管理層發言
Good day, and thank you for standing by. Welcome to the Certara First Quarter 2026 Earnings Conference Call. Operator Instructions. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Deuchler of Certara. Please go ahead.
Good morning, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have Jon Resnick, Chief Executive Officer; and John Gallagher, Chief Financial Officer. Earlier today, Certara released financial results for the quarter ended March 31, 2026. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements, and actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to Slide 2 in the accompanying materials for additional information which you can find on the company's Investor Relations website. In their remarks and responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on the company's website. Please refer to the reconciliation tables in the accompanying materials for additional information. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 11, 2026. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of information, future events or otherwise. And with that, I will turn the call over to Jon.
Good morning. Thank you all for joining today's call. Since we last spoke, I have crossed over the 100-day mark at Certara, and I continue to be incredibly impressed by many things within the company. We are differentiated by our world-leading scientists, institutional knowledge, regulatory leadership and our fit-for-purpose technology that is embedded in customer and regulators' workflows. Our clinical intelligence capability is the logic built into our technology, mining the latest science and drawing on what our experts know, our interactions with regulators over decades and what thousands of drug development successes and failures have taught us. Certara products and services are integral to the drug development process and increasingly scalable through the use of AI technologies. Having exited the listening and learning phase, my attention has transitioned to helping Certara reach its full potential. First quarter performance was in line with our expectations, but does not reflect the company's potential. I am focused on driving long-term durable growth across the organization by reshaping our business and portfolio strategy while instilling increased organizational and operational rigor. Today, we will discuss our markets and outline the steps we are taking to position the company for long-term success before wrapping up with our first quarter performance. Let me start by updating you on our end markets. Across the board, customers are increasing investment in AI and tech-enabled drug discovery capabilities. Today, there are over 200 AI-designed molecules in clinical development, up from just a few 10 years ago. Eli Lilly has partnered with NVIDIA to build a dedicated AI lab, and Roche Genentech is launching a hybrid cloud AI factory to scale their discovery and development efforts. Amazon has also announced the Bio Discovery product through AWS. Additionally, OpenAI and Anthropic have announced large language models for life science. The expansion of the use case in AI is consistent with Certara's approach using analytical techniques embedded in customers' workflow to accelerate the drug discovery and development processes while reducing the reliance on living subjects. As AI-driven drug development helps the industry deliver more molecules and innovation, demand will increase for Certara's core business, model-informed drug development, or MIDD, as customers race to turn drug candidates into approved treatments for patients. Accelerating data analytics processes becomes more important than ever as the decades-long goal of reducing drug application timelines comes within reach. In February, the ICH released ICH M15, providing guidance on the general principles for model-informed drug development which establishes an overarching set of principles for the acceptance of MIDD applications by regulators globally. In March, the FDA published guidance on the general considerations for the use of new approach methodologies or NAMs in drug development. And more recently, in April, the FDA announced a major initiative to implement real-time clinical trials, a shift to eliminate the delays that have historically slowed regulatory decisions. As FDA leadership has said, the agency has been conducting clinical trials the same way for decades, where key data signals and lag time have delayed regulatory decisions unnecessarily, which has slowed down drug development timelines. These tailwinds present a clear opportunity for Certara to tackle historically arduous drug development processes. Certara has an incredible legacy. We believe we are unrivaled in MIDD today because of what was required to build it. We have more than two decades of published scientific literature, 2,600 customers around the world, have run over 10,000 projects and have more than 160,000 users of our technology, including the FDA and Japan's Pharmaceuticals and Medical Devices