it's going to take to get those to market some dynamics around the conversion as we start to convert clients to cloud, by the way, which we're very excited about, the newness of the CertaraIQ offering, which had a soft launch, which we expect to continue to accelerate in the year. So I think you've got a little bit more of a function of timing, a little bit of market events. I don't hear and I didn't hear AI as being the driver. There was -- every sales rep, every client I spoke to, there's no indication that, that that's the driver of that slowdown in Q4.

Got it. And John, or Jon R, it's maybe a little unfair given what did you say, 56 or 57 days still. But as you come into the business and kind of evaluate where do you aim sales efforts? And where do you aim innovation investments? It seems like there's -- there have been a trade-off between like later-stage clinical development and opportunities to streamline there have perhaps bigger bang for the client and bigger TAM for Certara versus some of the recent maybe acquisitions or discussion and strategy at the company has aimed at early development, say, maybe not discovery, but kind of late discovery preclinical stage in more of a capture the molecule mindset? How do you weigh those 2 options and which One do you lean into?

So that's not the question. I thought you're going to ask me that you're going to ask me the TAM vers execution question. There's definitely -- the market exists to the question you've asked me directly before. Where that was to...

If you like...

I mean I think we addressed that in the prepared remarks pretty clearly. There is a -- this market is ripe for growth. And as I said in my opening remarks, I think there's a lot more opportunity for us to drive execution here. Look, I -- whether it's on the debt side, later on in the debt side earlier in discovery, there's trade-offs of those different markets. price point side, fragmentation. There's a lot of different things that are going to play. So I think we'll be a little bit selective around how we're choosing what to do.

I think John Gallagher alluded to this in his remarks, kind of look at the core MIDD portfolio that we have. It grew in those double-digit numbers that I think, David, you'd be expecting from this franchise. So the core kind of where we're doing the biosimulation and the computational work that is 10%. Now there's a range of places you can deploy that. You can deploy that at the point of regulatory submission, you can deploy that in trial optimization and trial design from some of the case studies and examples that we're highlighting. We were intentionally pointing you earlier things use of QST that pick targets and as we kind of integrate Chamaxone and some of the different offerings that we have that are closer to the discovery stage, we think there's going to be a lot more value by integrating PBPK and QSP earlier into that cycle. So I don't know if the trade up is much around do you play in discovery to play in that as much as how can we focus around those kind of core growth areas with our strong legacy and strong differentiation. And I think those are the types of things that you'll be seeing from us over the next couple of weeks and months.

Our next question comes from the line of Brendan Smith from TD Cohen.

I wanted to follow up actually on your commentary in the prepared remarks, I know you just expanded a little bit on this, but where you said Certara would be able to drive double-digit growth over time. Can you maybe just expand a bit more on what you kind of mean there? And over what time frame do you think this is feasible? Are there maybe certain benchmarks over the next couple of years? Do you think the company needs to hit to derisk that ramp to 10%-plus growth? And maybe just related to that, Curious how you're thinking about software growth specifically over the next couple of years, just given that I think some of your peers are in the space are benchmarking about 10% to 15% there. So wondering how we should interpret that in your kind of blended flat to 4% guidance.

Let me -- John, I'm going to take a quick stab and then I'll turn to you for some of the thinking. So First of all, I think you definitely kind of picked up on the points that we were there. Look, I don't know why our expectation was to be any different than anyone else in this peer group. There are no shortage of opportunities out there. We're not going to provide a multiyear path today. We will certainly get that to you over the course of this year. We're in the process of kind of updating those LRPs and those processes, and I will give you a very clear answer to timing of our expectation at that point.

The commentary that we had today is very clearly. If you look at the opportunity, look at the potential for that as you look at the range of use cases that this can be deployed into and you look at what alluded to around some of the opportunities around just execution. There's huge windows for improvement in what we do. But we will get you those answers over the course of the year, if not the next set of calls early into Q3, we'll be providing that multiyear guidance and a clear direction and path for you. you want to add anything?

Yes. Yes. I think maybe just to add on to that, the view to double digits, of course, is predicated on all the things that John just said some help from the end markets, which we seem to be getting like when you look at the performance of the services business, as John was saying earlier, perhaps a good leading indicator on discretionary spend that we could be entering a time of at least some stability, maybe even some tailwind from the end market, combined with some of the execution points that we've discussed here would set us on that path. And we look forward to giving an update in the coming quarters on just what that time line looks like. But when you look at adoption of MIDDversus versus where we are today and the growth rates that we have today versus the market-leading position that Certara has in this space, then we feel very optimistic about the future.

Our next question comes from the line of Sean Dodge from BMO Capital Markets.

This is Thomas Keller on for Sean. And welcome, John. Maybe going back to pricing, how would you characterize the pricing environment across the different solutions and customer tours? Are there more specific areas you'd call out, we're seeing a bit more pressure? Or we're on the flip side of that. Do you see some areas where you have an opportunity to maybe better align purchase with value.

Yes. Thanks, Thomas. It's a good question. I want to answer your question directly without necessarily communicating the entire world what our pricing strategy is going to be in some of these dimensions. Look, I think there's a handful of ways to think about it. There's some core products in the portfolio. that probably should be thinking in a little bit more disciplined way around how to -- for pricing for opportunity. So there's a segment of products that fit right into that category, where I think that there is more pricing potential.

And I think it's fair and commensurate with the value of the product and the level of investments that we're putting into the products and the value that it's adding to the organization. I mean I think 1 of the question behind your question, I presume is also how has the pricing environment changing as you start to extend the SaaS model and start to extend some of what you're doing internally at offerings that we bring, we believe, add a tremendous amount of value when you -- if you look at some of the case studies that we provided today or even other things in in the public domain or on impact.

So we're having -- whether it's trial avoidance or optimize trial or the ability to meta-analysis on things considerable money, I think we think we're bringing considerable value to the -- to our clients. And we certainly are looking at how do we better align things that we do to ensure that we're participants in some of that value creation. I think the world of flat picking the world about user fees and seat licenses and other things, I think it's going to considerably over the next few years. And I think we sit in a nice spot where we can partner with clients in a more longitudinal way and kind of demonstrate areas in which we're helping them avoid cost, accelerate time line, derisk trials in a way that we can tap into a little bit more value. So that's the focus that will be going on. I'm trying not to give you the 100% detail on it, but I think we -- we have a good forward approach here, which we think will align nicely to where our clients want to go as well.

I totally appreciate some of the sensitivity there. maybe going back to the Tier 1 bookings, there's kind of a disconnect between software and services should we think about that is demand for maybe some of the regulatory services, for example, could those be potential leading indicator on the software side of the business as well? Any color there would be helpful.

Yes. Yes. Yes. The strength in the services bookings in Q4 is a good indicator of the overall market, we think, as John was saying before, it's probably a good indication of the appetite for discretionary spend. And we thought not only in the reg business, we did -- we had a strong Q4 bookings number in REG but also in BioSim services. So on both sides of that, we -- and as we approached the year looking at 2026, we enter the year with a bit more optimism and a view toward a more stable end market environment as a result of that.

Our next question comes from the line of Max Smock from William Blair.

It's Christine Rains on for Max. Hoping you can walk through the relative magnitude of the factors driving your expected stepped out in adjusted EBITDA margin in 2026. Just if it's predominantly revenue driven, maybe any head count growth expected innovation investments you discussed or other strategic or commercial change programs you've put in place?

Christine, yes. So the margin guidance of 30% to 32% is in line with the guide we provided last year, and we had noted that it was a year of investment. -- you certainly saw that show up in our R&D expense during the course of 2025. 2026 is similar in the sense that we've guided a similar margin range. It is a step down, as you pointed out, from where we exited the year, and we did a full year of 32% last year. And that's because we do have further investments in R&D related to MIDD and unifying our platforms. And these are investments that we're going to continue to make. We launched 4 new software -- or sorry, 3 new software products in Q4 of last year. We intend to continue that path of launching new software and enhancements to our existing software during 2026.

And so that's where we're at. Now I balance that with the fact that, yes, we put 30% to 32% out. Last year, I think we did -- I'd like to say we did a good job of managing the investments that clearly we were making, you see show up R&D. We find operational efficiencies and still coming at the high end of that guide. As we look at this year, we're already starting to look at how we can make the investment this year while also looking at the cost structure, and you heard John mention cost avoidance that we've looked at already in the 26 plan of $10 million.

So hopefully, that gives you a sense of how we're thinking about it. We are investing this year. You're going to see that in R&D and hence, the guide of 30% to 32%.

That's super helpful. Given this innovation ramp, hoping you can discuss your CapEx and free cash flow assumptions for this year.

Yes. We don't guide those particular metrics. But I think that what you've seen is like if you're looking at capitalized expense, then that's largely due to the R&D investments. If you think about what it is we're doing, we're investing in R&D, we're developing new software products or enhancements to our platforms, we're unifying our tech architecture, all of which are capitalizable. And as a result of that, you've seen us capitalize a bit more. So the trend that you saw in 2025 or the levels of capitalization that we saw in 2025 would be similar based on the earlier comments that I made would be similar in 2026.

Our next question comes from the line of John Park from Morgan Stanley.

I'm on for Craig. Earlier in the prepared remarks, you talked about matching the right solution for clients. Do you think you have all the pieces together when it comes to personnel or IP? Personnel or IP, is that the question? Yes. Or like what -- do you think you have all the pieces together to really find the right solution for clients.

look, I think anyone would say they never have all the right answers. I mean that's the honest answer. This is a dynamic space with a range of rent things. But I think we feel pretty done good about our ability to respond to a range of questions. I think strategically, we always kind of have our eye on what else is out there with complementary capabilities to what we do. But there's no shortage of ability for us match kind of client demand, you take the toughest questions that our clients have about trial trial design, execution, chemical entity business design, we can answer a range -- a massive range of things. So I have no concern about the fitness of the current portfolio to execute. Obviously, we'll always continue to look for things to complement us as things continue to out, let's create scale and grow as a business and run out our offering. But on the whole, we have more than enough in the current portfolio to very actively work with a client on any number of challenges that are facing.

