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Greetings, and welcome to the Simulations Plus Fourth Quarter and Fiscal Year 2024 Financial Results Conference Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Lisa Fortuna from Financial Profiles. Ms. Fortuna, you may now begin.
Good afternoon, everyone. Welcome to the Simulations Plus Fourth Quarter and Fiscal 2024 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial Officer and Chief Operating Officer of Simulations Plus. Please note that we updated our quarterly earnings presentation, which will serve as a supplement to today's prepared remarks. You can access the presentation on our Investor Relations website at www.simulations-plus.com. After management's commentary, we will open the call for questions. As a reminder, the information discussed today may include forward-looking statements that involve risks and uncertainties. Words like believe, expect, and anticipate refer to our best estimates as of this call, and actual future results could differ significantly from these statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports and filed with the Securities and Exchange Commission. With that, I'll turn the call over to Shawn. Please go ahead.
Thank you, Lisa. Good afternoon, everyone, and thank you for joining our fourth quarter and fiscal 2024 conference call. Our team delivered strong results in 2024. Total revenue increased 18% year-over-year and 14% on an organic basis, excluding the fourth quarter contribution from Pro-ficiency. The organic growth rate was above the 10.5% growth rate we achieved in fiscal 2023 and at the high end of our guidance provided at the beginning of the fiscal year. Full year diluted EPS of $0.49 exceeded the high end of our guidance range of $0.46 to $0.48. Turning to key highlights of the year, as an industry leader in biosimulation software tools, we continue to improve our competitive edge during fiscal 2024 with major upgrades across our platform supporting PBPK, PK/PD, and drug discovery. Our release of GPX in May significantly enhanced our flagship GastroPlus, PBPK platform with advanced models, refined algorithms, and integrated machine learning technology.
GastroPlus greatly enriches the user experience with an intuitive interface, streamlined workflows, and faster processing. In May, we released Monolix Sweet 2024. This release included integrations, presets, and other upgrades that make the software easier and faster to run, allowing scientists to spend less time on programming and more on exploring models and simulation results. In July, we released ADMet Predictor version 12, our machine learning Cheminformatics platform in support of drug discovery. The release included enhanced models with greater predictive accuracy and expanded high-throughput pharmacometrics capabilities amongst other new features. During fiscal year 2024, we continued to supplement our organic growth with strategic acquisition accomplishments. We completed the integration of our June 2023 acquisition at Immunetrics. The combined scientific resources and therapeutic area coverage position us as a clear leader in the fast-growing area of quantitative systems pharmacology with 57% growth in fiscal year '24.
This June, we acquired Pro-ficiency, the largest and most significant acquisition in our company history. The transaction doubles our TAM to $8 billion and significantly expands our market opportunity. This addition enhances our ability to support clients across clinical operations, affairs, and commercialization. Our comprehensive suite of innovative solutions now spans the entire drug development continuum and uniquely positions us to drive growth and profitability. Next, I'll spend a moment on the macro environment, which we realize is an area of particular focus for the financial community. The spending environment for pharma and biotech has been cost and funding constrained for a second fiscal year. Current leading indicators, including pharma budgets, clinical trial activity, funding activity, and others provide a mixed bag of metrics for the next year that suggest a potentially improved environment compared to the last two years.
We continue to observe a wide range of activity levels among our clients, many who are engaged in their internal calendar year '25 budget preparation process. Although we are encouraged by some positive initial budget discussions for 2025, we are entering the year with cautious optimism. Our guidance for fiscal year '25 is based upon current market conditions continuing, but we will be prepared to take advantage of any improvement in our client spending during the year. Turning to our Software segment, software revenue grew by 12% for fiscal year '24, 9% on an organic growth basis. Software revenue grew by 6% for the fourth quarter and decreased 6% on an organic growth basis. The Cheminformatics business unit revenue grew 6% for the year and 1% in the fourth quarter. During fiscal year '24, we have grown the number of clients utilizing the AIDD module to 15 of our total installed base of 110 ADMet Predictor clients.
