Certara, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 7, 2022. Certara provides biosimulation software and technology-driven services for biopharmaceutical drug development, regulatory submissions, and market access. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Financial performance and position
- Q3 revenue: $84.7, up 15% year over year. Software revenue was $28.4 (+47%) and services revenue was $56.3 (+3%). Excluding $7.7 of Pinnacle revenue, total revenue growth was 4%.
- Nine-month revenue: $249.0, up 18%. Software revenue was $86.3 (+41%) and services revenue was $162.7 (+9%). Excluding $20.7 of Pinnacle revenue, total growth was 8%.
- Profitability: Q3 operating income was $10.9 versus an operating loss of $0.8 a year earlier; net income was $3.9 versus a net loss of $1.8. Nine-month operating income was $21.1 versus $10.1; net income was $5.6 versus a net loss of $3.6. Diluted EPS was $0.02 for Q3 and $0.03 for nine months.
- Margins: Gross margin, calculated from reported revenue and cost of revenue, was approximately 61.3% in Q3 versus 61.1%; for nine months it was approximately 59.5% versus 60.9%. Q3 operating margin was approximately 12.8%, compared with negative 1.0%; nine-month operating margin was approximately 8.5%, compared with 4.8%.
- Non-GAAP measures: Adjusted EBITDA was $32.7 in Q3 (+25%) and $88.3 for nine months (+17%). Adjusted net income was $16.6 in Q3 versus $17.2, and $48.2 for nine months versus $43.4. Adjusted diluted EPS was $0.10 versus $0.11 for Q3 and $0.30 versus $0.28 for nine months. These company-defined measures exclude recurring and other expenses and are not substitutes for GAAP results.
- Cash flow: Nine-month operating cash flow was $57.1 versus $39.6. Investing used $15.2, including $8.1 of capitalized development costs and $5.9 for acquisitions. Financing used $6.4, compared with $127.0 provided in 2021, which included $133.4 of stock-offering proceeds. Cash and restricted cash increased $27.2; foreign-exchange effects reduced cash by $8.3.
- Liquidity and debt: September 30 cash and equivalents were $210.5; restricted cash was $3.3. Current assets were $305.1 and current liabilities $76.5. Term-loan principal was $298.2 ($293.4 net carrying value); the $100.0 revolving facility was undrawn, subject to $0.1 of letters of credit. The term loan matures in 2026, with $288.4 of principal scheduled for 2026. The company reported covenant compliance.
- Balance sheet: Total assets were $1,508.7, total liabilities $454.3, and stockholders’ equity $1,054.4. Cash included $46.0 held outside the United States.
Changes versus the prior comparable period
- Revenue growth reflected customer renewals, expansion, new customers, and acquisitions; Pinnacle, acquired in October 2021, contributed materially. Foreign-exchange movements partly offset revenue growth.
- Operating expenses were $41.0 in Q3, down 11%, mainly because acquisition-related costs and stock compensation were lower. For nine months, operating expenses were $127.1, up 7%, with higher sales and marketing, R&D, and amortization partly offset by lower general and administrative costs.
- Q3 interest expense rose 59% to $5.2, primarily from higher market rates on variable-rate debt. Nine-month interest expense declined 9% to $12.3, partly because 2021 included a hedge-ineffectiveness charge.
- Other income included foreign-currency remeasurement gains of $2.9 in Q3 and $6.2 for nine months. Foreign-currency translation produced other comprehensive losses of $9.5 in Q3 and $20.2 for nine months.
- Bookings were $79.8 in Q3 2022, compared with $72.3 in Q3 2021 and $100.3 in Q2 2022. The software renewal rate was 93% in Q3, versus 87% a year earlier.
Outlook, commentary, and risks
- No specific forward revenue or earnings guidance is provided in the supplied filing text. Management expects existing cash, operating cash flows, and available credit to meet working-capital and contractual needs for the foreseeable future, while noting that acquisitions and other growth opportunities could increase capital needs.
- Management expects continued investment in scientific talent, sales and marketing, R&D, and administrative functions; headcount and total operating expenses are expected to increase over time.
- Management described COVID-variant-related delays in clinical-trial closeouts and regulatory-services projects as transitory, while acknowledging potential adverse effects.
- Key risks include customer renewals and contract timing, competition and adoption of biosimulation, biopharma R&D spending, inflation and foreign-exchange volatility, acquisition integration, cybersecurity and data protection, fixed-fee project cost estimates, and the ability to service debt.
- Controls: Disclosure controls were reported ineffective at September 30, 2022 because of a material weakness in IT general controls. Management said remediation was underway and expected completion by December 31, 2022; it nevertheless concluded the financial statements were fairly presented in all material respects.
- Tax and unusual items: The nine-month effective tax rate was 63%. Tax expense included $1.4 of corporate income taxes and interest assessed by the Portuguese Tax Authority for 2012, 2014, and 2019. The filing text does not clarify the assessment’s ultimate resolution.
- In August 2022, selling stockholders sold 7.0 million shares in a secondary offering; Certara received no proceeds and recorded $0.6 of related costs.
Important facts for investors to verify
- Whether reported growth persists after separating Pinnacle and other acquisition contributions, and after foreign-exchange effects.
- Whether bookings, renewal rates, and services growth support future revenue, given Q3 bookings declined from Q2.
- Progress in remediating the IT general-controls material weakness and whether controls are independently tested and operating effectively.
- Variable-rate debt exposure, interest-rate-swap coverage and terms, the large 2026 maturity, and covenant headroom.
- The Portuguese tax assessment’s status and the sustainability of the unusually high effective tax rate.
- The composition and recurrence of adjustments in non-GAAP results, including equity compensation, acquired-intangible amortization, and acquisition-related costs.