I know you mentioned a lot of the FDA remarks up top in the prepared remarks. Have your clients seen any changes in the FDA in other statements? I know it's probably way too early for drug approval rates change, but are they optimistic when it comes to maybe going 1 phase to another? So I think -- look, I think I would answer the question is fairly different, if you don't mind.

So I think -- look, I think I would answer the question is fairly different, if you don't mind. The way I tend to think bout it is, are we seeing a shift towards more of our services at the FDA starts to push people to more computational and modeling base pressures. And I think the answer is certainly, yes, the FDA and the life sciences industry does not move quickly. These cycles are long. So you get change the regulatory guidance, you have in-flight trials, you'll have a whole range of other things that take time to move. But if you look at underneath the growth in our QSP business and the core growth in our PPP business, those are reflective of these alternative approaches being used and during acceptance.

So look, as we kind of look -- if we look at the direction of travel to the FDA, we certainly think that the huge talent for our offerings, we're starting certainly to see the leading indicators in some of our core service offerings and good technology that underpins them. So we're optimistic about the way those guidelines and the direction of travel for the regulatory bodies and how that plays into our ability to support clients in a broader and more helpful.

Thank you for your participation in today's conference. This does conclude the question-and-answer session and concludes the program.

I think we're at the top of the hour, so we'll kick it off. A big thank you to John Gallagher, CFO of Certara, for joining us today at the Stephens Investment Conference in Nashville.

Thanks, Jeff.

Appreciate the time, John, and we'll just jump right into the questions from there. So hoping we could start by revisiting a key topic from Q3 on the difference in the demand environment between Tier 1 large pharma customers and other midsized and small customer tiers. What do you see in Q3? And why will it persist or not going forward?

Yes. Thank you, Jeff. Glad to be here today. Yes, so T3 -- so the Tier 3 customer category or biotech companies were a highlight in the quarter where we saw strong performance, particularly in biosim services, which were double-digit growers. And we see that in thanks to the commercial team with a strong focus on working with the biotech companies that are best positioned from a funding perspective as well as a skill set perspective to do work with Certara. And so that was a good part of the results as we looked at the quarter and even on a year-to-date basis.

So T3 has been a highlight that has partially been offsetting some weakness that we saw in the quarter on the Tier 1 customers. So that's the large pharma customers. And what we're seeing there is some delays, some slowness in decision-making, some program or project delays, most pronounced in the regulatory business and -- but still also and to a lesser extent, but also in the biosim services business. So that was what we're seeing. We did see some of that weakness carry over into Q4, which prompted us to make some of the comments we made on the call. So through October, we saw some of that weakness continue. Although most recently, we have seen close rates improve a bit as we get deeper into November and we approach the end of the year.

Great. Maybe a quick follow-up there. Any comments to help inform investors on how we should think of bookings seasonality and how we should think about the relative importance of November and December versus the rest of the year?

Yes. So we typically see a strong Q4. And in fact, we continue to expect Q4 to be one of our stronger quarters of the year and expect a sequential increase from Q3 bookings moving into Q4. And that's what we've seen historically in the business. Because of some of the slower decision-making with the Tier 1 customers, we don't expect that seasonality to be quite as pronounced as we've seen in prior years. But we do still expect to see a sequential increase in bookings from Q3 into Q4.

Excellent. That helps. A fairly tough comparable versus Q4 last year. I also want to dive into the pretty different demand environment that you've discussed for software versus services throughout the course of the year. What's driven that divergent behavior? And more importantly, what needs to happen to turn around services bookings?

Yes. Yes. So we have seen some divergence there, which is not totally uncommon. The services side of the business does tend to be a bit more volatile and performance is sort of in line with some of the broader market conditions that we've seen. The software business is very sticky. So that business across the customer tiers -- once the software is in place, we have very high renewal rates and customers tend to keep the software, and we don't see as much volatility in software performance. And that's including this year. So the organic software revenues for 2025 year-to-date have performed in line with our plan expectations. So that's been -- that kind of consistency is what you'd expect from software revenue achievement and a little less volatility.

Now services, on the other hand, we do see more movement. And remember, it takes about a couple of quarters for revenue to pull through from the time that we post a booking. So we've seen from the time that we convert a booking, it takes a couple of quarters for that to turn to revenue. And overall market conditions and what we've seen in the behavior of our customers, most notably in Q3 when we looked at Tier 1 customers is overall sentiment will drive a bit of volatility or a pullback or acceleration in better market conditions of the services bookings.

Got it. That helps. And just beyond the customer types or software versus services, any other comments on your perception of the end market or how general end market conditions need to evolve to positively translate into pipeline bookings and then conversion of backlog into revenue for Certara. And maybe with this one, you could also hit on some of the -- I think the commentary from CROs have been a little bit more positive and how we should think about the timing of the market turnaround for CROs versus seeing more of a quantitative impact for Certara from just that better sentiment from your biopharma customers?

Yes, sure. So a couple of things that are going really well, which is the overall pipeline or the sales funnel is full and intact. So the pipeline itself is strong. So that's notable. And then our conversion of existing bookings to revenue, so really converting the backlog has also been a bright spot. You saw that in the quarter when we delivered Q3 revenues and services were on plan at a period in time where bookings had seen some deceleration. So those are a couple of things that are working well.

Now the conversion of that pipeline to bookings is what we're calling out as one of the spots that we're keeping our eye on as we proceed through November and into December. And then your question about what CRO commentary is versus what we're seeing. And we have seen that historically, Certara's performance, particularly in services would come on a bit of a lag. Maybe it might be a 1- to 2-quarter lag on where we see some increase or decrease in performance. So the fact that there's a call for a better overall market backdrop is certainly going to be a positive to us in the future that will become a tailwind. But our Certara achievement of bookings and revenue has tended to be on a bit of a lag. So to the extent that we're seeing or we're hearing and we're seeing other companies talk about a recovery in the end markets, that's going to -- overall, that's going to end up being a tailwind to Certara.

Excellent. I appreciate that. I want to hit on the intersection of demand and the regulatory environment. Has the regulatory environment impacted customer purchasing decisions this year? And what has you excited or concerned around regulatory policy going forward? Is there a greater focus you think on implementing items like the nonanimal methodologies of testing announced earlier this year? Or is the focus more on what the next policy announcement to come is? Or is it just kind of the incremental work that you guys have always pushed for of incremental use cases of biosimulation that kind of super sees whatever leadership is at the FDA or what their current policy focus is?

Yes. The regulatory backdrop has certainly been mixed this year. We -- because of some of the there's -- at the FDA, at least there's employment uncertainty. There have been fewer drugs approved year-to-date this year than what we saw last year. And so it's certainly indicative of some slowness within the FDA, given all the uncertainty that we've seen there. And we think that shows up in our regulatory business and to some extent, in our biosimilar services business. So that's one aspect.

But on the other hand, though, of course, there was the directive by the FDA back in April on NAMs and moving away from animal testing, and that certainly provided a tailwind to the business and the overall sentiment toward marketing or modeling rather, and Certara's market-leading position in modeling it certainly is a good tailwind to the business. But what we're -- I think what we're all waiting on at this point now is some further guidance in addition to what was said back in April that will further support that overall tailwind to the business in achieving a higher growth rate, specifically related to moving away from animal testing. Of course, a couple of the bright spots for growth in Certara during this year, of course, has been Simcyp and Quantitative Systems Pharmacology or QSP business, both of which would be beneficiaries of further guidances from the FDA related to NAMs.

Got it. Appreciate that. Maybe transition a bit, talk a little bit more specifically about some elements of the software business. Want to start with the Certara Cloud and kind of broader platform strategy. Any milestones that you've hit so far in FY '25 worth noting? And how would you describe how the shift to this cloud and platform strategy is changing cross-sell for the business?

Yes. So Certara Cloud, really good adoption this year. Remember, Certara Cloud is a single sign-on opportunity that as customers are renewing their software licenses, Phoenix being the highest volume one here. As Phoenix customers are renewing, they're being ported over to a single sign-on environment that's showing them not only the Phoenix product, but all of the other software products that Certara offers. It's -- the conversion to cloud as people renew has -- we've been very pleased with the adoption.

And this comes at a time when we're launching new products, too. So very importantly, this adoption of Certara Cloud to raise the awareness of the software products to increase the cross-sell opportunities is coming at a moment in time when we just launched 3 new software products to Certara IQ, I'm referring to, Phoenix Cloud as well as Pinnacle Enterprise.

Want to ask maybe a little bit more specifically on Phoenix, knowing that it's one of the most long-standing Certara products, really great market share. Anything specific you'd call out on retention trends on that product? And also any new capabilities that you call out that you think customers are particularly excited about that's driving customer behavior?

Yes. We're excited about this launch. This is the cloud version of Phoenix. And this is, as you pointed out, Jeff, this is a long-time high-volume product for the company. And predominantly today, it's a desktop version. So most of our customers are on a desktop version. And so the goal here is to get them onto this cloud version, which, of course, is hosted by Certara and allows us to put some of the features and functionality that you can't get on a desktop version into this cloud version.

Think AI enablement for search and other enhancements within the product that we're able to put into the cloud environment that customers won't be able to get in the desktop version. So we're very optimistic that, that's going to be a good lure to bring customers over and begin a transition from the desktop version over to cloud. And of course, we have some pricing power there. And that's one of the key launches that we've just done recently that as we look toward 2026 should be a good growth catalyst for software overall.

Follow-up there. Any time frame that investors should keep in mind on customers transitioning from that desktop version of Phoenix to the cloud version? Is the strategy just to make the cloud version have more and more compelling. And in that way, evolve the customer migration rather than setting some type of sunset date and enforcing customers' hands?

That's exactly right. Yes, it's the compelling nature of it. And we think that the version that we have of Phoenix Cloud out there right now is going to be that kind of compelling. We're not going to put pressure on sunsetting the desktop version. And we do think that the overall conversion from desktop to cloud will take some time. And as customers renew, there's going to be a significant opportunity to transition over. But the goal there is to put the features and the functionality, including AI enablement into that cloud version that will really compel people to want to make that change more so than push them over due to a sunset.