The physiologically-based pharmacokinetics, or PBPK business unit, revenue increased 7% for the year and decreased 8% in the fourth quarter. GastroPlus continues to grow well despite some renewal slippage in the fourth quarter and ongoing softer growth in the Asian markets. Clinical pharmacology and pharmacometrics or our CPP business unit, revenue grew 18% for the fiscal year and 20% during the quarter. Monolix continues to increase its market share and displace its main competitor as the PK/PD platform of choice. Revenue in our Quantitative Systems Pharmacology or QSP business unit grew 7% for the year, but decreased 67% for the quarter. As a reminder, quarterly results can be lumpy for QSP software based upon the high ticket price per license and a smaller pool of end users. Revenue in our Adaptive Learning and Insights or ALI business unit was $1.1 million for the fourth quarter, generally in line with our expectations.
Revenue in our Medical Communications, or MC business unit was $100,000 for the fourth quarter, also in line with our expectations. Turning to our Services segment. Services revenue grew by 26% for fiscal year '24, 21% on an organic basis. Services revenue grew by 39% for the fourth quarter, 21% on an organic basis. We are pleased with this result given client cost constraint measures typically impact external service budgets as clients may eliminate budget work or delay execution in tighter funding environments. Performance was especially strong in CPP and QSP business units. CPP business unit revenue was strong, up 19% for the fiscal year and up 28% in the fourth quarter. The USP business unit revenue grew 57% for the year and 32% in the fourth quarter. PBPK business unit revenue decreased 5% for the fiscal year and 6% for the fourth quarter. We continue to encounter clients' data delays impacting the initiation of contracted projects in this space.
Medical Communications revenue was $1.1 million in the fourth quarter. This contribution was less than anticipated due to higher revenue recognized in the quarter prior to our acquisition as well as some project timing delays. Turning to an update on Pro-ficiency. As a reminder, Pro-ficiency provides experience in content simulation developed with AI technologies to enhance clinical trial success, data analytics, and medical communications, both in the regulatory approval process as well as post-approval commercialization. Ultimately, these activities support increased confidence in regulatory success for our clients. In addition, Pro-ficiency meaningfully expands our customer return on investment by helping them achieve accelerated clinical trial cycles, reduce protocol deviations, reduce the cost of clinical trial operations, and improve market awareness. The combined product and service portfolio results in offerings across the pharma value chain.
Software offerings from Pro-ficiency include: Pro-ficiency performance management, an adaptive learning platform that uses lifeline simulation and detailed data tracking to increase recruitment, retention, and protocol compliance during clinical trials. In simulations of complex real-world scenarios, learners are asked to make decisions and practice implementation of the trial protocol. The data generated provides insight into areas of the trial protocol that are unclear to healthcare practitioners, enabling clarification and further education prior to the start of clinical trials. Panorama KOL Insights is a platform for key opinion leaders' research in the life sciences industry. It provides current information about influential industry leaders, which can be filtered by criteria, including, but not limited to, therapeutic expertise, professional affiliations, and geographical location.
We are pleased to report that the integration process is tracking ahead of plan across all fronts. As previously announced, we formed two business units, Adaptive Learning and Insights to carry forward with our clinical simulations business, led by Jenny Rouse; and Medical Communications led by Murray Alper, to address medical affairs and commercialization support for our clients. On the sales and marketing front, our combined go-to-market strategies and lead generation are underway. We expect these efforts to contribute to business development opportunities. Together, our scientific and technological capabilities are expected to deliver enhanced products and services, which further benefit our clients. Additionally, we have integrated our back-office financial operations, general, and administrative organizations, which we expect will contribute to efficiencies and expense savings.
Thank you, Shawn. To recap our strong fourth quarter performance, total revenue increased 19% to $18.7 million, including a $2.3 million contribution from Pro-ficiency. Software revenue increased 6%, representing 53% of total revenue, and services revenue increased 39%, representing 40% of total revenue. Fiscal year total revenue increased 18% to $70 million. Software revenue increased 12%, representing 59% of total revenue, and services revenue increased 26%, representing 41% of total revenue. Turning to the software revenue contribution from our products for the quarter. GastroPlus was 49%, MonolixSuite was 17%, ADMet Predictor was 18%, and other products were 15%. For the fiscal year, GastroPlus was 53%, MonolixSuite was 20%, and ADMet Predictor was 18%, and other products were 9%. For the year, our software customer renewal rate was 93% based on these and 84% based on accounts, both increasing slightly compared to the prior year.