Agency. Pinnacle 21 has been used to validate more than 36 trillion data points in support of over 500 approved treatments. And we are a team of world-class scientists and are proud to have 10 scientists recognized in Elsevier's top 2% of the world's most cited scientists. This is not a position that can be replicated overnight. It is the product of decades of scientific rigor, regulatory trust and deep customer partnership that many underestimate. For example, the qualification of our Simcyp software for the prediction of drug-to-drug interactions in the EMA required two years of engagement with participants representing all 27 member states. Our most experienced scientists work directly with EMA reviewers to evaluate 25 years' worth of data, code and process documentation to gain approval from the EMA. To our knowledge, Simcyp is the only mechanistic modeling software qualified in Europe at this critical level. Building on this legacy, we have developed and continue to invest in category-leading products that are truly distinguished in the market. Chemaxon, Simcyp, Pinnacle 21 and Phoenix are purpose-built, validated and deeply embedded in the workflows of the world's leading drug developers and regulators. What makes these valuable to our customers is the cutting-edge science, proprietary data, intellectual property, thousands of validated biological parameters, unmatched computational precision and auditable transparency that regulated science demands. As we move the company forward, there is a window of opportunity for us to drive value from connectivity across our clinical intelligence capabilities. We are building an AI-integrated platform that sits on top of and complements our existing portfolio. This next-generation platform will give researchers the ability to interrogate Certara's full body of knowledge across products, data sets and scientific expertise to get accurate, trusted answers to increasingly complex questions. We have created an AI-native team, allocated the investment resources needed for this effort and are engaging lighthouse customers. Our annual Certainty Conference in Boston illustrated our scientific and technological leadership and provided clear evidence that our customers are looking for us to innovate. In front of more than 400 attendees, we showcased the latest in MIDD and AI-enabled technology capabilities for more than a dozen products, leveraging demos and user groups to collect valuable feedback. Moving to delivery. Let me share a few highlights from the quarter. Our technology and scientific experts supported numerous drug approvals. One notable example was a complex generic of tazarotene, a dermal product used in the treatment of acne and psoriasis. Certara's PBPK in silico modeling data was accepted in lieu of a clinical endpoint bioequivalence study. This is only the second time ever that PBPK modeling has been used to enable approval of a generic drug in lieu of running clinical trials. In another example, Certara also demonstrated the real-world impact of MIDD and regulatory success for the leukemia therapy, asciminib. Simcyp supported the evidence generation journey and approval with the FDA accepting the PBPK modeling results in lieu of clinical studies for at least 10 human trials, significantly reducing development time and cost. Certara scientists published nearly 100 peer-reviewed papers this year spanning dose optimization, pediatric development, virtual bioequivalence and next-generation MIDD frameworks, which align with the recently published ICH M15 guidance focused on the multidisciplinary principles of MIDD. Among these, a publication co-authored with the FDA and MHRA scientists highlighted the expanding role of MIDD in pediatric drug development, showing PBPK as potential to reduce timelines and costs for pediatric trials by informing dosing, study design, extrapolation and label extension while reducing unnecessary studies in children. In addition, one of Certara's leading scientists serves as the Editor-in-Chief of Clinical Pharmacology and Therapeutics journal, a position she took over from another leading Certara scientist. We had several technology advancements in the quarter with AI increasing the productivity of our developers and the value of our technology. There were multiple new releases of our software, including a new version of D360 to help discovery scientists accelerate therapeutic peptide design and optimization, new functionality in Pinnacle 21 to accelerate clinical study start-up and extended reporting functionality in Phoenix Cloud and the release of Simcyp with expanded simulation and virtual bioequivalence capabilities. To capitalize on these opportunities and prepare to scale, we are taking several decisive actions. First, we're focusing our business and accelerating long-term growth by exiting medical writing. Second, we're reorganizing and aligning the company around two distinct growth areas: MIDD and Discovery, which we call MID3 and Accelerated Clinical Evidence, which we call