SLP - NASDAQ

Greetings, and welcome to the Simulations Plus Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Wilfong from Financial Profiles. Thank you. Mr. Wilfong, you may begin.

Good afternoon, everyone. Welcome to the Simulations Plus third quarter fiscal 2023 financial results conference call. With me today are Shawn O'Connor, Chief Executive Officer, and Will Frederick, our Chief Financial Officer of Simulations Plus. Please note that we have -- 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 page at www.simulations-plus.com. After management's commentary, we will open the call for questions. As a reminder, 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. There are no -- there can be no assurances that these will actually take place. So our 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 said, I will turn over the call to Shawn O'Connor. Shawn?

Thank you, John. Good afternoon, everyone, and thank you for joining us today to discuss our third quarter 2023 results. To start off, I am pleased with our team's successful acquisition of Immunetrics, a well-respected modeling and simulation company. This acquisition is highly complementary to our core strength and expertise in quantitative systems pharmacology, or QSP. With Immunetrics, we can rapidly expand into the fast-growing therapeutic areas of oncology, immunology and autoimmune diseases. We are very excited to welcome the Immunetrics team that brings proven QSP technology, a strong reputation in the market and incredible scientific talent to Simulations Plus. By joining forces, we believe we can establish a leading position in these rapidly growing therapeutic areas. Moving on to current market conditions, as you know, we operate in an innovative and fast-growing market that is being driven by the vital need to achieve higher ROIs from the costly and time consuming drug development process. The compelling value proposition that biosimulation delivers continues to grow, especially with new advancements in technology, and expanding impactful use cases. However, as I've mentioned in previous calls, our industry is not immune to macroeconomic pressures and the current environment is challenging. We anticipated these challenges this past October when we provided our fiscal '23 guidance of 10% to 15% revenue growth after delivering 16% revenue growth in fiscal year '22. During the third quarter, small biotech, large pharmaceutical and CRO customers remained more cautious and we did see several non-renewals from smaller biotechs. Even so, we continue to perform within the guidance we provided. We believe this near-term hesitancy around investment will eventually reverse. The healthcare needs are so great and the stakes are too high for pharma to ignore faster, more efficacious ways to bring drugs to market. On a positive note, there has been good uptake of our price increases throughout the fiscal 2023, which we think demonstrate the value of our products and services. The adoption and growth of biosimulation software and services continues to grow despite current market conditions. In this context, third quarter results were in line with our expectations. We delivered 9% top-line growth year-over-year, driven primarily by strong revenue in our software segment, which was up 10%, while service revenue increased 5% over last year. From a profitability standpoint, we delivered strong gross margins of 82%, which reflected a favorable mix of higher margin software sales as well as the ability to pass on price increases. While carefully managing expenses is a top priority, this quarter, we incurred M&A expenses related to the Immunetrics acquisition of $0.4 million or $0.02 per share. Despite this, we delivered net income in the third quarter of $4 million or $0.20 per diluted share, in line with our guidance. Adjusted EBITDA was $6.5 million, representing 40% of total revenue. Will will cover our third quarter results in more detail. Now I'll take a few moments to discuss how our software segment performed during the third quarter. Overall, we're pleased with our performance. As previously mentioned, large pharma spending constraints and small biotech funding challenges have impacted some renewals and upsell opportunities. That said, our software revenue grew 10% in the quarter, benefiting from strong uptake of our price increases, good renewal rates and upsells and the addition of 17 new customers. Our top-line growth reaped some benefits from our renewal harmonization initiative, which we implemented at the beginning of this year, and is proceeding as planned. The goal of this initiative is to smooth out renewal contracts to create greater predictability and minimize seasonality. Largely due to more favorable renewal harmonization, we saw robust software revenues for MonolixSuite, which grew 84% year-over-year. While we expect to see ongoing benefits from our renewal harmonization initiative, in the short run, it can temporarily dislocate some revenues in certain product categories. For example, this quarter's GastroPlus revenues declined 2% year-over-year due to the timing and harmonization of the renewal contracts. Once we cycle through this harmonization, we expect to recapture these dislocated revenues. During the quarter, we saw 9% revenue growth in ADMET Predictor, our AI-powered software solution with six customer upsells and three new customers. In Q3, ADMET also achieved an important milestone with the successful integration of data provided by several