Good day and thank you for standing by. Welcome to the Certaro First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Beichler, 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 Furey, Chief Executive Officer and Andrew Semich, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2021. A copy of the press release is available on the company's website.
Before we begin, I'd like to remind you that management will make statements during this call that include forward looking statements within the meaning of the federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward looking statements. Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. For a list and description of risks and uncertainties associated with Certara's business, please refer to the Risk Factors section of our Form 10 ks filed with the Securities and Exchange Commission on March 15, 2021. We urge you to consider these factors, and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance.
Also in their remarks or responses to questions, management may mention some non GAAP financial measures. Reconciliations of adjusted EBITDA, adjusted net income, adjusted EPS and certain other 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. The conference call contains time sensitive information and is accurate only as of the live broadcast today, May 6, 2021. Sutara disclaims any intention or 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 William.
Thank you, David. Good afternoon, everyone. Thank you for joining Certara's Q1 earnings call. Andrew and I will start with prepared remarks and then we will take questions. I am very pleased with how the Sitara business performed overall in the Q1 of 2021, our first full quarter as a public company.
While we are turning the corner on this pandemic in some regions, COVID-nineteen continues to impact many lives around the world. I am deeply proud of how our Certara team has remained focused on our customers, developing innovative ways to further the adoption of our end to end platform to accelerate medicines to patients. In this quarter, We continue to strengthen our position as a global leader in biosimulation by delivering strong financial results and executing against our well defined strategic plan. Revenue in the Q1 grew 16% compared with the Q1 of 2020, achieving another record quarter of revenue. Adjusted EBITDA grew 20% in the Q1 of 2021 compared with the Q1 of 2020.
We saw very robust customer demand during the quarter across both software and services demonstrated by year over year total company bookings growth of 34%. In the Q1 of 2021, We expanded our global footprint with revenue growth of 31% in Europe and 69% in Asia Pacific, fueled by our continued momentum in China in both software and tech enabled services. Our team based in our new Shanghai office is excited to participate in the Drug Information Association's conference later this month. In Japan, The Pharmaceutical and Medical Devices Agency renewed more than 50 licenses of our Pfenex platform and SimSib Simulator. The majority of our new employees in the Q1 are based in Europe and Asia to support our strong worldwide expansion.
The needs of our customers continue to drive our passion for innovation in biosimulation. We were excited to announce version 20 of our SimSip simulator in the quarter. This latest version expands the use cases of biosimulation with new and enhanced models for maternal health, such as assessing drug performance during pregnancy and lactation. It also automates the assessment of virtual bioequivalents to obtain bio waivers. This is a key advancement in the modernization of drug development.
Scientists at the FDA recently published a manuscript illustrating the FDA's approval of a complex generic using the SynSive simulator to achieve virtual bioequivalents instead of a comparative clinical study in patients. Furthermore, We surpassed 80 novel drugs approved by the FDA that had drug labels informed by the SimSib Simulator. For these new therapies, our simulator was used to address critical decisions regarding dosing, safety and guidance for use for special populations. Another major update to the SimSIP platform is the newly expanded biologics module, The SimSip Biologics Simulator, which is now available to be licensed as standalone software. With upgraded capabilities in protein development, we can further help our customers address dosing and safety questions using virtual patients in an important area of research where our customers are accelerating investment.
This information and conclusions generated by the SimSips Biologics Simulator optimize dosing regimens and predict biologic behavior in special populations such as children, the elderly or patients with comorbidities. The SimSet simulator is having a growing impact in biologics, following a path similar to small molecules where the use of mechanistic biosimulation is now well established. We believe the go to market strategy of licensing the SimSib Biologics Simulator outside of the consortium potentially opens up new customers and markets for biosimulation in software and tech enabled services. Earlier this week, we announced another new software called secondary intelligence, of drug program failures and some of these safety issues arise from secondary pharmacology, which is the activity of a drug that is not related to its desired therapeutic target. With this software, safety pharmacologists and toxicologists can automate, streamline and standardize are decided to move forward, adjust or discontinue.
