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. Thanks for having me.
Under the bright lights here. I guess to start off, can you just recap how the quarter from 4Q shook out versus what you guys were expecting? This is more of just thinking about a jump-off point from kind of the lumpiness and the softer demand that we saw through 2025 and, you know, how the first quarter as you guys are looking at it within your assumption there through how 2026 is gonna progress, like puts and takes as you thought about it.
Yeah, 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%-8%, so that came in line with expectations. EBITDA, we had guided a 30%-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 were mixed in the fourth quarter. To your point, you know, 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. Unexpectedly to us in Q4, we saw a very strong month of December. So the month of December for services bookings came in at 17%.
We think that there's an element of seasonality, some budget flush that came in. The overachievement 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. As you look at services on the whole, it has been lumpy. Q3 was low, Q4 was high, some of that seasonality. Although we think that surge in discretionary spending in the fourth quarter is a good element as we look at, you know, 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, you know, the guidance as we look at 2026, where we said that the organization would be flat to up 4%.
Yeah, on that software, the booking side, are we even looking at the right metrics from that perspective, just when you're looking at the overall bookings? Is it like, is there an ARR benefit or, you know, how do you guys view that internally? 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.
Yeah. Good question. When you annualize it's not as acute as what you see in the fourth quarter. You know, on the TTM, which is, you know, probably the right way to think about 2025. The fourth quarter did pull down that TTM number to only 1% growth on the full year. As we looked at 2026, you know, that's what's informing low- single- digit growth across both software and services. Now, you know, why did that happen in the fourth quarter? We called out a couple of customer dynamics that were influencing the fourth quarter bookings. Not necessarily the full year, but in the fourth quarter, we saw that, you know, 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, you know, some volume of our seat licenses in Phoenix.
Not totally unusual and a product of some of the headcount reductions in the Tier 1, 'cause this softness was centered in Tier 1 customers. On top of that too, we said that study counts, so you know, our Pinnacle 21 platform is tied to study count. Less so than annual seat license. You know, 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. Pinnacle is a broadly used software product, which is great. You know, it provides a very sticky business for us with a very high renewal rate. It will be impacted by study count increases and decreases over time on a time lag. That was one of the other components that we saw impacting.
All right. Then on the Tier 1 customer base, you talked about like the lower seats there on the software side. I feel like you earned through a lot of restructuring the pipeline rationalization over the past, like four or five years. Within pharma. Is this just kind of catch up from what we saw? Like, I'm just trying to figure out that the durability of, like, the snapback here or how you guys are thinking about that business recovering.
You had asked too, like what's the cadence of 2026? We had said on the call that, you know, we expect that Q1 will be on the lower end of that guidance range. We do anticipate some trickle-through of the dynamics that we saw in Q4. It's also related to a tough comparison. Q1 is, on a dollar revenue basis, our toughest compare of the year, so that's also a component of it. We do think that there's opportunity to accelerate software revenue growth during the course of the year. We launched three new software products in Q4 that we're very excited about with Certara IQ for QSP. We'll get into this soon.
Certara IQ for QSP, the Phoenix Cloud version, and a Pinnacle product enhancement, all of which, you know, are taking some traction, too, and will grow into the year. We do see sequential increases during the course of 2026. Well, 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. On those launches, let's just dig in and start walking through some of them here. You know, three big launches coming up. I guess from a, you know, leveraging your existing sales force, are these new markets or are these just additional modular add-ons to exactly what you have now? You know, like break down where the holes in your workflow that these are filling a s you progress through the pipeline.
Well, a couple that we're really excited about that I'll talk to you about are 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. The first of which, Certara IQ, is AI-enabled software for the QSP space. 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. 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 all new and what's sort of add-on. This is the first all new, so this would be the first software offering in the QSP space. We're very excited about that. QSP, of course, is growing fast, as I mentioned, all services. 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. That's one we're very excited about. The other one I would mention is the cloud version of Phoenix.
We learned from prior versions and have, you know, 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. 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. That falls more into 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, you know, what's the right way to think about that software achievement? Interestingly, shifting from desktop to the cloud, you know, there is a revenue recognition difference there too going from all at once revenue recognition from, you know, on the desktop to ratable in the cloud version. You know, you'll hear us talk about the bookings and perhaps, you know, introduce ARR as a metric to start to look at how you look at the annualized progress we've made in Phoenix 'cause 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 2026.
Yeah. I was just about to ask kind of the timing there. When you do these launches, you have a, 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 a sales and marketing, how are you guys measuring the contribution here? I feel like the modular, the cloud opportunity is probably a little bit more near term where you have to actually. With the QSP, it's fast-growing, but it's still gonna take some market development time. Is that the right way to think about it?
It absolutely is. Yeah. I mean, look, like the Certara IQ QSP software is all new in its space. It's gonna take some market development. Even though it's a high-demand, fast-growing area of biosimulation, you know, 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. The cloud version of Phoenix is, you know, a little more straightforward as far as, you know, 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.
The AI piece coming in. I always called it Vinyasa, but it's Vyasa. I think that from an overall market perspective, AI is probably gonna be used as the efficiency tool, and John's predecessor, he would talk, you know, William would talk about, you know, how you guys are using it. Talk about what clients or, you know, pharma and biotech want from an AI perspective from you guys, and how durable it is where, you know. Or how realistic is it to think that pharma's gonna run their own AI internally and ultimately displace you guys?
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. 'Cause 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.
As you think about, you know, moving forward into an AI era, then because of the regulatory acceptance as well as the scientific expertise, so think, you know, the scientist 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. That ecosystem is primed for our customers. It makes it ease of use with Certara rather than displacement.