Average software revenue per customer for the year increased to $129,000. Shifting to our services revenue contribution by business unit for the quarter, CPP was 36%, QSP was 35%, PBPK was 17%, and MC was 13%. For the fiscal year, PPP was 43%, QSP was 31%, PBPK was 23%, and MC was 4%. Total services projects worked on during the quarter were 250. Year-end backlog decreased to $14.1 million, primarily impacted by two sources. First, there were some service contracts that slipped into September. And in the first two weeks of fiscal 2025, we've already closed more than $3 million of these. Second, we adjusted the backlog in the fourth quarter this year to remove open contracts that have been delayed, where there's still uncertainty regarding when the customers will resume the projects. As a result, anticipated revenue from backlog with 12 months increased to approximately 90% compared to 70% to 80% at the end of last year.
Total gross margin for the fiscal year was 62%, with software gross margin of 84% and gross margin of 30%. The year-over-year decline in gross margin was primarily due to the reclassification of operating expenses with the reorganization of our internal structure, the full year expense impact from the Immunetrics acquisition last year, and the additional expenses from the Pro-ficiency acquisition this year. Turning to our consolidated income statement for the quarter. R&D expense was 10% of revenue compared to 7% last year. Sales and marketing expense was 14% of revenue compared to 11% last year. G&A expense was 19% of revenue compared to 63% last year. The G&A expense variance was primarily due to the reclassification of expenses this year to cost of revenues collected in the reorganization of our internal structure mentioned at the beginning of the year. We also made a true-up of all international services-related expenses for the year in the fourth quarter.
G&A expense for the fourth quarter also included $1.7 million of transaction-related expenses for the acquisition of Pro-ficiency this year and included $2.5 million of transaction-related expenses for the acquisition of Immunetrics last year. The transaction expenses related to Immunetrics last year included a $1.6 million compensation expense. Total operating expenses were 43% of revenue compared to 80% last year, primarily due to the reclassification of expenses to the cost of revenue this year, offset by the addition of expenses related to Pro-ficiency this year. Loss from operations was negative 6% of revenue compared to negative 2% last year, and income before income taxes was 5% of revenue compared to 0% last year. Other income was $2 million this quarter compared to $0.4 million last year, primarily due to a decrease in the fair value of the Immunetrics earnout liability this year.
Net income for the fourth quarter was $0.8 million or 5% of revenue compared to $0.5 million or 3% of revenue last year. Diluted EPS was $0.04 compared to $0.03 last year. And adjusted diluted EPS, excluding the impact of transaction-related costs, were $0.06 compared to $0.18 last year. This year-over-year change was primarily driven by the transaction-related expense add-back to diluted EPS in Q4 last year being larger than the add back in Q4 this year. Fourth quarter adjusted EBITDA was $4.1 million compared to $4.9 million last year at 22% and 31% of revenue, respectively. We calculate adjusted EBITDA by adding back interest, taxes, depreciation and amortization, stock-based compensation, gain or loss on currency exchange, any acquisition or financial transaction-related expenses, and any asset impairment charges. The reconciliation of this non-GAAP metric to net income, the relevant GAAP metric, is in our earnings release and on our website.
Income tax expense for the fourth quarter was less than $0.1 million compared to an income tax benefit of $0.5 million last year. Our effective tax rate was 2% compared to 674% in the prior year period. As a reminder, we true up our annual income tax estimate in the fourth quarter each year, which impacts the effective tax rate in the quarter. Turning to our consolidated income statement for the fiscal year. R&D expense was 8% of revenue, equivalent to last year. Sales and marketing expense was 13% of revenue compared to 11% last year, primarily due to our increased investment in sales and marketing. G&A expense was 32% of revenue, down from 47% last year. G&A expense for the year included $2.6 million of transaction-related expenses for the acquisition of Pro-ficiency this year, and included $3.3 million of transaction-related expenses for the acquisition of Immunetrics last year. Total operating expenses were 53% of revenue compared to 66% last year.
