Simulations Plus, Inc. Aktie

Greetings, and welcome to the Simulations Plus Incorporated Second Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] And please note that this conference is being recorded.

It is now my pleasure to turn the conference over to Lisa Fortuna. Thank you. You may begin.

Good afternoon, everyone. Welcome to the Simulations Plus Second Quarter Fiscal Year 2026 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial Officer of Simulations Plus.

Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at simulation-plus.com.

After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect and anticipate refer to our best estimates as of this call, and actual future results could differ significantly from these statements.

Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission.

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 most recent earnings release available on the company's website. Please refer to the reconciliation tables and the accompanying materials for additional information.

With that, I'll turn the call over to Shawn O'Connor. Please go ahead.

Thank you, and welcome, everyone. We exceeded the top line guidance that we communicated to you last quarter and delivered $24.3 million in revenue during second quarter with growth in both our Software and Service segments. Adjusted EBITDA was $8.7 million, reflecting a 36% margin and adjusted diluted EPS was $0.35, in line with our internal expectations.

Turning to the macro environment. We continue to see encouraging market conditions globally, supported by ongoing most favored nation pricing agreements, easing tariff concerns and a more supportive funding environment for our customers.

On the regulatory front, the new approaches methodologies or NAMS guidance issued late last year was further clarified with an additional update last month. Against this backdrop, we're seeing a pickup in client spending reflected in solid software renewal rates, increased new logo activity and strengthened service bookings.

Overall, we're pleased with our first half fiscal 2026 performance and encouraged by the momentum that it is building across the business.

Next, I want to address the broader discussion around artificial intelligence and its impact on software companies, including our own. Over the past quarter, AI-related competitive concerns have weighed on their valuations across most software-based business models, and biosimulation has not been entirely immune to that sentiment.

That said, we believe it's important to separate short-term market perception from long-term fundamentals.

From our perspective, ongoing advances in AI are a net positive for biosimulation. AI is accelerating the industry's transition to a data-driven drug development workflows and, importantly, enhancing the value of trusted and validated scientific engines rather than replacing them. We have been an early adopter of AI for decades, beginning with the introduction of ADMET Predictor in the late 1990s, and we continue to lead in its practical application today.

Beyond using machine learning for property prediction or to improve software development efficiency, we are embedding AI across our product roadmap, improving compute performance, interoperability between scientific engines, data management and duration, automation of repetitive modeling tasks and making our tools more accessible across organizations.

While certain software models may face disruption from AI, we believe the core value of our scientific engines, including property predictions, PBPK, PK/PD and QSP modeling functionality and science remains strong and durable. These capabilities are built on decades of scientific investment deep domain expertise, validated methodologies and integration into customer workflows and regulated environments.

In contrast to black box approaches, our solutions are trusted, auditable and difficult to replicate. That is why we have long been the preferred choice for commercial drug developers even during a period of significant investment in AI-driven discovery companies, and a number of open source applications.

At our Investor Day in January, we outlined the road map focused on further leveraging AI across our ecosystem and we continue to make solid progress executing against that plan. Just a few weeks ago, we announced strategic collaboration programs with 3 large pharmaceutical companies to advance AI workflows across drug development life cycle. The close collaboration between Simulations Plus and leading pharmaceutical organizations will provide direct insight into how AI will be integrated into real-world environments, in forming product direction, workflow standardization and for future commercial models. The programs will utilize Simulations Plus' major software platforms, including GastroPlus, MonolixSuite, ADMET Predictor and Thales. Participating companies will integrate our internally developed AI agents directly into model inform direct development workflows, enabling natural language interaction, automation of data processing coordination of simulations across multiple modeling engines and generation of interoperable outputs from complex multistep pipelines. These programs represent an important step in moving us and our partners beyond experimentation and into practical implementation as we advance our software and services into a unified modeling ecosystem.

Finally, it's important to emphasize that our customers are not looking to replace biosimulation engines. Instead, they are looking to enhance their value using AI to improve efficiency, broaden deployment and accelerate drug discovery and development.

Furthermore, cost benefits accrue at any point that Simulations Plus can help us simplify and shorten the drug development process or mitigate costly miscalculations. This approach aligns closely with our strategy to be a key partner in our clients' AI journey and supports our long-term growth plans.

With that, I'll turn the call over to Will.

Thank you, Shawn. To recap our second quarter performance, total revenue increased 8% to $24.3 million. Software revenue increased 9%, representing 60% of total revenue and Services revenue increased 8%, representing 40% of total revenue.

Turning to software highlights for the quarter. Discovery revenue, primarily from ADMET Predictor, increased 19% for the quarter and 6% for the trailing 12-month period. The contribution as a percentage of total software revenue was 19% during the quarter and 18% for the trailing 12 months. Development revenue, primarily from GastroPlus and MonolixSuite increased 12% for the quarter and 3% for the trailing 12-month period. The contribution was 78% of total software revenue for both the quarter and the trailing 12 months.

Clinical operations revenue primarily from proficiency declined 54% for the quarter and 58% for the trailing 12-month period. The contribution during the quarter was 3% of total software revenue and 3% for the trailing 12 months.

We ended the quarter with 297 commercial clients, achieving an average revenue per client of $124,000 and a 91% renewal rate for the quarter. On a trailing 12-month basis, we achieved average revenue per client of $148,000 and our renewal rate was 87%.

While we've seen a decline in software renewal rates, it's worth diving a bit deeper into the patterns we've seen. For top 20 pharma clients, we've historically had 100% logo retention. For $1 billion-plus pharma, defined as companies generating over $1 billion in global revenue, we've seen 90% logo retention. Churn has predominantly been with other commercial pharma defined as biopharma companies with at least 1 approved product and less than $1 billion in revenue and precommercial biotech defined as biotech companies without an approved therapy. This is consistent with historically more episodic versus recurring demand as pipelines progress with the challenging early-stage biopharma market backdrop over the last few years. Our top 25 customers represent about 46% of overall software revenue and these customers are highly stable with 100% logo retention and 90% plus gross revenue retention.

As we continue to assess software renewal rates and advance our sales team reorganization from product-focused selling to a regional account-based model centered on deepening client relationships, we plan to provide increased visibility into software retention and cross-sell expansion opportunities. For example, in fiscal 2025, we saw the following from clients with software revenue greater than $100,000: 50% purchased 2 software products, 23% purchased 3 software products and 15% purchased 4 or more products. We believe this creates meaningful cross-sell and upside opportunities as reflected in the continued growth of average software revenue per client. We look forward to providing additional insight into these performance metrics over time.

Turning to services highlights for the quarter. Development services, which includes our biosimulation services, increased 12% for the quarter and declined 3% for the trailing 12-month period. The contribution during the quarter was 77% of total services revenue and 75% for the trailing 12 months.

Commercialization Services, which includes our MedChem services, declined 1% for the quarter and increased 66% for the trailing 12-month period. The contribution during the quarter was 23% of total services revenue and 25% for the trailing 12 months. Total services projects worked on during the quarter were 199 and ending backlog increased 18% to $24 million from $20.4 million last year.

Overall, we have a healthy pipeline of services projects.

Total gross margin for the second quarter was 66%, with Software gross margin of 89% and Services gross margin of 33%. On a comparative basis, total gross margin for the prior period was 59% with Software gross margin of 81% and Services gross margin of 25%. The increase in Software gross margin was primarily driven by increased software-related revenue, particularly from Development and Discovery Solutions and lower software-related costs largely reflecting reduced amortization expense following the impairment charge in the third quarter of fiscal 2025.

Other income was $0.3 million for the quarter compared to $0.8 million last year. The prior year amount included the gain on the change in fair value of contingent consideration related to the Immunetrics holdback liability.

Income tax expense was $1.4 million compared to $0.4 million last year our effective tax rate was 23% compared to 12% last year. The increase in the tax rate is primarily due to the result of favorable discrete item in the prior year that did not recur in the current year, a less favorable jurisdictional mix of earnings between the U.S. and France, increased unfavorable global intangible low-taxed income, or GILTI, impacts driven by higher French taxable income, and a lower foreign-derived intangible income or FITI benefit.

In addition, certain items affecting the current year effective tax rate relate to accelerated deductions elected under the One Big Beautiful Bill Act. These deductions are expected to be favorable to cash flows as they accelerate the timing of tax benefits and reduce near-term cash tax payments. As a result, we now expect our effective tax rate for fiscal 2026 to be between 23% to 25% as compared to our previous expectation of 12% to 14%.

Moving to our balance sheet. We ended the quarter with $41.8 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow as we continue to execute our growth and innovation strategy.

Our guidance for fiscal 2026 remains relatively unchanged from what we previously provided. Total revenue between $79 million to $82 million, year-over-year revenue growth between 0% to 4%, software mix between 57% to 62%, adjusted EBITDA margin between 26% to 30%. Adjusted diluted earnings per share is now expected to range between $0.75 to $0.85, which reflects the change in our effective tax rate we just discussed.

For the third quarter of 2026, we anticipate revenue to be between $20 million to $22 million, adjusted EBITDA margin of 27% to 33% and adjusted diluted EPS between $0.20 to $0.27.

I will now turn the call back to Shawn.

Thank you, Will. As I mentioned before, we're pleased with our first half performance and remain excited about the opportunities ahead. Simulations Plus is transitioning from a set of innovative modeling tools into an integrated AI-driven biosimulation ecosystem, supporting the full drug development life cycle, from discovery through commercialization.

Our core purpose remains unchanged, empowering our clients to deliver safer, more effective therapies through science-driven innovation. What's accelerating and is how we execute against that mission. By combining our validated scientific engines with enhanced cloud capabilities, AI-powered workflows and a coordinated road map we're delivering greater speed, consistency and interoperability to our clients.

Thank you for joining the call today. And with that, we'll open the call for questions.

[Operator Instructions] And our first question comes from the line of Matt Hewitt with Craig-Hallum.

Obviously, it's nice to hear we're starting to see some positive impact from the changes that we started to see last fall. Maybe first up, I was hoping we could dig in a little bit on the 3 large pharma customers that you announced here a couple of weeks ago kind of coming in and adopting the 4 major platforms. Could you walk through exactly how that's going to work? What does that -- what do those contracts look like? Is it cross-selling that's already occurring? Just any more color there, I think, would be helpful.

Sure, Matt. Yes, we announced a few weeks ago the collaborations with 3 large pharma accounts. Those collaborations have been underway for a longer period of time. These are not new relationships beginning. They've been involved in our product road map development for some time, prior to our unveiling of that to the Investor Day meeting in January.

Each of the collaborations has a little bit different focus across the scientific engines, but the tougher collectively, all of our scientific engines, collaboration is 1 of working together to ensure that we've got good visibility to their needs, their workflows, internal to their organizations so that we can match the development of the AI capabilities to meet their needs and fit into their environments. It's good to have 2 or 3 of these relationships so that every company is unique as to how they're deploying their efforts on the AI side. So it allows us to develop our solutions in a way that can be tailored to different needs across the pharma companies.

So we're engaging with them on a product development basis. There has been some financial component to at least 1 of the relationships already. The financial relationship going forward with each of the parties is in discussion right now as to what the long-term takedown across the technology platform will be and what the financial circumstances will be around that.

But very important relationships for us. It's similar to what we've done through our lifetime as a company. Our scientific engines have been developed in a series of collaborations with our clients, with regulatory bodies. It's what's made them on target in terms of the needs of drug development and good to see that that's continuing through our AI developments today.

That's super helpful. And then maybe a follow-up question. You noted you're having some success with cross-selling already. And you also mentioned that during the quarter, you won some new logos. I'm just curious, are those new logos customers that maybe hadn't adopted your software services before? Are these competitive conversions, like you're winning business or taking share? Just any other color there would be helpful as well.

Yes, as new logos, the nonexisting customers that are taking down solutions for the first time. So they're new to us in terms of the competitive situation in terms of their selection of our product, we have to go through each and every one. And as Will described, in terms of the stability of our client base at certainly the large top 20 as well as the billion-dollar large pharma companies. New logo opportunities are going to be at the lower end of the environment or size of the clients. So those customers can be clients that are just initially starting up in internal capabilities for biosimulation. But in some cases, they may be movement from competitive scenarios.

And our next question comes from the line of Constantine Davides with Citizens.

Just a couple of questions here. First, I noticed a large sequential uptick in the commercial portion of the services backlog. And I just wanted to get a sense for maybe the proficiency pipeline in both software and services, size of deals that you're seeing and then any seasonality we should consider as we think about that business over the back half of the year?

Sure. The backlog is as a reminder, entirely service revenue based. So that's driven -- 75% of our service business is in the development space, the 25% is in the [ kinetic ] communications space, that revenue service revenue stream that came to us through the acquisition of proficiency. We started to see good pipeline activity and closure as we exited and saw a good delivery in terms of service revenue in the first quarter, and that's continued into the second quarter here. So that side of our business is slowing quite nicely right now.

Turning to the proficiency question. All the backwards leverage off of the service, Med Communications service business through the halfway point of the year is up nicely. They had a very good first quarter. Second quarter growth was not as high on a percentage basis but a good contribution and certainly cumulatively through the midpoint of the year, they're performing quite nicely.

On the Software side, that performance has gone as anticipated. To recall, beginning of the '25 post acquisition of Proficiency, their first couple of quarters, delivered good revenue, clinical trial step back in the back half of '25, certainly brought that run rate of software revenue contribution down. That's continued into the first half of the year. It stabilized at a good sort of starting point, if you will, and we look for reasonable growth on a go-forward basis for the efficiency from this point forward.

Great. And then just -- I appreciate the added color on some of the product update. I think you said 50% of your customers have 2 or more and some other metrics around that. I guess when you think about upsell, Shawn, where is the biggest opportunity? Is it getting single product customers to 2? Is it getting some of the 2 product customers to 3? Just how should we think about sort of progress in that metric over time and what's feasible?

Yes, it's an opportunity exists in all of those levels, taking a claim from 1 to 2 and 2 to 3 and beyond. We historically have seen good linkage between ADMET Predictor and GastroPlus often our 2 product customers might start with those 2. Obviously, the Monolix product that came to us through acquisition 1.5 years ago now. It is a nice complement in the PK/PD space for our clients to reach out and bring on board. And we've seen over the last number of years, very strong growth. And our revenue from the Monolix PK/PD platform.

So opportunity exists across all the machinations there in terms of which products. And I think the opportunity here is for that to accelerate driven by, a, our reorganization of our business development organization from sellers, if you will, at each of the point solutions independently, so to speak, or quoted by product to an environment in which we are geographically and then to count organized with quotas that our business development people carry that are quotas for our clients as opposed to go to quotas for specific products. I think that focus will help in terms of our cross-selling efforts.