large pharmaceutical and agrochemical companies to retrain our machine learning models to predict ionization constraints -- constants, I'm sorry. This has significantly expanded our library of experimental pKa data to over 70,000 measurements, which gives our industry-leading models unprecedented accuracy of their predictions. As such, all users will be able to benefit from this major advancement in the new ADMET Predictor Version 11 release that is expected in the fourth quarter. Other notable software highlights include significant collaborative work between our modeling experts from the pharmacometrics software and services team. They are working together to develop a PKPD platform model framework that will quantitatively support our clients go/no-go decision making for oncology compounds based on linking early biomarker data to predict late clinical endpoints. We're very focused on driving synergies like this example across all of our acquisitions. On the international front, China was a strong performer with 29% revenue growth, mostly from GastroPlus and ADMET Predictor products. This is a massive market that is under penetrated and we anticipate continued growth here. Moving on to our services segment. Revenues grew 5% year-over-year, representing 35% of total revenues. Services backlog declined 6% to $16 million and our services team performed 212 projects during the quarter, 16 more than this time last year. PKPD services revenues grew 2%, reflecting the shift to higher margin time and material contracts, which represented 42% of projects this quarter and contributed to expanding our services gross margin. Furthermore, our pharmacometric consultants performed PKPD modeling to support a highly-anticipated novel therapy being investigated to treat a rare childhood disease. Our team of experts subsequently assisted this drug sponsor in preparing for an advisory committee meeting that resulted in attaining an accelerated approval granted by the FDA. In our business, these victories are personally meaningful to everyone involved. In QSP/QST, service revenues were up 6% for the quarter, primarily due to the market conditions previously discussed. Of note, we conducted a quantitative systems pharmacology project for a financial services firm that focused on predicting efficacy-related clinical trial outcomes in the pulmonary space. This was an interesting project because the goal was to use modeling and simulation to predict the best future outcomes that would warrant investment considerations by the firm. This is a great example of how industries outside of pharma are beginning to use predictive analytics and modeling to reach informed business decisions. We see some solid opportunity to expand the use of our applications in this space and others. We also conducted a DILIsym liver safety project for a pharma company focused on evaluating an early development drug candidate. DILIsym is a quantitative systems toxicology software platform capable of predicting and explaining drug-induced liver injury. This assignment identified liver safety issues with the compound and helped to inform the company's decision to abandon the candidate and avoid a multimillion dollar failure in future clinical trials. As you can imagine, predictive outcomes like this go a long way in strengthening relationships with our clients. PBPK revenues increased 5% in the quarter. We have made substantial progress on the five FDA funded grants, which advanced the mechanistic modeling and simulation science of drugs delivered through non-oral pathways. Additionally, we provided PBPK consulting support on seven projects in the quarter, which assisted pharmaceutical and generic companies in the design and development of pulmonary, ocular, intraoral, dermal and long-acting injectable drug products. The launch of our Consult and Coach program in early '23 has garnered significant interest in adoption from our clients. This innovative program provides clients with access to our cutting-edge software and valuable learning opportunities. We believe that over time our Consult and Coach program will gain meaningful traction by training and expanding in-house client expertise with the end goal of driving incremental software licensing revenues. Additionally, our team of PBPK consulting and regulatory experts successfully delivered a model-informed drug development strategy to support a top 50 pharmaceutical company. A mechanistic GastroPlus model was developed and applied to define the dissolution acceptance criteria for the company's commercial formulation of a new drug product and the simulation results submitted to a global regulatory agency to support the waiver of bioequivalents. The growing acceptance of these applications of PBPK analysis versus costly trials are driving growth in this service segment. We have made some significant strides in the third quarter and I'm very proud of our teams collaborating with one another and with our clients to deliver exceptional work. Going forward, we will continue to execute our strategy that combines organic growth, operating leverage and inorganic growth to create long-term value for our shareholders. Our renewal harmonization strategy is providing significant benefits to smoothing out our contract renewal timing and seasonality impacts. As anticipated, we should complete this shift of seasonality as we conclude fiscal year '23. With that, I'll turn the call to Will to review our third quarter financial results in detail.