ACE. Third, we are creating a stronger center of gravity for AI across the company, formalizing leadership with the Chief AI Officer and increasing investment in our next-generation Certara platform. Fourth, we're extending our capabilities and reach with strategic collaborations and partnerships highlighted by NVIDIA and Altasciences. Fifth, we're reviewing opportunities to leverage our existing clinical intelligence capabilities into new use cases; and sixth, improving execution and efficiency. Focusing on the first action, on Friday, we closed the divestiture of the regulatory writing and medical writing business to Veristat. This transaction allows us to sharpen our focus in areas where we have defined competitive and scientific advantage, results in a nearly one-to-one alignment between our expert services and our technology, where our value proposition is the strongest, improves the predictability of our revenue and unlocks approximately 150 basis points of incremental growth in 2027 and beyond. Second, we are reorganizing the company into two groups to accelerate growth and better service our customers: MID3 and ACE. Within MID3, we have merged our technology and expert services into one organization, creating a flywheel for technology innovation and customer engagement. ACE's mission is to reduce data timelines along the full life cycle from design through and beyond submission while maintaining or improving quality at every step in the process. Both groups will be supported by a Chief Product Officer reporting to me, who will oversee product development across the organization. We are engaged in an active search for this position. Third, we have appointed Dr. Chris Bouton as our Chief AI Officer. Further evidence of our commitment to drive innovative solutions that turn decades of cross-program scientific and regulatory intelligence into market-leading AI-integrated capabilities. Chris also serves as our Chief Technology Officer and led Certara's AI implementation efforts. In his expanded role, Chris will drive the acceleration of Certara's next-generation platform. Fourth, we are taking a new approach to partnerships. In April, we entered into a strategic collaboration with NVIDIA to apply accelerated computing and AI to Certara's next-generation platform. This partnership will reduce manual, time-intensive steps and shift biosimulation from sequential processes to parallel iterative workflows. This is particularly important for Certara's computationally intensive applications. We've been hard at work on this collaboration and we'll communicate more details soon. We've also expanded our commercial collaboration, most notably through a new relationship with Altasciences, a forward-thinking integrated CRO and CDMO. Together, we are advancing a model-first fully integrated and resource-efficient approach to early drug development that accelerates the path to proof of concept for biotech innovators, investors and pharmaceutical companies across the globe. These collaborations will strengthen Certara's underlying technology and enable us to bring value to new customers. Fifth, after completing a review of our portfolio and market opportunities, we've identified several new potential use cases that build off our clinical intelligence capabilities. For example, clinical trial simulation and asset evaluation to name just two. We are actively evaluating investment opportunities in these areas. There is excitement across the organization about these opportunities. Finally, we are taking decisive steps on the operational side of the business to drive efficiency, accountability and growth. We have deployed focused SWAT teams to address needed cultural shifts, simplify processes, accelerate technology development and improve execution. We are aligning sales and marketing to our new structure to clarify accountability and drive customer centricity. We are taking a data-driven approach to leveraging AI to better target and identify opportunities. Multiple efforts are underway to both review and optimize pricing, but also to explore more structural changes to how clients consume our solutions. We are also updating incentives to drive the right behaviors and encourage cross-functional collaboration. And we're also rationalizing internal spend to shore up our cost base and maximize investment efficiency. Let me turn to the first quarter results. The team's focus on technology resulted in improved performance over the second half of 2025, particularly in MIDD. This is a good start for the year, but we need to see consistent performance. Services performance in the quarter was mixed after an extremely strong Q4. The operational and commercial changes I outlined earlier are designed to address these gaps. It will take time to achieve our long-term operating goals and it's important that we make the right decisions for Certara's long-term growth and success now. With that, I will turn the call over to John Gallagher to walk you through our first quarter results and guidance.
