Certara, Inc. — Q2 2023 Form 10-Q
Business context and period. Certara provides biosimulation software and technology-driven services for biopharmaceutical research, drug development, regulatory submissions and market access. This unaudited report covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $90.5M | $82.8M | $180.8M | $164.3M |
| Gross profit | $54.2M | $47.6M | $109.7M | $96.3M |
| Operating income | $13.0M | $4.1M | $20.5M | $10.3M |
| Net income (loss) | $4.7M | $(0.6)M | $6.1M | $1.6M |
| Operating cash flow | Not stated separately | Not stated separately | $28.0M | $33.1M |
| Adjusted EBITDA (non-GAAP) | $32.4M | $28.0M | $64.7M | $55.6M |
Margins, calculated from reported figures: gross margin was approximately 60.0% in Q2 and 60.7% for the first half, compared with 57.5% and 58.6%, respectively, in 2022. Operating margin was approximately 14.4% in Q2 and 11.3% for the first half, versus 5.0% and 6.3%. Net margin was approximately 5.2% in Q2 and 3.4% for the first half, versus negative 0.7% and 1.0%.
- Q2 revenue grew 9%; software revenue rose 17% to $33.7M and services revenue rose 5% to $56.7M. First-half revenue grew 10%; software rose 15% to $66.7M and services rose 7% to $114.0M.
- Management attributed growth mainly to software demand, existing-customer expansion and new customers, and continued biosimulation services growth. Regulatory revenue declined; first-half results also faced foreign-exchange headwinds.
- Q2 operating income improved as revenue increased and G&A fell 20%, partly reflecting lower stock-based compensation. First-half operating expenses rose overall, including higher sales and marketing and R&D spending.
- Interest expense increased 46% in Q2 to $5.7M and 57% in the first half to $11.1M, primarily due to higher market rates on floating-rate debt. Interest-rate swap gains partly offset the increase.
Liquidity, debt and cash flows
- At June 30, cash and cash equivalents were $245.2M, restricted cash was $3.0M, and total current assets were $353.0M against current liabilities of $102.9M.
- Term-loan principal was $296.0M; no revolving borrowings were outstanding, and approximately $100.0M of revolving capacity was available, subject to a $0.1M letter of credit. The term loan matures in August 2026 and is secured by substantially all U.S. assets and specified subsidiary stock pledges. The company reported covenant compliance.
- The term loan’s effective interest rate was 8.38% for the first half of 2023, compared with 3.98% in 2022. In June, the credit agreement was amended to replace LIBOR with SOFR plus a credit spread adjustment. A $230.0M interest-rate swap, fixed at 2.8%, runs through August 2025.
- First-half operating cash flow declined to $28.0M from $33.1M. Investing used $14.5M, including $6.3M of capitalized development costs and $7.6M for acquisitions; financing used $7.3M. Cash and restricted cash increased $8.5M, including the effect of foreign exchange.
- Management said existing liquidity should cover working capital, capital expenditures and contractual obligations for the foreseeable future. The company also disclosed $14.0M of future lease payments.
Changes, outlook and notable items
- Quarterly bookings were $85.9M, down from $100.3M a year earlier; renewal rate was 93%, compared with 92%. Bookings can vary significantly from quarter to quarter. These indicators merit attention alongside reported revenue.
- Management expects continued investment in scientific talent, sales and marketing, R&D, operations and complementary businesses; it expects headcount and total operating expenses to increase over time. The filing provides no specific revenue or earnings guidance.
- On June 20, Certara acquired the University of Washington’s Drug Interaction Solutions business, including the Drug Interaction Database, for estimated consideration of $8.3M. The preliminary purchase-price allocation includes $5.6M of database content/technology and $2.3M of goodwill.
- Acquisition contingent consideration was $23.2M at June 30, including a $2.6M fair-value increase recorded as expense in the first half. Vyasa earn-outs can reach $60.0M over three years; DIDB contingent payments can reach $2.0M over two years.
- Management identified macroeconomic uncertainty, inflation, higher interest rates, financial-system instability, geopolitical conflicts and residual pandemic effects as possible challenges, while stating it believes their business impacts would be transitory. The filing added risk disclosure concerning access to cash and financial institutions; Certara said it held no deposits or securities at Silicon Valley Bank, but noted deposits at other institutions exceed insured limits.
- The company reported no material pending or threatened litigation, no material off-balance-sheet arrangements, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether bookings’ Q2 decline persists and translates into recognized revenue; monitor renewals and customer demand.
- Whether revenue growth and improved gross margin continue despite regulatory-revenue softness and foreign-exchange effects.
- How higher floating-rate borrowing costs affect earnings and cash flow after the LIBOR-to-SOFR transition and through the swap’s August 2025 expiry.
- Whether operating cash generation recovers, given its first-half decline, and how acquisition spending and capitalized development costs evolve.
- How contingent consideration for Vyasa and DIDB changes as revenue thresholds are assessed, and whether acquisition integration meets expectations.
- Whether available liquidity remains adequate amid debt maturities, contractual commitments, and uninsured bank deposits.