Yeah. Is there any part of your business that you feel like, "Oh, okay, it's like that could totally be disrupted if somebody came in"?
The only pocket that, you know, that we've talked about that could see that kind of change would be in regulatory writing.
I was gonna say regulatory writing.
Yeah. You know, I'm sure you're gonna ask me what's the latest on that. I'll answer your question but before we do, you know, that's one area of the business that's really ripe for generative AI to come in and create some secular change. Now, you know, we haven't seen that on a wholesale basis. I just got done mentioning that, you know, when you looked at services bookings performance in fourth quarter, grew 17%. That was the reg business growing 17% and Biosim services growing 17%. I wouldn't say that secular change has really taken full g rab quite yet. But at the same time, remember we launched at the end of 2024, we launched CoAuthor, which is a generative AI for regulatory writing, and that product is continuing to ramp. You know, we have offerings on both sides of it really when you look at it.
Okay. On the regulatory services piece, it's a great segue. Just talk about, you know, that had 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 seen from a demand side.
Of course, we had our new CEO Jon Resnick joined recently. You know, he naturally, I think, you know, wants to take an opportunity to evaluate what the status is of the reg business. Look, there are pros and cons to selling that business, removing that business from the portfolio. There are pros and cons to keeping that business. I think that, you know, most importantly, he's taking the time, as he should, to evaluate 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 a highly profitable business. Although we've seen revenue decline, strong bookings in Q4, we have seen revenue declines o n a year-on-year basis. That's the con side. The pro side is, you know, we have shared publicly before that, the regulatory writing business has a 20%-30% profit margin. So, you know, that's a pretty rich profit margin for a reg writing type business. It generates cash, that's important for us to be able to invest in the organization.
Got it. Yeah. Okay.
As well as, you know, I just got done talking through CoAuthor too. You can start to envision partnerships that take place between, you know, an existing AI product that we have associated with the business and start to find synergies within, you know, within the organization. That'd be the other pro to it.
Yeah. I think it just kinda grows into the overall, you know, as Jon's coming on and talked about some of the investments that need to be made, it kinda 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, you know, 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. I thought that, you know, 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, you know, ultimately what the portfolio vision looks like and how you guys are gonna, you know, either sell some stuff off or get leaner and meaner. Like, just talk about what you guys think about what this should look like.
Yeah. Yeah, I mean, the center and core to the focus is model-informed drug development or MIDD/ biosimulation. We think that's the reason why people show up and are interested in Certara. It's also the fastest-growing area of Certara. By the way, it's a blend of both software and services. It's both of those things, complementary to one another. You know, as we look forward and we think about investing, you know, you painted a picture of various point solutions that are contracted separately. One of the guiding principles that we have, that as we look forward in unifying the organization is how can we approach our customers in a manner in which, you know, they have the needs or the feedback that we receive from them.
Most often than not, it's not a contract over here or a contract over there. It's that theme of unification that you were thinking of. 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 and save money in drug development, which truly is the value proposition of what Certara offers.
Yeah. I guess that when you talked about some of the investments, is that what you guys were referring to be becoming more customer-centric on t he investment there? So like what dig into what kind of investment you guys need to make. I feel like that you have a pretty sizable sales force right now. Is this more about just or maybe some overlap or overlay of like, some enterprise sales guys? Like, just walk through it, what you mean by that.
Right. Yeah. Yeah, the customer centricity, I mean, look, Jon Resnick brings with him. You know, a strong background of customer centricity. He spent a lot of his first 60 years or so at the organization speaking directly to our customers across all tier categories, across software and services, and you know, gaining you know, pretty good insight on what the themes and the feedback are with customers. You know, I think one of the key takeaways is that you know, no two are alike. Our approach and how we you know, how we offer our software and services and the combination of those to our customers is you know, one of the things that that we're thinking through. Now, what does that mean and how does that translate? That we do not envision that translating to an outsized amount of spend in sales and marketing.
Remember, you know, and we recognize we've made sizable investments in sales and marketing. It didn't catalyze the revenue growth. It's not shown up in the revenue growth yet. We do look at that as an investment of, you know, how do we shift prioritization? How do we change incentives t o 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. As you think about tying that into the margin case, and you guys had pretty decent cash flow there, but from an investment standpoint, like going through this portfolio and thinking about where this should be, is the typical rule of forty stick with you guys, or is that not appropriate?
Yeah. Yeah. For sure it is. For sure it is. You know, we view ourselves as a rule of forty organization. I think if you do the math and add it up, I think we're just short of that right now. 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%. On top of that, you know, 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. Absolutely a Rule of 40 company.
I think what you're seeing right now is a product of, you know, 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. We're making some investments and continuing to make investments in the company that we think are really gonna catalyze that long-term growth.
On the guide, it assumes roughly around 100 basis points of contraction. Is that from the investment side or is that from more of a mix?
No, that's more from investment.
Okay.
I guess what I'd tell you too is that, you know, on the call, we mentioned that we've already found $10 million of cost avoidance in the plan. You know, what we're indicating is that, you know, we're thinking, although we guided 30%-32%, last year we guided 30%-32%, we came out on the high end of that. We'll exercise the same kind of discipline as we march through 2026. We do think there's cost opportunity there, so we wanted to signal that on the call.
Okay. That's great. Appreciate it. I think we got 10 seconds here.
All right.
I'm gonna put my pen down.
Thanks a lot.
Yeah, it's great. Thank you.
Appreciate it.