Thank you, Jon, and hello, everyone. Total revenue for the three months ended March 31, 2026, was $106.9 million, representing year-over-year growth of 1% on a reported basis. Total bookings in the first quarter were $115.3 million, which declined 2% from the prior year period. Trailing 12-month bookings were $479.2 million, increasing 5%. Software revenue was $49.7 million in the first quarter, which increased 7% over the prior year period on a reported basis. Growth in the quarter was driven by Simcyp, Phoenix and Chemaxon. Ratable and subscription revenue accounted for 57% of first quarter software revenues, consistent with the prior year period. Software bookings were $48.7 million in the first quarter, which increased 20% from the prior year period. Trailing 12-month software bookings were $192.3 million, up 8% year-on-year. The software net retention rate was 106% in the quarter. Looking at our software bookings performance by tier, we saw performance at or above plan across all three customer tiers, which was nice to see following a mixed fourth quarter performance. Now turning to services revenue, which was $57.2 million in the first quarter, down 4% versus the prior year period on a reported basis. We saw mixed results in our MIDD services business in the quarter, reflecting the operational dynamics Jon mentioned earlier, which was compounded by softness in regulatory services. Services bookings in the first quarter were $66.6 million, which declined 14% from the prior year period. TTM services bookings were $286.9 million, up 2% compared to the prior year. After a strong fourth quarter, we saw softer performance from Tier 1 customers in MIDD services during the first quarter. Total cost of revenue for the first quarter of 2026 was $41.6 million, a slight increase from $41.5 million in the first quarter of 2025. Total operating expenses for the first quarter of 2026 were $111.2 million, an increase from $98.4 million in the first quarter of 2025, primarily due to a $7.4 million increase in the change in fair value of a contingent consideration related to the Vyasa acquisition. Adjusted EBITDA for the first quarter of 2026 was $31.7 million, a decrease from $34.8 million in the first quarter of 2025. Adjusted EBITDA margin in the quarter was 30%. Wrapping up the income statement. Note that GAAP net income and EPS are both impacted by nonrecurring items. Net loss for the first quarter of 2026 was $8.8 million compared to net income of $4.7 million in the first quarter of 2025. Reported adjusted net income for the first quarter of 2026 was $14.5 million compared to $22.2 million for the first quarter of 2025. Diluted loss per share for the first quarter of 2026 was $0.06 compared to earnings of $0.03 per share in the first quarter of 2025. Adjusted diluted earnings per share for the first quarter of 2026 were $0.09 compared to $0.14 per share in the first quarter of last year. Moving to the balance sheet. We finished the quarter with $149.5 million in cash and cash equivalents. As of March 31, 2026, we had $294.8 million of outstanding borrowings on our term loan and full availability under our revolving credit facility. Last year, our Board authorized a $100 million share repurchase program. We have repurchased approximately $82.6 million of stock since that authorization, including $40 million during the first quarter of 2026. Today, we announced the closing of the regulatory writing and medical writing services divestiture. As a reminder, in 2025, these businesses generated $50 million of revenue and approximately $17 million of adjusted EBITDA, excluding unallocated overhead expenses. During the first quarter of 2026, they contributed approximately $13 million in revenue, and we expect to recognize approximately $5 million from them in the second quarter. Going forward, we anticipate our revenue mix to be approximately 50% software and 50% services. With that in mind, we are updating our full year 2026 guidance to reflect the divestiture as follows. We now expect 2026 reported full year revenue to be in the range of $395 million to $405 million, including the $18 million I just referenced related to the divested business. This outlook reflects full year growth of 0% to 4%, excluding the divested business in both periods and is consistent with our prior growth expectations from the call in February. We expect first half revenue growth to be closer to the low end of the 0% to 4% range, while the second half is expected to be at or above the high end of the range. We anticipate full year software growth to be at or above the high end of the 0% to 4% range for the year, with first half closer to the midpoint and second half above the high end of the range. The software outlook contemplates higher visibility compared with last year, and we are optimistic about opportunities for newly introduced products. In Services, we expect full year growth to be towards the low end of the 0% to 4% range, with first half at or below the low end of the range, improving to the high end during the second half of the year. We see the Tier 2 and 3 end markets improving through the course of the year following a strong capital raising environment through April. Generally, compared to the guidance provided in late February, this more detailed revenue outlook reflects modestly improved software performance and modestly lower services outlook, which we attribute to some of the execution dynamics Jon referenced in his remarks. We anticipate full year 2026 adjusted EBITDA margin to continue to be in the 30% to 32% range, including contribution from the regulatory writing and medical writing business. First half margins will be modestly below this range and second half margins will be closer to the higher end of the range. Margin performance through the year reflects higher revenue growth in the second half of the year as well as improved operating discipline across the organization following the divestiture. We expect adjusted EPS in the range of $0.35 to $0.41 per share for the full year. Fully diluted shares are expected to be in the range of 157 million to 159 million, and we are modeling an effective tax rate of about 30%. With that, we will open up the call for Q&A. Operator, can you please open the line?
