Hey, great. Thanks, everyone, for joining. My name is Francois Brisebois. I'm one of the Biotech and Healthcare Analysts at Oppenheimer. Our next presenting company here is SLP Simulations Plus. Ticker is SLP. We do cover at the firm with an outperform. From the company, we have Shawn O'Connor, the CEO, to present. We'll do a fireside chat, so if you have any questions, feel free to send them my way. We'll jump right into it. Shawn, how have you been? What's going on? There's been a little bit of an uptick in the stock, which has been nice. Just so people kind of know where we stand here, what is SLP and what are you guys working on?
Thanks, Frank. Thanks for having us at the conference today. Simulations Plus, an early pioneer and today a leader in the world of modeling and simulation, biosimulation support to the biopharma industry, both pharma companies, biotech companies. We provide a suite of software platforms that support their implementation, adoption of in silico modeling approaches to affect the cost, time duration of the drug development cycle. Yeah, very pleased in terms of recent movement. Hey, the environment for biopharma, no new news here in terms of cost constraints, biotech funding, et cetera. Really being in place for the last couple of years and continuing into 2025. Within that environment, we've executed pretty well over this time frame.
I think, you know, as much frustration as we've had in terms of pretty consistent, good quarterly releases, we seem to always have a CRO that releases the day after we release with some ugly results and/or guidance adjustment. I think, you know, one of the things that may be happening is that understanding that Simulations Plus business model is not a CRO model. You know, the 60/40 split of our revenue, 60% sourced in software licensing, 40% coming from services. That software side of our business is really an infrastructure investment on the part of our clients, an investment that in, you know, tightening, cost tightening environment, they're not dismantling the infrastructure. Our software side of our business, 60% of our revenue flow is insulated from the challenges that the industry is facing.
Our renewal rates in terms of our software continue at the historical 95% renewal rate and, you know, continues to perform well. Perhaps they're not adding personnel to the group and therefore increasing their license platform to some degree. You know, pretty insulated side of our business. The service side of our business does come out of discretionary spending budgets and, you know, it is not a recurring revenue business and therefore is subject to, you know, the flow and pace of spending on their part. We are much more insulated and that's reflected in very positive delivery of revenue growth and profitability over the last number of quarters. You know, hopefully I think that that may be part of people are seeing that now and, you know, some upward movement in terms of our valuation.
Yeah, would you say, yeah, the funding, it's interesting because it's not to get into the political side of things, but are you getting any sense of the funding environment or biopharma, biotech changing a little bit here with, I guess, new management or is it still cautiously optimistic? Hard to say what exactly is going to come out of it.
Yeah, you know, I think, you know, our client base has been subjected to, is operating in an environment of, you know, end-of-life patents, IRA, pricing scrutiny. You know, they've gone through a cycle of, you know, matching expense lines to revenue lines. They are, you know, taking close scrutiny in terms of their development programs, a lot more reallocation of resources, changes and approaches there taking place. You know, that, you know, that I don't think is a temporary thing. It is, you know, part of our mantra is fail fast and reallocate resources to more highly predictable success programs. That I think is here for the long haul. Hopefully they've adjusted their cost structure to near-term revenue expectations and that sort of motivation for change goes away.
Yeah, the environment, a lot of uncertainty, if you will, in terms of, you know, government transition and focus there. That is all, you know, efficiency and cost reduction driven. You know, that's what we are all about.
Yeah, so that's, I was going to say, isn't there an argument?
Our clients is how can development program.
Sorry, froze out for a sec. Go ahead. I cut you off.
You're okay. You know, I think those are all good things. You know, in my years in this business, you know, there's been rough times like this or in terms of cost constraint environments. What we sell is efficiency. In these environments, you know, the challenges sometimes, you know, the efficiency is recognized, but they're a little too fat, fat happy and dumb to worry about it at the moment. I kind of prefer to be in these environments in which, you know, the value is seen and let's find the budget to bring in, you know, more in silico approaches that can drive improvement in their operations.
Okay, great. Super helpful. I'm sorry. I think it cut out for a sec, but not too long. I think we're all good. I just also, you know, recently, because I was going to say, isn't there an argument to say that you guys are fail fast and, you know, put your basically costs at work in areas that, you know, where you should invest? From your perspective, maybe a breakdown a little bit more of biopharma versus biotech. How important are they as clients? Like what percent of your revenues come from larger pharma? Just remind people how many clients you have in those spaces.