Income from operations was 9% of revenue compared to 15% last year. And income before income taxes was 18% of revenue compared to 20% last year. Other income was $6.3 million during the year compared to $3 million last year, primarily due to an increase in interest income and the previously mentioned decrease in the fair value of the Immunetrics earnout liability. Net income for the fiscal year was $10 million or 14% of revenue compared to $10 million or 17% of revenue last year. Diluted EPS was $0.49, equivalent to last year, and adjusted diluted EPS, excluding the impact of transaction-related costs, were $0.53 compared to $0.67 last year. Adjusted diluted EPS was lower than expected primarily due to the lower transaction-related expense add back to diluted EPS in the fourth quarter. Fiscal year adjusted EBITDA was $20.3 million compared to $20.6 million last year at 29% and 35% of revenue, respectively.
Income tax expense for the fiscal year was $2.5 million compared to $1.7 million last year, and our effective tax rate was 20% compared to 15% last year. We expect our effective tax rate for fiscal year 2025 to be in the range of 23% to 25%. Turning to our balance sheet. We ended the year with $20 million in cash and investments. We remain well capitalized with no debt and strong free cash flow to execute our growth strategy.
I'll now turn the call back to Shawn. Thank you, Will. We're very pleased with our 2024 performance, and our results reflect strong execution in both our Software and Service segments. Also, the integration of the most significant acquisition in the history of our company is progressing ahead of our expectations. Moving on to our outlook for fiscal 2025. Based upon current market conditions, our organic growth is expected to be in the range of 10% to 15%, consistent with fiscal year '24. In addition, the Pro-ficiency acquisition is expected to contribute $15 million to $18 million, consistent with the range we previously provided. Our guidance for fiscal 2025 is as follows: Total revenue between $90 million and $93 million, year-over-year revenue growth in the range of 28% to 33%, software mix between 55% and 60%, adjusted EBITDA margin between 31% and 33%, adjusted diluted earnings per share of $1.07 to $1.20.
We're providing guidance on adjusted diluted EPS versus diluted EPS, consistent with guidance practices for our industry. For comparison purposes, our adjusted diluted EPS guidance translates to at or above our fiscal year '24 diluted EPS of $0.49. Of note, our guidance does not include the impact of any future acquisitions. As a reminder, our first fiscal quarter is historically our lowest revenue quarter due to the seasonality of our revenue streams. As such, the EPS could dip below breakeven, and a low diluted adjusted EPS will be above the diluted EPS level. We still expect some impact. We anticipate higher revenues in the remaining quarters of fiscal 2025, as we have had in the past, resulting in higher profitability in the remaining quarters of our fiscal year. Our near-term priorities include completing the acquisition integration, expanding cross-selling opportunities, driving towards our historical adjusted EBITDA margin target of 35% to 40%, and correspondingly, profitability levels.
We are well positioned to achieve our goals this year and remain focused on executing our disciplined growth strategy to deliver long-term value to our stakeholders. Thank you for your time today. With that, I'll turn the call over to the operator for your questions.
分析師問答
Thank you. We will now begin the question and answer session. Please hold on while we gather questions. Our first question comes from Max Smock with William Blair. Please go ahead with your question.
Hi, great. Thank you for taking our question. Our first one was just hoping you can give an update on staffing and services. I recall that very low attrition rates in the business have been weighing on margins. So curious if this trend has continued over the last few months. And what your hiring plans look like in 2025, basically trying to get at when we can expect utilization to improve and how we should think about the cadence of margin progression in 2025?
Yes. Thanks for the question. Yes, as we indicated last conference call, our back half profitability in Q3 and Q4 was impacted as we hired to our plan, but attrition that we baked into that plan was much less than anticipated, and that has contributed to some pressure in terms of margins in the service business in the back half of the year continued into the fourth quarter. Since this became more visible, we adjusted our recruiting plans on a go-forward basis and anticipate that we'll get back in line, if you will, with the matching of the capacity and revenue streams on the service side in the first half of fiscal '2025. So a little bit of pressure in the first half of next year, but I believe that improvement will be gradual, and through the first half and into the second half, we should be back on track, and it's reflected in our guidance of 31% to 33% EBITDA margin and that improvement during the course of the year.
Great. That's really helpful. And then just one on Pro-ficiency in terms of its competitive moat. So given that we have seen a continuing trend and expectation for more trials to be run by CROs. And given that Pro-ficiency doesn't sell into CROs, do you see this as limiting the size of your business opportunity in the space?
