Certara, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; filed November 8, 2023. Certara provides biosimulation software and technology-driven services for drug development, regulatory submissions, and market access. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $85.6 | $84.7 | $266.3 | $249.0 |
| Gross margin | 49.7% | 61.3% | 59.8% | 59.5% |
| Operating income (loss) | $(52.8) | $10.9 | $(32.3) | $21.1 |
| Net income (loss) | $(49.0) | $3.9 | $(42.9) | $5.6 |
| Adjusted EBITDA, non-GAAP | $28.8 | $32.7 | $93.5 | $88.3 |
| Operating cash flow | Not separately reported | Not separately reported | $59.4 | $57.1 |
Q3 revenue grew 1% year over year: software revenue increased 10% to $31.3 million, while services revenue declined 4% to $54.2 million, primarily reflecting lower regulatory revenue. For the first nine months, software revenue grew 14% and services revenue grew 3%. Q3 GAAP results included a $47.0 million goodwill impairment charge. Adjusted EBITDA is a non-GAAP measure and excludes specified items; Q3 adjusted net income was $17.1 million versus $16.6 million, and nine-month adjusted net income was $54.7 million versus $48.2 million.
Balance sheet, liquidity and cash flow
- September 30 cash and cash equivalents were $272.3 million, up from $236.6 million at December 31, 2022. Operating cash flow was $59.4 million; investing cash use was $18.5 million and financing cash use was $8.2 million for the first nine months.
- Term-loan principal was $295.2 million; no revolver borrowings were outstanding, and approximately $100 million of revolving capacity was available, subject to $0.1 million of letters of credit. Cash less term-loan principal was approximately $(22.9) million.
- The term loan matures in August 2026, with $288.4 million of principal scheduled for 2026. The reported effective interest rate on term-loan debt was 8.67% for the first nine months of 2023, versus 4.60% in 2022. A $230 million interest-rate swap fixes the rate at 2.8% on its notional amount through August 2025.
- Management said existing liquidity should meet working-capital, capital expenditure and contractual needs for the foreseeable future. The company reported compliance with credit-agreement covenants. Future lease payments totaled $12.7 million.
Material changes and unusual items
- Q3 revenue growth was modest and accompanied by a decline in regulatory revenue. Q3 bookings were $84.8 million versus $79.8 million a year earlier, but the software renewal rate fell to 86% from 93% in Q3 2022 (after 90% and 93% in Q1 and Q2 2023).
- The $47.0 million goodwill impairment related to the Regulatory and Writing reporting unit. Management cited reduced revenue-growth and profitability forecasts, primarily reflecting lower demand from certain customer groups for the legacy business.
- Acquisition-related contingent-consideration remeasurement produced an $11.3 million expense for the first nine months, including an $8.8 million Q3 increase. The reported fair value of acquisition-related contingent liabilities was $31.9 million at September 30.
- Q3 general and administrative expense also included $1.6 million of lease-abandonment expense following an office-footprint review. Nine-month interest expense rose 38% to $17.0 million, mainly due to higher market rates; hedge gains partially offset the increase.
- On October 10, 2023, Certara completed its acquisition of Formedix for consideration of up to $39 million: $30 million in cash, subject to adjustments, and up to $9 million contingent on revenue thresholds.
Outlook, commentary and risks
The filing provides no specific financial guidance for future periods. Management plans continued investment in scientific talent, sales and marketing, research and development, operations, and complementary businesses, and expects headcount and total operating expenses to increase over time. It described macroeconomic impacts as potentially transitory, while noting uncertainty around inflation, interest rates and financial-system stability.
Key risks include customer renewal or contract reductions, demand for biosimulation and regulatory services, competition, execution and integration of acquisitions, fixed-fee contract cost estimates, cybersecurity and service-provider disruptions, foreign-exchange movements, and debt obligations and interest rates. The company also noted that substantially all cash is held at financial institutions and deposits exceed insured limits. It reported no material litigation and no material change in market-risk exposure; management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the lower Q3 renewal rate and regulatory-services demand stabilize or continue to weaken.
- The assumptions behind the Regulatory and Writing impairment and whether further impairment indicators arise.
- How acquisition earn-out remeasurements, including Vyasa’s contingent consideration, affect reported expenses and cash obligations.
- Whether operating cash generation, available revolver capacity and debt-service costs remain consistent with management’s liquidity assessment.
- Formedix’s final purchase-price allocation, integration progress and contribution to results; the filing states initial accounting was to be finalized in Q4 2023.