The introduction of this software plants the seeds of innovation for future longer term growth allowing us to tap into new markets. Turning over to services, Our technology enabled services business continues to experience elevated growth due to the expansion of our work with existing customers and the acquisition of new biotechnology customers. Our services offering powered by our proprietary technologies is highly differentiated and profitable. The majority of Certara's services business incorporates the use of biosimulation software the drug discovery and development continuum. We are incredibly proud of our team of scientists who are well known in the industry as thought leaders and at the forefront of the science and technology of biosimulation.
Our solid total company The impressive total company growth in bookings is driven by demand across all customer types and is reflective of higher levels of activity at our customers as we begin to make our way out of the pandemic. The Q1 is typically when many of our customers are making major budget decisions on their Our remarkable achievements this quarter were the result of hard work by our dedicated and talented Certara colleagues. We continue to add to our expert team worldwide, increasing our employee base by more than 5% in the quarter. Approximately 75% of our new hires this quarter were scientists and subject matter experts and many of the remaining hires were business developers. Our turnover remains very low.
As I mentioned earlier, While we are starting to recover from the pandemic in some parts of the world, others are continuing a fierce battle with this disease. Our colleagues in India are especially in our thoughts and we continue to provide support to our global team through these challenging times. In summary, Certara is widely recognized as one of the largest and leading biosimulation companies in the world with relationships across more than 16.50 customers at the end of 2020. We are enthusiastic about the continued success of our customers, a good number of whom had drugs approved at the FDA during the Q1. These customers use Certara's end to end platform in their development programs, covering a wide range of therapeutic areas Such as autoimmune diseases, infectious diseases and oncology.
Today, Certara is involved with thousands of programs annually throughout all stages of discovery and development across a very diverse and expanding customer base. We are dedicated to innovating and delivering high quality science backed results for our customers and our opportunities are expanding every day. I will now turn the call over to our CFO, Andrew, to discuss our financial results for the Q1.
Thank you, William. Hello, everyone. As mentioned earlier, total revenue for the 3 months ended March 31, 2021 was $66,700,000 representing year over year growth of 16%. Software revenue was $21,900,000 which increased 8% over the prior year period as a result of strong first quarter bookings and renewal rates. Software bookings were $21,900,000 which increased 22% from the prior year period and the aggregate renewal rate was 92%.
We continue to see strong demand for our biosimulation software products. Services revenue was $44,800,000 which increased 21% over the prior year period. The growth in services revenue also driven by strong demand for our biosimulation solutions. The overall growth rate in services was very robust despite some lingering effects of clinical trial delay from last year, which may impact the timing of project start ups for regulatory science engagements. The installed base of Certara customers continue to see the value of our highly technical consulting business, which has led to continued success of our land and expand strategy.
This can be seen in services bookings of 60,000,000 increased 39% from the prior year period. Total cost of revenue for the Q1 of 2021 was $26,000,000 an increase from $22,200,000 in the Q1 of 2020, primarily due to a $2,300,000 increase in employee related costs and a $800,000 increase in stock based compensation costs, partially offset by decreases in travel related costs and retention expenses. Total operating expenses for the Q1 of 2021 were $62,400,000 in the Q1 of 2020, primarily due to a $3,900,000 increase in stock based compensation expenses, $1,400,000 increase in employee related costs and $1,000,000 of ongoing public company costs. The remaining increases were due to increases in secondary offering costs and acquisition related costs. The components of operating expenses are as follows.
Sales and marketing expenses were $3,800,000 compared to $2,900,000 for the costs $400,000 increase in stock based compensation expenses, partly offset by lower travel. R and D expenses were $4,700,000 compared to $2,900,000 for the Q1 of 2020. The increase was primarily due to $500,000 increase in employee related costs, dollars 600,000 reduction in capitalized research and development and $400,000 increase in stock based compensation expenses. G and A expenses were 16,600,000 to $11,500,000 for the Q1 of 2020. The increase was primarily due to a $3,100,000 increase in stock based compensation expenses, $1,000,000 in ongoing public company costs and $2,300,000 of transaction and M and A expenses, which were partially offset by lower costs in a number of other line items.
