Certara, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022; filed August 9, 2022. Amounts below are in millions of U.S. dollars unless stated otherwise. Certara provides biosimulation software and technology-driven services, regulatory science solutions, and market-access tools to the biopharmaceutical industry.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $82.8 | $70.1 | $164.3 | $136.8 |
| Gross profit | $47.6 | $42.6 | $96.3 | $83.3 |
| Gross margin | 57.5% | 60.7% | 58.6% | 60.9% |
| Operating income | $4.1 | $5.3 | $10.3 | $10.9 |
| Net income (loss) | $(0.6) | $(2.9) | $1.6 | $(1.8) |
| Adjusted EBITDA, non-GAAP | $28.0 | $25.5 | $55.6 | $49.4 |
| Adjusted net income, non-GAAP | $14.6 | $11.8 | $31.5 | $26.3 |
Q2 diluted EPS was approximately $(0.00) per share; H1 diluted EPS was $0.01. The non-GAAP measures exclude specified items and should not be treated as substitutes for GAAP results.
Revenue and operating trends
- Q2 revenue rose 18%; excluding $7.0 million attributed to the Pinnacle acquisition, it increased 8%. H1 revenue rose 20%; excluding $13.0 million from Pinnacle, it increased 11%.
- Q2 software revenue increased 43% to $28.7 million, including Pinnacle; services revenue increased 8% to $54.0 million. For H1, software revenue rose 38% to $57.9 million and services revenue rose 12% to $106.4 million.
- Management cited renewals, customer expansion, new customers, biosimulation services growth, and acquisitions as drivers. Foreign-exchange movements partly offset revenue growth.
- Gross margin declined year over year in both periods. Cost of revenue grew faster than revenue, reflecting billable headcount, acquired-asset amortization, and share-based compensation. Sales and marketing and R&D expenses also increased with staffing and investment.
- Q2 other income included a $2.7 million increase in foreign-currency remeasurement gains; H1 gains increased $3.6 million. H1 foreign-currency translation losses in other comprehensive income were $10.7 million.
Cash flow, liquidity, and debt
- H1 operating cash flow was $33.1 million, versus $19.6 million a year earlier. Investing cash outflow was $11.9 million, including $5.9 million for acquisitions and $5.2 million of capitalized development costs. Financing cash outflow was $5.1 million.
- At June 30, cash and cash equivalents were $194.8 million, plus $3.5 million of restricted cash. The company reported $286.0 million of current assets and $81.5 million of current liabilities.
- Term-loan principal was $299.0 million; carrying value of long-term debt, net of current portion and debt issuance costs, was $290.9 million. The $100 million revolving facility was undrawn, subject to $0.1 million of letters of credit. Debt matures principally in 2026; $288.4 million of principal is scheduled for that year.
- The term loan is variable-rate debt. A $230 million interest-rate swap effective May 31, 2022 fixes the rate at 2.8% through August 2025. The reported effective term-loan rate was 3.98% for H1 2022. The company said it was in compliance with credit-agreement covenants and expected liquidity to cover foreseeable needs.
Outlook, risks, and notable items
- The filing provides no numerical revenue or earnings guidance. Management expects continued investment in scientific talent, sales and marketing, R&D, and operating capabilities; it expects headcount and total operating expenses to increase over time.
- Management reported that COVID-19 variants had slowed clinical-trial closeouts and delayed regulatory-services projects, which it viewed as transitory. The filing also identifies foreign-exchange volatility, inflation and macroeconomic conditions, competition, customer renewals and contract scope, regulatory acceptance of biosimulation, recruiting and retention, cybersecurity and service-provider disruptions, acquisition integration, and debt obligations among relevant risks.
- The H1 effective tax rate was 75%, including discrete items; management attributed tax-rate effects chiefly to the mix of domestic and international earnings and other tax factors. Q2’s rate was 121%.
- Disclosure controls and procedures were deemed ineffective at June 30, 2022 due to a material weakness in IT general controls. Management reported progress on remediation and targeted completion by December 31, 2022; it nevertheless stated that the financial statements fairly present the company’s results in all material respects.
- The January 2022 acquisition of Integrated Nonclinical Development Solutions had total consideration of $8.0 million and was not significant to the consolidated statements. No material changes to previously disclosed legal proceedings were reported.
Important facts for investors to verify
- Whether growth excluding Pinnacle continues, and how renewals, bookings, and customer expansion translate into recognized revenue. Q2 2022 bookings were $100.3 million and the renewal rate was 92%.
- Whether gross-margin pressure eases as staffing, acquisition-related amortization, and growth investments develop.
- Cash conversion and receivables: H1 operating cash flow improved, but accounts receivable used cash; track collections and deferred-revenue trends.
- Debt exposure and interest costs, including the variable-rate portion not covered by the $230 million swap and the large 2026 principal maturity.
- Progress toward remediating the IT-controls material weakness and the filing’s stated year-end 2022 target.
- Foreign-currency impacts on revenue, earnings, and accumulated other comprehensive loss, as well as the sustainability of reported currency gains.