Secondly, the development and delivery of our ecosystem, as we've described, it enhances the interoperability across the scientific engines tremendously. And as well, putting it into the cloud offers more opportunity for the smaller and medium-sized entities out there taking access. So that may be a new logo opportunity, but that new logo opportunity then rolls into cross-selling opportunities.

So from both an organizational and our sales approach perspective as well as our product road map, I think we are very focused on our cross-selling efforts going forward and the opportunity certainly is quite large there.

And our next question comes from the line of Max Smock with William Blair.

Wondering if you can discuss kind of where you're at right now halfway through the year relative to your expectations when you gave your initial guide at the end of last year? Just trying to get a sense for the level of conservatism that's embedded in the guide in light of your bullish macro commentary and the growing interest in NAMs. Just kind of looking at the numbers, revenue up 3% in 1H, but I think guidance imply was basically flat revenue in the second half off of what looks like easier comps. So if you can just maybe level set and help us understand the thought process behind not taking up to guide on the back of the really strong results we saw here in the second quarter?

Sure, Max. Not a surprising question. We -- each quarter, each opportunity we report, take a look at the guidance opportunity to adjust as warranted.

I'd say we're operating still in an environment that fragile might be a reasonable term to use. We see a lot of momentum, good spending in part of our clients. But we've got macro issues in terms of global politics as well as the more specific pharma-related scenarios that could raise their head. And so a cautious approach to this based upon our experience over the last 24 months drives us pretty strongly here.

That being said, yes, the momentum seems to be building on that delivered quite nicely in the first couple of quarters here. And certainly, it puts us moving into the back half of the year with greater confidence in terms of the guidance that we've got out there. But a relatively cautious approach in terms of let's not take a 1 or 2 quarter drive it into a trend just yet.

That's really helpful. And maybe just following up on that, particularly your comment around the fragile environment. I know it's probably hard to tell to some extent, but just wondering if you can bifurcate a little bit between the momentum you're seeing, whether how much of that is coming from just an overall recovery in the macro environment and biopharma spend more broadly versus how much of do you think -- how much of that recovery do you think is more a function of just increasing interest and growing adoption of NAM specifically?

I'd say broadly, I mean when we say NAMs, some people might jump and say, boy, is that the animal testing announcement, and I would say the momentum built here is certainly, that's on the horizon and -- but it's a horizon still a couple of years out. So in general, the support for biosimulation for in silico methodologies for AI is strong broadly from the regulatory perspective. I think our clients shifted in '25 to AI investment strategy, which was a partnership with other AI discovery companies. That shift is now causing them to take a look at internal implementation of AI. I think there's a lot of momentum building out of those endeavors, circling in the large pharma environment. So I think it's pretty broad based, but we operated in an industry that is somewhat fragile in the sense of external announcements and macro issues.

And our next question comes from the line of Jeff Garro with Stephens.

I want to ask a little bit more on cross-selling. You just kind of hit the macro versus micro part of that topic. But I was hoping you could dive a little bit further on evaluating your progress to reach multiple buyers within your clients' organizations getting kind of beyond the modeling department with these clients?

That's a good question, Jeff. Getting as much of your targeted budget as you can as an objective, but also looking for other pockets of budget within our clients has always been something that has been at the forefront here. Our efforts in terms of the proficiency acquisition opened up our reach into clinical trial operation projects. And so that is certainly presents more TAM at a macro level. And specifically, a network can do another part of our client organizations and new budget dollars.

I'd say the most predominant 1 again, is in the arena of the AI budget within our clients. And I think in that regard, the collaborations that we've announced, those collaborations have served well, our ability to leverage our very strong modeling and simulation relationships, leverage that into relationship build with the leaders within those collaborative clients, building that relationship and in fact, opportunity for the funding of our ecosystem and our AI functionality to be sourced outside the traditional modeling and simulation budget. And I think that bodes well. And when I step back and looked at it and we sort of estimate growth of modeling and simulation budgets you really need to open up your eyes and see that, that growth is incremental when you look at the AI budgets alongside the modeling and simulation budgets. And certainly, the AI spend those budgets in our clients is broad-based across the full continuum from patient recruitment to all kinds of investments of AI that a pharma company may be making. But a portion of that AI budget is it's in the biosimulation space. And so when we look for budget growth and modeling and simulation, they receive the traditional momentum picking up there, but the icing on the cake, a very thick icing, can be found in the AI budgets within large pharma as well.

Excellent. I appreciate all those comments. And probably a nice segue to the other question I wanted to ask on AI monetization. You said that we should have kind of low to minimal expectations for AI monetization this year. You mentioned that discussions are really still ongoing on the economic model with your labor collaborative partners that you recently announced, but I still want to ask just kind of a what timing is on when AI monetization starts to show in the P&L? How we should think about the pacing of those discussions? And maybe just more broadly, what we can look to as potential proof points that AI is generating incremental value outside from the likely aid that it will provide to renewal and retention efforts?

Yes, good question. That discussions are underway with those collaborators, which will just as they are proving the path forward on the technology development, they will prove the path forward in terms of monetization. And I'd say at this stage that the recognition of the value of the incremental technology is very visible and accepted on the part of our clients. And -- so the groundwork, if you will, in terms of value and monetization is there. The mechanics of how that rolls out is where the discussions lie right now. we certainly not anticipated in fiscal year '26, significant contribution from this arena at all in our guidance per se. And inevitably, is also tied to commercial delivery of this technology. And so I would look out to this being a contributor to fiscal year '27.

And our next question comes from the line of David Larsen with BTIG.

Are any of the sort of large AI companies, clients of yours, like Google DeepMind comes to mind or any of these other organizations?

Yes. I mean, yes, the historical drug discovery, primarily AI entities, the Recursions, the DeepMinds, relevant AIs of the world. Yes, generally, there's -- it's not 100% coverage, but a good percentage of those are licensing some footprint of our software, yes.

So you're generating revenue from the AI market already supporting these AI organizations. And I would imagine they need SLP because of your data dictionaries, because of the training of your scientists, because of all of the data that you -- and models that you've built over the past decades, that they can then search that, is that right?

Ultimately, they have evolved into drug development companies. They are all, for the most part, in discovery, some have reached early clinical status with a program or two. And so historically, to date, primarily the opportunity, our discovery platform is ADMET Predictor. So it's ADMET Predictor and its utility in terms of property prediction is what is the value to them now as they move into the clinic. The scientific engines of GastroPlus and Monolix and Thales become candidates for their use in the development -- clinical development cycle of their development of drugs.

And our next question comes from the line of Brendan Smith with TD Cowen.

Maybe first, just on some of the services metrics that you show, I think it's on Slide 13, if I'm not mistaken. I just want to make sure I'm understanding correctly. I guess how should we think about kind of the relative decline, albeit minimal in total projects year-over-year kind of versus the increase in backlog there specifically. Is that kind of a function more of the types of projects you're moving into, the customers themselves? Or I guess, are there any other dynamics at play there?

Yes. A number of projects can evolve over time, we can have projects that are consuming a good percentage of our staff in a particular quarter, and other quarters where we're working on smaller or medium-sized projects and whatnot. So that can kind of ebb and flow quite a bit. The backlog growth is nice getting back to prior year levels here in terms of our total backlog, and it's good measurement in terms of our pipeline on service as it's closing ahead of actual performance of those projects.

Okay. Got it. Helpful. And then maybe a second one, just looking at kind of Slide 9, I think you -- where you had the comparison of as Q2 versus trailing 12 months and just looking at the breakdown of software solutions as a percent of software revs. I mean it looks pretty stable over the last year. But I guess I'm just wondering if you expect any meaningful shift in that segment breakdown over the next 12 months? Kind of as some of these new rollouts and broader sector interest starts to evolve? And I guess if not, with maybe just underpinning some of those assumptions, presumably, I guess, based on your recent conversations.

The assumption under -- Brendan, I'm sorry, but just to clarify the assumption in terms of software and service mix, is that what you're referring to?

Actually, just within the software. I guess what I'm really asking is it looks like the kind of relative breakdown of which software solutions you have over the last year is pretty consistent with what we saw in Q2. I'm just curious if you're expecting any shift in that just between kind of discovery, development and clinical ops over the next year, just kind of given the push to get new logos signed and kind of expanding within kind of the sector interest into the space?

Yes. Okay. I understand now. Clearly, our development solutions of Monolix and GastroPlus are the key drivers in terms of our software revenue with ADMET Predictor contributed the proficiency training platform providing contribution, but the smallest piece of the pie there.

The cross-selling opportunities would support both somewhat in the ADMET Predictor and GastroPlus space, but significantly in terms of Monolix, seeing more of the large $1 billion plus pharma plus top 20 clients take on Monolix as their preferred platform in the PK/PD space. That slice could grow. It's growing faster in terms of percentage growth than the other solutions for the last couple of 3 years. So seeing grow would not surprise me.

New logos, often the starting point there is going to be the GastroPlus or Monolix if it's a development company that's a pre-product biotech company. If they're in discovery and probably an ADMET Predictor.

So I think we've seen some stability in the pie chart there contribution. I think that stability will remain pretty much the same with perhaps Monolix taking a little bit of incremental piece of that pie.

And with that, there are no further questions at this time. I'd like to turn the call back over to Shawn O'Connor any closing remarks.

Very good. Okay. Over the next few months, we've got a number of investor conferences, including the RBC Global Healthcare Conference, Craig-Hallum Conference, TD [ Life Science ] Tools and Diagnostic Revolution and the Citizens Medical Devices and Health Care Services Forum. Hopefully we can see many of you there. Otherwise, I appreciate the opportunity to deliver this quarter's results to you and look forward to speaking again next quarter. Take care, everyone.

And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may now disconnect your lines, and have a wonderful day.

Good afternoon or evening as the case may be, and welcome to Simulation Plus' Investor Day. I'd like to thank each of you for joining us, our shareholders, analysts, partners and members of the broader life sciences community. Today is an opportunity to step back from the day-to-day and evaluate where we are, where the industry is headed and where we are positioning Simulations Plus for the future.

Let me briefly outline the agenda for our session. We'll begin with an overview of our vision, mission and values, followed by company highlights and a look at our history of growth as we approach our 30th anniversary. We'll then move through the major components of our business, the industry environment and the challenges and opportunities shaping drug development, our software product strategy and fiscal year '26 roadmap, our scientific services organization, and we'll conclude with a Q&A session.

This is an important moment for our industry. Biopharma is undergoing significant transformation, the adoption of AI, the shift towards cloud-native scientific computation, the move away from animal testing and the growing reliance on model-informed drug development. These changes are accelerating, and they are redefining the means to develop safe, effective therapies efficiently. It is also a defining moment for Simulations Plus. We are shaping our technology, our services and our operating model to meet the inflection point, strengthening our leadership while building the integrated ecosystem our clients need for future innovation. Today, we'll take a deeper dive into that ecosystem, our capabilities, our roadmap and the exciting developments ahead in fiscal year 2026 and beyond.

Our vision at Simulations Plus is to improve quality of life through innovative solutions. Our mission is to create value for our clients by accelerating the discovery, development and commercialization of pharmaceuticals and other products through innovative science-based software and consulting solutions. Our values, which include innovation, respect, integrity, commitment and wellness, shape how we operate, how we collaborate and how we serve our clients and communities. These principles matter because they reinforce what's ultimately at stake. Every model we build, every workflow we automate and every service we deliver contributes to the decisions scientists make about therapies that reach patients. They give our clients confidence, they anchor our employees in meaningful work, and they help investors understand the long-term value creation potential that drives our growth strategy.

As we define our brand more clearly, we've adopted a statement that captures both our scientific rigor and our role as a trusted partner. Simulations Plus enables innovators across the drug life cycle to explore confidently, distilling scientific complexity into data-driven success. This is who we are. It's also who we are becoming, a company that illuminates complexity with clarity and empowers discovery with confidence.

Let me speak briefly about what sets Simulations Plus apart today. Our leadership is rooted in the depth of our scientific engines, GastroPlus, MonolixSuite, ADMET Predictor, DILIsym and our QSP modeling tool, Thales, which have earned trust across industry and regulatory agencies for nearly 3 decades. Clients rely on us not only for our software, but also for the expertise of our services organization and the strength of our long-standing regulatory relationships. We are a company defined by both scientific excellence and technological innovation. This combination is rare. It is our differentiator, and it is becoming even more powerful as we integrate AI, cloud compute and workflow orchestration into a unified ecosystem.

As we look ahead, it's meaningful to reflect on how far we've come. In 2026, Simulations Plus will celebrate its 30th anniversary, a milestone built through both organic innovation and strategic acquisitions. This combination of innovation and acquisition has enabled us to expand across the entire drug development life cycle from discovery to development through clinical operations and into commercialization. And as we look forward, we are continuing to evolve, shifting from point solutions to an integrated cloud-enabled ecosystem that supports our clients' expanding needs.

We operate in a large and steadily growing market with accelerating adoption of biosimulation, AI augmented modeling and digital clinical operations. Regulatory agencies continue to champion model-informed drug development and new alternative methodologies. Clinical trials are becoming more complex, placing greater pressure on precision, predictability and operational efficiency. And in a competitive therapeutic landscape, commercialization strategies increasingly depend on data-driven insights.

Our total addressable market or TAM is large at approximately $12.5 billion, $4 billion of which is traditional biosimulation and the other $8.5 billion related to clinical trial training and medical communications, which we are now addressing through our acquisition of Pro-ficiency 1.5 years ago. All of these forces play to our strengths and expand our opportunity.

Before we dive into the sessions, I want to introduce the members of our executive leadership team who will be presenting today. John DiBella, Chief Revenue Officer, a 22-year veteran of Simulations Plus, who has contributed to everything from early GastroPlus development to leading our global sales and marketing organization. Dr. Jonathan Chauvin, Co-Chief Technology and Product Officer, with 19 years of product development experience. Jonathan joined SLP through the Lixoft acquisition 6 years ago. Erik Guffrey, Co-Chief Technology and Product Officer, with 17 years of software and product leadership, he joined through the Pro-ficiency acquisition in 2024. And Jill Fiedler-Kelly, President of Services Solutions, a founder of Cognigen more than 30 years ago and a cornerstone of our scientific services practice since the 2014 acquisition. I'm proud of our leadership team, each of whom has guided the final steps of our reorganization into a client-focused, functionally integrated operating model, strengthening our ability to deliver solutions to our clients consistently, predictably and with greater cross-functional alignment. With that, I'll now turn the floor over to John, who will discuss the industry environment and customer priorities.