Thank you, Shawn. We had another solid quarter with total revenue increasing 9%, with software up 10% and services up 5%. Software represented 65% of revenue during the quarter. For the nine months, total revenue increased 4%, comprised of a 2% increase in software and services growing 9%. Software represented 62% of revenue during the year. Gross margin for the quarter declined slightly to 82%, reflecting softer margins in our services segment. Software gross margin was down slightly to 91% from 92% last year and services margins came in at 63%, primarily due to lower margin work on grants. Gross margin for the nine months was flat at 81%, with software gross margin at 90% and services margin at 66%. Now turning to software for the quarter. GastroPlus represented 57% software revenue, MonolixSuite was 18%, ADMET Predictor was 19% and other software was 6%. For the nine months, GastroPlus represented 55% of software revenue, MonolixSuite was 20%, ADMET Predictor was 18% and other software was 7%. During the quarter, our customer renewal rate was 96% based on fees and 87% based on accounts. These rates reflect the positive impact of our ongoing revenue harmonization program, offset slightly by non-renewals with smaller biotech customers. Generally, the smaller customer non-renewals were offset with price increases as reflected in the higher fee-based renewal rates. Average revenue per customer increased to $97,000, mainly due to higher prices and some seasonality in our software business. We expect quarterly comparisons to prior periods to fluctuate through Q4 with our new seasonal expectations based on our revenue harmonization program. For the nine months, our customer renewal rate was 94% based on fees and 83% based on accounts. Average revenue per customer increased to $118,000, up from $108,000 last fiscal year. Shifting to our services business. The services revenue breakdown for the quarter was 45% from PKPD services, 23% from QSP/QST services, 25% from PBPK services and 7% from other services. The services revenue breakdown for the nine months was 48% from PKPD services, 20% from QSP/QST services, 25% from PBPK services, and 7% from other services. Other services consist primarily of the regulatory services we provide customers to help them meet global regulatory compliance and quality requirements. We also provide comprehensive learning services focused on modeling and simulation training with a variety of options to help our customers succeed. Total services projects worked on during the quarter increased 8% compared to last year and backlog decreased by approximately $1 million from last year to $16 million. The backlog decrease was primarily due to the QSP/QST services business. Turning to our consolidated income statement for the quarter. We saw an increase in total R&D costs primarily due to the development of the newest version of GastroPlus version 10, or GPX, and from an increase in personnel costs from market compensation adjustments. Total R&D costs in the quarter increased to $1.8 million compared to $1.4 million last year. R&D expenses were $0.9 million compared to $0.7 million, and capitalized R&D was $0.9 million compared to $0.8 million. SG&A expense increased by $1.4 million or 21% to $8.2 million compared to $6.8 million last year. This increase was driven by an 11% increase in total headcount to meet our growing demand for our services business along with market compensation adjustments to attract and retain talent in this area. Additionally, we incurred $0.4 million in merger and acquisition costs. Income from operations decreased 17% to $4.1 million in the quarter, while operating margin was 25% compared to 33% last year. Interest and other income was $0.8 million this quarter versus an expense of $0.1 million last year due to returns from higher interest rates on our investment portfolio balance. For the quarter, income tax expense was $0.9 million compared to $0.7 million, reflecting an effective tax rate of 19% this quarter compared to 15% last year. Net income decreased 2% to $4 million and diluted earnings per share remained at $0.20. The revenue impact for the quarter from foreign currency exchange was $0.1 million. Expenses related to M&A during the quarter were about $0.02 in diluted earnings per share. Adjusted EBITDA was $6.5 million and adjusted EBITDA margin was 40% compared to adjusted EBITDA of $6.5 million or 43% margin last year. As a reminder, we calculate adjusted EBITDA by adding back stock-based compensation expenses and expenses related to M&A or other non-cash operating expenses. We provide a reconciliation of this non-GAAP metric to net income to relevant GAAP metric in our earnings release and on our website. Turning to our consolidated income statement for the nine months. Our total R&D costs were $6 million or 14% of revenue compared to $4.7 million or 11% of revenue last year. The increase was primarily due to the development of the newest version of both MonolixSuite version 2023 R1 and GPX, along with an increase in personnel costs from market compensation adjustments. R&D expenses were $3.4 million compared to $2.4 million last year. Capitalized R&D was $2.6 million compared to $2.3 million last year. For the nine months, SG&A expense increased by 34% to $23.3 million or 53% of revenue compared to $17.4 million or 41% of revenue last year. This increase was primarily due to a $4.3 million increase in employee and labor-related expenses. Additionally, we incurred merger and acquisition costs of $0.8 million. Income from operations decreased 37% to $9 million, while operating margin was 20% compared to 34% last year. Interest and other income was $2.6 million versus a nominal amount last year due to interest income of $2.6 million, driven by the increase of interest rates. Income tax expense was $2.2 million compared to $2.7 million last year, reflecting an effective tax rate of 19% this year, similar to last year. We expect our effective tax rate for the fiscal year to be in the range of 19% to 21%. Net income decreased 18% to $9.4 million and diluted earnings per share decreased to $0.46. The revenue impact for the nine months from foreign currency exchange was $0.6 million. Expenses related to M&A during the year were about $0.04 in diluted earnings per share. Adjusted EBITDA was $15.7 million and adjusted EBITDA margin was 36% compared to adjusted EBITDA of $18.7 million or 44% margin last year. Now turning to our balance sheet. We ended the quarter with $122.4 million in cash and short-term investments. The change from last year was primarily driven by the addition of $15.5 million in free cash flow, less $3.6 million in dividend payments and $20 million for our accelerated share repurchase. We concluded the ASR with Morgan Stanley during the quarter and received a total of 492,041 shares at an average cost per share of $40.65. The repurchased shares were retired and treated as authorized unissued shares. As Shawn discussed earlier, we recently acquired Immunetrics. And under the terms of the agreement, we agreed to pay the shareholders of Immunetrics cash consideration at closing in the amount of $15.5 million, including a $1.8 million hold-back plus two future earnout payments in the aggregate amount of up to $8 million based on the revenue performance of Immunetrics through December 31, 2024. We continue to be well capitalized, have strong free cash flow and seek opportunities for strategic acquisitions, investments, and partnerships. I will now turn the call back to you, Shawn.

