Certara, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollar amounts below are in millions unless otherwise stated. The interim financial statements are unaudited.
Business context and performance
Certara provides biosimulation software and technology-enabled services for drug discovery, development, regulatory submissions, and market access. It reported one operating segment. Management cited expanding adoption of biosimulation and growth in customer expansions as business drivers.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $70.1 (+15%) | $61.1 | $136.8 (+15%) | $118.6 |
| Gross profit / margin | $42.6 / 60.7% | $40.5 / 66.2% | $83.3 / 60.9% | $75.7 / 63.9% |
| Operating income / margin | $5.3 / 7.5% | $13.6 / 22.3% | $10.9 / 8.0% | $21.6 / 18.2% |
| Net income (loss) | $(2.9) | $2.8 | $(1.8) | $3.8 |
| Adjusted EBITDA (non-GAAP) | $25.5 | $25.3 | $49.4 | $45.2 |
| Operating cash flow | Not provided separately for Q2 | $19.6 | $16.6 |
Q2 software revenue grew 12% to $20.1 million and services revenue grew 16% to $50.0 million. For the first half, software revenue rose 10% to $42.0 million and services revenue rose 18% to $94.8 million. Management attributed growth primarily to subscription renewals, new subscription customers, and technology-enabled services, particularly biosimulation.
Financial position, liquidity and debt
- At June 30, cash and cash equivalents were $267.8 million; restricted cash was $1.8 million. Total current assets were $344.8 million and current liabilities were $59.2 million.
- Cash, cash equivalents, and restricted cash decreased $3.7 million during the first half. Investing used $18.0 million, including $14.1 million for acquisitions and $3.4 million for capitalized development. Financing used $5.2 million.
- Term-loan principal outstanding was $302.0 million; balance-sheet debt, net of issuance costs and current portion, was $292.6 million. The company reported $99.9 million available on its $100 million revolving facility and was in compliance with debt covenants.
- A June credit-agreement amendment extended term-loan maturity to August 2026 and revolving commitments to August 2025, and increased revolving commitments by approximately $80 million. The debt is secured and bears variable interest.
Material changes, outlook and risks
- Despite revenue growth, operating income and GAAP earnings weakened year over year. Q2 cost of revenue rose 33%, faster than revenue, and operating expenses rose materially. Management cited higher headcount-related costs and stock-based compensation; first-half stock-based compensation was $12.7 million versus $1.1 million a year earlier.
- Management attributed the first-half net loss primarily to increased stock-based compensation, partly offset by higher gross profit. The reported tax rate was unusually high in the first half because of discrete tax effects related to prior-period interest-rate-swap losses and near break-even pretax income.
- The company determined its $230 million interest-rate swap had not been highly effective since April 2018 and no longer qualified for hedge accounting. It recorded a $2.4 million swap liability at June 30 and reclassified $3.0 million of accumulated comprehensive loss to interest expense in Q2. Management concluded the out-of-period correction was immaterial to all periods.
- Management expects operating expenses and headcount to increase, but said it expects expense growth at a lower rate than revenue growth. It believes existing cash will fund operations and capital expenditures for the foreseeable future. No specific revenue or earnings guidance is provided in the filing.
- Q2 bookings were $75.1 million versus $70.1 million a year earlier; software renewal rate was 90% versus 96%. Management cautioned bookings vary by period and may not predict revenue realization.
- On August 2, 2021, after quarter-end, Certara agreed to acquire Pinnacle 21 for $250 million cash and $60 million in restricted Certara stock, subject to regulatory approvals; closing was anticipated early in Q4. COVID-19 remained an uncertain risk, though the company reported no material adverse financial impact through June 30.
- Other disclosed risks include competition, customer renewals and contract scope, sales-cycle variability, acquisition integration, talent retention, regulatory changes, cybersecurity and data privacy, and the ability to meet debt obligations. The filing reported no significant changes to previously disclosed risk factors and no material change in legal proceedings.
Key facts for investors to verify
- Whether revenue growth converts into improved operating margins as hiring and stock-based compensation costs rise.
- Bookings, renewal rates, backlog conversion, and the durability of services and subscription growth.
- The Pinnacle 21 transaction’s approval, closing, funding impact, and expected contribution.
- Debt repayment capacity, variable-rate exposure, and compliance with covenants after the credit-agreement amendment.
- The effects of swap accounting and unusual tax items on future reported earnings and cash flows.