Thank you, Shawn, and hello, everyone. I'll start with the environment in which our clients are currently operating. The pace and scale of change across drug development is reshaping what the industry needs, and it directly influences our strategy.

In the early years of Simulations Plus, modeling was used in a limited way, what we think of as the model supported era. Teams used simulations reactively to justify or interpret experimental or study data. The model supported what was seen, but did not drive the future design, helpful but not central to the decision-making process. Then starting in the late 2010s, we saw the shift to the model-based era, where modeling was used proactively to start influencing drug development plans, support regulatory submissions and help teams make more consistent decisions. Experiments and studies were then designed around the model's predictions, but still on a project-by-project basis.

Fast forward to today, where the environment demands something much more integrated. We've entered the model-informed era. Modeling and simulation are no longer supplemental. They are foundational. They shape program strategy, derisk key portfolio decisions and increasingly serve as the quantitative backbone required by both regulators and internal governance. And the industry is feeling pressure from all sides, accelerating this transition.

The first source of pressure is economic. It now costs more than ever to bring a new therapy to market and development time lines continue to lengthen from early discovery through late-stage execution and launch. Every client, whether a large pharma or emerging biotech, is being forced to rethink how they increase efficiency and reduce uncertainty. They simply cannot afford empirical-only development or siloed functions. They need trusted predictive engines and fast iteration cycles, fully integrated workflows and novel learning approaches to streamline clinical operations and decision-ready insights that extend through regulatory approval and commercialization.

The second source of pressure is scientific complexity. Today's pipelines include RNA therapeutics, cell and gene therapies, degraders, antibody drug conjugates, radiotherapies, targeted biologics, modalities that require mechanistic understanding and multiscale modeling. Empirical trial and error approaches break down when biology becomes nonlinear or patient variability matters. Clients need technology that helps them anticipate, simulate and explain outcomes long before entering the clinic.

And the third pressure point is technological expectation. Our clients now expect modern digital infrastructure, cloud access, collaborative environments, integrated data layers, automation and AI assistance. They expect modeling ecosystems, not isolated tools. They want interoperability across biosimulation disciplines and learning systems. They want modeling embedded directly into their SOPs, not bolted on after the fact.

These pressures are reinforced very clearly by regulatory momentum. Regulatory agencies around the world have published guidance frameworks and position papers calling for broader use of model-informed drug development, nonanimal methodologies and quantitative justification. Regulators want more modeling earlier in programs with more transparency and reproducibility. And as AI becomes part of the development process, regulators are signaling that AI must be paired with mechanistic models, explainability and scientific grounding, not simply automation or speed. In short, the external environment is no longer nudging the industry towards modeling. It is pulling it.

And that leads to one of the most important trends that we're seeing, companies are actively redesigning and reimagining their processes around modeling and simulation. Large pharma clients are rewriting standard operating procedures to require modeling from discovery through pivotal studies. Emerging biotechs are building cloud-native model-informed workflows from day 1. Teams want standardization, scalability and reproducibility across all programs. And they want to augment their internal capabilities with partners like Simulations Plus who can provide science, technology and implementation support.

And this is where our commercial orientation has evolved. We're not simply selling licenses. We're partnering with organizations to help them transform how they work. Through a unified go-to-market strategy, we're helping them modernize workflows, integrate new modeling modalities, adopt AI thoughtfully and responsibly and help clients experience Simulations Plus as a single strategic partner spanning discovery, development, clinical operations and commercialization.

The integration of our software and services creates new pathways for expansion within existing accounts and accelerates adoption across new segments. Sales will harness this alignment to expand account depth by positioning Simulations Plus as an end-to-end partner and ensuring every major client is engaged with at least 2 or more solutions across the product life cycle, to accelerate cross-selling and solution selling by linking model-informed drug development with simulation-based training and commercial offerings into comprehensive value propositions that address clients' most pressing portfolio needs and to deliver customer experience excellence by operationalizing our date the customer strategy to ensure personalized engagement, responsiveness and measurable improvements. Each sale within the ecosystem drives incremental value. Software adoption enables service engagement. Service delivery accelerates data generation and data insights reinforce product stickiness and new opportunity creation. This flywheel effect is expected to result in sustained client account growth, higher margins and a compounding base of recurring revenue.

So my takeaway is this. Our role is shifting from tool provider to ecosystem partner. We're helping clients build integrated centers of excellence, connect siloed functions and adopt and scale AI-powered MIDD across global organizations. And that shift is perfectly aligned with where the industry is going. This sets the stage for Jonathan and Erik to walk you through how our platform strategy addresses these needs directly.

Thank you, John. For nearly 30 years, Simulations Plus has shaped the scientific backbone of model-informed drug development. Our modeling and simulations products, GastroPlus, MonolixSuite, ADMET Predictor, DILIsym and our QSP platforms are used across the industry and inside regulatory agencies around the world. They guide choices about dosing, safety, exposure and patient risk.

With Pro-ficiency, the same scientific foundation now extends into clinical operations where protocol fidelity, timing and human factors influence trial outcomes. And we're extending the same foundation into commercialization where exposure, dose justification and safety guide labeling and market access. We are no longer a discovery and biosimulation company. We now support discovery, development, clinical operation and commercialization, all grounded in the same scientific core. They are deterministic, they are reproducible. They are grounded in validated scientific principles.

This matters because the industry is quickly changing. Teams are distributed across partners and geographies. Cloud compute is expanding what scientists can simulate. AI is generating vast numbers of hypotheses more than any scientist can process. This leads to the question, what can I trust? In our industry, companies will answer that question by addressing the following: what is grounded in biology, what is grounded in data, what is traceable, what is reproducible, what supports the leap from simulations to clinical execution.

Our position is clear. AI can accelerate the work, but validated science and causes. Otherwise, AI is a guesswork. Cloud technologies can expand access, but scientific engines define its value. Training improve execution, but only when grounded in the same logic. Otherwise, cloud is simply distribution. This integration, scientific engines plus grounding intelligence plus operational fidelity is what sets us apart from our competitors. We are not just building better tools. We are building an integrity and cohesive system that connects the entire drug life science from early discovery through commercialization.

Historically, clients came to us for individual tools, a PBPK model, a population analysis and ADMET Predictor or clinical readiness training, reducing protocol deviation. Each provided value. But today, clients needs more than just isolated results. They need cohesion. They are asking for integrated workflows, automation that reduces manual effort, reproducibility across teams, AI that operates inside validated scientific boundaries and a consistent way to connect modeling with operational decisions.

This is not an incremental evolution. This is a structural shift and once in a generation opportunity. AI, cloud and validated science are converging and the companies that act now will shape the next decade of model drug -- model-informed drug development. That's why we've evolved, everything from our architecture and roadmap to our R&D investments and our service strategy. It is what it is driving us to move from individual products to a unified AI orchestrated ecosystem. In this ecosystem, our engines remain authoritative. Our architectures make them interoperable. Our AI is grounded in science. Our cloud layer is optional, additive and secure and our operational training aligns with the same underlying logic.

Competitively, this is where we stand apart. Some competitors lead with AI but lack scientific validation underneath, other lead with cloud platform but rely on fragmented modeling capabilities. And all others have strong scientific engine, but no unifying architecture, no integrated workflow layer and no connections to clinical execution. Simulations Plus is uniquely positioned to deliver unifying scientific modeling, AI-assisted reasoning, cloud scale compute and clinical operational training inside a single validated ecosystem. Erik will now take you through how the architecture works and what it unlocks.

Thanks, Jonathan. Everything we're building rests on a simple principle. Our scientific engines remain authoritative. The architecture around them makes them far more powerful. To make that possible, we've organized our architecture into four connected layers. Together, they turn individual tools into a coherent system. At the base are validated modeling engines you may know. They remain the mathematical and biological foundation of everything we do. And critically, our scientific R&D teams provide the fuel and refinement to keep every scientific engine advancing. New methods, new models, new validation, new regulatory alignment. They are deterministic, they are regulatory aligned, and they are continuously progressing.

Above the engines is our powerful composition layer we call Vienna. Vienna provides a place where all our engines connect. It standardizes how data is prepared, transformed and parameterized. It enables consistent workflows across products, and it makes our engines interoperable without rewriting them. Above the composition layer sits our grounded intelligence layer. This introduces AI copilots that operate inside validated scientific constraints. They help with data assessment, parameter recommendations, scenario generation, model interpretation and draft reporting. Importantly, they don't replace scientific judgment. Rather, they amplify it by capturing repeatable patterns and making them readily accessible. Every recommendation these copilots make is tied to the underlying scientific structure. By keeping computation in the loop, the AI-driven work is explainable, traceable and aligned with regulatory expectations for reproducibility.

Above grounded intelligence, our orchestration layer automates everything into end-to-end workflows. It can automate multistep scientific and operational processes, capture provenance and version history, enforce auditability and ensures results can be reproduced, reviewed and scaled across teams. It turns steps into repeatable enterprise-ready workflows. Earlier this year, we launched S+ Cloud, a scaled, secure compliant platform built on technology gained through our Pro-ficiency acquisition and matured for scientific workflows. It provides unified identity and access, secure compliant infrastructure, workspace-based compute, integrated telemetry and on-demand access to engines. It is important to note that S+ Cloud is not a replacement strategy. It is an augmentation strategy. It does not replace local environments. It mirrors them. S+ Cloud adds scale, collaboration and governance, but the architecture itself remains the same, both in desktop and in cloud. This is how we modernize without disrupting the work of our clients rely on today.

Across all layers, the architecture is open and extensible. It integrates with external data sources, models and systems because our clients operate in diverse scientific environments. It meets clients where they work rather than forcing a single deployment model. When you connect engines, composition, intelligence, orchestration and cloud into a single structure, clients gain capabilities that simply weren't possible before. This unlocks first, faster cycles. Processes that once took weeks can be reduced to hours. Reusable pipelines, hybrid compute and AI assistants remove bottlenecks. This allows teams to spend more time interpreting results and less time assembling them. Second, it provides traceability and reproducibility. Every input parameter and model version is captured. This creates a transparent record that supports internal review, external collaboration and regulatory interactions.

Third, with cloud and orchestration, we can truly provide team-based modeling. Teams can share workflows, reuse validated patterns and collaborate across geographies with consistent processes. This reduces variability and strengthens institutional knowledge. Fourth, we also gain compounded connected value. Each product becomes more valuable when connected through a shared architecture. A modeling workflow can feed an operational one. AI copilots can support both, and cloud execution can accelerate either. Fifth, it accommodates trustworthy AI. With this architecture, our AI operates inside validated scientific boundaries and is transparent and traceable. This accelerates decisions without sacrificing control. Our AI stays inside the boundaries that matter. Sixth, it expands our life cycle reach. The same architecture supports early discovery, translational modeling, clinical readiness and operational execution using one consistent framework.

Clients are already experiencing parts of this ecosystem today, but its full value unfolds over three horizons. Over the next 12 months, we're completing the structural backbone. In practice, this means that more engines are exposed through unified interfaces. Declarative pipelines become standard, AI copilots embedded in real workflows, S+ Cloud identity and workspace infrastructure maturing and early cross-product workflows emerging. This is where clients begin to feel work becoming faster, clearer and more consistent.

In the unification period of the following 12 to 36 months, modeling, intelligence and operational workflows are expected to begin speaking the same architectural language. This will include a maturation of cross-engine templates, convergence of scientific and operational workflows. Our AI expands across modeling and readiness use cases and teams adopt multiproduct workflows instead of tool-by-tool usage. In short, our workflows begin to feel seamless across all phases.

On a long-term horizon, it will become a cohesive ecosystem where discovery, development and clinical operations flow through a continuous feedback loop. AI supports teams across disciplines, insights move naturally from early development into later decision-making and cloud scale compute supports increasingly complex modeling demands. It becomes an environment where the value of the ecosystem reinforces itself over time. Our competitive advantage becomes self-reinforcing, not just better software, but the operating system for model-informed drug development, clinical readiness and life cycle intelligence. I'll now turn the floor back over to Jonathan to explain what opportunities this unlocks for our business.

Thanks, Erik. What you've seen so far is how we are building an ecosystem that accelerates science and operations. Now let's talk about what that means for the business because the same architecture that accelerates scientific and operational works also strengthens our business. Let me highlight four areas. The first one, new revenue opportunities. Our unified ecosystem supports workflow-based products, cross-product bundles, some premium AI copilots, cloud-based collaboration features, tokenized usage models, clinical operations and commercialization modules, portfolio level workflow packages. These are a natural extension of the platform itself, not entirely new product lines, but new ways of accessing value.

The second one is higher customer lifetime value. When products connect, we expect higher adoption within each account, broader enterprise expansion, deeper integration into customer workflows, longer, more resilient customer relationships. Clients stay longer, use more and expand faster because the systems makes their work better. The third one is pricing and packaging evolution. Our annual licensing model remains the foundation of our business. What changes is where value is created as the ecosystem matures and how that value becomes accessible. As we unify engines, compositions, intelligence and orchestration into a single architecture, we expect to unlock new monetization layers above the core scientific engines without modifying the underlying licensing constraints.

Three principles guide our pricing evolution. New value sits above the engines, not inside them. The deterministic engines remain licensed as they are today. New monetization comes from the layers that makes these engines more accessible, more connected and more productive. Composition becomes a licensable access surface. As we standardize our clients interact with our scientific engines, this composition layer becomes a product of its own. Clients can license the AI connectivity of our engine and cross-engine integrations that accelerate their work. Grounded intelligence introduces optional premium layers AI copilots, parameter intelligence, scenario reasoning, model interpretation, draft reporting, all operate on top of validated scientific structures. These copilots will follow a licensing-based model aligned with the user's role and scientific domains with usage transparency and full auditability.

Cloud capabilities expand the commercial model. S+ Cloud allows us to introduce complementary models that sit alongside annual licenses. Tokenized usage models for selected cloud-based services, usage-based compute for large-scale multi-engine simulations workload and much more. These options allow clients to scale access according to program needs while keeping their core product licensing stable and predictable. The fourth one is strengthening our execution engine. Three internal pillars works together, product where is where engines, AI, cloud and workflow comes together; R&D advances the science, contributing new methods, models and validation and defining the science standard our ecosystem must meet. Services accelerate delivery and feed insight back into the ecosystem. This creates a flywheel of scientific rigor, product innovation and real-world validation.

Success in this space comes down to five fundamentals, and we lean in all of them. First of all, a trusted scientific core. Our engines are widely used and scientifically validated, including use within more than a dozen global regulatory agencies. No one else integrates scientific engines, operational training and life cycle workflows the way we do. The second one is an architecture that amplifies the science. We don't dilute the science. We build around it. We have interoperable workflows, a grounded AI, optional cloud scale, integrated operational systems. These structures amplifies our scientific strengths.