Thank you, Will. Our team delivered solid results this quarter despite a challenging operating environment. We have been executing on our strategic priorities and, as a result, are delivering profitable growth, generating cash and strong returns for our shareholders. As such, we remain well positioned to meet our stated goals for fiscal 2023, which include: year-over-year revenue growth in the range of 10% to 15%; total revenue between $59.3 million to $62.0 million; software revenue mix between 60% and 65%; services revenue mix 35% to 40%; diluted EPS of $0.63 to $0.67. We announced this range in October not including any impact from M&A activity. Through the end of the third quarter, we have incurred M&A expenses of $0.04 and anticipate an additional M&A expense of $0.05 in the fourth quarter. Regarding the Immunetrics acquisition, based upon the timing of the acquisition close and its historical seasonality, Immunetrics' fourth quarter revenue contribution will be positive, but limited. This revenue contribution is contemplated in our 10% to 15% overall revenue growth guidance. Q4 Immunetrics' operating results will be accretive to earnings. We will provide fiscal year '24 guidance for Immunetrics in conjunction with our guidance for the entire business at the end of our fiscal year '23. In conclusion, our ability to create value for our customers by using innovative solutions is transforming drug development R&D, optimizing treatment options and improving patient lives. As a result, we continue to see greater adoption of our solutions to reduce costs and save time across the industry. Thank you for your time and attention. With that, I'll turn the call over to the operator for the question-and-answer session.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed with your question.

