[Management View]
Simulations Plus reported mixed results for Q3 FY2025, with total revenue increasing by 10% to $20.4 million, including a $2.4 million contribution from the Proficiency acquisition. Organic revenue declined 4%, primarily due to lower QSP/QST software revenue and a decrease in biosimulation services revenue. Management highlighted the impact of a significant client cancellation and ongoing market headwinds. Strategic priorities include integrating AI capabilities across core software platforms and implementing a company-wide reorganization to achieve $4 million in annualized cost savings.

[Outlook]
Management revised FY2025 guidance downward, citing continued delays in service bookings and persistent uncertainty in the biopharma funding environment. FY2025 total revenue is now guided to $76 million-$80 million, with Proficiency and the medical communications business expected to contribute $9 million-$12 million. Adjusted EBITDA margin is projected at 23%-27%, and adjusted diluted EPS between $0.93 and $1.06. Future plans include expanding AI-driven product innovation and enhancing clinical trial design services through new investments.

[Financial Performance]
Total revenue increased 10% YoY to $20.4 million, including a $2.4 million contribution from the Proficiency acquisition. Organic revenue declined 4%. Software revenue grew 6% YoY, driven by Admet Predictor, GastroPlus, and Monolix Suite. Services revenue increased 17% YoY, with medical communications as the main driver. Adjusted EBITDA was $7.4 million or 37% of revenue, compared to $5.6 million or 30% last year. Adjusted diluted EPS was $0.45 compared to $0.27 last year.

[Q&A Highlights]
Question 1: What is driving the margin erosion next quarter?
Answer: The reorganization and expense structure changes primarily impact future quarters. The fourth quarter margins are affected by the revenue step down and increased marketing activities, leading to a mid-to-high 20% range in adjusted EBITDA.

Question 2: Can you provide more color on the renewal rates for software?
Answer: Renewal rates were impacted by client consolidations and site closures, particularly for GastroPlus and Monolix. Historically, renewal rates have been in the 90-95% range, and management expects to maintain these rates long-term.

Question 3: Are you seeing any improvement in client activity following the FDA's April 10 guidance?
Answer: The FDA's announcement on alternative methodologies for animal testing is a positive indicator for modeling and simulation. However, the impact on revenue is expected to be gradual as clients await further clarity from the FDA.

Question 4: What has been the biggest headwind recently, and what will it take to ease these pressures?
Answer: The combination of uncertainties, including funding environment, client consolidations, and site closures, has caused clients to be cautious in their spending decisions. Management is optimizing performance in the current environment and preparing for future market improvements.

Question 5: Can you provide a breakdown of COGS and OpEx spend as a percentage of revenue for Q4 and FY2026?
Answer: Revenue drop in Q4 is driven by service side impacts, while expenses remain relatively fixed. Marketing activities in Q4 contribute to higher expenses. Long-term EBITDA expectations remain at 35%, with cautious balancing of R&D investments.

Question 6: What are the financial expectations for Proficiency in FY2025?
Answer: Proficiency is expected to contribute $9 million-$12 million in revenue, down from initial expectations due to market headwinds. A large engagement in medical communications has initiated but faced some delays.

[Sentiment Analysis]
Analysts expressed concerns about margin erosion and renewal rates but acknowledged the positive impact of AI initiatives and strategic reorganization. Management maintained a cautiously optimistic tone, emphasizing long-term growth prospects and commitment to innovation.

[Quarterly Comparison]
| Metric | Q3 FY2025 | Q3 FY2024 |
|-------------------------|-----------|-----------|
| Total Revenue | $20.4M | $18.5M |
| Organic Revenue Growth | -4% | 5% |
| Software Revenue Growth | 6% | 8% |
| Services Revenue Growth | 17% | 12% |
| Adjusted EBITDA | $7.4M | $5.6M |
| Adjusted Diluted EPS | $0.45 | $0.27 |

[Risks and Concerns]
Risks include ongoing market headwinds, client budget constraints, delayed project starts, and reductions in government funding. A significant client cancellation impacted near-term revenue by approximately $2 million. The $77.2 million noncash impairment charge related to prior acquisitions resulted in a net loss of $67.3 million and a diluted EPS loss of $3.35 for Q3 FY2025.

[Final Takeaway]
Simulations Plus faced mixed results in Q3 FY2025, with inorganic revenue gains offset by organic declines and profitability burdened by a substantial noncash impairment charge. Management responded to biopharma sector headwinds with strategic reorganization, targeted cost reductions, and a focus on AI-powered solutions. Despite lowered guidance for FY2025, the company remains optimistic about long-term growth prospects driven by AI integration and enhanced clinical trial design services.