Intangible asset amortization was $9,500,000 for the Q1 and depreciation and amortization expense was $600,000 during the period. There were no significant changes in either line item. Continuing down the P and L, interest expense during the Q1 was $3,900,000 compared to $6,900,000 for the Q1 of 2021. The reduction in interest expense due to the repayment of our Holdco loan in the Q4 of last year. Our income tax expense was $500,000 resulting in an effective tax rate of 33% for the Q1.
The expense for the quarter was primarily due to the tax effects of U. S. Pretax income, the impact of nondeductible items, the effects of tax elections made for U. K. Earnings and the relative mix of domestic and international earnings.
Net income for the Q1 of 2021 was $1,100,000 compared to a net income of $1,000,000 in the Q1 of 2020. The increase in revenues as well as the decrease in the provision for income taxes were offset by increases in cost of revenues and operating expenses, of which $4,600,000 was stock compensation expense. Diluted earnings per share for the Q1 of 2021 was $0.01 compared to $0.01 for the Q1 of 2020. Adjusted EBITDA for the Q1 of 2021 was $23,900,000 compared to $19,900,000 for the Q1 of 2020. Despite having measurable public company expenses that we did not have last year, we delivered an adjusted EBITDA margin expansion.
Ongoing direct public company expenses were in excess of $1,000,000 in the quarter. Adjusted diluted earnings per share for the Q1 was $0.06 compared to $0.02 for the Q1 of 2020. Now moving to the balance sheet. We ended the quarter with $273,000,000 of cash and cash equivalents. One timing difference that I'd like to point out is that we paid our annual bonuses to employees in the Q1 this year compared to the Q2 last year.
Our total debt outstanding was $298,400,000 net of deferred financing fees of $4,900,000 as of March 31, 2021. The current debt structure does not include any significant maturity until 2024. Regarding the financial outlook, we are updating our previously reported guidance for full year 2021 revenue, adjusted EBITDA and effective annual tax rate. Revenues to be in the range of $277,000,000 to $285,000,000 adjusted EBITDA to be in the range of $100,000,000 to $102,000,000 adjusted EPS to be in the range of $0.20 to $0.24 per share the cash tax rate to be in the range of 25% to 30%, a slight revision to our effective tax rate guidance to be between 40% 45% and fully diluted shares to range between 153,000,000 and 155,000,000 at year end. Thank you.
Now I'll turn it back to our CEO, William Fihari.
Thank you, Andrew. In summary, Certara had a successful start to our year and our 1st full quarter as a public company. The Certara team continues to focus on our commitments to customers and deliver strong growth for our shareholders. We believe that our end to end platform is well positioned to continue benefiting from solid market trends. We expect to capture a larger share of overall biopharmaceutical R and D spend as we continue to innovate, acquire and add new solutions to our end to end platform.
At this point, we'll open the call for questions. Operator, can you open up the
Our first question comes from the line of Luke Sergant from Barclays. Your line is now open.
Hey, guys. Just a couple just a quick one here on guidance. So, I'm just trying to get a sense of You had a really strong bookings quarter. Things seem to be opening up and a decent beat on the top line. On a modest guidance raise, is this just as we think about conservatism, I know you have 85% visibility into your business.
Is there something with those bookings that they're going to flow through later on, most likely 'twenty two? Or just how to think about that
Yes. Thanks, Luke. And Andrew, why don't you take that?
Okay. Sure. So the year over year growth rates have been stronger than we had anticipated. I would say that in terms of conservatism, you get more a new public company. Those booking results make us very comfortable with our guidance, but we'd like to see another quarter or 2 before making any adjustments.
Certainly reassess it at that time. The way that I look at this is not just in a quarter, but also Looking back in the trailing 12 months, and on a trailing 12 months basis, the bookings growth was a little bit over 20%, 22%, Which is highly supportive of achieving the mid to high teens revenue growth and with another quarter of activity, we'd be in a better
3 here and the pacing through the year, between services and the software piece, any Dynamic that you want to call out and from a modeling perspective?