Good afternoon. Thank you for taking the questions. Maybe first up, regarding the Immunetrics acquisition, first of all, congratulations. I know it's something you've been trying to close, an acquisition that is for the last couple of years. So it's nice to see you get one across the goal line. But as we look at this opportunity, obviously, it expands you into some new markets, particularly in the oncology area. And I'm just curious, how quickly do you anticipate being able to see some cross-selling opportunities kind of get closed? Is that something that we could even see here in the fourth quarter? Or do you think it's going to take a little bit longer to get everything integrated and get the sales teams up and ready?

Yes, Matt. Thanks for the complement. Great pleasure to finally get an acquisition across the finish line here. I know everyone has been anticipating one. Integration commenced some time ago in anticipation of the deal closing. Interaction between the teams commenced and is at full speed now as we have them on board, acquisition closed. And from an internal operational point of view, from a business development point of view, the integration process is moving quite nicely. They've come into the transaction with a pipeline of business, a revenue outlook that while somewhat distracted during the closing part of acquisition discussions, they are very focused on and driving towards their revenue expectation. Cross-selling opportunities, that will be derived from, including their portfolio of models, which I would say are already built. So these are models in these key strategic areas, therapeutic areas that may require some tailoring for clients as we bring them onboard, but the model itself is already in place. That business development effort leading to cross-selling, new lead generation, new opportunities, beyond the opportunity that they see or saw before them should happen quite quickly. Sales cycles being what they are, are not 30 day sales cycles in this space. So it will take some time for lead generation to project scoping to closing of the deal to take place, but we could see that certainly accrue to us as we enter into fiscal year '24. Looking forward to not just the business, the book of business that they bring to the table, but that which we can assist them with going forward. Much like our previous acquisition of Lixoft, a small company, relatively slim in terms of their resources in the business development area. Steve Chang, the CEO, comes on board and continues those relationships that he has in the marketplace with some key clients. But our team -- business development team can certainly expand the coverage of the marketplace and the doors that we knock on, the leads that we generate and opportunities that we have to close going forward here pretty quickly.

That's very helpful. Thank you. And then, maybe a separate question here regarding the customer landscape, if you will, maybe if we could dig in a little bit deeper. Small versus large, it sounds like maybe there's a little bit more of a nuance with the large customers taking a little bit longer to get across the goal line to get those contracts signed. Is that something you anticipate is maybe shorter in duration? Or how do you see that kind of playing out here over the remainder of the calendar year? And is there anything to read into some of these dynamics and whether there's maybe some new competitive changes or maybe a pricing dynamic? Is there anything beyond just the funding issues that that's really kind of holding up some of those customers? Thank you.