Yeah, I know you're breaking up a bit on my side. You know, our business, our business clientele sort of 70. I think we were discussing a little bit the efficiencies and how it makes sense with your company, how your software side is kind of insulated a little bit from what's going on in the market. I'll let you kind of take it from there. Yeah, thanks, Frank. Sorry about that. Yeah, we, you know, provide efficiency to our clients and their development programs looking to impact decisions from discovery through to FDA or regulatory approval and in some cases post-approval in our biosimulation solutions and our adaptive learning and medical communication solutions that came to us with Pro-ficiency.
Perfect. As you mentioned, Pro-ficiency, I think people would appreciate maybe a quick explanation of that. It was a very transformational acquisition. Seems like, you know, we did not get much credit on the market side. It is nice to see a rebound now. Obviously, you talked about the revenue impact on it. Can you just talk about Pro-ficiency, what it was, what made it attractive, and how is it synergistic?
Yeah, absolutely, Frank. Very significant acquisition for the company and acquisition of greater size than we've done in the past. Importantly, an acquisition that supplemented our biosimulation footprint and extended it into clinical operations, medical affairs, medical communications, adding, doubling the size of our TAM, our opportunity on a go-forward basis. While plenty of opportunities still exist and no slight to our future in terms of biosimulation, the opportunity to increase substantially our opportunity going forward was very attractive here. Something we've always looked at in terms of adjacencies to biosimulation that made sense. Why does Proficiency make sense for us?
Our culture and our approach has always been based upon deep knowledge on the science side combined with technology to provide predictive analytics to our clients so that they can anticipate issues, use predictive analytics to make better decisions, to improve protocol design in a number of ways, anticipate problems, solve them before they are costly ventures on the part of our clients. Proficiency fit that bill perfectly in the sense that they have a unique combination of science, in this case, science in both therapeutic knowledge, but science in terms of knowledge learning science, developed training modules and displays what has been a, you know, underutilized or under-implemented technology space of training sites for protocol deployment in clinical trials.
Being able, putting the drug sponsor in a position to anticipate where adherence problems are going to exist in clinical trials, which is the number one citation post-trial from the FDA, the lack of adherence for protocol, which adds tremendous cost to clinical trials and contributes to unsuccessful outcomes for those clinical trials. Proficiency fit that bill in terms of combining science and technology into a predictive analytics solution to our clients, exactly what we've done quite well in the biosimulation space. It contributed in a number of ways. We have expanded on the SLP legacy side, our reach into budgets and discovery and modeling and simulation budgets, historically the source of funding for our products and services.
Previous to Proficiency acquisition, we extended our relationship into data management teams, which had been very critical in terms of supporting in these cost-constrained times, finding more budget sources to pay for modeling and simulation support. The Proficiency acquisition gives us access to an additional three budgets: the clinical operations budget in our clients, the medical affairs budget, and the commercialization marketing budget post-approval for medical communication services. Expanding our footprint in support of our clients, becoming a bigger partner to them is important. Access to multiple budgets within our clients is very important. The one and one equaling three in this acquisition, first and foremost, the cross-selling opportunity, if you will, is driven by our ability to get Proficiency, our adaptive learning and insights platform, in front of clients quicker and at a higher level than Proficiency prior to acquisition was able to achieve as a small organization.
They had touched eight out of the top 20 large pharma in their build as an organization to date. Our relationship with all of the top 20 large pharma companies can be leveraged here to get them into the right communication, the right position to accelerate their revenue growth, which quite frankly was greater, larger than our biosimulation revenue growth figures. We think they can take that business and drive even faster growth from the Proficiency assets. In the long run, cross-selling of biosimulation solutions out of those other budgets is a little bit longer-term opportunity for us. In a world in which personalized medicine is becoming more and more a reality, both in the drug development cycle as well as post-approval commercialization of drugs, modeling and simulation will play a role in that in the long term.
This gives us an entry point into those budgets, into those areas of our clients to establish our presence there, our reputation there through the assets we acquired with Proficiency. Very excited about, yeah, transformational, very significant acquisition on our part. Integration has gone very well since its close in the fourth quarter, our fourth fiscal quarter. They have delivered on target their contribution in our first quarter of our fiscal year and look to be in line to add $15-$18 million of revenue to Simulations Plus going forward. When I came on board six, seven years ago at Simulations Plus, at $20 million in revenue, the challenge was how do we get to $100 million quick and as fast as we could? I will round up here a little bit in the sense that our guidance is about $90-something million this year.