分析師問答
Operator Instructions. Our first question comes from Scott Schoenhaus with KeyBanc.
So Jon, you mentioned this next-generation AI platform that you guys are developing. Maybe walk us through the opportunity here, the monetization. Is it more a function of it drives engagement utilization on the software piece? Are you taking ASP up? Maybe walk us through the dynamics here to bridge us to this opportunity.
Thanks, Scott, for the question. Yes, we're extremely excited about what's ahead of us there. First of all, before I get into the detail on the platform itself, AI more broadly, we've taken a step change in terms of our readiness. We're focused on things like product development, which is the platform, scaling capabilities across the organization, people and talent; you saw the announcement about Chris and overall corporate governance of it. Historically, the foundation and capabilities we have over decades has created an exciting position in terms of embeddedness in client workflow, codification of science, validation, auditability and transparency. In essence, closing that last mile in a regulatory sciences market. Our view and expectation is that Certara's capabilities, know-how and expertise will fit in very well as a complement to what's out there today. The platform is about building on these capabilities. It is an effort to unify many of our products and our know-how under a single environment. It will allow us to take the independent know-how and the independent applications we have and answer questions across the life cycle. And it's going to create unique business models for us as we move forward. In terms of how to think about it, for 2026, as we indicated, we're out talking to lighthouse clients and engaging. This is now in active discussion. I wouldn't think too much about near-term modeling. We will provide more guidance toward the end of this year about how you should think about this relative to our conventional software portfolio as we think about the platform into 2027 and beyond.
And then my follow-up is the strong software bookings you have this quarter. You mentioned a lot of new product releases. Maybe help us parse out where you're seeing the strongest demand into that bookings strength this quarter on the software side?
So I think software was strong pretty much across the board this quarter. We're obviously off a soft trailing 12-month number that we saw at the end of last year. We put a lot of focus on it, really got underneath it with our sales teams and looked at incentives and products and plans and have done a lot of work in Q1 to get ready. It was pretty consistent and Phoenix Cloud had a good quarter with a very good pipeline. We're extremely excited about the transition there and the growth. Simcyp had a good quarter as well, our core PBPK offerings. Pinnacle, which has ebbs and flows a little bit with new trial starts and will be a little slower than in past years, actually slightly outperformed expectations in the quarter. So I think just about everything performed at or above expectation.
Our next question comes from Brendan Smith with TD Cowen.
Congrats on all the progress. Maybe just a bit of a follow-up on one of the previous questions. Can you speak a bit more specifically to the new customer mix you're seeing year-to-date? I know you mentioned pharma really leaning more into AI, which we continue to see across the board, but also maybe some impact on Tier 1 customers. So first, how do the new software adds within pharma compare to new customer adds within smaller emerging biotech? Any trends to call out in those relative buckets?
Brendan, we were pleased with the rebound we saw in software this quarter. Across all customer tiers, 1, 2 and 3, we saw a significant acceleration in bookings. We saw good achievement on the revenue with 7% software revenue growth in the quarter. Specifically, Tier 3 and Tier 2 customers leaned in on the offerings you would expect; we saw strong performance in Phoenix and Chemaxon. In the Tier 1 category, we had another good quarter on Simcyp. Those highlights represent the outperformance across tiers on the heels of some choppiness we saw in Q4.
Okay. Got it. And then maybe just a quick follow-up. Talking about the operational efficiencies you mentioned, as an internal target for helping drive margins, can you help us understand, through that lens, the structure of the NVIDIA collaboration, what that looks like and how we should think about the impact over the next couple of quarters?