So we talked about it briefly last call. So the Q1 and the 4th quarter are High quarters for software bookings given the renewal cycles in software. The services, we expect to kind of grow sequentially throughout the year Given the kind of profile of the bookings that are coming in, historically, if you kind of normalize for One time items or movements, about 49% of the EBITDA is generated in the first half of the year, 51% in the second half of the year. The margin trajectory will pace with the revenue growth. So targeting that kind of mid teens revenue growth with maintaining our EBITDA margin outlook.
Okay, great. If I
could sneak one last one in on the Shanghai office, I know you guys are opening that one. Where are you on that being open and when can We started expecting more of a meaningful contribution from that area.
Thanks, Luke. The office is open. It opened at the very end of last year, and we started hiring then. So We have a small but growing team there. And so as you'd expect, we've got some growing to do as we go forward.
We do have a nicely growing business in Asia Pacific and in China, Partly due to the fact that we get some sales that were coming in even before we opened that office. So I think It's a good sign for the future, but we've got some building to do as we go through the year here and we hire people.
All right. Sounds great. Thanks. I'll let the cede the floor.
Thanks a
lot, Luke.
Thank you. Our next question comes from the line of Dave Windley from Jefferies. Your line is now open.
Hi, good afternoon. Thanks for taking my questions. William, I wanted to ask around the biologic simulator how your clients are applying your software between biologics and small molecule end applications Or if you could comment perhaps on how this expanded biologic simulator opens up new market Just trying to get an understanding of how that could accelerate growth in the biologic side?
Yes. So if you go way back, Sinosip started focused on small molecules and we've been adding functionality related to biologics over the last, I don't know, 5 years or so. So in some ways, the latest release is a culmination of that and it's not the final state. So is why the software is different. What we've announced is that we've decided to make the biologics module
We have some customers that work
on both small molecule and biologics, but
there's a large group of customers that are only working on biologics, so it sort of lets us address them little bit more in a more straightforward way with that product.
Got it. That's helpful. Thank you. And then I guess Kind of similar questions about the secondary intelligence product that you announced this week. It sounds like that's very unique in the market, newly launched.
Is that something that you expect to have rapid uptake? Or is that something that you need to kind of seed the market and make your customers familiar with? How would you expect that to evolve? And do you expect that Your clients may be on both of these, are they likely to license software from you on these or engage you through tech enabled service to get out these capabilities?
Yes, great question. No, great. Thanks for that question. So we believe that the secondary intelligence product is the only software we're aware of of its kind that predicts and what it does is it predicts Sort of unintended. So there isn't an existing market for this.
We are create to your point, I think we're creating the market And we're out there announcing this so that we're starting to get customer feedback over the next 6 to 12 months. What we've announced right now is the first version of the product. We have about, let's say, about a dozen receptors right now. By this summer, we'll have more than 40 in the product. And I think that as we add more and more, we're going to find that there's a fairly large group of safety pharmacologists and toxicologists at drug companies that will find this to be a very useful product.
But as a new category, we do need to go out And do our introduction and demonstrate it. So that's what we're kicking off right now.
Got it. And then the you think clients will license the software or
I apologize. Yes, sorry, I didn't give up
your whole question. The answer is both.
You can license the software
And we will also provide the
service through tech enabled services as well. It depends on as I think we've said in previous calls, it really Depends on the client. Larger clients with internal groups, a lot of times they prefer to license the software directly and other ones Prefer to use our services groups to do the work to basically use our software and do the work for them. So both of them are Valid, I guess you call it delivery mechanisms for the technology to our customers.
Got it. I'll leave it at that. Thank you very much.
Thank you, David.
Thank you. Our next question comes from the line of Michael Tschin from Bank of America. Your line is now open.
Hey, guys. Thanks for taking the question. Andrew William, first one would be on, I think in your prepared remarks, you had an interesting comment in there on clinical trial delays I asked you and sort of the lingering impact on the services business. I was wondering if you could expand on
that a little bit, sort
of how should we think about that impacting the business as you go through the rest of the year? Are you sort of hinting that that could be a nice little tailwind as some of those delays work their way through the system and sort of we go back to operating a normal, specifically on the tech enabled services side of things. I was wondering if you could clarify that a little bit.