Third, solving the workflow gap. Clients need a coherent way to connect modeling, data and execution. Our architecture gives them a consistent, reusable, auditable way to do exactly that. The fourth one is the grounded intelligence. Our AI works inside of validated scientific frames that keeps it explainable, reproducible and trustworthy for scientific and operational use. Finally, the fifth one is the scalable ecosystem design because each product sits within the same architecture or language, every new capability strengthen the whole. It's a long-term advantage built on compounding value, not only a single tool. That concludes our section on our product strategy and roadmap. I'd like to hand the floor over to Jill, who will discuss our scientific services capabilities. Jill?

Thank you, Jonathan. Good afternoon, good evening, good morning. I'm Jill Fiedler-Kelly, President of Services Solutions at Simulations Plus. Now that you've heard our product vision, I want to share how our services complement that as part of our overall company strategy. Importantly, our services teams are power users of the Simulations Plus tools and platform, applying our software daily in real-world development programs, stress testing workflows at scale and translating hands-on client experience into actionable feedback that continuously strengthens our product ecosystem.

Our scientific consulting teams across PBPK, QSP, PK/PD and clinical pharmacology help clients navigate some of the most complex decisions in drug development with clarity and confidence. While our clients vary from emerging biotechs to the world's largest pharmaceutical companies, their needs are remarkably consistent. They want to reduce uncertainty, avoid unnecessary cost and delay and make decisions they can stand behind. Our role is to provide the insight and the scientific judgment that allows them to move forward with confidence. At the same time, every engagement serves as a validation loop for our technology. Client use cases, regulatory interactions and edge conditions identified and consulting projects directly inform software enhancements, workflow optimization and roadmap prioritization across the Simulations Plus platform.

Across every discipline, our approach is consistent. We interpret complex biology, accelerate critical workflows and help teams advance their programs with a higher degree of confidence and a lower degree of risk. This work is deeply rooted in scientific rigor, transparency and integrity, values that are core to who we are as a company. Our PBPK solutions team develops and applies mechanistic models that integrate in silico, in vitro and in vivo data to predict human pharmacokinetics and drug product performance. These approaches are broadly recognized by global health authorities and have become an essential part of modern development programs.

Among other high-impact applications of PBPK modeling are first-in-human dose selection and prediction of drug-drug interactions. Using validated workflows, our PBPK team helps clients reduce development costs, compress time lines and avoid unnecessary human and animal studies. And after collaborating with regulators, industry partners and academic researchers and supporting hundreds of approved products, our experience gives sponsors the assurance that their modeling work can withstand regulatory scrutiny.

Our QSP solutions team builds quantitative systems pharmacology and toxicology models that represent disease biology, drug mechanisms and patient variability across biological scales. These models allow companies to anticipate outcomes long before clinical data are available. Some of the high-impact applications of QSP and QST modeling include predicting efficacy and safety potential a priority based on mechanisms and representations of biological pathways, cellular interactions and feedback processes and increasing the likelihood of clinical trial success through optimized study design and dose selection. A distinguishing strength of our QSP/QST practice is the emphasis on both efficacy and safety. By examining both sides of the benefit risk equation mechanistically, we help sponsors refine development strategies that are more likely to succeed clinically and translate effectively to patients.

Our clinical pharmacology and pharmacometric solutions team supports clients across the full quantitative decision space from preclinical PK to late-stage exposure response analysis. Leveraging MonolixSuite and advanced pharmacometric methods, we provide population PK/PD and exposure response analysis, noncompartmental and concentration QT assessments, pediatric extrapolation and model-based meta analysis, data curation, regulatory documentation and embedded team support. These analyses give sponsors the evidence and clarity required to make faster, better informed development decisions. And as development programs move through the regulatory submission process, findings from these analyses form the backbone of understanding regarding determinants of efficacy and safety to bolster solid dose justification arguments.

Every consulting engagement operates within a robust quality management framework, validated software, QC code and verified scientific conclusions. This ensures our clients can rely on our work in high-stakes regulatory settings. We also have former U.S. FDA experts on our team who help sponsors anticipate regulatory expectations and understand where modeling will have the greatest impact. Their guidance helps reduce the likelihood of additional information requests, delays that can be costly for any development program. Equally important, our scientists translate complex modeling outputs into clear, actionable recommendations. In a world where teams are often dispersed across functions and geographies, this clarity accelerates alignment and decision-making.

Achieving regulatory approval is not the finish line. Success increasingly depends on how clearly science is communicated to clinicians, payers and other stakeholders. Our commercialization solutions team uses Panorama and AI-enabled workflows to transform scientific and model-based insights into education, strategic content and competitive intelligence assets that support uptake and understanding across the product life cycle. These services connect early development, medical affairs and commercial teams with the same clarity and consistency that guide R&D decisions. As the use of biosimulation and associated quantitative analysis methods has become an integral element in the fabric of modern drug development programs, understanding of the strengths and advantages of alternative methods has evolved as well. With this understanding has come an awareness of the complementarity of the various model-based methods.

A unique strength of the Simulations Plus consulting practice is the breadth of our expertise with different modeling approaches. It is this foundation that allows us to offer multidisciplinary support using multiple approaches together, not in isolation. This key differentiator leads to more robust insights for decision-making.

I'll now provide a few case studies to illustrate how this multidisciplinary approach translates directly into faster time lines, lower cost and reduce development risk for our clients. Case study 1, QSP and CPP synergy for first-in-human in Phase II optimization. In this case study, a small biopharmaceutical company was preparing for their first-in-human study of a novel drug, where late surprises could have resulted in costly delays or program failure. We developed a bespoke QSP model that predicted the efficacy of their novel compound, but also identified immunogenicity, the drug's ability to trigger an immune response as a major potential driver of variability in drug behavior before the first patient was ever dosed.

By revealing this risk months earlier than traditional approaches would have, the client avoided costly protocol amendments and accelerated their first-in-human study design by an estimated 3 to 6 months, saving several million dollars in potential rework and delays. Equally as important, our predictions of patient response to therapy revealed the potential for a far greater efficacy advantage for this compound over current treatments, allowing for more confidence around prioritization of assets and acceleration of program level decisions. As data were being collected during the first-in-human trial, we integrated the observed data to refine the QSP model and ran advanced pharmacometric analysis to quantify how intrinsic patient factors and antidrug antibodies contributed to the variable drug behavior. With these insights, we simulated Phase II dosing paradigms and optimized the Phase II plan without additional exploratory studies, effectively reducing the time to a confident Phase II design by roughly 1/3 and improving the client's probability of technical success.

The combined expertise of our QSP and CPP teams provided the sponsor with a unified mechanistic understanding of risk, reduced the need for additional clinical experiments, delivered a more predictable and cost-efficient path forward and ultimately, improved patient safety in Phase II. In our second case study, it's population PK and PBPK and QSP strategy, driving faster formulation and regulatory success. In this instance, for another emerging biopharmaceutical company in the metabolic disease space, our clinical pharmacology and pharmacometrics team provided strategic support across their entire program, resulting in an efficient route to proof of concept. After defining the clinical pharmacology development plan, we performed population PK analyses and identified an opportunity to optimize the formulation strategy through PBPK modeling with GastroPlus. This insight allowed the sponsor to select the final formulation without running additional costly clinical formulation bridging studies with potential associated savings of more than $1 million to $2 million and shortening the development time line by 4 to 6 months.

Our population PK findings also fed directly into regulatory documentation. By proactively addressing drug-drug interaction concerns, we helped streamline the client's regulatory interactions and reduce the likelihood of requests for additional analyses or studies, a common cause of multi-month delays. Additionally, our analyses derisked the safety profile and guided dose selection optimization for later-stage clinical trials, helping to reduce the number of study arms, thereby lowering costs and providing earlier access to relevant informative data. Our medical and scientific experts also engage targeted key opinion leaders to pressure test key assumptions, helping the sponsor make confident decisions earlier in development.

The next stage, integration of all clinical and mechanistic data into QSP models will further shorten the pathway to proof of concept by allowing simulation of efficacy boundaries and responder phenotypes before running expensive clinical studies. This end-to-end approach provides the sponsor with a higher confidence, lower cost and faster path through early development.

One of the most meaningful shifts in our industry is the FDA's roadmap to reduce reliance on animal testing through new approach methodologies or NAMs. Recent guidance from FDA provides further direction for streamlining nonclinical safety assessments for monospecific antibodies based on an integrated knowledge-based risk assessment. This direction aligns closely with the strengths of Simulations Plus. Our services teams are actively implementing NAM-aligned strategies using Simulations Plus software today, providing mechanistic, scalable and regulatory acceptable alternatives to traditional in vivo studies and allowing us to refine workflows, validate regulatory acceptance and rapidly incorporate emerging data types and methodologies into our platforms, well ahead of broader market adoption. Our NAM-aligned platform capabilities include GastroPlus, which supports virtual species translation, dose optimization and first-in-human predictions, applications that can reduce and in some cases, replace nonclinical animal studies in early development; MonolixSuite, which enables model-based translation from sparse preclinical data into human predictions and supports efficient in silico study design and our BIOLOGXsym platform is well positioned to incorporate emerging experimental approaches such as organ-on-a-chip data, helping evaluate and improve liver safety for large molecules, including monoclonal antibodies.

Our NAM-aligned scientific services consist of our PBPK and QSP/QST teams who develop mechanistic validated models that integrate standard in vitro and in silico data to predict human PK, PD and safety with confidence. And our regulatory experts who help sponsors interpret evolving FDA expectations and determine how NAMs can be incorporated thoughtfully into development and submission strategies. As NAM adoption continues to grow, the combination of our platform technology, our depth of scientific expertise and our regulatory insight positions Simulations Plus as a trusted partner in this next chapter of model-informed development, one where high-quality predictions and mechanistic understanding play an increasingly central role.

By continuously translating real-world client experience into ecosystem enhancements, our services organization validates the relevance, durability and competitive advantage of the Simulations Plus environment, creating a virtuous cycle of innovation, adoption and growth. Simulations Plus services are not peripheral. They are a strategic asset that ensures clients navigate development with confidence, develop greater skill with and affinity for our platforms and bring better medicines to patients faster and more efficiently. I'll now turn the presentation back to Shawn.

As we come to the end of today's program, I wanted to recap the themes that framed our discussion this morning and connect them to the long-term story we've unfolded together. At the start, we reviewed the foundations of Simulations Plus, our mission, our values and nearly 30 years of scientific innovation that have helped define the field of model-informed drug development. We highlighted our leadership position, the strength of our scientific engines, our trusted relationships with global regulators and the evolution that has brought us from a single PBPK tool in 1998 to a company that now touches discovery, development, clinical operations and commercialization. Those highlights weren't meant as a retrospective, they were meant as a lens, a way to see clearly who we are so we could then look confidently at where we're going. And over the course of today, you've seen that journey arc in full.

You heard from John about an industry at an inflection point, one where the cost, time and complexity of drug development demand new approaches, where regulators are pushing hard toward MIDD and NAM. And where AI-generated insights require a robust scientific backbone. The stakes are rising and the market is moving toward integrated, transparent, cloud-ready workflows at a pace that is accelerating. Jonathan and Erik then revealed how we're meeting this moment, not just with a collection of tools, but with a modern orchestrated platform that can turn opportunity into impact. You saw how our scientific engines form a deep and durable moat, how the S+ Cloud provides the secure and compliant backbone, how orchestrator brings coherence to workflows that once lived in silos and how AI copilots grounded in validated science are beginning to reimagine what scientific productivity looks like. Together, these pieces form the ecosystem shift we described this morning. from stand-alone tools to unified modeling environment, from local computation to cloud execution at scale, from manual modeling steps to AI-assisted workflows, from isolated analysis to traceable, reproducible pipelines, from point licensing to enterprise pathways built for the future.

And Jill showed how our services organization complements and amplifies that platform. They are not an add-on. They are interpreters, validators and accelerators of client success. Their multidisciplinary expertise turns our technology into outcomes and helps derisk adoption for organizations that depend on accuracy, transparency and regulatory trust.

That brings me to my final point I'd like to leave with you. Simulations Plus didn't just participate in the first 30 years of model-informed drug development. We helped build the scientific foundations of it. Now the industry is entering its platform phase. And because our ecosystem is rooted in validated science, grounded in regulatory credibility and architected for AI and cloud scale computation, we are prepared to define what comes next. This is our moment of convergence, science plus cloud plus AI plus services becomes one coherent platform, a platform designed not just to accelerate workflows, but to create confidence, confidence for scientists, confidence for regulatory partners and confidence for the investors who are backing a durable future-ready business.

Thank you for spending this time with us today. Thank you for your partnership and your support. We look forward to continuing this journey with you as we enter the next era of model-informed drug development, integrated AI-enabled and cloud-ready. Let's move now to Q&A.

Hi, everyone. Thank you for joining today. Our first question comes from David Larsen from BTIG. How large is Pro-ficiency software and services business? And how is growth in this area?

Dave, thanks for the question. Our Pro-ficiency acquisition brought us two revenue streams. First, the Pro-ficiency training module platform that is sold into clinical operations. And secondly, the Med Communications service-based business, which supports the commercialization process. Both of those businesses, as indicated upon acquisition, like our biosimulation solutions saw a step down in revenue in the back half of this past year, fiscal year '25 for us. Both are moving forward, sets that inflection point quite well, both on the software side, the training module platform size in terms of building up its momentum back in contribution of revenue as well as the service business, which overperformed in the first quarter, contributing to our service accomplishments. TAM for both of those businesses, as we referred to, are quite large. The acquisition of Pro-ficiency doubled our TAM opportunity going forward and are both positioned well to contribute growth into the future.

The next question comes from Matt Hewitt of Craig-Hallum. How does the introduction of the FDA's NAMs guidance change the amount of R&D dollars being allocated towards simulation and modeling? And are your customers shifting resources?

Matt, I keep looking under the covers in terms of allocation of budgets. We certainly come into our fiscal year '26 and the new calendar year of '26 with some budget momentum in the industry. We saw that contribute to our first quarter results. Certainly, positive indications out of the JPM conference that budget uptick in modeling and simulation budgets, AI budgets universally are being funded. How much is being driven specifically by the NAM opportunity, I can't speak to, but it certainly is something that those clients that are in that space, therapeutic space that's being focused on are looking at in terms of what can get us to that way of evidence threshold to reduce animal testing. The NAM announcement is globally yet another indicator. John DiBella spoke to the pulling, not pushing of the regulatory world in terms of the expanding use of modeling and simulation. The NAMs announcement is a good example of that, and that which has spurred growth in modeling and simulation over our history and no doubt we will continue to push it into the future.