No, no. I mean the marketplace that they sell into is in support of pharma clients and their clinical trials in association with the CROs that are out there. We are complementary to their services, competitive to those that do offer this sort of comparable, if you will, training type of capabilities, but the Pro-ficiency offering is pretty unique in terms of both its training module development and the software platform that supports it in terms of its delivery and the impact on adherence to clinical trials. So clinical trial uptick in 2025 would be a favorable indicator for the Pro-ficiency business, and it falls through in a marketplace alongside CROs and competition with some CROs, but that's the same marketplace that it's been selling into and succeeding in the last number of years.
Great. And then lastly, just a quick modeling question. Sorry if you already said it, and I missed it. But how much did Immunetrics and Pro-ficiency contribute to total sales in Q4? And also, what is the breakdown in terms of software versus services? Asking because based on the it seems like the inorganic contribution was much lower than we would have thought in the fourth quarter. So if this is the case, can you discuss the dynamics around this?
Pro-ficiency's contribution came in a bit below the $3 million expectation that we had. It came in at about $2.1 million to $2.2 million in revenue primarily in terms of the medical communications side, where our anticipation of how much of the project revenue, the service revenue from medical communications would be recognized in the quarter prior to our close of the transaction, obviously, don't pick up the revenue flow from those projects until close, which was in the mid-June timeframe. So that recognition at the beginning of the quarter was a little bit greater than we anticipated. And then secondly, yes, they were subject to some of the delays that we see across our service business in terms of some projects being pushed out. So 2.1 in terms of the Pro-ficiency contribution to the fourth quarter. And it does not change our expectation in terms of $15 million to $18 million contribution in the future. Immunetrics fourth quarter contribution revenue is not a part of acquisition revenue. They had a fourth quarter contribution revenue in '23 as well as fourth quarter '24. Our integration of that business now is pretty well complete, and we're servicing those opportunities from the combined staff of our two organizations. So don't have a breakout of that for the fourth quarter.
That was all really helpful. And just as you were talking about 2025, kind of a similar question on Pro-ficiency. It seems like you're counting Pro-ficiency revenue as all inorganic, despite it kind of closing, like you said, in the fourth quarter. So just hoping that you can help us bridge your organic versus inorganic growth expectations for next fiscal year and if you can, by both software and services.
Yes, I don't provide other than our expectation that the software will be in the range of 55% to 60% of our total revenues. I don't have a breakout in terms of software versus services. But let's call it SLP-like business; everything except Pro-ficiency. Our guidance is based upon the assumption that organic growth will be in the range of 10% to 15%, similar to our guidance for last year, fiscal year '24, which was 10% to 15%, for which we came in at about 14% growth. Then, in 2025, Pro-ficiency's contribution should be in the range of $15 million to $18 million.
Our next question is from Matt Hewitt with Craig-Hallum. Please proceed with your question.
Good afternoon, Thanks for taking the questions. Maybe first up, could you help us bridge the gap on your EPS guidance for next year? Just trying to figure out significantly higher and then what I was modeled and what the Street was modeling. I'm just trying to figure out what the doubt there is.
Thanks. I believe the discussion around adjusted diluted EPS versus diluted EPS is important. We have included adjusted diluted EPS because it aligns with what our peers are using, allowing for better comparability. Will, could you elaborate on the differences between the two?
Sure. Thanks for the question, Matt. I would refer to the reconciliations that we have in the press release. One of the things we did for FY '24 is we've got the reconciliation of adjusted EBITDA to net income. And for the most part, we've got typical exclusions there that we've communicated in the past. The adjusted diluted EPS to diluted EPS, we've really just taken transaction-related expenses as the adjustment. Based on the feedback we're getting from folks as well as sort of comparative in the industry, it made sense to standardize in FY '25, so for this next fiscal year to just have the reconciliation items that are in the adjusted EBITDA be the same adjustments that are going to be for the adjusted diluted EPS with the tax impact as well. So FY '24 was just an adjustment for transaction-related expenses. FY '25 will have a consistent approach with the way we do the adjusted EBITDA, just to simplify it.
