Certara, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Certara provides biosimulation software and technology-enabled services for biopharmaceutical research, regulatory submissions, and market access. Unless stated otherwise, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $73.9m | $60.3m | $210.8m | $178.9m |
| Gross margin | 61.1% | 61.8% | 60.9% | 63.2% |
| Operating income (loss) | $(0.8)m | $7.5m | $10.1m | $29.1m |
| Net income (loss) | $(1.8)m | $1.2m | $(3.6)m | $5.1m |
| Adjusted EBITDA, non-GAAP | $26.1m | $20.5m | $75.5m | $65.7m |
- Q3 revenue rose 23% year over year; software revenue increased 9% and services revenue 28%. For the nine months, revenue increased 18%, with software up 10% and services up 22%.
- Q3 GAAP operating margin was approximately -1.0% versus 12.4% a year earlier; nine-month operating margin was 4.8% versus 16.3%. GAAP diluted EPS was $(0.01) for Q3 and $(0.02) year to date, compared with $0.01 and $0.04, respectively.
- Cash from operations was $39.6m for the first nine months, versus $32.1m. Investing used $20.6m; financing provided $127.0m, principally reflecting the September stock offering. Cash and cash equivalents were $416.9m at September 30, up from $271.4m at year-end 2020.
- Term-loan principal was $301.2m; reported debt, net of issuance costs and current portion, was $292.2m. The company had $100m available under its revolving facility and reported compliance with its covenants. Cash exceeded term-loan principal by approximately $115.6m at quarter-end, before the subsequent acquisition.
- Current assets were $504.8m and current liabilities $69.6m. The company reported $93.8m of unsatisfied performance obligations.
Changes, outlook, and notable items
- Revenue growth was driven by software renewals, customer expansion and new customers, and growth in biosimulation and regulatory services. Q3 bookings were $72.3m versus $72.9m a year earlier; renewal rate was 87% versus 84%.
- Profitability weakened despite revenue growth. Nine-month net loss reflected higher stock-based compensation, employee costs, and acquisition costs; lower interest expense and increased revenue partly offset those costs. Q3 general and administrative expense rose 95%, including $7.5m of acquisition-related expense and higher stock compensation.
- Stock-based compensation expense was $20.8m for the first nine months versus $2.3m a year earlier. Adjusted EBITDA and adjusted net income are non-GAAP measures and exclude significant costs, including equity compensation and acquisition-related items.
- In September, Certara issued 4.5m primary shares at $31 per share and received $134.1m net proceeds; selling stockholders also sold shares. In June, the company extended term-loan maturity to August 2026 and increased revolving commitments to $100m.
- On October 1, after quarter-end, Certara acquired Pinnacle 21 for $250m cash and 2,239,717 restricted shares. Purchase-price allocation was not complete at filing. This is a material post-period use of cash and adds integration and government-customer exposure.
- Management said existing cash and cash equivalents should fund operations and capital expenditure requirements for the foreseeable future, while noting future needs depend on acquisitions and other growth opportunities. It expects investment in personnel, sales and marketing, R&D, and administrative functions; operating expenses are expected to rise, but at a slower rate than revenue. No specific numerical revenue or earnings guidance is provided.
- COVID-19 had not materially affected financial condition, results, or cash flows through September 30, but continuing pandemic effects remain uncertain. Other stated risks include competition, customer renewals, regulatory acceptance of biosimulation, cybersecurity and data privacy, hiring and retention, debt obligations, and acquisition execution.
- An interest-rate swap was found not highly effective for hedge accounting; the company reclassified $3.0m of accumulated loss to interest expense in Q2 and said the out-of-period correction was immaterial. Management reported disclosure controls effective and no material change in internal control during the quarter. No material change to previously reported legal proceedings was disclosed.
Important facts for investors to verify
- Whether revenue and bookings trends, including the 87% Q3 renewal rate, persist; bookings can vary substantially from quarter to quarter.
- How recurring stock compensation, acquisition costs, and public-company expenses affect GAAP margins and the comparability of non-GAAP results.
- Pinnacle 21’s final purchase-price allocation, integration costs and results, and the effect of the $250m cash consideration on post-acquisition liquidity and leverage.
- Debt repayment capacity, variable-rate exposure, covenant compliance, and the availability and terms of the $100m revolving facility.
- Potential effects of regulatory or industry changes, customer concentration, COVID-19, and the company’s transition from emerging-growth-company reporting requirements.