Let me round up to $100 million and say, you know, now the focus is how do we go from $100 million to $200 million? And certainly biosimulation will be, you know, the largest component of that, but the addition of Proficiency into the mix here shortens the number of columns in that spreadsheet that get us to the next hurdle here in terms of growth in the long run.
Yep. Okay. No, that's very helpful. It makes sense. I've been getting a lot of questions on the margins. Can you help maybe understand the impact on margins of Proficiency and just where do you see it as a whole and just strategically the importance of profitability for the firm versus long-term growth? Just a little more color on margins would be helpful.
Yeah. Yeah. No, most certainly. You know, the factors in margin, A, we've got two business models, a software contribution and a service contribution, each have differing gross margin profiles, obviously. The margin in each of those two business models and the mix of software and services contributing to our total revenues all come into play here. You know, first from an SOP legacy perspective, we have over the last couple of years, having made a couple of acquisitions, having encountered significant compensation creep post-COVID in our scientific, you know, headcount, you know, we've slipped to 30-31% adjusted EBITDA over the last couple of years and are very focused in fiscal year 2025 here that we're in to get that back to 35% target with potential to go beyond that.
Our guidance this year of 31%-33% adjusted EBITDA reflects getting the SOP legacy business up to the 35% adjusted EBITDA level. I think we're making good progress in that regard. Proficiency comes in, the adaptive learning platform in its software revenue. Their gross margin is at, you know, an 80% sort of level compared to our 90% gross margin, software gross margin. You know, their margin is always going to be somewhat less than ours, reflecting the fact that there's a cost to the building of the training modules that get licensed to the client. But they're making improvement and that 80% should improve over time here as they implement and have been, you know, quickly adopting already AI and avatar and other technologies that are much more cheaply effective in terms of gross margin versus hiring actors and film editors, et cetera, et cetera.
Software should converge there. On the service side, again, the value-added part of medical communications is comparable to our margin. They also have a component of logistics. The agency position that they're hired into fulfill usually brings along with it, you handle the booking of hotels and airlines and honorariums for KOLs and the meetings that are put together both pre and post-drug approval. We're looking at ways to, you know, partner with other organizations to take on that low-margin logistics activity. That'll accrue over time and we'll see some improvement. The biggest impact will be the fact that the software revenue line from Proficiency is growing faster than the service growth line. Their mix coming into the fold is more in the 60/40 direction in terms of services.
Its impact will show improvement just simply from our focus on software, their faster revenue growth on the software side and services that again will contribute to benefit. While we get the legacy business into 35% EBITDA margins in fiscal 2025, our guidance there is 31%-33% with Proficiency consolidated in there. As we move out to fiscal year 2026 and 2027, I think we'll converge consolidated to historical 35% or better profitability for the consolidated business.
SLP as a whole, the mix from software and services as a whole for SLP long-term, the goal is probably to stay a little more on the software side in terms of mix there?
Oh, absolutely. For, you know, a whole host of reasons, the obvious recurring revenue and profitability of the software side harken back to where we began in terms of the software being a more infrastructure buy on the part of our clients that isn't susceptible to the ups and downs of spending climate and whatnot. Yeah, we've been very committed. We're an inquisitive organization and we've always tried to keep that balance of new revenue flows from both service and software to maintain that 60%+ component on the software side. Pretty committed to that. I think it's a differentiator in terms of some of our peer companies that are out there. Our focus on software, I think, gives us a little edge in terms of risk profile and benefits in terms of profitability.
Okay. Great. Maybe lastly, if we could touch on the guidance for the year on the top line, is that, you know, is that conservative or is that aspirational? How do we feel about the guidance there?
Sneaky question there, Frank. You know, our guidance was reconfirmed, guidance that we put forth at the beginning of the year. We've reported our fiscal first quarter. We're in the last weeks of our second quarter here. At the end of the first quarter, we confirmed our guidance for top line and other components that was given at the beginning of the year with no change. Yeah. Hey, you know, it's a balance. Underlying it is the 10%-15% growth, the organic growth assumption with $15 million-$18 million of revenue contribution from the new Proficiency business lines. You know, if everything, you know, performed at the top of the range, yeah, there'd be opportunity to exceed that guidance. Those things sort of outcomes rarely occur.
You know, I think our guidance was designed at the front end to be achievable and it remains that way right now.
Excellent. Thank you. Sorry for the quick disconnect there, but hopefully we got to everything. I appreciate you taking the time today, Shawn.
Hey, no problem. Take care, Frank. Thanks for having us.