That's helpful. But I was looking for clarification on whether you expect $5 million in acquisition-related expenses. There's a significant difference between where everyone was before on an adjusted basis and your new guidance, which represents a notable increase. I'm trying to understand the reasons behind this increase. I'm assuming it's related to M&A expenses, but I want to confirm that I'm considering this correctly.
Yes. Right now, we don't have any M&A expenses assumed in the guidance, which excludes any acquisitions. So to the extent that if you look through the EBITDA reconciliation, the big drivers there are depreciation and amortization expense and stock comp expense. I mean those combined were about $11 million to $12 million in FY '24 and will have an increase with the additional intangible amortization from the Pro-ficiency acquisition. So that total probably goes to about $14 million to $15 million of adjustments.
Got it. All right. Shawn, could you provide an update on the integration with Pro-ficiency, specifically regarding the sales and marketing efforts? Have those teams been fully trained at this point? How is the cross-selling pipeline looking?
Yes. We have integrated the sales and marketing staff from the Pro-ficiency acquisition into our consolidated business development team. We have conducted training and shared presentations about our capabilities to ensure everyone is familiar with our new products and services. Over the past couple of years, we have transitioned our sell-through points, which have historically included the discovery department for ADMet Predictor and mainly the modeling and simulation organization on the clinical side. Before this year, we focused on expanding our reach to include the clinical management teams, which consist of personnel managing drug programs, including representatives from modeling and simulation. Strengthening our relationship in this area has been crucial for supporting significant service growth in a challenging market and has stemmed from identifying opportunities to positively impact drug programs that may have exhausted resources in modeling and simulation.
Due to budget constraints, these budgets have become tighter, allowing our service business to be funded through clinical trial budgets. This strategy has contributed to our success in service sales during a tough period. Moving forward with Pro-ficiency, we are now extending our reach to their touch points, specifically the clinical operations team and the medical affairs team within our clients. The initial step in engaging with the market externally is to expand these networks and build relationships around new budget opportunities available to us. So far, this is progressing well. We are three months post-acquisition, which is a short time frame, but I believe we are making good progress.
Thank you. Our next question is from David Larsen with BTIG. Please proceed with your question.
Hi. Can you talk a little bit more about the software revenue growth on a year-over-year basis? I think I heard you say it was down 6% year-over-year organically. Is that correct? And how does that compare to your own internal expectations? And what was that internal growth rate or organic growth rate for the year, please?
Yes. Will, can you just remind us of the specific growth rates on the software side as I flip through in mind, making sure I get it right. I mean, the growth rate was down in the fourth quarter but up 12% for the year, 9% organically, right?
Yes. I mean, total revenue for the year, yes.
In the fourth quarter, revenues from software were down. The main challenges were twofold. We experienced some delays in renewals past August into the first quarter. However, our primary issue has been in the Asian market, which has been unstable since COVID. This is a major focus for us as we enter fiscal year '25. We've seen strong growth in our North American and European markets, helping us to offset the challenges. Nevertheless, there is room for improvement in this area moving forward.
Okay. I see the software gross margin is around 72% in the fourth quarter, which is usually in the 90% range. Should we consider this an unusual quarter due to some renewal timing, and will it return to the 90% range in the first quarter of next year? Can we expect to see that organic software revenue growth starting in fiscal first quarter?
Yes, our software revenue margin is impacted. I think it was in the mid-80s. There is some impact as we indicated earlier that the software side of the Pro-ficiency business is down towards an 80% margin compared to our existing legacy software products, which are above 90%. Overall profitability for Pro-ficiency, both in software and services, is improving as we progress through the year. We made significant improvements through the acquisition by streamlining some of the overhead expenses of that business unit. This began in the fourth quarter and will continue into fiscal year '25 with a profitability profile slightly lower than our legacy model. The overall company EBITDA guidance is between 31% and 33% on the legacy side, which could have approached our goal of 35% to 40% if not for the impact of Pro-ficiency in '25. We believe that by '26, we will align them with our profitability profile, and there will be continued improvements through 2025. Specifically regarding software, there is some impact from Pro-ficiency, but I think we will gradually see improvement quarter-to-quarter throughout '25.