The next question is from Brendan Smith of TD Securities. Regarding FDA's NAMs roadmap, what has been your client experience thus far in terms of demand and new customer inbounds? To what extent do you expect this to drive upside to current revenue estimates? And how long do you expect it will take to see this upside? In other words, where are we in the hockey stick curve of NAMs-related adoption/upswing?

Thanks, Brendan. I smile only in terms of hockey stick. We're in a world of adoption of new techniques and procedures that typically don't hockey stick, but slowly build over time. Certainly, it's a topic at the top of the priority list in terms of clients as the guidelines came out a few weeks ago or early December. And that iterative process of commentary and finalization of those has gotten a lot of discussion, continuing discussion going forward, continuing scientific debate as to what really is possible here. But that what's possible will be achieved in baby steps over time. Revenue contribution will follow as most of these endeavors, initiatives by the FDA have proven in the past as more modeling and simulation is applied there, ultimately, modeling simulation departments within our clients get larger, more software is required to populate their desktop and make them effective. Our consulting services business in terms of clients that draw us in to work on these sorts of projects, that will uptick over time. So again, a lot of focus, a lot of anticipation. It's a very positive step forward and endorsement by the regulatory bodies that financial impact will roll in over time.

Next question is from Scott Schoenhaus of KeyBanc. How should we think about your near and midterm tech objectives in terms of growth and margin impacts for the business over the next 12 to 36 months?

Yes. Thanks, Scott. Yes, we're excited. Our business is enhanced tremendously our business opportunities as we move forward by our roadmap as we've described here. Our tried and true licensing business of our engines, our products to date opportunity and strength of growth going forward exists as a baseline. The incremental revenue opportunities as described by Jonathan, are abundant and really taking us into a world in which while we've earned our keep, if you will, from the modeling and simulation department, our clients have grown independent AI budgets, ecosystem budgets internal to their organization that we believe we will be able to access in this rollout of product strategy, enhancing our dollar opportunity within our clients. Impact on the financial side, first place to go is in terms of R&D budget. You've seen and we spoke as we announced our first quarter, uptick in R&D spending that is already baked into the guidance that we provided at the beginning of the fiscal year, a result of our reorganization last year and focus of resources within the greater organization. That R&D spend level, we believe, will be consistent in its allocation and supportive of our growth in terms of the technology roadmap on a go-forward basis. So no additional incremental step-up in R&D spending is contemplated. Over time, much of the revenue upside opportunities that we will be pursuing will be on the software side. As you know, our big impact in terms of our gross margin overall is our mix of software and services. And the roadmap rolls out incremental software opportunity -- revenue-generating opportunities going forward that should in time enhance and contribute to improvements in EBITDA into the future.

Next, we have a follow-up question from Brendan at TD Securities. Regarding your commentary on pricing evolution, can you give us a sense of how much each additional add-on would cost per customer, for example, cloud, composition as a service, premium AI, et cetera? And how should we think about the relative ramp in revenues as these roll out over the next 18 to 24 months?

Yes, Brendan, we don't have the price list drafted yet. So individual pricing of these modules, which are still being developed. We've introduced some of this technology with our GastroPlus release last year. It will continue to roll out as we reach our typical milestones in terms of upgrades to Monolix, ADMET Predictor, et cetera, down the road. So it will continue to roll out. Some of the AI functionality in some of those layers is still being defined and their definition will obviously translate to value, which will translate to pricing. So no specifics at this point in time in terms of price list of those incremental opportunities. But the definitive value of them to our clients in terms of accelerating workflows, in terms of supporting efficiencies from that discovery through commercialization phase. The value of these technologies will produce very strong ROI presentation to the clients, and we believe incremental revenue to the company going forward.

Next question is from Constantine Davides of Citizens. You mentioned wanting to be engaged with two or more solutions across the product life cycle. Can you provide a little bit more color about -- around that objective, where you've been most successful in the past and where is the most opportunity in terms of product that has historically been underpenetrated?

Yes. Our -- that spreadsheet that every company has of all of its clients posted against all of one's products and services, our opportunity set in terms of cross-selling is -- has improved over the years, but still creates a vast opportunity. Clients that utilize all of our solutions across all of discovery through commercialization. The whitespace is quite healthy and clear. Our success in the past across the board a bit, but ADMET Predictor and GastroPlus are very closely linked and integrated and success there in the past, somewhat more than elsewhere, very indicative of when the products are highly integrated, that ability to cross-sell is enhanced. And so as the integration interoperability across all of our platforms steps up over time, that will support that cross-selling activity. That sequencing on the biosimulation side of ADMET Predictor, GastroPlus, Monolix and our QSP solutions, as you saw in Jill's presentation, the application of those imaging, modeling and modalities to address the same use case or a use case utilizing different modeling techniques is growing. And therefore, our ability to, with an integrated -- more integrated platform, cross-sell across those platforms, I think, is going to step up as we move forward into the future.

Next, we have a follow-up from Matt Hewitt at Craig-Hallum. There have been a number of press releases lately regarding pharma and software companies partnering up. Is that something Simulations Plus will explore? If not, why not?

Yes, absolutely. The client base is depending on size and shape and where they're at financially investing in building internal ecosystems to support their AI strategies. And through that effort are looking for partners to supply the componentry of those ecosystems. This roadmap that we presented today has not been done in isolation and has been done in close endeavor with several of our large pharma clients. In time of these, a broader technology relationship with our clients might translate from partnership sort of scenarios that are not licensing of individual product by individual product, but by partnership and relationship economics that may be reflected in the way we build our relationships with customers in the future, yes.

Next question is from Max Smock and Christine Rains of William Blair. Given your recent revenue breakdown reporting changes, can you please map out how each of your product offerings, Gastro, ADMET, QSP, QST, et cetera, map to discovery, development, clinical operations and commercialization in terms of percentage of revenue across both software and services?

Yes, I'll provide the mapping. Certainly, our earnings release and slide deck show the breakout there. Discovery represents our ADMET Predictor solution, which is sold into discovery. Development, clinical development is where you'll find GastroPlus and Monolix and QSP, the solutions that are used in the clinic. Clinical operations is our Pro-ficiency training module platform. Commercialization does not have a software revenue contribution. It is Med Communications services only. If I go back and run through the continuum again, discovery, there's occasional projects there, but very limited service revenue in that segment. In clinical development, that's where the breadth of Jill's team and our consulting services is allocated. And in clinical ops, no services, again, commercialization, fully services.

A follow-up question from Scott Schoenhaus. Your slides indicate overall TAM is expected to grow mid-teens over the next few years out to 2030. And this is in line with your prior comments about how the industry on average grows annually. But Medical Communications is expected to grow only around 6% in your slides. Is there a way for you to take market share and grow at a more accelerated pace in the next few years?

Yes. Medical Communications is a business that strategically fits into our SLP business as an indicator, an involvement on our part in a space that's going to enhance in terms of its being data-driven in a world of personalized medicine. Medical Communications is a very large TAM of companies that support the biopharma industry in terms of introducing their drugs commercially after approval. We're going to look for those opportunities that leverage data most significantly, and that's where our growth will be most enhanced on the commercialization side.

Another follow-up from David Larsen at BTIG. Is fiscal 2026 guidance being reaffirmed? And if not, why not?

Our guidance is reaffirmed that we provided before. No change in our guidance here. Our focus in this call is to present our product roadmap. Certainly, the product roadmap supports our expectations for the coming year and beyond. No change in guidance.

Next, we have a question from Jeff Garro at Stephens. How will your sales and marketing teams provide -- prove out the ROI of the composition or connectivity layer as a product that merits incremental payments to SLP?

Good question, Jeff. I'd say our validation of expectations in terms of impact sourced in two ways. One, I mentioned we've not developed this in isolation. Those clients that have been involved have contributed just that validation in terms of the value of what we're working on. And then secondly, I'd point to one of the key benefits of having such a strong service organization, the enhancements and benefits that we are bringing to our clients through our software enhance and are benefited by our service organization and our performance of this type of work on behalf of our clients and therefore, validation of the ROI, we benefit from it as well. So internal validation is very key here.

A follow-up question from William Blair. What do you see as your long-term sustainable growth rate for software services and the overall company? When can we expect to get back to this level of growth?

Yes. We've -- good question. We have historically pointed to a biosimulation primarily growth rate of 14%, 15%, which validated in terms of third-party research analysis. We've operated in an environment in which growth has during cost-constrained era of the last couple of years been plus or minus to the 5% level, if you will. Certainly, a more stable market can get us to 10% in the coming time. But I think with all the emphasis in terms of data-driven model development, the support provided by the regulatory environment, the new opportunities to enhance the drug development process that are coming from advanced technology, AI, access to data, speed, computational speed, all of these will contribute to continued evolution of the drug development process in the direction of modeling and simulation. Can we see 15% or better growth into the future? Boy, there's some that are really pointing to that. I'd like to get back to the 10% level and then move from there. But certainly, the opportunity set bodes well for accelerated growth into the future in the long run.

At this point, there aren't any further questions. So I'll hand it back to you, Shawn, for closing comments.

Thanks, Lisa. I appreciate everyone's attention and participation in the investor presentation that we've made today. Certainly available for follow-up further questions and discussion. I hope it's been beneficial to you to give you an idea of where we are headed with our business and the strategic opportunity it presents for us in our client world. Thanks again for attending and look forward to talking to you again soon. Take care.

Greetings, and welcome to the Simulations Plus First Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Lisa Fortuna, Investor Relations. Please go ahead.

Welcome to the Simulations Plus First Quarter Fiscal Year 2026 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at simulations-plus.com. After management's commentary, we will open the call for questions.

As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect and anticipate Refer to our best estimates as of this call, and actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. In the 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 most recent earnings release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. With that, I'll turn the call over to Shawn O'Connor. Please go ahead.

Thank you, and happy new year to everyone. We delivered on the first quarter top line guidance we communicated in December, with revenue decreasing 3% as expected. Adjusted EBITDA was $3.5 million and adjusted EPS was $0.13. And in line with our internal expectations. Turning to the macro environment. The positive trends we cited last quarter continued to present themselves. At the global level, most favored nation pricing agreements are moving forward, tariff threats have subsided and the biotech funding environment is improving.

At the regulatory level, the FDA recently issued NAM guidelines for review as well as support of in silico methodologies. We began to see an uptick in spending at the client level, which is reflected in good performance in our Services segment, both revenue and bookings. We've experienced an acceleration in year-end spending, and this increase is encouraging since improvement in services typically precedes an increase in software activity.

Our priorities in fiscal 2026 are to advance the progress we've made toward an integrated product ecosystem that combines 3 strengths of Simulations Plus, validated science, cloud-scale performance and AI that is grounded in regulatory-grade modeling. Across GastroPlus, Monolix Suite, ADMET Predictor, our QSP platforms and proficiency, we are driving innovation through advanced science, ongoing investment in the scientific engines trusted by global regulators in leading R&D organizations, a connected ecosystem, seamless interoperability across products powered by the S+ cloud enabling end-to-end modeling workflows from discovery through clinical development.

AI-driven services, intelligent tools that enhance data curation accelerate simulation analysis and simplify regulatory compliant reporting. AI and human collaboration, copilots and reusable modules, that boost efficiency, consistency and turnaround times for scientists and consultants alike. These advancements aren't theoretical they directly address customer pain points and aligned with the industry's trajectory. More importantly, they position us to deliver new capabilities to market faster and with greater cohesion than ever before. With that, I'll turn the call over to Will.

Thank you, Shawn. To recap our first quarter performance, total revenue decreased 3% to $18.4 million. Software revenue decreased 17% and representing 48% of total revenue and services revenue increased 16%, representing 52% of total revenue. Turning to the software revenue contribution from our products for the quarter Discovery products, primarily ADMET Predictor, were 15%. Development products, primarily GastroPlus and MonolixSuite were 81%. In clinical ops products, primarily proficiency were 4%. On a trailing 12-month basis, discovery products were 18%. Development products were 77% and clinical ops products were 5%. We ended the quarter with 302 commercial clients, achieving an average revenue per client of $97,000 and 88% renewal rate for the quarter. On a trailing 12-month basis, we achieved average revenue per client of $147,000 and our renewal rate was 87%.

During the quarter, software revenue and renewal rates continue to be impacted by market conditions and client consolidations. Specifically, Discovery revenue increased 3% for the quarter and for the trailing 12-month period. Development revenue declined 6% for the quarter and grew 1% for the trailing 12-month period. Clinical Operations revenue declined 82% for the quarter and 28% for the trailing 12-month period. Shifting to our services revenue contribution by solution for the quarter, development, which includes our biosimulation services, represented 71% of services revenue and commercialization, which includes our MEDCOM services, represented 29%.

The revenue contributions for the trailing 12-month period were 74% and 26%, respectively. Total services projects worked on during the quarter were 186 and ending backlog increased 18% to $20.4 million from $17.3 million last year. Overall, we have a healthy pipeline of services projects. Services revenue for the quarter increased compared to the prior year, primarily due to the strong contribution in our MEDCOM business. Specifically, Development Services grew 8% during the quarter and declined 5% for the trailing 12-month period. Commercialization Services grew 42% during the quarter and 191% for the trailing 12-month period. Total gross margin for the first quarter was 59%, with software gross margin of 84% and services gross margin of 36%.

On a comparative basis, total gross margin for the prior period was 54%, with software gross margin of 75% and services gross margin of 26%. The increase in software gross margin was primarily due to the lower clinical ops revenue and the increase in services gross margin was attributable to the prior year reduction in force and the reorganization of services personnel to support product development efforts. Other income was $0.3 million for the quarter compared to $0.1 million last year, primarily due to higher interest income. Income tax expense was $0.3 million compared to income tax expense of $0.1 million last year, and our effective tax rate was 30% compared to 24% last year.

Moving to our balance sheet. We ended the quarter with $35.7 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow as we continue to execute our growth and innovation strategy. Our guidance for fiscal year 2026 remains the same as previously provided. Total revenue between $79 million to $82 million, year-over-year revenue growth between 0% to 4% and software mix between 57% to 62%, adjusted EBITDA margin between 26% to 30% and adjusted diluted earnings per share between $1.03 to $1.10. We anticipate second quarter revenue to be approximately $21 million to $22 million.

I'll now turn the call back to Shawn.