Are there any revenue recognition headwinds...

Inherently, so we do recognize revenue all at once with the desktop version, which I think you understand based on the question. When we shift to cloud, it will become ratable. So it will be month-over-month or a quarter at a time of revenue recognition. That would typically present a headwind, but there's a couple of things with it why we really haven't called that out. One is pricing. So we're able to price for the cloud version at a higher rate than we are the desktop version, which helps to offset some of that headwind. And then also, it's the cadence of the renewals. So they're staggered throughout the year. So we don't have any particular month or quarter where all of our customers are renewing. So instead, we view this conversion would take certainly the course of the year, if not even into '27 to convert customers over. And for that reason, then it kind of smooths out what that headwind would otherwise be.

With that, we'll move to Simcyp. You had some efforts to have some kind of Simcyp offshoot products like Simcyp Discovery, Simcyp that's more focused for biotech customers. So I want to follow up on the momentum and success there. And then more broadly, any particular therapeutic areas, use cases that you'd call out driving continued adoption and momentum for the broader Simcyp universe? Could you define that product...

Yes. So Simcyp is what I would call our core biosimulation software. So this is like think of this as organ models to replicate how a molecule impacts the body or how the body impacts the molecule. So -- and it's one of the fastest-growing products in Certara. So -- and this year, too, is no exception. So we've seen really strong growth from Simcyp during 2025. Jeff, as you pointed out, we have a number of modules that are seeking to expand the use cases or the user bases for Simcyp. And we're seeing good growth across each of those areas. So really happy with the growth in Simcyp, and we don't expect that to slow down as we approach next year.

Excellent. Excellent. I appreciate that. We'll move to Chemaxon, which you're over a year post acquisition on that one. So maybe an update on what capabilities are kind of live and fully integrated now? What's been the customer response over the last year or so to Chemaxon and maybe a broader growth outlook for preclinical solutions that might center around Chemaxon?

Yes. The acquisition of Chemaxon has definitely proven to be a good one. They've performed on plan through this year, and the integration has gone really well. In fact, we said we'd exit this year with Chemaxon having a margin in line with Certara's corporate average EBITDA margin. And we're only -- in Q3, we're only 40 basis points away from that. So we're well on track to be able to hit that target by the end of the year.

On the revenue side, the organization has been performing on plan. And I'd say that, that was an aggressive plan. So to be in line with expectations there, then that means a few different things are happening. One is we're able to take the Chemaxon product and introduce the Chemaxon portfolio of products to Certara to the Certara customer base, which is a wider and broader customer base than Chemaxon had independently. Then two, we've also been able to make significant progress in combining. We talked about the legacy Certara Discovery product was D360 and being able to combine D360 with Chemaxon is a compelling sales opportunity for us because what we had seen is that many customers were independently buying these 2 solutions. And so to combine them both together under Certara's leadership has also been a good opportunity for us.

So I'd say everything with Chemaxon is going on track. And whether it's the integration or whether it's the sales opportunities or even the combination of our products, then everything has been going according to plan.

Any time frame we should keep in mind for the kind of Chemaxon, D360 broader preclinical platform combination?

Yes. I think -- so as I mentioned, we're making progress on it. It won't be inside of this year, but certainly can look to next year for that.

Great. I want to ask more broadly about net revenue retention trends. I think you've generally been on plan this year, but a little bit off peak for what we've seen from the last several years. So how should we think about go-forward NRR trends exiting Q3? And what's been the biggest driver of the NRR results year-to-date? And I guess on a go-forward basis between -- and I think the 3 big buckets between seat expansion, cross-sell and the pricing lever.

Yes. So as you said, Jeff, the NRR is in line with plan, but it's at the lower end of the plan. And as a reminder, the NRR is a product of our organic software revenue growth. And so like on Q3, as an example, we grew organic software revenue 6%. How does that yield a 104% NRR? Well, it's basically -- it's about 200 basis points of new biotechs that we're working with and bringing on, which is about consistent with what we usually do, 200 to 300 basis points of new biotechs coming on and then 4% of the mixed bag of everything that you just described, Jeff, in the sense of a combination of price expansion and new business in there with existing customers.

And so what we've seen is we raised price consistently in software, and so we've continued to do so. And it does imply that we've had a little bit of headwind or a reduction in seat licenses. We called out Phoenix before for some of that. As you think about that, that's a higher volume product. We've seen layoffs in pharma. So it's not unusual to see some pullback in seat license in that kind of environment. In addition to -- we believe there's some pent-up demand as we are just now launching the cloud version of Phoenix too. So we think that's what's driving a piece of it. But overall, coming back to the NRR, it is coming in line with plan. It's driven by organic software revenue growth, which is coming in plan, but on the lower end of the plan.

On the software side of things, I certainly want to ask about AI as we do in every investor conversation, every company conversation that we have these days. You guys have certainly been kind of ahead of the game on artificial intelligence, probably one of the first companies on my coverage list fully embedding AI into one of your products. And since you embedded AI into more of your products, even more to come, maybe a broad update from you on kind of where you are in the progression through the product development road map with embedding AI and any framework how investors should think about your monetization of AI?

Yes. Yes. So I appreciate you bringing that up. We do like to think that we're ahead of the curve on that. We acquired Vyasa in 2022 and have been embedding AI into our various software offerings and creating new software offerings since that time. So where are we in the cycle? Well, we've rolled out new products. CoAuthor is a great example of that. CoAuthor is an AI product that's Generative AI for regulatory writing. And that we launched that last year. So we're seeing -- certainly seeing customer interest in being able to automate some of the regulatory writing. And that was the first product offering that we have.

Of course, just recently, we've launched Certara IQ, which is QSP software leveraging our AI technology as the foundation for developing software around QSP, what that's going to allow us to do. Remember, QSP at Certara and anywhere actually is all service-based business today. So we're the first to market with some software that seeks to automate and speed some of the processes that the subject matter experts are working on when they're working through QSP projects. So that's the latest development.

So -- and we're not done there. Where are we in the cycle? There's still more work to be done as far as embedding AI into the software. In fact, I mentioned earlier, one of the lowers on the Phoenix Cloud version to lower customers over from the desktop is to embed some AI features into the modules of Phoenix as well. So we're continuing to do that work with it's each iteration of software, whether it's new software or an enhancement to our existing platforms, we're putting the AI technology and functionality in there that our customers are really going to appreciate as users.

And in terms of monetization, is it adding new capabilities, including AI and being able to garner pricing increases every year? Or is it a step function of you're paying an additional fee to gain access to some of these AI capabilities?

Yes, it's a little bit of both. And it's providing some efficiency inside of our organization as well. So first of all, we have paying customers for AI. As I mentioned, we have the CoAuthor product out on the market since last year. Certara IQ just recently launched. So we have paying customers for the software itself. Then we're also using it, as I mentioned, on Phoenix Cloud as an inducement to get off a desktop. Obviously, we're charging for that also because there is a price difference between the desktop version of Phoenix and the cloud version. So that's another way that we monetize it. And then importantly, too, inside of the organization, using our own tools then we're able to get higher throughput on, say, as an example, software development, we were just able to launch 3 new software applications over the last quarter, and that's in part, thanks to efficiencies that we're finding in software development, which we expect to continue into 2026.

Understood. I appreciate that. And I want to transition to services more broadly, but maybe we'll start with just an AI follow-up there. As part of the internal efficiencies from AI as your internal thought leaders in various parts of biosimulation being able to use these latest versions of your software to deliver deliverables or outcomes for clients at faster levels? And how has it impacted overall services utilization and the lot of potential there?

Yes. Yes, good question. So absolutely, a good case in point for the -- through the efficiencies that we find internally would be QSP. So QSP is a services business that has been capacity constrained mainly because of the growth. So the demand for QSP services has been very high, one of the highlights of growth during the course of 2025. And therefore, of course, that team is somewhat capacity constrained. With the introduction of Certara IQ, again, AI-enabled, it is allowing for us to be able to take on more projects than we otherwise would with the existing team. So it's a good example of how we're finding efficiencies and able to do more work for our customers with the use of the AI tool.

Excellent. And just more broadly on services demand, any kind of subverticals or categories within services other than QSP that you'd call out as being areas with momentum in 2025? Is kind of more traditional biosim, has that been cannibalized at all by QSP? And then maybe comments on the regulatory consulting bucket as well would be helpful.

Yes. So QSP is definitely a highlight in services, but more traditional PK/PD type services work has also been growing pretty strongly. And so I wouldn't say one is cannibalizing the other. I'd say more so that we've seen the weakness in some pockets of services, most pronounced in regulatory, where I mentioned earlier that when you look at the FDA this year, and some of the uncertainties, some of the employment reductions, they're approving fewer drugs, then that's certainly going to impact a business like the regulatory business, and we've seen that. So some of the positives are the QSP and sort of traditional biosim services related to PK/PD. But then alternatively, we've seen some of that weakness in regulatory, which I called out earlier.

Understood. And continuing on the services side, part of the discussion earlier, was that pipeline is strong, backlog is strong. Pipeline to bookings conversion could be a little bit better. But again, backlog to revenue conversion has been solid. So maybe you could speak a little bit more about staffing utilization and just about the durability of the backlog to continue revenue visibility even when you see a little bit of volatility on services bookings.

Yes. Yes, that's an important point because as I mentioned, Q3 was an example of the services team being highly utilized, achieving revenue expectations in an environment where bookings were decelerating as we talked about. We expect that to be able to continue not only in Q4, but even into next year. And that's why our revenue guidance for the remainder of 2025, we had narrowed the range there, but to a large extent, had kept the bottom part of that range intact, mainly because we do have visibility to the backlog of services bookings that had already been put up and converting those bookings. And so the services team is working hard on and the utilization rate is high on converting existing bookings. We did that in Q3. It's going to continue to happen during Q4 and into next year.

