Certara, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Unless noted otherwise, amounts below are in U.S. dollars. Certara provides biosimulation software and technology-enabled services for biopharmaceutical drug development, regulatory submissions and market access.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $66.7 million | $57.4 million |
| Gross profit / gross margin | $40.7 million / 61.0% | $35.3 million / 61.4% |
| Operating income / margin | $5.6 million / 8.4% | $8.0 million / 13.9% |
| Net income | $1.1 million | $1.0 million |
| Adjusted EBITDA (non-GAAP) | $23.9 million | $19.9 million |
| Cash provided by operating activities | $4.9 million | $8.8 million |
- Revenue grew 16% year over year. Services revenue rose 21% to $44.8 million; software revenue increased 8% to $21.9 million. Geographic revenue was $46.6 million in the Americas, $14.2 million in EMEA and $5.9 million in Asia Pacific.
- Net income was nearly unchanged despite higher revenue: operating expenses increased 29% to $35.1 million. General and administrative expense rose 44%, including higher stock-based compensation, public-company costs and secondary-offering costs. Q1 equity-based compensation was $5.2 million versus $0.5 million a year earlier.
- Interest expense declined 43% to $3.9 million, principally due to lower debt outstanding. Basic and diluted EPS were each reported as $0.01.
- Cash and cash equivalents were $273.0 million at March 31, 2021, up from $271.4 million at year-end; restricted cash was $0.7 million. Current assets were $347.6 million and current liabilities $63.4 million.
- Long-term debt principal was $303.3 million, with $19.9 million available on the $20 million revolving facility (subject to a $0.1 million letter of credit). The term loan matures in August 2024. The company reported covenant compliance; $1.5 million of required excess-cash-flow prepayment was due by April 30, 2021.
- Investing activities used $3.5 million, including $2.0 million for an acquisition, $1.2 million for capitalized development and $0.2 million for capital expenditures. Financing activities used $0.9 million. Operating cash flow was lower year over year, primarily reflecting payments of accrued bonuses.
Material changes and operating indicators
- Bookings increased to $81.9 million from $61.0 million; the software renewal rate remained 92%. Management cautions that bookings vary substantially and may not predict realized revenue.
- Operating margin fell to 8.4% from 13.9%, as operating costs grew faster than revenue. Gross margin edged down to 61.0% from 61.4%.
- The company completed a secondary offering on March 29 in which stockholders sold 10.0 million shares, including the underwriters’ option. Certara sold no shares and received no proceeds; it recorded $0.7 million of related costs.
- A March 2 acquisition was described as immaterial. Preliminary purchase-price allocation included $1.2 million for customer relationships, $0.1 million for non-compete agreements and $1.1 million of goodwill.
Outlook, risks and other disclosures
- No numerical revenue or earnings guidance is provided. Management said existing cash should fund operations and capital expenditure requirements for the foreseeable future, while noting that future capital needs depend partly on acquisitions and other growth opportunities.
- Management expects continued investment in scientific talent, sales and marketing, R&D and administrative capacity. It expects operating expenses to rise over time, but at a slower rate than revenue; public-company costs are expected to increase G&A expense.
- Management reported no material COVID-19 impact on financial condition, results or cash flows through March 31, 2021, but warned that future effects remain uncertain.
- Key risks include competition and customer retention, acceptance of biosimulation by regulators and customers, biopharmaceutical R&D spending trends, sales-cycle and backlog uncertainty, acquisition integration, cybersecurity and data privacy, personnel retention, and the ability to service debt. The filing reported no significant changes to previously disclosed risk factors and no material changes to legal proceedings.
- The interest-rate swap covered a $230 million notional amount and fixed the rate at 2.1284% (excluding the credit spread) through May 31, 2022. The company said it expected no material reclassification of deferred hedge gains or losses into earnings over the next twelve months.
- Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile strong bookings and revenue growth with lower operating margin and operating cash flow, including the timing of accrued-bonus payments.
- Assess the composition and expected persistence of the $5.2 million stock-based compensation expense and other adjustments included in non-GAAP results.
- Review debt amortization, the April 2021 mandatory prepayment, variable-rate exposure after the swap expires, and covenant terms.
- Track the conversion of bookings and the $83.2 million of unsatisfied performance obligations into recognized revenue and cash collections.
- Check the cash-tax figure: the cash-flow statement reports $1.644 million paid, while MD&A reports $1.663 million.
- Interpret comprehensive loss correctly: the filing reports net income of $1.052 million and other comprehensive loss of $1.068 million, resulting in comprehensive loss of $0.016 million.