Thank you, Will. Fiscal 2026 marks our 30th year as a company, and we're excited about the opportunities ahead. Simulations Plus is transforming from a collection of pioneering modeling tools into a fully integrated ecosystem that supports discovery, development, clinical operations and commercialization. Through strategic acquisitions, continued investment in science and a unified operating model, we've broadened both our reach and our impact. What remains constant is our core purpose. Providing our clients the tools to bring safer, more effective therapies to patients through science-driven innovation. What is accelerating is how we fulfill that mission.

With proven scientific engines, enhanced cloud capabilities, AI-powered workflows and a coordinated road map, we're positioned to support our clients with greater speed, consistency and interoperability than ever before. Thank you for joining us today. And with that, we'll open the call for questions.

[Operator Instructions]. Our first question is from Matt Hewitt with Craig-Hallum.

Maybe first up, I was hoping we could get a little bit more color on some of the positive commentary you spoke to regarding most favored nations lower tariff risk, those types of things? And how that you see impacting budgets from your customers and whether or not you're anticipating a greater allocation of those R&D budgets towards modeling and simulation.

Sure, Matt. We just did our fourth quarter earnings call not that long ago, and we spoke to some of the events in the latter part of calendar year '25 of agreements at some level in terms of most favored nation pricing and certainly, tariff talk as died down a bit. The U.K. agreement was put in place. So I think all of these things are starting to stabilize outlook for our clients, and we saw that begin to impact the discussions we had through the latter part of '25 as they were preparing budgets, so certainly a lot of activity and give us proposals, we want to put it in the budget for next year.

And so that was a very positive impact. As an update here in January, we saw a pretty robust activity turning those proposals into contracts for next year. And, in some cases, accelerated requirements in terms getting some of that work done before the year-end that budget flush that happens every year in the industry. Certainly took place this year, and that translated into a pretty robust service revenue delivery for us in our November and ending quarter. So certainly puts more wind in the sale in terms of optimism as we move into the calendar year of that the constrained spending environment that we've operated in for the last number of years is starting to show some signs of opening up a bit. I'm Missourian and we'll believe it when I see it, but certainly, very optimistic given the activities of late.

That's very helpful. And then maybe just to dive into the software a little bit. It looks like GastroPlus and was pretty good. I had met predictor was pretty good, but it looks like more on the DILIsym QSP side, things might have been a little bit soft. Is there -- was that just kind of a one-off in the quarter? Or is it waiting for the FDA guidance that we just got here a couple of weeks ago. If you could just kind of provide a little more color on the puts and takes there.

Yes, certainly, certainly. The QSP models, if you recall, though there is a recurring license, subscription license for the basic platform that many of our QSP models are accessed through. But the majority of QSP software licensing is the licensing of the therapeutic models, and our clients acquire those models on perpetual license basis. And we had an extremely good quarter a year ago, first quarter of last year and sold multiple therapeutic USP models. And while we did have a closure here in this first quarter of this year, not the same level of activity on the QSP side in this quarter.

Maybe look at it on a year-to-year basis, we anticipate therapeutic model licensing to grow. But on a quarter-to-quarter basis, we had a difficult comp compared back to the first quarter. So in general, QSP software revenue came in as expected. It's always a lumpy perpetual license flow of business there, but the interest is very high for those models high and space altogether, both software and service support in that area, a very rapid growing area in terms of biosimulation altogether. But this quarter, in particular, on a year-over-year basis that QSP software license growth impacted by a bunch of models that were recognized last year.

Our next question is from Max Smock with William Blair.

It's Christine Rains on for Max. So just diving on the service side and a little bit more, it's nice to see that business performed so strongly this quarter. But given the relative softness this quarter in software relative to your mix guide, I'm hoping you can give us some color on the expected mix cadence for software in the remaining 3 quarters? And what will catalyze the relative step-up in software performance.

Yes. No change in our guidance range in terms of software service mix. So the robust first quarter on the service side that brought its percentage of revenue up. That doesn't change our outlook for the year. Our guidance there is 57% to 62%. I think it is on a full year software contribution to our revenues. And our biggest software quarters are in third -- second and third quarter just from the seasonality of our renewals, the book of renewals that we have in those 2 middle quarters. So great performance in the first quarter from the service organization, as I indicated in the prepared remarks, I think, as our clients turn to a little bit more accelerated spending, they've got a backlog of projects that they've been holding back on in terms of giving green light to that's more easily initiated on their part, software licensing, acquisition, increasing their staffing and modeling and simulation department with come as a lag to that or follow the ease of opening up the outside service line of their budgets. And so I don't anticipate any change in what we've guided to in terms of software service mix at this time.

Great. That makes sense. And then just one more on the software side for us. You discussed last quarter how the consolidation of large problem was somewhat of a headwind to software renewals in the back half of fiscal 2025. So given what appears to be an improving M&A environment, did you see this headwind intensify in the first quarter. And then what is your typical impact from normal consolidation historically versus what's baked into your 2026 guide?

Yes. Consolidation is always an impactful contributor to that less than 100% renewal bankruptcies, the other component there in, and we certainly did see an uptick in some consolidation in the back half of our fiscal year '25. No major contribution in the first quarter in that regard. And so point we've mapped out in terms of larger entity acquisitions. Typically, there's some visibility to announced acquisitions ahead of the renewal time frame and what not, so we get a little bit of forewarning, there's no forewarning of that in our renewal base for '26.

So I think the uptick in the accelerated acquisition activity that we're starting to see in the industry. is large pharma acquiring assets from smaller biotechs or the smaller biotechs are typically not large software licenses. And so while it is a headwind and it can have an impact as we experienced in the back half the outlook doesn't show tremendous impact there, not in the first quarter results and our expectations or guidance for the year.

Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets.

So Sean, I know you mentioned that the regulator guidance doesn't reflect any mix changes from the prior guidance. But it seems like the environment has improved and that there's a lot of momentum and backlog here. Does the cadence of your guidance change, should we expect less extreme weighted guidance here based on this sort of momentum this improved environment.

Well, there is a little backloaded when you look at it from a percentage growth perspective, from an absolute dollar perspective, it's not quite so backload. What do I mean by that? I mean we're pretty open in looking at our '26 versus '25 revenue streams. And we knew that on the software side, proficiency platform revenue, software revenue contribution was at its peak in the first and second quarter of '25, and its run rate trend line came down in the back half of '25. And while it moves forward positively, our first half of the year, year-over-year software growth is going to be impacted by proficiency contribution at a little lower level.

The biosimulation software much, much better shape. You've got the dynamic that I just described in terms of the perpetual license and they're having some impact, so on and so forth. So when we look at the software revenue flow on an absolute dollar basis, it kind of runs to the seasonality patterns of the past. But when you're looking at a year-over-year comp, given our profile of software revenue coming down in the back half of last year, 25% being at a higher level in the first half of the year, that overall year-over-year increase percentage is going to step up in the back half of the year as we get into a different comp situation.

And then actually it's a great fall earlier to my follow-on. So I think in the prepared remarks, you guys have mentioned that MEDCOM business was outperforming beyond expectations in the quarter. If that's right, should we assume that those proficiency comps that you just talked about should prove to be a little bit more conservative than your initial expectations 90 days ago.

Yes. Keep in mind, we're talking proficiency software platform licenses on the software side. Met communication is the support we provide in commercialization service revenues. And yes, that came out of the chute here better than anticipated, quite frankly, in the first quarter, and their backlog is looking good, and we look forward to their contribution in growth, but they will provide during the course of our fiscal year '26 here. That comp year-over-year challenges more dramatic and tackle on the proficiency software side.

Our next question is from Jeff Garro with Stephens.

Yes. Shawn, earlier in the prepared remarks, I think I heard a comment that services should be a leading indicator for software demand. Maybe you could revisit on why that's been the case historically and how that rationale would apply to the current setup of the integrated product vision and the maybe larger portfolio of products than you've had historically?

Yes. I don't mean to imply that a client will acquire service business prior to engaging in licensing. I mean, it goes both ways in terms of a new logo will start up -- could start up on either side of the business model. What I was referring to was the fact that as our clients work their way through their '25 -- calendar '25. And we're challenged to constrain their spending, cut back on their budgets. That didn't impact software as much as it affected outside services. That was the discretionary, if you will, budget line that they could hold back on, and we saw that impact our service business.

As clients turn more favorably to spend their ability to turn on and initiate a project to sign the contract or give the green length of the performance of the contract that's been sitting there on hold is much quicker. And as they open up their budgets, often software upsells with existing clients occur as they expand the modeling departments. So that expansion that green length to go hire more modelers into their organization, obviously, takes a little bit more of a lead time in terms of their recruiting process and building their organizations. So the fact that service bookings activity is picking up quite nicely and what that may be that a leading indicator that the budget in totality is going to increase, and we'll see on the software acquisition side, some for step-up in activity there to come.

Excellent. I appreciate that. And maybe to switch gears a little bit to the profitability side of things. There was the comment around the reallocation of services personnel to product development. want to see if there's a specific impact to the P&L in the quarter to call out there? And just whether that's a temporary shift or something a little bit more permanent in nature related to the integrated product strategy. And I'll just tack on a follow-up. I know we'll get the cash flow statement in the 10-Q, but with R&D expense a little bit higher than we modeled. I want to see if there's anything to call out on capitalized software development expense.

Sure. Yes. I mean if I take you back in time, we undertook a reorganization of our organizational structure and the risk back in the third quarter fiscal year '25. And so the objective there was twofold. One, we rationalized our service resources to a lower level service revenue, and that has an impact on favorable margin in terms of excess staff that is no longer here. We also retained some of those valuable assets, people, scientists, and fully devoted them to our R&D effort, which was picking up with regard to the product vision that we were honing in on and beginning its implementation on.

So that increase in R&D spend comes from additional personnel there invested in accelerating our product activity, which we look forward to take the opportunity to advertise. We have an Investor Day meeting scheduled on January 21 to walk through and give some visibility in more detail as to what that unfolds with for the future. And so yes, some increase in R&D expense. I'll let Will comment in terms of software capitalization and those sorts of things. I'd also before I hand it off, I point out that the R&D expense at a little bit higher percentage. Keep in mind that higher percentage were in our first quarter seasonality, the revenues are lower in the first and fourth quarter than second and third quarter. So the percentage increase of R&D spend in the first quarter will be averaged out over the course of the year as we work through our seasonal revenue quarters due to the end of the year. But Will, do you want to comment on capitalized software?

Sure. I'll sort of step back as well, kind of revisit some of the items you mentioned, the reorg that we talked about, that was a reduction in services staff to look towards increasing utilization targets for billable personnel as well as reevaluating the work that folks did in the company on product development. So we've historically had last couple of years, services margins at around the 30%, and we're certainly looking, as we've messaged getting that closer to 30% to 35%. And that's due to the reorg as well as the reduction in force. The R&D expenses, certainly, we have continued to invest in that area.

So what you saw in first quarter, the 16% of revenue we do expect to see about a 15% to 17% R&D spend of revenue for the year. But we're still keeping our operating expense total around 50% of revenue for the year. So that's sales and marketing continuing to run at the 13% to 15% range. And then G&A is the one that will continue to come down as a percentage of revenue. On the capitalized software standpoint, that's running about the same. It's in the mid-20 of the work that's done is going into capitalized software and then that comes through as amortization expense on a quarterly basis.

Our next question is from David Larsen with BTIG.

On the services side, I think you mentioned that the commercialization efforts showed the growth there. Is that mainly proficiency? And just any more color around the strength there would be very helpful.

Yes. Just -- thanks, Dave, for the question. Yes, the proficiency acquisition in today's vernacular, brought us two revenue streams. One was the proficiency software platform, the training platform and clinical operations. and the second revenue stream was medical communications and medical communications represents today 100% of our service revenues in the commercialization space. So yes, the medical communications in the commercialization market, it source was the proficiency acquisition.

So if I recall correctly, like a year ago, proficiency services revenue growth was under some pressure, and that was leading to some challenges. And correct me if I'm wrong, but I think what we're seeing here is kind of a recovery there and maybe a little bit of an easier comp.

Yes. The commercialization, the med communication service revenues like most all of our services was under pressure in the back half of our fiscal year '25 as budgets pulled back. And so the delivery in terms of MEDCOM in the first quarter was a bit above our expectations and very reflective of more active spend on our clients in that space and its outlook is pretty positive for fiscal year 2020.

Okay. And then just one more quick one for me. On the software side, I think I saw clinical operations software down. I thought it was like 80% or something like that, which led to the overall decline in software year-over-year. So it looks like it's like is that one product line? Which product line was that? And is there a reason why it was unusual. Did a deal push or something like that?

Yes. The clinical operations software is our proficiency training platform. And so upon acquisition, its contribution in its first and second quarter of fiscal '25 was pretty strong. We saw that come down in the back half of the year, driven by clinical trial start-up challenges and the like. And so here in the first quarter, while they delivered pretty much to expectation, the year-over-year comp is negative, but in line with our expectation at this point in terms of fiscal year 2016.

Okay. And just -- I'm sorry, one more quick one. 88% fee retention. Is that in line with your expectations? And then I'll hop back in the queue.

Yes. It's been at that level over the last several quarters. Historically, 90% plus is where it's at. We did have a couple of renewals that didn't get signed over Thanksgiving weekend and got signed in the first week of December that impacted that number a bit. So I think the renewal rate relatively good, especially if you think of it in terms of those couple of deals that slipped into the beginning of the fourth quarter.

Our next question is from Brendan Smith with TD Cowen.

I wanted to actually first ask about this ongoing AI integration with the core platform. and how the initial rollout is going? Anything of note you're hearing from customers? And maybe just how we should think about that as it pertains to license renewals and maybe pricing flexibility within those renewals over the coming months.

Yes. The initial release of some of the new AI features went out with the GastroPlus release late last fiscal year, response has been favorable, very favorable to it with the -- what more can you do as some clients have gotten visibility to our road map and what that it's monetization comes along the way in several forms and shapes. We were a bit more aggressive this year in terms of our price increase. with some of that AI technology being embedded in the base model, if you will.

And there will be opportunities to monetize it modules and other new products into the future. I look forward to walking through that in a couple of weeks at our Investor Day. But it certainly is immediately contributing as we bring it out across our product line in terms of an ability to be a bit more aggressive in terms of pricing.

Got it. That's super helpful. And maybe just related to that, and this might be more a question for the Investor Day in a couple of weeks. But are there plans to launch any new verticals or products within the existing platform over the next, say, 12 to 18 months? Or should we really see this year as a time to land and expand within the existing franchises you have on hand now.

There's no desire, if other verticals take us outside of our supportive drug development now. we do support work effort in the chemical space, agrobusiness, cosmetics, some business there. But certainly, our focus is primarily in drug development discovery clinical development, commercialization, clinical ops. And our baseline engines GastroPlus, Monolix QSP capabilities, et cetera, are the engines that drive there are there's ability to create new revenue streams with the product ecosystem that we're working to deliver to the marketplace.