Excellent. Maybe I'll try to tie some of it together. How should we think about the intersection of software and services. As you add breadth and depth to the software portfolio, does that create greater opportunities for services engagement over time? Or is it the alternative where customers are buying more software and then doing more themselves and having less of a need for your services?

Yes. We see the 2 linked together very closely, especially when you're talking about biosimulation services and the subject matter experts that conduct that work on behalf of our customers. And I think the increased adoption and prevalence of biosimulation software is going to bring with it an increased amount of subject matter expert warranted type services. So we see there will always be a significant place for those expert services in Certara, even with the growth and the strategy we have around growing the software.

Understood. Makes sense. Maybe we'll transition over to the financials and really focus on the profitability of the organization. EBITDA margins are off peak, but kind of stable to improving, trending in the, I'd say, the right direction with a few different drivers. Year-to-date gross margins kind of at or near record levels, that's a clear positive and Q3 EBITDA margin up quarter-over-quarter. So if we just try to be forward-looking from here, what could keep margins at the current range? Or what are the different potential big picture drivers that could elevate margins from here?

Yes. Thanks, Jeff. So we've been happy with the ability this year to make the investments we said we were going to make in software. We rolled out 3 new software products this quarter. And you see the expenses associated with those investments show up in the R&D line. R&D in Q3 grew 24%. So we're making the investments that we said we were going to make, yet we're still achieving the highest end of our EBITDA margin guide on the year. And we're doing that through very thoughtful and careful allocation of spend as well as high utilization by our services team.

So you commented on the gross margin. That's -- the gross margin is improving, one, because of software mix, but two, and very importantly, the utilization of the services team is very strong as we're converting bookings and backlog into revenue and hitting those revenue expectations. On the sales and marketing line, as we mentioned at the tail end of last year, we feel like we built out the commercial team. And so we're still continuing to grow the sales and marketing line, but we're going to grow that more in line with the rate of sales. And I think we've shown good discipline on G&A. So we're watching the expenses on the line items on each of the line items to ensure that we're not overspending, and that's creating capacity within the margin expectations that we set out to make the investments and still hit the high end of profitability, which we know is important to shareholders.

Excellent. Just kind of on a go-forward basis, can you help us think through the balance between moving to the cloud and maybe that generating some cost of goods sold efficiencies versus areas of continued investment. It sounds like R&D is likely the focus. And so those 2 kind of go hand in hand.

That's right. Yes. So moving into next year, we would anticipate continuing to make investments in R&D. And so we've seen that in '25. We should expect that in 2026. I'll say that part of the efficiencies that we found in answer to your prior question also, part of the efficiencies that we found too have been just in using our own AI capabilities in streamlining and going to market more quickly with software development and new software products. And so that's something we're focused on as we move into next year also is how to make the investments that we're committed to making to drive that growth, but do them as efficiently as possible and AI will help enable that for us also.

If we think beyond this year, beyond next year, longer term, as you really get cloud software at scale, you get AI more fully deployed. Is there a long-term model or framework that investors should have in mind as they think about where gross margins and EBITDA margins can ultimately go?

Well, when we catalyze the growth that we're looking for from these investments and we expect on a long, long-term basis that we would have double-digit growth in software and be able to obtain that in services as well. So once we reach that point, then naturally, I think we're going to continue to invest in the business with the software business, you have to annually invest in the software product, and we're doing that now. We would continue that in the future. But with the expansion of the growth rate, then naturally, we would expect some of that to fall through the P&L, and I think we'd see some margin expansion as the growth rate goes higher, then it's fair to assume that there's some margin expansion that's going to go along with it.

Understood. Maybe I'll transition over to capital deployment and I don't think there's a specific update today, but maybe you could give a quick reminder on what you've said before on the timing around a decision to divest the regulatory services business or not? And then also, if you did divest that, what the implications would be for the financial profile of the company?

Yes. Yes. So we said on the call a couple of weeks ago that we'd have a decision by the end of the year. So obviously, we're actively working toward drawing that to a conclusion, and you can expect an update from us before the end of the year, so over the next several weeks. When we think about capital deployment this year, for the first time, we opened up share buyback as an opportunity to return cash to shareholders. We've executed partially against the authorization that we had by the Board earlier this year.

And -- but over our history, though, we've also been an acquisitive company. We've done, I'd say, a significant amount of M&A has also contributed to our growth over time. And so it's going to be a balance. When it comes to having excess cash, then you should count on us to deploy it either toward M&A with strategically software being sort of first priority in mind there and balancing that against share repurchase, all depending on the backdrop of the overall environment that we're operating in.

Makes sense. And on the M&A front, any general thoughts or lessons learned from the last few deals completed? You had a couple in the QSP space and then Chemaxon in the kind of preclinical or discovery space more recently. And even more broadly, why can Certara be a strong consolidator of software assets in the biosimulation space?

Yes. We've been very pleased with the set of acquisitions that we've done over the last few years. Chemaxon, which we talked about already a bit during this call, then is on track. And we think -- we think that, that deal was done at a good valuation for what we have, something that's accretive to the top line and soon to be in line with our overall profitability expectations and got us strategically to expand our footprint into discovery. So really happy with that.

The other one I'd highlight, too, is Applied Biomath. So back in 2023, we acquired Applied Biomath, which is a quantitative systems pharmacology, so QSP practice that combined with Certara's legacy QSP practice to have the largest QSP practice in the industry at a time. And then during 2024, we were integrating the 2 practices together. And here we are in 2025 with QSP being one of the fastest-growing areas of Certara and one of the fastest-growing areas of biosimulation. So that, too, was a deal that has paid off very well as far as accelerating growth by a combination of acquiring an asset and combining it with the existing footprint at Certara.

So we would continue -- as I mentioned earlier, when it comes to M&A and cap deployment, we're focused on software. And we think our track record of deals over the -- during the time that we've been public is certainly indicative that we're in a strong position to be a consolidator of software companies in this space.

It sounds like you've identified some areas that are underpenetrated within biosimulation. You found attractive assets, bought them at reasonable prices and integrated. How do we think about the additional white space that's out there?

Yes. As you just said, Jeff, one of the key tenets around our approach to M&A is valuation and what we're paying. So we do look for unique opportunities. They often come in the form of partnerships that we've had with companies that we've already worked with to look for valuations that are going to allow us to pay a reasonable price for something that's going to be accretive to our growth very quickly. And in our recent past, at least, our method to do that has been to look at organizations that we've already partnered with in a way where we can see some revenue synergies very quickly upon combining the companies.

Excellent. I have one more I can throw at you with. I think we have 3 minutes left, but maybe I'll offer up to the audience if there's anyone that wants to put the question...

[indiscernible] what does it take to get back there? And how...

Yes. The commercial team has performed -- we built that out. We put investment. You saw investment in 2023 and '24 in sales and marketing that was building out the commercial team. The team has done quite well. There are some bright spots. Even though we have seen some -- what we believe is market-driven weakness in some of the bookings, we've seen some really strong performance in other areas. The Tier 3 or biotech companies would be an area I would highlight where the commercial team has worked with VCs as well as targeting biotechs that are well funded and have the ability and desire to work with Certara. And as a result of that, we've seen T3 biosim services growth in the double digits this last quarter. So I think that's a testament to what's working well with the new commercial structure.

I'll throw one more your way. Mix of software and services and influx of AI. How are your customers looking at in-sourcing versus outsourcing to Certara on both the software and services side. Any insight into how they're using AI internally and how that is impacting some of their activity and purchasing decisions as it relates to biosimulation?

Yes. We see AI as a competitive advantage and a tailwind to the Certara organization. One, for all the reasons we talked about, we're selling to customers AI products. We're using AI products inside the organization for efficiency. And to the extent that customers are also using technology, then we think that plays well into the overall narrative of using technology in the drug development process where this is an area where Certara is the market leader. So we think that the convergence of various technologies and the utilization of these technologies, we think, plays as an advantage to Certara overall.

Not to put words in your mouth, but it sounds like you have a first-mover advantage there that you can continue to execute on.

Yes, exactly, Jeff. Exactly.

Excellent. Well, that puts us at time.

All right. Thank you very much for having us. Appreciate it.

Appreciate it. Thank you John.

Yes, of course.

Okay. Good morning, everybody. Thank you for being here. I'm Dave Windley with Jefferies Healthcare Equity Research in the States, cover the pharmaceutical services supply chain, and I like to think of it as services, technology, manufacturing, kind of if you sell the pharma R&D, I'm interested. So we have here with us Certara and William Feehery, the company's CEO. Thank you for being here.

Thanks, David.

Think that I can't remember if this is your first time at this conference or maybe first or second. But nonetheless, we're glad to have you here. Thank you very much.

So I wanted to start off, I want to get into kind of guts of the business, but I did want to start off with your third quarter results and maybe more so, the reaction that you saw since then and what -- were you surprised by that? And I guess what have been your conversations? It sounds like you've had a number of meetings with investors, what have been your conversations with investors? And what do you think perhaps the market is misunderstanding about where the company stands and what your near-term opportunities are?

Yes. Great. All right. Thanks. Good question to start off with there. So going into the end of the third quarter and the beginning of the fourth quarter, we did see a slowdown in bookings, which I think is alarming to the market. The estimates for our bookings that were out there were higher than we thought was reasonable, and so we wanted to signal that. But I think maybe the reaction was a little bit stronger than we thought. .

So what I'd say about that is we still -- what we saw there was we've got very good results with what we call Tier 3 with biotech. We've been very successful with our strategy of focusing on venture capital companies that have large portfolios of them, and that's been paying off. In our regulatory business, we did see actually fairly weak bookings in the third quarter, to be honest. That's a business which has been volatile for the last couple of years. It doesn't do that many transactions in a quarter. So what we see is that if they get delayed or if we miss 1 or 2, it can really affect it in the quarter. We did see that.

