CertaraCERT

Key highlights

• Software bookings slowing: New software bookings grew 9% to $50.7 million, a slower pace than the 17% growth reported last quarter. Because these contracts represent future revenue for the company's biosimulation tools, this slowdown suggests more moderate growth ahead for its most profitable division.
• Service bookings still shrinking: Bookings for the services division fell 6% to $47.6 million, which is the money customers committed to pay for drug development consulting. While this is an improvement from the 9% drop seen previously, the business is still struggling to find a floor as it reorganizes its sales model.
• Restructuring to save millions: The company cut approximately 5% of its workforce this quarter to save roughly $13 million in yearly costs. These cuts are meant to offset the loss of business from a divested unit and to help the company reach its goal of double digit growth in the future.
• Margins remaining steady: Total gross margin, which shows the profit left after the direct costs of providing software and services, was 62.3% for the quarter. This is up from 58.1% for the full previous year, mainly because the company is shifting more of its business toward software which costs less to deliver than consulting.
• Full year outlook maintained: Management expects total revenue for the year to land between $367 million and $382 million, a range that represents 0% to 4% growth over last year. Profit is expected to be between $0.31 and $0.36 per share, reflecting the impact of selling off the regulatory and medical writing business.

Our take: This was a soft quarter that fell short of expectations on both the top and bottom lines. The main concern is the slowing growth in software bookings, which is the engine that needs to fire for the business to truly transform. While cost cutting will help short term profits, the long term case depends on software growth returning to double digits.