And yes, we -- we'll walk through that in a little bit more detail at the Investor Day. I wouldn't anticipate that their delivery and translation into revenue flow I guess the way to put it is that it's not anticipated to be significantly impactful to our '26 revenue and/or is embedded in our guidance already.

There are no further questions at this time. I'd like to hand the floor back over to Shawn O'Connor for any closing remarks.

Yes. Thanks, everyone. We look forward to sharing more about the strategy we've been talking about and referring to our product road map. The next phase of our evolution is at our Virtual Investor Day on January 21. We're excited to give you a deeper look at how our ecosystem comes together and how it will create value for our clients investors and patients will go. You can register on the Investor Relations section of our website.

And if you have any questions, please feel free to reach out to Lisa Financial Profiles who can assist with any questions you might have there. But otherwise, I appreciate your attention, and look forward to seeing you later in the month. Take care, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Greetings and welcome to the Simulations Plus Fourth Quarter and Full Fiscal 2025 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Lisa Fortuna from Financial Profiles. Ms. Fortuna, please go ahead.

Good afternoon, everyone. Welcome to the Simulations Plus Fourth Quarter Fiscal Year 2025 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial Officer of Simulations Plus.

Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at simulation-plus.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect and anticipate refer to our best estimates as of this call, and actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. In the remarks or responses to questions, management may mention some non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to those most directly comparable GAAP measures are available in the most recent earnings release available on the company's website. Please refer to the reconciliation tables and the accompanying materials for additional information. With that, I'll turn the call over to Shawn O'Connor. Please go ahead.

Thank you, Lisa, and welcome, everyone. We closed fiscal 2025 with strong execution across the business, delivering on the full year guidance we set in June. Revenue grew 13%, adjusted EBITDA grew 8% and adjusted EPS grew 8%, demonstrating resilience and operational discipline in a year marked by significant market volatility. Importantly, 2025 was also a strategic reset for Simulations Plus. We completed our transition to a unified operating model, aligning product and technology scientific R&D, strategic consulting services and business development into a single client focused, functionally oriented organization structure.

This shift is already improving how we prioritize, build and deliver for our customers and positions us to move faster for the opportunities ahead. The external environment remained challenging throughout the year. Client budgets were pressured by broader pharmaceutical headwinds, including the threat of tariffs and most favored nation pricing implementation, which created real disruption starting midyear. As we move toward calendar 2026, we're seeing early signs of stabilization.

Large pharma has clearly adds clear visibility into pricing frameworks, biotech funding has improved modestly, and our clients have entered their budgeting cycles with more confidence. Proposal activity and conference engagement have both strengthened. That said, we believe uncertainty will persist in the overall environment in the near term. Despite these challenges, the momentum behind biosimulation continues to accelerate. Our biopharma and regulatory partners are scaling their internal model and form development capabilities investing in data curation and digital infrastructure and increasingly incorporating AI into modeling workflows. The convergence of cloud computing AI and model inform direct development is reshaping how the R&D teams within our biopharma clients operate, and our validated science puts us at the center of that shift. We started laying the groundwork for this future with the release of GastroPlus 10.2 earlier this year, and we'll continue with portfolio-wide updates in fiscal 2026.

As our customers expand their internal biosimulation capabilities, they are turning to partners who can deliver scientific rigor, integrated workflows and and AI-assisted deficiency, all grounded in regulatory grade and scientifically validated models. Our product vision directly aligns with these needs, connecting advanced science cloud-scale computation and AI-driven services into a unified ecosystem that supports teams through discovery, through clinical development and commercialization. Taken together, these trends reinforce the long-term demand for our solutions and our leadership in the field. What we are hearing consistently from clients is that biosimulation is no longer a set of point solution tools. It's becoming the backbone of how R&D organizations operate.

Teams want faster cycle times stronger interoperability and AI-assisted workflows that reduce manual effort while preserving scientific rigor. They want systems that help them organize their data, standardize their modeling approaches and deliver reproducible results for regulatory submission. This is exactly where our strategy is headed. Over the past year, we have been building toward an integrated product ecosystem that combines 3 strengths Simulations Plus can offer. Validated science, cloud-scale performance and AI that is grounded in regulatory-grade modeling.

In fiscal 2026, that strategy comes into focus. Across GastroPlus, Monolix Suite, ADMET Predictor, our QSP platforms and proficiency we are enabling advanced science continuous investment in the scientific engines trusted by global regulators and leading R&D teams, a connected ecosystem, interoperability across products, powered by the Simulations Plus cloud to support end-to-end modeling workflows from discovery through clinical development. AI-driven services, tools that enhance data curation, accelerate simulation, interpretation and streamlined regulatory compliant reporting, AI and human collaboration copilots and reusable modules that improve efficiency, consistency and delivery times for scientists and consultants alike.

These enhancements are not abstract concepts. They are tied directly to customer pain points and to the direction the industry is moving. And importantly, they position us to bring new capabilities to market with greater speed and cohesion than at any point in our history. We look forward to sharing much more detail about this integrated product strategy at our virtual Investor Day in January, including the road map that unifies our scientific engines cloud infrastructure and AI capabilities into a modern, interoperable biosimulation ecosystem.

With that, I'll turn the call over to Will.

Thank you, Shawn. To recap our fourth quarter performance, total revenue decreased 6% to $17.5 million. Software revenue decreased 9%, representing 52% of total revenue and services revenue decreased 3%, representing 48% of total revenue. Fiscal year total revenue increased 13% to $79.2 million. Software revenue increased 12% and representing 58% of total revenue and services revenue increased 15%, representing 42% of total revenue. Turning to the software revenue contribution from our products for the quarter Discovery products, primarily ADMET Predictor, were 18%. Development products, primarily GastroPlus and Monolix Suite were 77%.

In clinical ops products, primarily proficiency were 5%. For the fiscal year, Discovery products were 17%, development products were 75% and clinical apps products were 8%. We ended the quarter and fiscal year with 311 commercial clients, achieving an average revenue per client of $94,000 and an 83% renewal rate for the quarter. For the fiscal year, we achieved average revenue per client of $143,000 and our renewal rate was 88%. During the quarter, software revenue and renewal rates continue to be impacted by market conditions and client consolidations. Specifically, ADMET Predictor declined 10% for the quarter compared to the prior year and grew 5% for the fiscal year. GastroPlus declined 3% for the quarter compared to the prior year and grew 1% for the fiscal year.

Monolix Suite grew 3% for the quarter compared to the prior year and grew 14% for the fiscal year. Our QSP QST solutions grew 22% for the quarter compared to the prior year and grew 26% for the fiscal year. Proficiency declined 63% for the quarter and grew 206% for the fiscal year with the prior year reflecting on fourth quarter revenue following the June 2024 acquisition. Shifting to our services revenue contribution by solution for the quarter, development, which includes our biosimulation solutions, represented 77% of services revenue and commercialization, which includes our MedChem services, represented 23%.

The revenue contributions for the fiscal year were 76% and 24%, respectively. Total services projects worked on during the quarter were $191 and ending backlog increased 28% to $18 million from $14.1 million last year. Overall, we have a healthy pipeline of services projects and we continue to expect at least 90% of the backlog to convert to revenue within the next 12 months. Services revenue for the quarter declined compared to the prior year is expected and grew 15% for the full year, primarily due to the addition of the MedChem business. Specifically, PBPK services declined 10% for the quarter compared to the prior year and 14% for the fiscal year. QSP services declined 50% for the quarter compared to the prior year and 26% for the fiscal year. PK/PD services grew 18% for the quarter compared to the prior year and 5% for the fiscal year.

MedChem Services grew 70% for the quarter and 622% for the fiscal year with the prior year reflecting only fourth quarter revenue following the June 2024 acquisition. Total gross margin for the fiscal year was 58% and with software gross margin of 79% and services gross margin of 30%. On a comparative basis, total gross margin for the prior year was 62%, with software gross margin of 84% and services gross margin of 30%. The decrease in software gross margin was primarily due to an increase in the amortization of developed technology with the acquisition of proficiency and higher amortization expense for capitalized software development costs related to the release of GastroPlus in May 2024.

Turning to our consolidated income statement for the fiscal year. R&D expense was 9% of revenue compared to 8% last year, reflecting our continued investment in product innovation. Sales and marketing expense was 15% of revenue compared to 13% last year, deliberately supporting initiatives to drive growth across our expanded portfolio and increased market awareness. G&A expense, excluding nonrecurring items, was 25% of revenue, down from 28% last year. Total operating expenses, including a noncash impairment charge of $77.2 million were 148% of revenue compared to 53% last year. Other income was $1.4 million for the fiscal year compared to $6.3 million last year. Primarily due to a decrease in interest income and a decrease in the fair value of the Immunetrics earnout liability.

Income tax benefit for the fiscal year was $4.7 million compared to income tax expense of $2.5 million last year, and our effective tax rate was 7% compared to 20% last year. We expect our effective tax rate for fiscal 2026 and to be in the range of 12% to 14%. Net loss and diluted loss per share for the fiscal year, including the $77.2 million noncash impairment charge were $64.7 million and $3.22 compared to net income of $10 million and diluted EPS of $0.49 last year. Adjusted diluted EPS was $1.03 this fiscal year compared to $0.95 last year. Fiscal year adjusted EBITDA was $22 million compared to $20.3 million last year, at 28% and 29% of revenue, respectively. Moving to our balance sheet. We ended the year with $32.4 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow to continue to execute our growth and innovation strategy.

Our guidance for fiscal year 2026 remains the same as we provided in October. Total revenue between $79 million to $82 million, year-over-year revenue growth between 0% to 4%; software mix between 57% to 62% and adjusted EBITDA margin between 26% to 30% and adjusted diluted earnings per share between $1.03 to $1.10. We also anticipate first quarter revenue to be approximately 3% to 5% lower than the same period last year. Our fiscal year and first quarter guidance assumes a stable operating environment with market conditions in FY '26 expected to resemble those at the close of FY '25. Should market conditions improve and our clients' increased spending in FY '26, we will be poised to respond.

I'll now turn the call back to Shawn.

Thank you, Will. As we look ahead to fiscal 2026, our 30th year as a company, we're energized by the opportunity in front of us. Simulations Plus is evolving from a set of pioneering modeling tools into a unified ecosystem supporting discovery, development, clinical operations and commercialization. Our acquisitions, our investment in science and our integrated operating model have expanded both our reach and our impact. While remains unchanged is our core purpose. Helping our partners bring safer, more effective therapies to patients through science-driven innovation. What is changing and accelerating is how we deliver on that mission. With validated scientific engines, expanding cloud capabilities, AI-assisted workflows and a coordinated road map, we're positioned to support our clients with more speed, consistency and interoperability than ever before.

We look forward to sharing more about this strategy, our product road map and the next phase of our evolution at our virtual Investor Day on January 21. We -- we're excited to give you a deeper look at how our ecosystem comes together and how it will create value for clients, investors and patients worldwide. Thank you for joining us today. And with that, we'll open the call for questions.

[Operator Instructions]. Our first question comes from Jeff Garro with Stephens Inc. You may proceed with your question.

Maybe start by asking about the demand environment. I was hoping you could give us an update on recent trends and some of the underlying factors that can translate to bookings and revenue, like RFP volumes pipeline development and SLPs win rate?

Yes, Jeff, thanks for the question. I can give global metrics that have been cited often, certainly an uptick in biotech funding is a positive. So another funding announced today, up modestly from where it's been over the last 6 to 12 months, continued funding in that sector would support that element of our business, which is about 25% of our client base or revenue drivers out of the biotech sector. On the large pharma side mixed bag, mostly positive, but sporadic challenges from some of the large pharma and the encountering of program success or failure, but certainly, an uptick there.

We come out of our heavy conference window of time with our clients and budgeting activity for next year seems to have some momentum. I'm cautious about that. There was momentum there last year. and new surprises came after the first of the year. So I feel very positive in terms of the discussions we're having with customers, setting up proposals. And budgeting activity for next year, it looks pretty good. And so we enter our fiscal year '26 here on good footing, being cautious, watching for an evolving marketplace where certainly, announcements often cause pause in the activity of our clients, but mostly great lines.

Great. I appreciate all those comments. And then to follow up, I don't want to get too far ahead of ourselves in front of the Investor Day, but I am curious on the feedback for the GastroPlus release that's been infused with some AI capabilities. And what that might mean for that key product as well as demand for AI infusions and other products. You hit the kind of macro details, I would love to hear about how the innovation plan is starting to impact your client discussions even at an early stage.

Yes, it is early stage. The announcement of GastroPlus was followed with webinars and some training and visibility provided to clients much visibility prior to its delivery as many of our clients participate in the development programs and provide input during the course of its activity. And the response has been positive. They're digesting it. We're seeing a lot of evolution in terms of clients and their internal IT infrastructure and many of the cloud and AI capabilities that are being released now will fit into those new ecosystems that they're building internally.

And so initial response is good as with most releases in our space their adoption and installation in our clients is fit into their timetables and process. But I think everyone is looking for ways to leverage AI capabilities. Our clients are very focused in terms of their data management internal to their organization that feeds the analytical tools that we provide them. And so great excitement in terms of they're saying that our platforms are staying ahead of the curve in terms of functionality that they're looking to deploy in the coming months and years.

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

Maybe first up, and you've touched on this a little bit, but you had most favored nation pricing. You've had tariffs, you've had a soft funding environment. And it seems like we're getting either clarity or improvement in all three of those. Is there anything else that would result in large pharma being cautious? Or is it just more confirmation on those three buckets and that's when you'll start to see kind of the increase in spend.

Yes. I mean there's a number of factors there, and it's anecdotal with each client in their own specific back at in terms of their drug programs and top line patent expirations, each entity has their own guidepost that they've got to manage and strategize around and we'll respond. I mean generally, it's an industry that responds to its budgeting cycle. So budgeting for the calendar year '25 is in place, not changing, and now they're looking at and putting budgets in place there. So there's sort of a more positive there doesn't necessarily translate to this quarter, but they're budgeting into next year.

I think we all check our home periodically to see if there's been a tweet today or not. So there's still that cautiousness and foreboding of what may happen tomorrow. But yes, generally, I think outlook is positive momentum into the budget preparation for '26 is positive. And I think if we get some quarters in a row without any surprises, they tend to put the shock wave into the system. We see a few quarters without that, then I think that confidence grows and spending gets more firmly committed.