I have one more quick question. I noticed that the service gross margin you reported was minus 4% in fiscal Q4. I'm assuming this relates to Pro-ficiency, which I understand is closely linked to the clinical trial activities, specifically in training personnel at the sites on how to implement the trials according to the trial master file. Could you discuss the mix of clinical trials you’re supporting? For instance, are you seeing an increase in obesity health-related trials or a slowdown in gene therapies due to the funding environment? Additionally, I believe you hired a couple of scientists last quarter. Are they involved in sales, and do you anticipate this will boost your service gross margin?
Yes. Two-part answer. I'll talk to the Pro-ficiency side of your question. And then, Will, maybe you can talk to the fourth quarter margin. Pro-ficiency in terms of, yes, supportive clinical trial activity on the simulation side as its primary focus, business driver, if you will. No specialty in terms of singular therapeutic areas. Their portfolio of past projects spans most all therapeutic areas and tends to be more valued in difficult complex clinical trial protocols where obviously a more aggressive comprehensive training ahead of its initiation benefits protocol adherence more significantly. But there's no therapeutic area sort of concentration in terms of their portfolio of activities. Will, do you want to talk about the margin?
Sure. I can address this in relation to the software and services. Q4 includes some adjustments we make annually during the audit process. The 72% you mentioned for software in Q4 was mainly due to the Immunetrics software underperforming. However, as Shawn noted, we anticipate this will rise to the mid-80s going forward. I used to expect it to be in the 85 to 90 range, but I mentioned there would be some decrease. On the services side for Q4, we reviewed the year and I mentioned there was an adjustment of about $2.5 million. This was related to our international efforts with employees and our services group, which operate through a professional employer organization or a PEO. We reclassified those from general and administrative expenses to services in Q4. Looking ahead, the total services margin for the year is projected to be 30% as we continue to enhance our efficiency and aim for growth through a focus on billable utilization. We are targeting a range of 30% to 40%.
Thank you. Our next question is from Scott Schoenhaus with KeyBanc Capital Markets. Please proceed with your question.
I wanted to discuss the 10% to 15% organic growth projected for next year. Currently, your guidance reflects levels that are noticeably low. Last year, you provided similar organic revenue guidance. Could you explain what is factored into both the low and high ends of that range? Additionally, could you share your expectations for the biotech end market for next year?
Yes. We're all trying to throw that dirt and read the tea leaves in terms of we are only moving forward, and we certainly see some positive things. I saw the Thermo CEO speak very positively today of market opportunity into 2025, and we see a lot of positive signs too. Our discussions of late in terms of clients budgetary processes that phenomena of our industry in which we've got a few dollars left to spend this year. We lose it if we don't spend it by the end of the calendar year. Some great discussions taking place right now, and I want to be optimistic, but I'm also conscious. We've seen upticks in funding that have been short-lived and pulled back and therefore, our approach here in terms of guidance for '25 is pretty conservatively set based upon, okay, the market as it is today. The range of 10% to 15% organic growth. We came in on the higher end of that range this year. I've got confidence in our organization, we've executed well in a challenging market over the last 2-year window of time and would be confident in terms of our ability to perform at the high end of that range, but guidance being what it is, we'll take a conservative approach and carry forward our 10% to 15% from last year.
But poised, if current market conditions do run on the uptick and start to improve this fourth quarter of the calendar year or into '25 that we should be able to support and grow with that growth as well into next year. But certainly, at this point in time, prudent that we take a conservative approach to setting our guidance for next year.
So I'm assuming you're meaning that you have very little assumptions of a return or reacceleration of the biotech end market, given all that commentary?
No. I have hope for, but from a guidance sort of perspective, let's start to accrue before we count.
Can you provide more details about the recent slip in renewals for GastroPlus? Was it related to a large pharmaceutical company, and what were the reasons for not renewing or delaying the renewal?
Yes. The pushouts, it's not a nonrenewal decision. It's getting the paperwork through and getting the documentation purchase order and not getting that all done by August 31 to our funky fiscal year here. August, a lot of people are on vacation, and it's not an excuse, but it sometimes is often difficult to get things closed. I mean, the only challengeable one in the mix there is that in the fourth quarter, we did have a renewal situation where we had a specific client that acquired a second company during the course of the year and, in fact, then as well closed one of their sites. And so that was a situation where we had three renewals come up. The original company, the acquired company, and within that original company, their license configuration was site-based. So in that situation, which is when you look back over our history in terms of the differential between mid-90 renewal rates on software and 100%, what is that difference? I mean, it's either companies going bankrupt and departing the landscape or consolidation. And so we had one of those in the fourth quarter results. The slippage ones are timing and aren't takeaways of our book of business, if you will. It's only those acquisition scenarios that can be troublesome.