Biosimulation was -- bookings were a little bit soft, but not alarmingly or so. Tier 1 clients, we saw a notable slowdown in the rate of closing. We don't believe we lost any business. We still have a very strong pipeline. It's just a question around when business is closing. And the only thing I'd say is I think what we saw -- someone has been interpreted as being different than what other companies have reported. And my view is that a lot of the CROs saw similar things in the second and the third quarter. They, at the end of the day, said more positive things about where fourth quarter is going. And what I'd say about that is we've seen an increase in our closing rate as we've gone on in the fourth quarter. We have a very healthy pipeline and so I'd say we're not inconsistent with that either.

I think you said the Tier 1 -- so Tier 3, it sounds like was stronger. Tier 1, I think you were talking about is where you saw that slowdown in close rate, the improvement that you're highlighting in the fourth quarter is also in that Tier 1 category? Or is it more broad than that?

It is. Yes, it is. So it's in Tier 1 as well. So we just -- we have a lot of deals to close in every fourth quarter. This one is maybe a little bit more intense as we go into the second half of that but we have a good pipeline. We have seen some improvement in the closing rate.

And the other thing I'd just point out is we have a very, very -- we don't really report on it, but I would say we have a very, very healthy backlog. So at this current rate of closing, we can maintain our business for quite a while.

Got it. And to kind of pause on the regulatory business, you've had that business under review and looking at taking some action there for about a year. The business, I think in 2Q, saw a little bit of, you know, maybe picked its head up a little bit and then reverse coursed. Anything you can -- any color you can add in terms of what's going on in the environment or maybe specifically in the business?

Yes. Look, we've had that business under strategic review for a year now. That's honestly longer than we thought that would happen. And it's -- I think, number one, the business has been volatile, and we see some of that. The other thing that's been not particularly helpful as we've been reviewing that business is the current disruption at the FDA has sort of caused questions around the short-term prospects around bookings and revenues on that business. We're expecting that, that will sort itself out as we go into 2026, but it is a factor as we thought about that.

So what we said about this business is the same. It's a profitable business. It's not -- we don't believe it's of the same strategic importance to the company as it once was. And the bookings have been volatile and of a concern to a lot of investors for a long time. So that -- there are good reasons for the strategic review. Having said that, it's not a business where you just wind it up or give it away for free. It's got some value. And so as we've kind of gone through this process and thinking about the process of price discovery, that's kind of where we hope to get some clarity soon, and we say we'll report by the end of the year.

Yes. Yes. So as a segue back into biosim, I think one of the keys that you've highlighted to me in the past in terms of driving adoption of broader biosims to have pretty high-level regulatory experts in your organization to, for lack of a better phrase, handhold the clients through decisions around should we rely on biosimulation for this case or not. Do those high-level experts sit within this regulatory business? Or are they...

So what's in this business is primarily medical writers. Most of our businesses, we call it onshore, but it's in North America or in Western Europe. It's kind of a high-end medical writing business that focuses on writing INDs and NDAs and other documents that would go to a regulator. It particularly does a lot of work in things like patient narratives and things like that.

So yes, from one of the reasons we owned it was because we view that at the time, it gave us credibility in regulatory. Right now, we feel pretty good about our position in biosimulation. We have a lot of regulatory experts that are not part of this business that are not doing the actual writing but providing the advice and providing the strategy around biosimulation in particular. And so that's when I said it's not of the same strategic importance to us than maybe it was when we bought it 10 years ago.

Okay. That's helpful. The -- so then as promised, switching back to biosimulation and your -- the point that you just made, which is very true that Certara sits in a pretty sizable leadership position in the area of biosimulation. It seems like an area that is a beneficiary of some of the efforts of the administration to push more streamlined and say, less animal intensive approaches to drug development. How do you see -- before I get into details around the quarter, but how do you see some of that administrative -- administration push percolating into your sales funnel?

Yes, great question. So what you're referring to is the FDA leadership last -- I guess, in the spring report, pushed an initiative to reduce the number of animal -- amount of animal testing that's done. And in particular, they cited monoclonal antibodies, but in a desire to go beyond that over time.

So our view of this is that this is a perfect example of what is actually possible today with modeling. So our QSP business has built up a significant amount of business about doing things like first-in-human dosing. And what we found, for example, in our monoclonal antibody customers, they are doing that type of modeling work in parallel with all of the animal testing. They're doing the modeling work because we actually get better data out of what the first dose ought to be in humans than you would get from animals. They're doing the animal testing because the FDA has not yet put out the guidance of exactly how do you go to the FDA and not have animal testing.

So good news is the technology is there. We're doing this type of work for a number of customers. And then when the FDA puts out this and makes it kind of lays out the regulatory guidance and the details of how you do this, it will be a benefit for Certara overall, this will expand. And there's more that we can do as you go vast monoclonal antibodies and you go into other areas where animals are used. But overall, we think it's a positive, and we're expecting more from the FDA in 2026.

Got it. And so that I'm not surprised by what you're describing, the running these approaches in parallel. Does that even predate these announcements by the administration? In other words, were clients already thinking this way?

Well, the thing about monoclonal antibodies is you're giving a nonhuman antibody. So there's always been questions about the utility of some of that data. And so yes, the general idea and the technology that we've developed with some of our customers does predate that. But it certainly increased the short-term interest and just sort of as companies are thinking about the long-term strategy. So a lot of our customers are -- they believe the FDA will sort this out over the next year, but their drug developments are going to span the next 7, 8, 9 years. So they're thinking long term about where they want to go here.

Got it. And then -- so then coming back into the -- a little bit the here and now, your -- you have some of these broader tectonic shifts, but the current environment, a little challenging. And in particular, the services bookings were softer. So maybe help me make sense of Tier 3s were stronger, they would typically lean into services, I think, because they are less able to do that stuff internally, but the services bookings were challenged.

Yes. So I look at this in 2 ways. So 1 is the Tier 3 services were good and have been good all year. There's -- I think that's a good sign for the prospects in the view of biosimulation because it used to be a few years ago, the smaller companies have never heard of biosimulation and never heard of us. And as biosimulations become more standard than expected, they're seeking that out.

Now we've also made a few changes in the way we've approached the market. One of the problems for us with biotech is there's just so many of them just the marketing expense of finding them. There's a lot of churn in the market as well. They come and they go. Some of them obviously get big and successful. And so we've really focused a lot on the financial sponsors. We have a number of larger [ BCs ] and funds that basically become important customers for us and as they've had portfolios. It's made that part of the business sort of easier for us to find a stable base. We still find lots of other ones as well.

In the Tier 1s, we've got kind of multiple things going on in the services. We have -- a lot of them are buying our software. They -- all of them have internal groups that do this and so what you have is they bring us in for services for 2 reasons. One of them has to do specifically with the software. You want extensions to the software or you want some specific experts that only Certara has that wrote the models or wrote the software.

And then the second piece of it, honestly, is, well, when they get busy, then they call us for help, and it tends to be hard to turn down your best customers who get -- who need new work. That -- we're kind of at the bottom of the cycle. As we look forward, there have been a lot of layoffs in big pharma. At some point, they're going to get this into the category as they always do, where they don't have enough people, and this will come back, that can come very quickly. It doesn't need -- we can see that come back very quickly. We have a very large backlog of work. A lot of our work goes on for years with pharma. So that's why I said earlier in your first question, we think that maybe we signaled a little -- the market reaction was more than we intended to signal around where we really think we are right now.

Got it. And on that -- on that bottom of the cycle point, a little bit of slowness in bookings. I think Certara has typically had pretty good pricing power on the products that you provide are pretty unique. How does that -- how is the current pricing environment compared to, say, normal history?

Well, I mean, in this kind of environment, it's a little bit slower and weaker. Obviously, we exercise our pricing power less than we might otherwise. We typically get mid-single-digit pricing increases on our software products, and we've continued to do that. Maybe a little bit tempered comparable when inflation was higher a year or 2 ago and things like that and given the market environment. I'm more focused right now on growing the usage of biosimulation, the number of seats we can sell, the penetration in more types of drugs and the sale of our new software. And I am on just trying to eke out an extra 1% or 2% of price at the [indiscernible]

And on that point about more types of drugs, the biologics capabilities in Simcyp or something that you've expanded. And then I think you expanded into large molecule capabilities and then you kind of streamline that to make it price appropriate for that smaller customer a couple of years ago?

Yes. So I think we were referring to -- we launched some new versions of Simcyp, one of them we called Simcyp Discovery, which, I guess, confusingly is actually targeted towards preclinical. So we're looking at people who have -- they're getting -- they're either going to go from discovery right into humans or if they have animal data, then translating that data into human data. So it's targeted to that 1 preclinical field. It's a narrow group of people. They don't need the full version of the software and maybe more targeted version at a different price point.

The second one is Simcyp Biopharmaceuticals, which is targeted towards formulation side. So there we're looking at, okay, we know that we're going to take the drug forward. We're tailoring the formulation for whatever it is absorption or something like that. It's a different group in pharma, again, slightly different needs, different price point.

But it kind of goes along with our thinking about how we're going to expand biosimulation and pharma, right? So if we were going to be limited to just the kind of our core Uber users, which we love, then there's so many of them. But as we can get into these other groups and we can make modeling more accessible to other parts of the drug development organizations that maybe aren't going to go into the literature, write all these models, but they do want to use them, they want to understand them, they want to understand the implications, then you can sell a lot more seats, and this is kind of the trend that we're pursuing there.

Another consistent with what you just described, another area where I think you're trying to push that is new, opens up new use cases is QSP. You acquired Applied BioMath, which I think is predominantly it was a service platform, but you are now evolving to an industrializable software offering in QSP.

Right. So this was a strategy that we set out when we acquired Applied BioMath roughly, I don't think it was 18 months ago, I don't know exactly the date. But the -- we and they had significant QSP groups. The QSP is a growing trend in biosimulation particular -- it is not limited to large molecules, but a lot of the questions in large molecules are addressed in QSP. So it's a growing -- we know that's a growing trend. The technology is advancing pretty quickly in QSP as well. So it's important for us to be in it.