Got it. And then maybe the follow-up to that is if we do see the improvement and you see a ramp in bookings and backlog, do you feel like you've got the right headcount now to support a higher revenue base, at least over the near term? Or do you feel like depending upon how things shake out, you might be in a situation where you're having to backfill some roles that given the kind of the reductions over the past 2 years.

Yes. The software side of the business is leverageable in terms of immediate needs to that are created that business uptake. If it uptakes, there's not an immediate need in terms of people side. It's certainly a fair question on the service side of our business, and we feel very comfortable with the capacity we have now. It's utilization. Supporting the guidance we've given into '26. If that side of the business accelerates more quickly than we're planning for our ability to grow that capacity is much better today than it was in the past when the resources were a little bit scarcer and in terms of the scientific profile that does this type of work.

We made our reduction in force last year with a little bit more confidence that, hey, if we need to step up in terms of our team there that we can do so relatively timely in support of business volumes increasing. So I think we're well positioned today for our business in '26 as anticipated. If it accelerates our ability to meet that demand is what we should be capable of doing so.

Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets.

Shawn, I wanted to ask about the guidance and to reiterate it, obviously. Maybe parse through, if anything has changed underneath that guidance. I believe there was some caution around the services side. Software was sort of -- there was headwinds in the first half. Mostly related -- or I think partly related to proficiency growth comps, but that eases in the second half. Maybe just walk us through if anything has changed on the background of the guidance and maybe parse through the first quarter guidance that you just spoke about on the prepared remarks.

Sure. No, I mean, in a short interval, since we delivered the guidance in October, nothing significant has changed underlying. The assumptions underlying that -- we entered fiscal year '26, having post our adjustment back in June, July time frame, bringing down our guidance for the back half of the 2025 time frame. We achieved that back end fiscal year '25 guidance, which reflected a little bit of a stability in terms of the flow of revenues, both on the software and service side is albeit at a reduced level. We see some progress on an absolute dollar basis moving into the first part of the year. Normal seasonality patterns exist. First quarter is not our most robust quarter for renewals. Most of those are timed in the second and third quarter or at least peaks in those 2 quarters.

And in the first part of the year, we've got reduced levels of proficiency revenue contribution, both in software with the proficiency platform as well as med communication service revenues that their comparable time frame in '25. Those were their most highest revenue contribution post acquisition. And so some challenging comps there. So as we indicated, 3% to 5% first quarter revenue below the comparable year in the first quarter. that fits into our 0% to 4% growth for the year. And so no change in expectations or assumptions underlying the guidance we provided.

And then does your guidance assume any biotech end market recovery? And then also, I know that there were some degree of cancellations baked into the guidance as -- it sounds like that the biotech environment is still cautiously optimistic. What would it take you to view the cancellation projection or caution for the full year, what would it have to take for you to sort of moderate your expectations there?

Yes. I mean two components to your question there in terms of biotech funding. If it continues, it certainly will prove a positive in terms of contributing both on the software and consulting side. there's not an immediate translation in terms of funding today and purchase order issued tomorrow there it depends on the circumstance of the stage of that particular funded biotech programs where they are in the development time line to driving what type of services that can support them. Obviously, if it continues in a positive way here that will bring back that segment that contributed certainly, a greater percentage of revenue and revenue growth back a year or 2, 3 years ago when it was a relatively robust funding environment by tech contribution to our revenue flow was growing at a much steeper rate than it has of late during the funding trough, if you will.

And as we've projected into '26, we've not projected a significant uptick in the biotech funding leading to uptick in biotech revenue contribution in '26. So that would be potential upside. Second part of the question in terms of cancellations certainly in the cancellations can be two different things. I'm not sure what you were pointing to. But we've had some consolidation in terms of our software renewals acquisitions that had led to one on one, not equaling two in terms of two clients that have consolidated in terms of their renewal. That is an ongoing thing that we've always experienced encountered from quarter-to-quarter. It was a little bit higher in the back half of fiscal year certainly keeping an eye on our client base in that regard. We've got no known cancellations of any magnitude that are on the horizon in acquisitions that have been announced with the effective date to [indiscernible]. Nothing out there visible at this point in time. But we have, in the past, always had those no doubt there will be some of that into the future.

Cancellations will also occur on the service side in terms of programs that are sometimes just delayed, but sometimes canceled if that REIT outcomes and the program is curtailed, we had significant one in the back half of '25 that impacted us relatively unusual circumstance both in terms of its -- well, in terms of its magnitude size of contract there. No standout risk of that nature in our backlog right now. But no doubt, there will be programs that have bad readouts and delays that will occur out of the contracts that sit in backlog. Our forecasting process of metering out when that backlog revenue will be taken to revenue. Certainly includes a discount factor, a risk factor that those delays will occur. And believe we've been cautious in terms of an estimate of that impact in our assumptions underlying our guidance going forward.

And again, that will always be there. We're in the business of helping our clients curtail programs quicker if the predicted outcome is not high. So that's something that will always occur in our business, and we just need to be adept at managing around them, which in fact, we did very well in the fourth quarter that large cancellation, we had put a very large gap in our fourth quarter service schedule there. And the team did a very good job of replacing reallocating resources to other projects that were current and able to be worked on. Our sales team did a good job of closing business in the quarter that could be started in the quarter and silver lining there that was also all done with a pretty good flow of bookings during the quarter.

So our backlog was not depleted in fact seen an increase in back year-over-year. And so on the cancellation side, yes, it will continue to occur into '26. That's a normal part of our business. We've implemented discount factors in our forecasting at the sort of levels coming out of the back half of the year, maybe potential upside if there's slowdown in fact.

Our next question comes from Max Smock with William Blair.

It's Christine Rains on for Max Smock. First one, I imagine it touches on the answer for the previous question a little bit just in terms of large pharma consolidation. But we noticed that the renewal rate in software remains below previous years and last quarter on a fee basis. So hoping you can provide some context on what it was on an account basis in the fourth quarter? And what factors are weighing on renewals and just kind of if and when we can expect renewals to return to the 90% ballpark?

Yes. Good question. We encountered renewal on the step down into the high 80s, mid-80s really driven by couple 3, maybe 4 impactful consolidations that hit us in the back half of the year, the third and fourth quarter. driving that down. The other element in there is that while our clients are generally not reducing their staffing and modeling its simulation and that if he will, ties to the amount of software, the number of seats, if you will, that they're licensing from us. They -- in this constrained budget environment, they do take a very close look at configurations.

And while reducing the number of platforms that they're licensing from us or generally the seats for them. They do look at the modules that are associated with each seat and platform. And can they save some money there. And so we saw a lot more scrutiny of that nature in the back half of '25 that also contributes to that renewal on fees number coming down a little bit. It will drive back towards 90 as we see the absence of as many consolidations, I think having gone through their scrutiny on a module-by-module basis last year. the potential for that impacting the renewal rate this year is less.

They've done that once, and we'll have done that review and filtered out things that maybe they don't need as many of these modules or those modules. So I think that will help improvement going forward as well. And the other factor will be price increase, all things being equal, that renewal on fees percentage is also impacted by the uptake of our annual price increase, which has been a bit more aggressive this year than it was last year. And so that should have a positive effect on renewal on fee rates as well.

Got it. That makes a lot of sense. And just one on margin for us, given the number of moving pieces on the cost side, hoping you can walk through what is baked into your EBIT margin guide for gross margin overall and in software versus services? And then just broadly, any color you can give us on your EBITDA margin cadence over the course of fiscal 2020 maybe similar to the revenue guide you gave in terms of down or up in Q1, I imagine down, but anything you give would be helpful.

Yes, from a kind of overall perspective, we come in and as we're looking at quarter-to-quarter on the expense side comparisons are reduction in course contributes. We announced the $4 million impact from the reduction in course. Million quarter starting in the fourth quarter. So the first 3 quarters of our fiscal year '26 guidance anticipates that benefit when you're looking year-over-year there. Secondly, in a world in which your top line growth is 0% to 4% where we're out. Where we're at, that does not give a lot of leverage in terms of EBITDA in an environment where you've got other expenses that inevitably are going to rise in terms of the compensation increases for your staff on board and medical benefits and things like that.

So our guidance in terms of adjusted EBITDA, 26% to 30% adjusted EBITDA shows a little bit of improvement to see some greater improvement than that. I think we need to see some -- get back to where we were in terms of top line growth at 10% or above. Our expectation is still targeted at 35% EBITDA. And I think our ability to get there does exist. It will need some time or some upside to the top line cadence that we have provided this next year.

Our next question comes from David Larsen with BTIG.

Can you talk a little bit about the proficiency asset? I think you said in the fourth quarter, revenue was down fairly substantially I guess, can you maybe just talk about why that is? Is it the software business or the service business? And what's driving that? I think it was down, was it 63% year-over-year in the quarter. Is that right?

I would say 63% in terms of the proficiency platform on the software side. Services were commercial MedChem services from the Proficiency acquisition were up 70% for the quarter. So the contributions of revenue from the acquisition on the software side, as we've indicated, in the back half of fiscal year '25, clinical trial starts and other factors have shown a slowdown in that side of the business. Clinical Communications has been impacted somewhat, but still growing quite nicely and there year-over-year. was much higher in terms of fourth quarter -- the first quarter contribution last year versus this year.

Okay. And can you just remind me what percentage of efficiency revenue is software?

It's -- [indiscernible], I don't have the exact percentage. I don't know well if you've got it, but generally, it's about 40% software, 60% service or something of that nature.

Yes we've definitely included in the investor deck, kind of the percentage of total software revenue and percentage of services revenue that the proficiency software contributes towards the MedChem business, really integrating it as we sell the solution across the entire ecosystem.

Okay. And then for the 1Q revenue guide, I think that's through November. So you probably have very good visibility into that. Still a year-over-year decline I mean, in order to meet your full year guide for fiscal '26, I would -- I mean, you're going to have to see some ramp-up in bookings. I mean do you have -- how much visibility do you have into that? Is it mean are those deals booked? Any sense for what percentage of the software or service revenue is under contract?

Yes, like any period, obviously, our earnings release here on December 1 is later given the change in reporting status and whatnot, gives us an ability to reaffirm our guidance for the year with good visibility, obviously, into the first quarter here. And so that is all tracking to those numbers. Yes, I think the dynamics of the quarter-by-quarter contribution for fiscal year '26 here. shows better year-over-year growth percentages. But the absolute dollar revenue uptick, if you will, on a quarter-to-quarter basis is pretty consistent. Given our seasonality, first and fourth quarter, we were on software on that.

And the percentage growth has really impacted significantly by the strong first and second quarters we had in '25 and the weak third and fourth quarters that we had in 25%, say, percentage growth dynamic that will show a big step up in the back half of the year. It isn't quite as big a step-up when you look at it on an absolute dollar basis from our starting point coming out of the back half.

Our next question comes from Constantine Davides with Citizens.

I just want to clear something up. Am I right to infer that your 2026 guidance contemplates an extension of recent renewal trends kind of in the low to mid-80s. I just want to be sure I heard that right.

It does. I would say it does in the sense of the consolidations, that sort of activity. As I mentioned earlier, we have implemented a more higher price increase this year. And so that on a year-to-year consistency basis, that's a contribution to the renewal rates and our revenue guidance is baked in there.

Got it. And then, Shawn, you guys talked about the strength of the balance sheet as well as cash flow? And I guess two questions on that. One is, what's a good way to think about cash flow in fiscal '26? And then I know you kind of always talked about being on the hunt for interesting assets. And just wondering if you can talk about your level of interest in terms of assets in your core markets, a newer market like clinical ops and even the potential for a transaction outside of those markets?

Yes. Cash flow runs the seasonality pattern of our revenue. driven by that seasonality of when our clients renew and that serves the revenue into quarter buckets. Our outlook there is robust as it has been even in our challenging times. The cash flow is very positive. Turning to acquisition side of your question. Yes, our scoping of opportunities out there no change in expectation that we will, as we have in the past, continue to grow through both organic contribution as well as acquisitions into our future opportunities that exist and the two landscapes that we operate in, primarily biosimulation as well as clinical ops and lots of opportunity there as we move forward into '26. 25,

I'd say it was -- would be characterized as a year of integration of our large proficiency acquisition, '26 should give us an opportunity to take a look at how we can get to the next acquisition, if you will, in our history.

Our next question comes from Brendan Smith with TD Cowen.

Maybe just quickly expanding on some of the earlier questions here. But can you speak to -- really how we should be thinking about pricing flexibility that you all have? And I guess, maybe any plans at this point to lean into some of that next year, especially as some of the AI capabilities roll out across the platform. Really just trying to understand a little bit to what extent the 26 guide includes any of those pricing assumptions kind of versus new customer add expansions of existing customer licenses? And just really what kind of levers we should think about that could kind of drive repeat versus 4% or even more within that framework next year?

Yes, Brendan. Good question. Yes, our pricing is a little bit more aggressive and it is part and parcel with the upgrades and new platform, AI and cloud capabilities that are planned to be delivered during the course of the year. The monetization of that functionality comes through a combination of separately priced modules and some of that technology integrated into the base platforms, which supports a more aggressive price increase this year. The stickiness of the product has been such that we have a to raise prices on an annual basis and when we've delivered significant improvements to the platform, we've sought to share the benefits of that with our clients, if you will, in terms of more aggressive pricing.

Much of the AI, certainly, the automation components of it will provide them greater efficiency and make their organizations that much more productive and modeling and simulation. And therefore, a price increase is justified. So in terms of sharing the wealth there a bit with them. How much of that is baked into our guidance going forward. It's -- keep in mind that it's -- the answer is it's baked in, but discounted at a couple of different steps of the way. there's always a yield to a price increase. You don't get the full price increase from every single one of your customers out there and as well. it still through the course of the year when licenses are renewed. And so it's paced and discounted, I guess, I think it's the phraseology. Price increase on the service side is it in an environment like this where there are fewer shots on goal, meaning there are fewer projects that are offered up in the marketplace makes for a little bit more price competition in that space.

So while there inevitably is some price increase in terms of the standard, hourly rates of our staff and whatnot. We've anticipated a very competitive still market to remain in fiscal year '26. So I wouldn't say that any of what we normally do on a pricing basis on the service side, there's no step-up baked into the guidance on the service side.

This now concludes our question-and-answer session. I would like to turn the call back to Shawn O'Connor for closing comments.

Well, thank you again for joining our call and your interest in Simulations Plus. On December 11, we'll be attending the TD Cowen Third Annual Diagnosing Tomorrow Tools and Technologies For The Next Decade in New York. During the week of January 12, we'll be attending the JPMorgan conference in San Francisco. I hope to see many of you at either of these on the calendar coming up in the near term here. Other than that, I appreciate your interest and take care.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.