Yes. It's a great question. As we pointed out, the market is somewhat disrupted due to COVID and the fact that There were delays in clinical trials in 2020 for parts of 2020 that are still working their way Through the drug development cycle, and have resulted in delays to certain projects that we have. We haven't lost any projects, but we have seen in some cases that Projects are delayed as they're waiting for their data to come in. As you point out, That will mean that has some implications around the potential that we'll have Multiple projects catching up with us in the later part of the year.
But COVID the post I don't
know if it's fair
to call it a post COVID situation, but as we come out of COVID, we're in kind of a unique situation and want to keep an eye on that.
Okay. All right. That's fair. And then following up on the last couple of questions on some of the new product introductions, secondary intelligence, The new SIMSIP nodule. I'm wondering how should we think about the cadence of new software introductions or new solutions Going forward, is this a couple of new launches a year, a couple of new launches a quarter?
And are these more sort of complementary to the business or are there any or should we should anticipate any material
Yes, I think it would be a challenge for any software company to do
a couple of products a quarter. So
I guess You should think more around a couple of a year is something that I think we could be proud of. These products are, I think extensions of our existing business, but pretty sophisticated extensions, The secondary intelligence product we're very excited about. That moves us into really an entirely what we think will be an entirely new market and a new way to help our customers out. But at the same time, it is an extension of A logical extension of what we've been doing in CIMSIP and there will how do I put it? You should expect there'll be others as we go forward.
Okay. And then one last one, one last quick one for me. Andrew, I think you mentioned a 5% increase to headcount in the quarter. Is that just sort of early in the year bump up or are you anticipating sort of a similar cadence through the rest of the year? How do you think about SG and A and sort of headcount additions as we go forward?
Yes, I think that's a similar I think the best way to look at it is similar cadence the rest of the year.
Okay, great. Thanks.
Thank you. Question comes from the line of John Kreger from William Blair. Your line is now open.
Hey, thanks guys. I have a couple of questions about mix. I think in the past you've talked about your revenue mix being mainly in clinical, with much smaller chunks in discovery, preclinical and post market. Assuming I've got that right, if you look at your recent bookings, are you seeing any shift in that mix or should we expect that to be Fairly typical. What I'm getting at is sort of where are you seeing the biggest changes and how clients are using your software?
Andrew, do you want to address that first?
Sure. I can start. The mix is consistent With the previously discussed mix, no changes there.
Great. Thanks, Andrew. And maybe a similar one. How about mix between large and small clients? Is that fairly stable?
Or are you seeing any change?
What we're seeing I mean, I can answer that. What we're seeing is growth in both areas. We're seeing growth in more of the mid teens in large clients and higher growth rates An uptick with the small clients. We had a record number of new logos in the Q1.
All right. Thanks. And then maybe one more, Bill. Can you just talk a little bit about how you guys have played a role in COVID work? Should we view that as all a material contributor if you think back to the last couple of quarters?
And therefore, would you expect it to be a headwind or a tailwind as you move through 2021?
Yes. Thanks, It's Anna. The way I think about this is that the business was really resilient throughout COVID, so I'm really proud that we were able to continue serving our clients without really skipping a beat. We did work on I forgot what we had said last year more than 30 COVID projects last year. But a lot of that had to do with customers move to work on COVID and we moved with them and then when they move back to work on other things, we're moving back with them.
So from a financial standpoint, we don't believe this That will really be a significant event. Obviously, the operations of the company, we did We worked on somewhat different projects last year and we're managing The disruptions that to some extent happen in the pharmaceutical pipeline as we go into the Q1, but We have a very diverse and broad business across pharma. And so that Kind of lets it basically makes us pretty stable throughout the whole thing. So I wouldn't expect it to be either really a headwind or a tailwind as we go into this year.
Okay. Thank you.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to William Fiery, CEO, for closing remarks.
I wanted to thank everybody for joining us. This was our first quarter as a public company. I believe that Certara performed very well. I'm very proud of our team. We the team set out with a very good solid plan.
I believe we've delivered on that throughout the quarter. And I think we are quite well set up as we go forward for the rest of the year. We'll look forward to updating everybody in the coming quarters. Thank you very much. And with that, I think we can wrap up tonight.
Thank you.
This concludes today's conference call. Thanks for participating. You may now disconnect.