But the reason why we bought Applied BioMath, it was not to create -- not necessarily just to create a big services group, but it was because we saw an opportunity to create a standard software product in a market that doesn't have one right now. Kind of think about this in terms of what we did in Simcyp over the years. We kind of created the standard PBPK product that's accepted by regulators and has a huge amount of support by modeling scientists across the industry, there's an opportunity to do that in QSP as well. So I'm pleased to say we just did put out our first product. It's called CertaraIQ, and that's the modeling platform that we believe can become the standard in QSP like we do with Simcyp. It's kind of too early for me to tell you. We've had lots of revenues in a couple of weeks, but I will tell you that there was a tremendous amount of interest at the conferences of the scientists where we've launched this. There's really nothing out there and people use Matlab, people use Python, see it's kind of all over the place.

And what that software does for us for that business is, number one, it makes our quite large group of internal people much more productive. Number 2 is it makes us more able to resell models, right? So we put out models in specific therapeutic areas, like, for example, we've got the immunogenicity. We have 1 in early development. We have things in ready ligands, things like that where we can resell them much more easily.

And then number three, as companies go to the FDA as the regulators now makes these models much more understandable to regulators, much more usable. We have AI embedded in this product. So as you're looking at -- what the FDA is interested in is not just the model. They're interested in what's in the model, where did you get it, what did you consider, what did you -- maybe you considered and you discarded it. So there's a large regulatory file that has to go along with any model that it also enabled. So it's why we think that this is an important part for the company and I think could be a really good product as we go forward.

And should we think of CertaraIQ and QSP as selling into and a different and, I guess, earlier phase or selling into a different modality like large molecule or both? Or where is the applicability and the early uptake?

So it tends to be -- you can take QSP in a lot of directions because what you're doing is you're modeling how the drug actually interacts with a target. However, the business uptick that we're seeing tends to be in preclinical, it tends to be in large molecule because a lot of the questions that people are asking, they're not really PBPK -- there are more questions around.

For example, I'll give you an example. So one, we have a -- we've developed an immunogenicity model, right? So now we're interested in basically how fast does the body produce antibody drug reaction to whatever protein you're giving that affects dosing. It affects the populations you'll go into, affects the selection of the molecule. That tends to be preclinical. That's a specific question that really only exists mostly around large molecules. And there's other ones like that too.

While we're on relatively new products, so you're trying to evolve the product for the software product portfolio into the cloud, single sign-on access, portal access. Phoenix Cloud, I think, is the second iteration of attempt on kind of cloudizing Phoenix. How is that effort, that broader effort of driving customers to your portal evolving?

So the portal is going well. All of our products have been migrated to work on the portal. That's really, I would call that kind of like phase 1 and what -- on our larger vision around pulling these products together in a platform structure so that we can deploy them at a bigger scale across pharma. So the first thing we had to do is get it to all the products you sign on and they're starting to work together.

The second phase is what we're doing as we go into 2026 around using AI to create the connectors between all of these things. So you could actually deploy, for example, our discovery level products around Chemaxon and D360 along with Simcyp, for example. And so there's a bigger strategy. The products I said we launched in Q3, that's certainly not the end of the story. We've got a lot of R&D that we've built up over the last 3 years or so that's starting to pay off there.

And how -- so if there are multiple steps to this long-term evolution, what's your time horizon on deploying?

So the first phase, we talked about 3 products we just launched, well, I didn't talk about all of them, but we launched 3 significant ones. They will -- we expect to have acceleration in revenue in software as we go into '26 from them. They've all -- they're not it's important as we go into big pharma. Obviously, we have to get in the capital cycle, but we will be in that as we go into '26.

And we have additional products coming out. One of the things -- I'll mention it, but we bought Chemaxon last year. We have a product called D360 and Discovery, and we're creating them -- we're basically going to launch a new version of that, which is designed to create a fourth platform for Certara. Right now, we have Simcyp, Phoenix, Pinnacle 21 is just about 80% of our software. We believe that this one is going to occur a fourth one as we go into 2026 and 2027, for example.

Okay. And if I back away in the last minute. So you have this environmental catalyst in the form of 1 just regular -- just kind of well-known ROI pressure on R&D at pharma. Added to it, an administration in the U.S. that's saying we need to move away from certain ways of doing things and try to be faster and more streamlined and animal-friendly and a lot of things in that basket that would seem to push clients in your direction. The economic realities that they face being what they are, how do you overcome that hesitation to spend when your products would seem to offer significant efficiency and productivity enhancement?

Well, I think that the main problem right now in the pharma area, it's not that they won't spend. It's that we're kind of caught in the middle. So for example, what we talked about in the animal testing, the government's indicated what direction they want to go, but they haven't completed the next phase. So it's caused some uncertainty about when will that happen. There's other uncertainties going on from a macro and pharma around what types of drugs will be favored or disfavored, and that has caused a short-term kind of hesitancy in closing deals. That's what I think is really going on. I think we're not the only ones that have seen that.

However, as you go forward, that is going to resolve itself. There's tons of pressure for them to sort out a lot of these details, and we've already seen some positive signs as far away from us, but things like the new negotiations with pharma companies have kind of put some more certainty there, which is helpful, and I think there'll be more of that.

As we go in the long run, pharma is pretty inefficient. There's price pressures. It will drive even more interest in modeling, which is fundamentally more cost effective than anything else you can do in pharma. And if we can -- which I believe we can, if we can change the probability that a drug makes it from discovery to approval by even a small amount the amount that's available economically to us is pretty significant.

Yes. I appreciate that. Thank you for being here. Thanks to the audience for your attention and wish you a good conference. Thanks.

Good day, and thank you for standing by. Welcome to the Certara Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, David Deuchler, Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Certara we have William Feehery, Chief Executive Officer; and John Gallagher, Chief Financial Officer.

Earlier today, Certara released financial results for the quarter ended September 30, 2025. A copy of the press release is available on the company's website.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements, and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying materials for additional information, which you can find on the company's Investor Relations website.

In the remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 6, 2025. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

And with that, I'll turn the call over to William.

Thank you, David, and good afternoon, everyone. Thank you for joining Certara's third quarter earnings call. John and I will begin with prepared remarks, and then we will take your questions.

During the third quarter, our team continued to execute against our 2025 goals, while also positioning Certara for long-term success by investing in our R&D and commercial teams. Third quarter revenue of $104.6 million was in line with our expectations, representing 10% reported year-over-year growth.

We outperformed internal profitability expectations, delivering adjusted EBITDA of $35.2 million, representing a margin of 34%. Our team remains focused on investing for growth with R&D up 24% versus the same period a year ago and increasing to 10% of revenue from 9% in the prior year period. On the other hand, third quarter bookings of $96.6 million came in below our expectations, representing growth of 1%.

Among our Tier 1 services customers, we observed cautious spending behavior with some customers pushing deal time lines later into the fourth quarter and into 2026. Taking this into account, we are narrowing our revenue guidance to $415 million to $420 million, which we believe reflects the most likely range of outcomes for the year based on our performance to date. We have raised our adjusted EBITDA margin guidance to the high end of our previous guidance range and raised our adjusted EPS guidance to reflect the continuation of outperformance against our profitability targets and the impact of share repurchase activity.

We continue to see pockets of outperformance throughout our portfolio, including our Simcyp PBPK software and our QSP services. However, some of our customers are still dealing with factors that impact decision-making time lines and R&D allocation decisions. As large pharma customers adjust focus with their R&D programs and now onshoring initiatives that are impacting personnel and resource allocations, we have seen a slowdown in deal completion time lines, particularly in regulatory services and biosim services. This slowdown has persisted into the beginning of the fourth quarter, conflicting with historical seasonality trends. We are closely monitoring consumer spending patterns as we begin to plan for 2026.

At a high level, we continue to see several positive leading indicators for the biosimulation market and for Certara. Among large pharma customers, the use of model-informed drug development is growing throughout all stages of development. Customers are adopting biosimulation solutions for use in dosing, efficacy and toxicity analysis and using the technology earlier as we expand our software capabilities into discovery and preclinical.

Among our smaller customers, the adoption of biosimulation is accelerating through the use of our technology-enabled services. As drug developers look to optimize their speed and efficiency, they are often attracted to areas of our business such as QSP, which can help streamline decision-making and trial design in both the preclinical and clinical stages. Since our IPO, we have seen a significant increase in both the number of customers using our products and services as well as the wallet share of Certara within larger organizations.

Most of all, we are encouraged by our evolving relationships with key stakeholders and users at customers. Earlier this year, we hosted our second annual Certainty Conference, bringing together hundreds of our users to discuss the future of model-informed drug development. In early October, we held the same conference in Barcelona with our European user base, and the experience was very productive for all parties. At both events, I had the opportunity to discuss Certara's products with customers where they provided feedback on our software, suggested new features and functionality and learned about our new products and long-term vision for the Certara platform. There is tremendous value that can be gained by making more informed decisions earlier in the drug development life cycle, which is why we are moving into discovery and preclinical.

We closed the Chemaxon acquisition a year ago in early October of 2024, which gave Certara an established product suite in discovery with synergistic capabilities relative to Simcyp. In the first 12 months under Certara ownership, Chemaxon has continued to grow and is on track to reach corporate average margins by the end of the year. Elsewhere, our services group has grown preclinical work in QSP, especially since the FDA's guidance promoting the use of new approach methodologies. QSP has grown ahead of the rest of the biosimulation business on a year-to-date basis and is becoming an increasingly important part of our business.

Now turning to our financial performance. In software, bookings of $40.8 million represented growth of 17%. We saw solid bookings performance in Tiers 1 and 3, which were in line with expectation, while Tier 2 was below expectations, which we attribute more to timing than anything. Software revenue of $43.8 million grew 22% on a reported basis and 6% organically, led by strong growth from Simcyp in addition to $5.6 million of contribution from Chemaxon.

In services, bookings of $55.8 million declined 9% on a reported basis, driven by slowness in the Tier 1 customer base. We have continued to observe cautious decision-making among large pharma customers into the fourth quarter. Services revenue of $60.8 million grew 3% on a reported basis and on an organic basis, led by growth in QSP services.