On execution, there's a range of initiatives in play. Today we've announced reorganization and a divestiture, and there's been broader work on operational cadence, execution and the cost base. We're moving quickly to set up the business for the long term. Regarding the NVIDIA partnership, our mindset is to focus on substance rather than splashy press releases. We've been working with NVIDIA for the last couple months through an MOU and a signed partnership agreement to define ways of scaling the speed of some of the more complicated simulations, allowing democratization. We believe that if we can speed core QSP and PBPK offerings, we can enable broader use within organizations so teams can get quicker reads earlier and meet the expectations of early discovery and preclinical users. We're excited and we'll come back with more details on how to think about product development, joint efforts, and its impact on operational efficiencies.
Our next question comes from Luke Sergott with Barclays.
I want to talk about the reorganization across the two segments. It's more about the consistency or stability we could see from software versus services because it seems like one quarter one segment is really strong and then the other and vice versa. What are you doing to build consistency and more sustainability going forward between the two?
Yes. I've had the same observation. There's been a lot of inconsistency over the last few quarters. We put a lot of focus on software this quarter and had a strong result. Moving forward, we're trying to get the balance right. First, the exit of the regulatory and medical writing business will help because that business was extremely lumpy on the services side. The resulting mix will be more balanced between services and software, giving more predictability. The regulatory business wasn't really tied to our core software business. On the MIDD side, MID3 brings together expert services and technology to create that flywheel effect. We are also taking steps with our sales and commercial organization to better align specialty engagement for more predictability. I wouldn't say we've completely solved the riddle, but we see the pattern and are focused on incentives and organizational changes to get both segments moving at the same pace.
Great. And then with regards to guidance and the back half step-up here, you had really big bookings improvements. When do we see that flow through? Help us with the pacing on the services ramp through the year?
Services bookings typically take a couple of quarters to pull through. One focus area has been backlog conversion, and we saw good backlog conversion despite choppiness on services bookings. We expect that to continue through the year. Backlog will help support revenue, especially in the back half, with the bookings posted in Q4 and recent bookings. We're seeking to drive an inflection point via execution to fill up the backlog; that's a current focus.
Our next question comes from David Windley with Jefferies.
I wanted to ask on the references to execution and go-to-market challenges that impacted the first quarter. Jon, you touched on those at a high level, but I'd like more detail. Was that caused by the realignment during the quarter? Or what more detailed description would you give of those execution and go-to-market challenges that impacted the first quarter?
David, there's a legacy model in place and many of the changes we're making are meant to enhance it. I'm pleased by the progress on software. Overall, we want more consistency across teams. We're focused on optimizing expert-to-expert engagement because a lot of our interactions are scientist-to-scientist and we want to emphasize that. We're expanding partnerships—Altasciences is an example—reflecting a different approach to go-to-market. Our offerings are highly complementary to many players, including at-scale CROs and CDMOs, and we are pursuing partnerships in that direction. We've leaned heavier on a targeted approach, continuing to focus on Tier 1 while building relationships in Tier 2. We've layered in AI initiatives to drive more opportunities. Change creates some churn, and we had regulatory business in and out; those things have impact. Our goal is to set up a business that grows in line with expectations and that requires some short-term tougher decisions for longer-term growth.
Got it. My follow-up is around biologics in particular. There has been effort over years to refine or augment platforms, particularly Simcyp, to better address the large molecule market. Can you comment on progress and specific client traction, particularly Simcyp, on the biologics side?
Great question. I don't have specific data points in front of me, and I can provide them in a subsequent discussion. There's been a lot of focus on that area internally as I've ramped up. We see growth not only in Simcyp but in QSP, which brings in biological components beyond oral small molecules, including peptides and other modalities. We are seeing a growing percentage of our business outside of oral components. The new offerings we are building are relevant to both chemical and large molecule spaces. I'll provide follow-up with more color in our next discussion, but we are focused on extending applications into the large molecule space.