Our next question is from Francois Brisebois with Oppenheimer & Company. Please proceed with your question.
Hi. Thanks for taking the questions. Just two here. I was just wondering if you can give us a little more explanation or color around that TAM doubling that you talk about. It's not necessarily a biosimulation play, but with Pro-ficiency here, how do you get to a doubling of the TAM? And then I know you're still getting this acquisition integrated, but any other color on more M&A? Or is it just one step at a time. This is a big acquisition. Let's get this one figured out for the time being?
Certainly, Frank. The total addressable market increase associated with Pro-ficiency, amounting to $4 billion, is fairly evenly divided between the two markets. Our evaluation focuses on the market for training activities in the clinical trial sector, which includes estimated expenditures across all phases and therapies of clinical trials, particularly in relation to training within those trials. On the MEDCOM side, their market is twofold. It is primarily focused on the regulatory and pre-approval processes, as well as medical communications agency work that occurs post-approval during the commercialization of a new drug. Their business leans more towards the regulatory aspect, which is reflected in our calculated total addressable market for that area. Acquisitions are an ongoing part of our strategy, as we monitor the landscape and keep track of companies of interest, making adjustments as necessary.
We've dedicated resources to integrating our latest acquisition, but our approach remains consistent—balancing organic growth with acquisitions. While we may take a slower pace for now, we are not pausing our acquisition plans. If a suitable opportunity arises, we will certainly consider it. We have completed one acquisition each of the last two years, and I believe our pace is healthy. Although there's no guidance for an acquisition in 2025, there are active developments that could lead to future opportunities.
Our next question is from Constantine Davides with Citizens JMP. Please proceed with your question.
Thanks, Shawn. Is this the time of year when you typically consider adjusting prices? I'm curious about how that might look in the future regarding potential price increases and how that compares to last year.
Yes, it is sort of our adjusted price list time frame of the year. Our approach this year around was somewhat similar to last year. If the outcome was similar to last year, historically, that price increase can be 5% plus sort of level. Typically, you don't yield 100% of that large clients or in particular market segments; you're looking to discount to gain footholds. Two years ago, not last year, not fiscal year '23, but fiscal year '22, we were a little bit more aggressive. It was a start on, I'll call it, peak of inflationary macro environment and whatnot, came back down in fiscal year '24 and as we enter fiscal year '25, relatively comparable to last year.
Great. And then I guess just one follow-up on operating expenses. For the past few years, sales and R&D growth has kind of occurred at a clip that exceeds sales growth. Are you going to start to see a little bit more leverage in fiscal '25 on those line items?
We have made significant investments in sales, marketing, and research and development. Over the past year, we reclassified certain costs from general and administrative expenses to gross margins, which included overhead costs related to sales and marketing and R&D. Despite this, we have seen positive results from our investments, contributing to our double-digit growth and our anticipated growth in fiscal year '24. Our business development resources have been critical, allowing us to confidently pursue acquisitions like Pro-ficiency and effectively leverage our expanded offerings. We are already experiencing benefits from these resources. In R&D, we achieved a successful year with major software releases, supported by collaborations with large pharmaceutical companies and regulatory advancements, including a recent FDA collaboration. Overall, our investments in R&D and sales and marketing are paying off, and we expect these benefits to continue. We are also committed to restoring our business to historical profitability levels, targeting over 35% adjusted EBITDA by '25, with the potential for further benefits beyond that.
There are no further questions at this time. I'd like to hand the floor back over to Mr. Shawn O'Connor.
Thank you all for joining our call today and for your interest in SLP. I want to mention that we are concluding our participation in two major conferences related to biosimulation. One ends today, and the other will take place in a couple of weeks. The AATS PharmSci 360 Conference and the ACOP conference next month are both important for us, and we look forward to the opportunities they will bring. Additionally, I will be attending Stephen's conference and a BTI investor virtual conference next month, and I hope to see many of you there. With that, we will conclude the call. Thank you again for joining us today.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.