On the innovation front, 2025 has been our most active product development year since our IPO. We've embedded artificial intelligence into both our development processes and our products, accelerating the pace of new model creation following our Vyasa acquisition. We launched several major products this quarter. Pinnacle 21 Enterprise, a cloud-based upgrade, improving regulatory data compliance and submission speed.

Phoenix Cloud, which transitions our customers from on-premise to Certara Cloud deployment and provides significant upgrades to product functionality; and CertaraIQ, our new software for QSP modeling designed to expand the use of biosimulation across discovery and clinical phases. Early customer feedback on these releases has been excellent, and we're confident they strengthen our long-term software growth engine.

Last year, we announced the strategic review of our regulatory services business. To date, we have made significant progress in our evaluation, including dialogue with external parties and significant internal analysis of best practices. As we evaluate our business, we recognize that regulatory writing performance has been inconsistent. Simultaneously, we value the regulatory writing business' ability to generate cash, which we have used to invest in growth and support recent share repurchases. At this point in time, we are in the final stages of our process and intend to share a definitive outcome before the end of 2025.

To close, we remain focused on delivering our 2025 plan and entering 2026 well prepared to capitalize on the opportunities ahead. Although we are seeing some variability in Tier 1 services, we are encouraged by the widespread momentum of biosimulation adoption in drug development.

I'll now hand things over to John Gallagher to discuss our financial results in more detail.

Thank you, William. Hello, everyone. Total revenue for the 3 months ended September 30, 2025, was $104.6 million, representing year-over-year growth of 10% on a reported basis and on a constant currency basis. Total bookings in the third quarter were $96.6 million, which increased 1% from the prior year period on a reported basis.

Trailing 12-month bookings were $471.4 million, increasing 12% on a reported basis. Excluding Chemaxon, total company organic bookings declined 4% compared with the third quarter last year. Software revenue was $43.8 million in the third quarter, which increased 22% over the prior year period on a reported basis and 21% on a constant currency basis.

Organic growth was 6% in the quarter, driven by strong growth from Simcyp. Chemaxon contributed $5.6 million to our reported revenue, which was in line with our expectations. Ratable and subscription revenue accounted for 65% of third quarter software revenues or 71% excluding Chemaxon, slightly down from 72% in the prior year period.

Software bookings were $40.8 million in the third quarter, which increased 17% from the prior year period. Third quarter bookings included $4.2 million of Chemaxon bookings. Organic software bookings grew 5% versus the prior year. Trailing 12-month software bookings were $187.9 million, up 23% year-over-year. And the software net retention rate was 104% in the quarter, consistent with our full year plan.

Looking at our software bookings performance by tier, we saw strong performance in Tiers 1 and 3, driven by the continued adoption of our software. In Tier 1, we saw some timing-related slowness due to renewals, which we expect to normalize in the fourth quarter.

Now turning to services revenue, which was $60.8 million in the third quarter, up 3% versus the prior year period on a reported basis and on a constant currency basis. We saw strong performance from our QSP and Simcyp services businesses in the quarter, which was partially offset by softness in the regulatory services. Technology-driven services bookings in the third quarter were $55.8 million, which declined 9% from the prior year period. TTM services bookings were $283.5 million, up 6% as compared to the prior year.

During the quarter, we saw softer performance from Tier 1 customers and biosimulation services, driven by spending hesitancy among our largest customers. In regulatory, bookings declined in the double digits, while biosim services were down low single digits.

Total cost of revenue for the third quarter of 2025 was $39.7 million, an increase from $37.2 million in the third quarter of 2024, primarily due to higher software amortization and consulting expenses, offset by lower employee-related costs.

Total operating expenses for the third quarter of 2025 were $61.9 million, an increase from $55 million in the third quarter of 2024, primarily due to higher employee-related costs in sales and marketing and R&D.

Adjusted EBITDA for the third quarter of 2025 was $35.2 million, an increase from $33.1 million in the third quarter of 2024. Adjusted EBITDA margin in the quarter was 34%.

Wrapping up the income statement. Net income for the third quarter of 2025 was $1.5 million compared to a net loss of $1.4 million in the third quarter of 2024. Reported adjusted net income for the third quarter of 2025 was $22.2 million compared to $20.3 million for the third quarter of 2024. Diluted earnings per share for the third quarter of 2025 was $0.01 compared to a loss of $0.01 per share in the third quarter of 2024. Adjusted diluted earnings per share for the third quarter of 2025 was $0.14 compared to $0.13 per share in the third quarter of last year.

Moving to the balance sheet. We finished the quarter with $172.7 million in cash and cash equivalents. As of September 30, 2025, we had $293.1 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Subsequent to the end of the quarter, we executed a reprice of our outstanding term loan, which is expected to save $700,000 annually in interest expense beginning in 2026.

Earlier this year, our Board authorized a $100 million share repurchase program. We have repurchased approximately $41 million of stock during 2025. With year-to-date results and our outlook for the fourth quarter, we are providing the following guidance for 2025. We are narrowing the revenue range to $415 million to $420 million, representing 8% to 9% growth compared with 2024.

We expect Chemaxon to contribute software revenue of $23 million to $25 million. We expect an adjusted EBITDA margin around 32%, which is the high end of our previous guidance range, reflecting outperformance versus our internal profitability expectations to date. We expect adjusted EPS in the range of $0.45 to $0.47 per share, fully diluted shares in the range of 160 million to 162 million and a tax rate in the range of 25% to 30%.

I will now turn the call back over to our CEO, William Feehery, for closing remarks.

Thank you, John. To summarize our message today, our team is working diligently to execute our growth and profitability goals despite a mixed operating environment. We are excited to bring several new products to market and look forward to providing further updates on our progress early next year.

Operator, can you please open the line for questions?

[Operator Instructions] Our first question comes from Michael Cherny from Leerink Partners.

This is Dan Clark on for Mike. Just wanted to ask a little bit on the Tier 1 services revenue or bookings dynamic in the quarter. I guess, one, when did you start to see a slowdown in decision-making timing? And of the potential deals that got pushed, I appreciate the color on some of them hopefully closing in 4Q with the remainder in 2026. How are you kind of thinking about that split at this point?

Yes. As it relates to the bookings, so it was our Tier 1 services customers where we saw delays. And what we're seeing is hesitancy to a slowness in decision-making. And a lot of times, we would talk about that as impacting timing and trickling into the next quarter. But what we just said in the prepared remarks, though, is that through the month of October, we continue to see some deceleration in Tier 1 services bookings related to these larger customers of ours. And as a result of that, we're expecting it to continue in Q4.

Our next question comes from David Windley from Jefferies.

Hopefully, you can hear me. I'm in the car. I was hoping you could comment or disentangle the gross profit outperformance between mix and perhaps efficiency, productivity?

Yes. Thank you, David. Yes. I mean -- so on the gross margin line, then we've certainly seen some productivity, especially compared to last year. You might recall, we did some reductions last year on the services side that hits cost of sales. We're still comping to that in the third quarter of this year. And therefore, some of that productivity is a key component of why the gross profit is accelerating. The other piece of it, of course, is the fact that we're achieving more mix on a software basis. So when we're looking -- the software business has, of course, a higher gross profit than services. So not only are we getting productivity on the cost of sales side when we look at services, but the mix shift towards software is also a tailwind to the gross profit.

I was going to make my next question, my second question about your areas of innovation, but it does end up being somewhat related. So think you talked about CertaraIQ is your more AI-enabled QSP and Phoenix Cloud launches. It sounds like those have been well received. The comment in the prepared about QSP being your fastest-growing area, maybe you could also drill into that because I think today, most of QSP is service-driven, but you're launching this, what I think sounds like a more technology or software-driven QSP. And how do you expect that to evolve? And does that growth in QSP mix kind of reverse the software mix until the technology -- the software picks up a little bit more. I'm just curious how the QSP feathers into that since you highlighted its growth.

Yes. Thanks, David. This is Bill. We are executing the strategy that we set out to do when we acquired Applied BioMath about whatever it was, about 2 years ago, which was to take QSP and to bring a software platform to it, and that is CertaraIQ, which we launched, as you pointed out. So there's a huge demand for QSP. Some of it has to do with the recognition that this type of modeling has been quite useful now that the FDA has made its announcement on NAMs and on reducing the number of nonhuman primates. And some of it has to do with the growth in biotech or in large molecules where QSP has been particularly valuable.

We're attempting, and I think we will very much succeed with this product to create a standard product that QSP modelers use not just within pharma companies, but also as they go forward and submit their models for approvals to regulators. There's a big need in the market for this, and there's a big opportunity to make QSP a lot more widespread by improving the efficiency of modeling, which we can do with AI and providing a platform where our consultants are much more efficient, providing the same platform so that our pharma customers are using the same platform internally and can also drive that kind of same efficiency, and we can get work going back and forth.

And then finally, this is an opportunity for us to create foundational models in particular therapeutic or drug modalities that we can sell over and over again using this software platform. So there's multiple ways that this will benefit the company financially as we go forward. There's nothing like it really on the QSP market. There's obviously modeling tools out there, but we believe this is a significant advance. It's been well received. We only launched it a couple of weeks ago. So it's a bit early to talk about the financial success, obviously, but we expect as we go into 2026, this will be a success for the company.

Our next question comes from Matt Hewitt from Craig-Hallum Capital Group.

I apologize, I'm having to hop between a couple of different calls. But first off, I recognize that there's some challenges or hesitancy with your Tier 1 customers. I'm just curious if you've heard or seen any change since we got a little bit of clarity on the most favored nation pricing and what that could mean, some clarity on the tariffs and what that impact could be. I mean we've heard from a few other companies that post some of those initial most favored nation type contracts or changes that pharma was kind of reengaging. Is that similar to what you're seeing? Or any color along those lines?

