Certara, Inc. Q1 FY2021 earnings

Certara's first quarter of fiscal 2021 was its first full quarter as a public company, and the top line carried the story. Revenue for the quarter ended March 31, 2021 came in at $66.7 million, up 16.1% from $57.4 million in the prior-year quarter. Services grew 21% and software grew 8%. Management pointed to technology-enabled services and software licenses and subscriptions as the main drivers, along with strong renewal rates. Bookings reached $81.9 million in the quarter against $61.0 million a year earlier, which the company described as 34% year-over-year growth. The renewal rate held at 92% in both periods. Remaining performance obligations of $66.7 million were up 16.1% from the prior-year quarter, and current deferred revenue was $29.8 million.

The profit picture was messier. Operating income for the quarter fell 29.7% to $5.6 million from $8.0 million in the prior-year quarter, and operating margin narrowed to 8.4% from 13.9%. Higher stock-based compensation and acquisition and transaction related costs did most of the damage, and the company also flagged secondary offering costs and D&O insurance. Net income still edged up 0.6% to $1.1 million from $1.0 million, and diluted EPS was flat at $0.01. The gap between the operating line and the bottom line matters. A sharp decline in operating income produced a small increase in net income because the prior-year quarter carried a heavier interest burden.

Non-GAAP results look far stronger. Adjusted EBITDA for the quarter was $23.9 million, up 20% from $19.9 million a year earlier. Adjusted net income was $9.4 million versus $2.1 million, and adjusted diluted earnings per share was $0.06 against $0.02. Those adjustments lean heavily on stock-based compensation, acquisition related expenses and intangible asset amortization, so the distance between GAAP diluted EPS of $0.01 and adjusted diluted earnings per share of $0.06 shows how much of the cost base is non-cash or tied to deals. Cash generation was weaker. Operating cash flow for the quarter was $4.9 million, down 44.1% from $8.8 million in the prior-year quarter. The filing attributes most of the swing to roughly $12.4 million of cash used by operating assets and liabilities, primarily accrued bonus payments. Capital expenditures were $0.2 million, down 51.6% from $0.5 million.

Guidance for full year 2021 was updated, with the low end of the ranges for revenue and adjusted EBITDA raised and the effective annual tax rate lowered. The company expects full year 2021 adjusted EBITDA of $100 million to $102 million, fully diluted shares of 153 million to 155 million, and an effective annual tax rate of 40% to 45%. Those targets cover the full fiscal year, not the next quarter. The tax range is wide, and the company notes it cannot reconcile forward-looking adjusted EBITDA to the comparable GAAP measure without unreasonable effort.

The risk list is long and mostly structural. Certara competes with other scientific software vendors, contract research organizations, in-house development teams at biopharmaceutical companies, and free open source tools such as R and PK-Sim. Pricing pressure and consolidation among biopharmaceutical customers could slow bookings, which the company warns vary significantly from quarter to quarter. Regulatory shifts matter too. A relaxation of approval requirements or faster approval pathways could reduce demand for the company's regulatory services, and fixed-fee contracts carry estimation risk on costs. Certara completed a small acquisition on March 2, 2021, with goodwill of $1.1 million, and a secondary offering on March 29, 2021 in which selling stockholders sold 10,000,000 shares and the company received no proceeds. COVID-19 remains a stated uncertainty, though the company reported no material adverse impact on its financial condition, results of operations or cash flows as of March 31, 2021. With cash and cash equivalents of $273.0 million and 1,650 biopharmaceutical customers across 61 countries, the platform story still has room to run, but operating leverage has to show up for the shares to work from here.