Our next question comes from Michael Cherny with Leerink Partners.
Circling back on the strategic AI expansion. John, as you think about the investments, the reorg internally, how are you balancing ensuring appropriate returns versus spend levels? What are the up-down dynamics to make sure investments are the right ones?
Good question. We've increased R&D spend in the quarter and are deliberately making investments. Under Jon's onboarding, we've changed the approach to ensure return on capital by looking at a portfolio view and business cases around what we're investing in and when revenue will come. We're taking a disciplined approach toward investments in R&D and looking at when the return will begin, recognizing many of these 2026 investments will start to show up in revenue in 2027.
I'll add that our portfolio is built on clinical and scientific intelligence already: 10,000 projects, thousands of published articles, regulatory know-how, and entrenched workflows with 160,000 users. There's a lot of unique data and applications within our walls. The investment is focused on turning that unique capability into something broadly available and integrated in clients' ecosystems. We understand our fit relative to other model providers and we're comfortable partnering in the ecosystem. NVIDIA is an example of where we're going. We have other discussions ongoing to be targeted and stepwise so we can achieve the returns we expect.
One quick additional question. With the divestiture completed, what are the plans for use of capital raised?
On capital allocation, we repurchased $40 million of shares in Q1 under our $100 million authorization and have repurchased approximately $82.6 million since authorization. Share buybacks continue to be a focus for capital allocation. We also have a good track record of tuck-in M&A and are evaluating pipeline opportunities. We're not committed to only one path; both buybacks and strategic tuck-ins are under consideration.
Our next question comes from Jeff Garro with Stephens.
I wanted to ask about the new MID3 and ACE categories. Could you spell out in more detail which products fit in each area and what we should expect in terms of metrics or commentary on those categories going forward?
Sure. MID3 will be our core model-informed drug development and discovery applications and will house technology assets like Simcyp and CertaraIQ, as well as expert service capabilities including QSP and PBPK. It's accountable for building regulatory and scientific footprint and offering development, leveraging the flywheel effect between technology and expert-based services. ACE will focus on solving data problems across the lifecycle—underscored by recent FDA trial acceleration commentary—and will include products like Phoenix, Pinnacle, CoAuthor and GlobalSubmit, focusing on data and workflow problems to accelerate the transformation of data into evidence for submission.
Thanks. Curious about how the go-to-market evolves with these categories. How big of a change is this for your go-to-market teams? What's the timeline to make those operational changes? Any expectation on the impact from these go-to-market changes?
The predominant focus is to build the business to reach double-digit growth over the midterm. The changes we've announced are alignment-based rather than a fundamental restructuring of the commercial organization. Historically, we had a centralized sales organization operating independently; one change is aligning the portfolio teams selling MID3 or ACE products with the actual businesses. This shortens feedback loops from clients, creates more accountability within the business and helps product innovation. There may be some near-term churn, but these changes are intended to set up the business for midterm growth. We haven't quantified near-term churn, but the expectation is improved growth over time.
Our next question comes from Craig Hettenbach with Morgan Stanley.
Can you touch on visibility in the software business and the expectation for a stronger second half, including any differences you see by customer tier over the course of the year?
Craig, visibility on software for a stronger second half is better this year than last. The deferred revenue balance is higher, meaning ratable software business that we've sold is in hand and will build through the year. The second-half ramp is more about a ramp in growth rate than a large dollar increase; comp easing in the second half will make the growth rate appear higher. Those are key reasons for the first-half/second-half story, and the performance in the quarter gives us confidence.
Customer tier was broad-based in Q1. Is that the expectation moving through the year or any tier-specific callouts?
Across categories, growth exceeded our plan expectations and that was most pronounced in Tier 2 and Tier 3. Tier 1 was a strong contributor as well. The funding environment provides tailwinds and we expect Tier 2 and Tier 3 to benefit as the year progresses.