Yes. Thanks. This is Bill. We have also heard other companies talking about that and heard some discussion among customers. So I would say that we're cautiously optimistic that's a pretty recent development. So we need to see that kind of get out in the marketplace. But I think any sign of kind of the macro stability for the Tier 1 customers and the -- and what's going on with pricing, I think, would be ultimately good for us and will flow into hopefully a better environment as we go into 2026.

Got it. And then maybe just as a follow-up, and I realize it's still very early, and we haven't even closed out this year yet. But as you're talking to your customers, not only about the remainder of fiscal '25, but as they're starting to think about their budgets for fiscal '26, are you getting any sense for where those budgets may be going? Any sense for how modeling and simulation kind of fits into those budgetary plans for '26, recognizing, yes, it's early days, but having gone through this now for a while, I sense you guys might have a feel for, okay, if we're hearing this at this stage, that bodes well for the final budgets when they're announced later this year or early next year.

Yes. I mean we obviously only have kind of anecdotes you're asking a question about the overall industry. So what I can say is I think some of our new products have been very well received. People have talked about making sure that there will be budget for them as they go into 2026. And we're getting some sense that the pullback in services is not across the entire industry. We see it in Tier 1s. We're actually doing quite well with Tier 3s with biotechs right now. The Tier 1 seems to be kind of a hesitancy based on the overall macroeconomic environment. And I think every time we hear kind of positive signs of stability, things get a little bit more bright for us. So we're not -- what I've heard and we're expecting kind of want to call it a stabilizing environment, I guess, is the way I'll put it as we go into 2026 as opposed to kind of where we've seen part of this year where it's been getting a little bit tougher.

Our next question comes from Luke Sergott from Barclays. Our next question comes from Brendan Smith from TD Cowen.

Actually, I just wanted to follow up on some of the earlier questions related to the software business a little bit more. And this is frankly something we're just asked by investors a fair amount. But I guess we're obviously seeing pharma and some of those Tier 1 customers invest a lot more internally in some of their own AI plus capabilities. And I guess, do you kind of feel that's net-net headwinds, tailwinds, maybe a wash to where you guys come out? Just trying to understand like to what extent as they build out those capabilities, they turn to you all to help make sure that those internal processes are ramping as they should? Or is it kind of an or rather than an and within their budgets just based on your conversations?

Yes. Thanks for the question. What we've seen happen with AI has been tremendous. This is starting more than a year ago, a tremendous excitement and willingness to try things in pharma, but somewhat of a hesitancy to commit to enterprise sales until they understood the full implications of putting AI in terms of data security and how the products will be used, sort of the, let's call it, the quality controls that you need to put in around AI and some of these uses.

So we saw a lot of -- in the beginning, there were really great marketing opportunities, but slow to sell. And as we've gotten through 2025, we've seen somewhat of a pickup in actual sales of the pure AI products. All of our products that we've recently launched, well, let's say, Phoenix and CertaraIQ have embedded AI in them, and that's been quite well received. And I think we're seeing a bit more willingness to move faster to put these things in as you deploy them across the enterprise.

You're asking a somewhat different question also around is pharma considering building our core products using AI internally versus buying them from us. The core modeling technologies we have are really quite specialized. And so we're -- that doesn't tend to be a real option. And you can see that with our software, which is still growing quite nicely, and we expect will continue to be strong as we go into 2026.

Our next question comes from Joe Vruwink from Baird.

Just to go back a couple of questions ago, you mentioned the prospect of stabilized environment for 2026. What do you think stabilized means for Certara growth potential at this point? And I just ask as the last 3 years have obviously seen a lot of macro turbulence, Organic growth has averaged 3% to 4% over that stretch of time. Is stabilized supportive of mid- to high single-digit growth and robust gets you back to the double digits? Or any way directionally, just appreciating kind of what the company has been through over recent history?

Yes. Joe, so as it relates to us calling it stabilized, and really, what we're saying is we see continued performance on the software side, which has been playing out according to plan this year. So year-to-date software bookings have been 7% on a TTM basis. And then we're seeing -- or 6% year-to-date, 7% TPM and then 6% organic software this year. And then we're adding the products that Bill was talking about, of course, too. So those are the positives.

The headwind to all that is what we're seeing in services right now. And we saw it -- you can see it in the Q3 results. But you can also see it -- we saw it in October. And that's why we were indicating that as we look towards the end of the year this year, we're not really expecting to see the same level of seasonality that we've seen over prior years. And so that's going to provide a bit lower of a jumping off point as it relates to services. So services is likely to be in the low single digits as we approach next year as a result of that. So software going well, playing out according to plan. We've got new products, but services is the spot that we're keeping our eye on as we finish '26.

Okay. That's helpful color. Just to go back to David's question on gross margin. As I look at the mix of software sales this year, a lot of the incremental growth has come from higher license sales as opposed to subscriptions. Does that -- and that might be Chemaxon related, but in case it's not, is that a beneficial margin mix to year-to-date results? Or how to think of that versus a higher proportion of, I guess, ratable subscription revenue?

Yes, you've got that straight, Joe. So bringing in Chemaxon, Chemaxon is predominantly a license based, at least right now. So whenever we're recognizing revenue there, we're getting all of it at once. And so that, combined with Phoenix achievement on revenue this year is what's helping the gross margin, if you will, from that perspective, while at the same time, it's reducing the proportion of ratable that we have. And that's why I like to cite it not just what the ratable portion of software is, but even excluding Chemaxon is a better comp to the prior year.

Our next question comes from Kyle Crews from UBS.

You mentioned that customers were adopting model-informed drug development for use in toxicity and dosing analysis. CBR earlier in October here announced that you could use potentially pharmacokinetic analysis to replace some animal testing for first-in-human dosing. Can you elaborate a bit more on that point that you made earlier in the call?

Yes. One of the significant uses around QSP has been in these 2 areas. So first-in-human dosing has been particular area of interest in pharma for modeling. It doesn't sound like the biggest problem. But when you really think about it, the initial dose that gets tried in a Phase I trial really defines the range that will be used for all trials later. Many of the -- if the doses that are tried are outside the effective or the safe range, they're kind of wasted. And so that's been recognized by a lot of companies in the pharmaceutical industry, and it's been also good to see that the regulators are paying attention and are encouraging it as well. So that's been one of the reasons for the uptake in modeling services like QSP that we've seen.

Great. Can you speak briefly on your exposure to biologics or small molecule drugs at this point with your software offerings?

We have exposure to both. We are fair -- we always said, and I believe this has not changed, that our exposure is pretty similar to what the pharmaceutical industry as a whole is working on at any given point. So the questions that get asked in modeling between small molecules and large molecules are often somewhat different. For example, small molecules, there can be more formulation questions and absorption questions. In large molecules, there are often more questions around things like dosing and immunological responses and things like that.

However, we have products targeted for both. We have quite healthy and active businesses for both technologies and even other technologies that maybe don't even quite fit this kind of definition. For example, we've got products focused on radioligands and peptides, things like that. So I think we're pretty well covered in terms of our exposure and our investment in the technology to kind of serve both of these.

Our next question comes from Max Smock from William Blair.

John, maybe just want to follow up on some of your earlier commentary around services bookings, particularly in Q4. I think you mentioned you haven't seen much improvement or you didn't see much improvement in October. Just kind of looking back historically, I typically see a 30%, 40% sequential increase in bookings in Q4. Can you just kind of frame out, given the volatility quarter-to-quarter here, how you're thinking about just kind of the range of outcomes on the services bookings in Q4? Just to give us some more color around what the organic growth of that segment can look like in 2026.

Max, so we do still expect from Q3 into Q4 a sequential increase, but not to the same magnitude that we've seen historically. Historically, you've seen a book-to-bill in Q4 that's 1.3 to 1.4, and we don't anticipate that being the case given what we've seen through October.

That's helpful. Maybe just one on the margin side. Really nice performance in the quarter. And I know in the past, you talked about maybe pulling back on some of your investments if the macro environment got a little bit more challenging. Just want to make sure that, that wasn't a factor that contributed to the beat on margins in the third quarter here. And then as we're thinking out in 2026, can you just talk about how you're kind of prioritizing the opportunity that you have here to continue to advance or invest in your pipeline versus prioritizing margin expansion? And just your initial thoughts on how we should be thinking about margins moving forward?

Yes. Yes. So definitely not pulling back on the investments, and you can see that reflected in the 24% growth in R&D year-on-year. So we're continuing to make those investments. good discipline across the rest of the P&L. We talked a little bit about gross profit. But if you exclude Chemaxon from the expense lines, you'd see that they're in line or lower than growing at the rate of sales. So I'd say, yes, making the investments, absolutely. You can most notably see that reflected in the R&D line as you would expect. And there is more investment to come as we look at next year. But we've been pleased with our ability to navigate both making those investments in software development while also preserving our margin.

[Operator Instructions] Our next question comes from [ John Park ] from Morgan Stanley.

I was wondering, I know you guys talked about Tier 1 and some of the macros that they're facing. I was wondering if you could talk to Tier 2 and Tier 3, acknowledging that they make up a smaller portion of the revenue, but is it any different in terms of some of the macro headwinds that Tier 1s are facing?

Yes, that's a bright spot for us actually. So Tier 3, both Tier 2 and Tier 3 services have had good growth throughout the year. And in fact, in Q3, we saw double-digit growth in biosim services Tier 3. So this has been a partial offset to the headwinds that we've been describing in Tier 1 has been the positive growth and momentum that we have in Tier 2 and most notably in Tier 3.

Great. And just as a follow-up, I know you guys work with the FDA. I was wondering if there was any type of waterfall implications with the government shutdown regarding -- for FDA or any of the agencies you guys work with?

Yes. Thanks for the question. It's I guess the question revolves around how long it lasts. I think most people in the pharmaceutical industry believe that this will resolve itself at some point and that point will be less time than causes serious issues. It goes on for a really long time, and we have a big slowdown in drug approvals or something, that's one thing, but I don't think that, that's really what people believe. There's a little bit of slowdown in terms of any kind of contracting with the government, but we don't expect that will have a significant effect on the year.

Thank you. I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.