And on the AI dedicated team, as you allocate capital, are you finding efficiencies in parts of the organization where you're shifting spending? Any color there?
Yes. We mentioned cost avoidance previously and we're still working through that. Our margin guidance reflects expected improvement through the year. We are reallocating and making trade-offs on the operating side as well as R&D investments.
We're also seeing significant acceleration improvements in developer productivity with AI. The amount of code our teams generate and the productivity gains are dramatic, accelerating road maps and capabilities.
Our next question comes from Sean Dodge with BMO Capital Markets.
Maybe on the Altasciences partnership—anything more you can share on how that works, the opportunity, the economics? Is it just software you're providing or will services be part of the partnership?
We're excited about this. Our portfolio lends itself to partnerships and we're highly complementary to many at-scale market players. The relationship with Altasciences, announced this past week, shows genuine alignment around acceleration of trials and rethinking early-stage execution. Altasciences has integrated lab, animal and human CDMO capabilities and can connect many of the modeling activities we do. Working together allows us to do disruptive things with data and accelerate data flows. Over the next weeks and months, we'll define joint opportunities to engage customers with high overlap and identify ways to better integrate technology and service workflow across the two organizations to benefit our clients.
On software upsells you referenced this quarter, can you give examples of common upsells lately? Are these consistent across tiers or concentrated?
Our net retention rate reflects upsells. We did 106% this quarter, an inflection higher than recent quarters. In Tier 1, upsells are expansions such as taking more seats or selling more functionality. In Tier 2 and Tier 3, upsells can include adding new names or new logos. We have a large customer base—about 2,400 customers—so upsells are part of a land-and-expand strategy working our existing base and ensuring customers are aware of our product breadth.
In the prior call, we talked about pricing discipline as a lever. We've looked at pricing on a few dimensions. Operationally, John referred to net contract values and upgrade paths, and we have a SWAT team focused on that. Strategically, clients have provided feedback that enterprise consumption of our software can be inhibited by current pricing structures. We're working on enterprise-based pricing approaches consistent with our push into platform engagement. We believe both tactical upgrades and strategic pricing initiatives will be net beneficial to growth.
Our next question comes from Matthew Hewitt with Craig-Hallum Capital Group.
Jon, you spoke about partnerships and consortiums. I'm curious: is the ultimate goal to drive adoption of simulation and modeling to accelerate the market, which benefits you, or to create a wider moat to retain and grow your business? What is the ultimate goal and when do you expect to see benefits from these partnerships?
Great question. The answer is both. Success in this market requires a connected ecosystem. It takes a range of capabilities to be successful and to grow at the rate we believe possible. We're focused on what we do very well and are doubling down, while partnering to fill gaps—technology suppliers, compute partners, and commercial partners like early-stage CROs that have large books of business. These partnerships are accelerants and can expand adoption. It's a win for us, a win for partners like Altasciences, and a win for clients because it accelerates timelines and reduces cost. Partnerships help accelerate the market and strengthen our position; we expect to demonstrate value as joint efforts are implemented over the coming months and quarters.
Our next question comes from Max Smock with William Blair.
Curious to get your thoughts on how much interest there is on the large pharma side to build internal solutions. Do you expect these investments to result in solutions that compete with your offerings in discovery? And in clinical, how should we think about the risk that large pharma builds solutions that compete with your MIDD solutions going forward?
I think in the near term most activities and productivity gains are in earlier-stage discovery, and that's a net positive for the market because more compounds mean more demand for MIDD services. We're hearing from many players asking how to tap into our capabilities. I described earlier the effort it took to get Simcyp approved in the EMA and the need for transparency and auditability. The combination of legacy data, unique IP and regulatory trust is not easy to replicate. It's inefficient for others to build these capabilities in-house. It's incumbent on us to democratize capabilities where appropriate and partner so clients can access the benefits without duplicating the effort.
Thank you. I'm not showing any further questions at this time. As such, this concludes today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.