Yes. Look, I mean, we're talking about basically two segments of the marketplace here. Small biotech, which we've certainly talked about for multiple quarters, for maybe eight quarters since the funding cliff occurred in that segment. And so the disruption to that segment of the market has been long term here now. Based upon input I'm getting from people such as yourself, there seems to be little bit of an uptick in terms of biotech opportunities and funding thereof, but it certainly has not gone back to where it was eight quarters ago, two years ago. So hopefully, we see that on the upswing in the future. But business as usual there as it has been for the last eight quarters. Large Pharma as well, I mean, we saw that in their budgetary cycle of October, November of last year that for different reasons, not their funding necessarily, but macroeconomic conditions causing them to be more cautious and prudent in terms of their budgets coming into fiscal -- their calendar year, fiscal year of '23. We saw that began to slow at that point in time and hence our reduced guidance at the beginning of the year. Renewal would be a challenging market. I don't think it's changed here as we -- our third quarter of the fiscal year is sort of midpoint of the calendar year, that's played out as anticipated. I think the next stalking the ground will be as we see them start to prepare their budgets in October and November for the following year and see how those fallout will be the next opportunity to see whether that dynamic will change near, medium or long term. We've been operating in this environment for a couple or three quarters and I'm very proud of the team. They've delivered in a more challenging environment to our expectations here this year. And while we'd like to see them -- the results a little bit more robust, they are as we anticipated. And I know in the long run, the impact of the biosimulation has in the industry is not one that is going to go by the wayside, and we'll continue to grow. It's growing today, albeit at a lesser pace, and the opportunities for it to grow into the future are very strong.

Thank you. That's very helpful. Thanks.

Take care, Matt.

Our next question comes from the line of David Larsen with BTIG. Please proceed with your question.

Hi. Congratulations on the good quarter. Can you maybe talk a little bit more about Immunetrics? Based on our channel checks, we're hearing that oncology could be a good opportunity area for Simulations Plus. Obviously, there's a lot of investment into the oncology space. Just any color around sort of like the different areas of oncology that Immunetrics focuses on or any thoughts around or anything that you can share around, like, how much revenue Immunetrics brings annually or maybe how many customers they have? Any more color there would be very helpful. Thanks a lot.

Sure, David. Yes, Immunetrics is a real strength, and it's just -- based upon its name, it's been focused in areas of immunology, oncology and for its long tenure. And so these models that they've built large mechanistic QSP models are well tuned over many years of data flow and client engagement with these models. Oncology is a fast growing area in the industry. And QSP development or the acquisition [and build] (ph) of QSP models, the acquisition by clients in this space are most relevant in areas where clients have ongoing multiple drug programs. And oncology certainly fits the bill in that characteristic. It's not a -- it's typically a focus of an entity, and typically not just a single drug candidate. And so that is the environment in which an investment in a large mechanistic model that can guide their development program over a longer-term period of time makes the most sense. So it is what is attractive on our part to get there more quickly as opposed to the longer-term build internally of the model in that space. The acquisition of Immunetrics brings those to us very quickly. In terms of size, I mean, the entity, let's go to the bottom-line first, it's accretive immediately, will be in the fourth quarter. And as we move forward, there'll be some efficiencies that probably improve their profitability within the Simulations Plus family. Most importantly, on the top-line, yeah, it's -- the revenue profile of the company is best pointed to in their earnout characteristics, the terms of the earnout payments, which called for their earnout payments in '23 -- calendar year '23 should they achieve the revenue of $6 million for the 12 month calendar year and $8 million approximately in fiscal year '24. Pleased with their revenue projection targets from which they get their earnout payments. A little aggressive maybe, but all of our past acquisitions, the earnouts have been happily paid in full to our acquisitions. So we'll be working with them to achieve those targets. It's little tough with a short quarter here, the close of the transaction into the quarter. They're going to have to adjust to the fact that they're part of the public company with an August year-end, which wasn't necessarily a key calendar milestone for them in the past. So we'll make a transition here in the fourth quarter. They will contribute to revenue and it will be accretive. We'll be better positioned to give longer-term guidance when we get to the end of our fiscal year and the guidance for the 12 months into -- for fiscal year '24.

Okay, great. Thanks. That's very helpful. And then, in terms of software growth, up, I think, around 12% -- I'm sorry, 10% year-over-year shows a very good uptick, especially relative to 1Q -- fiscal 1Q of '23. Can you maybe just talk a bit about -- I think, there were 13 GastroPlus upsells, that seems very good to me quite frankly. You had a tough comp in the year-ago quarter for GastroPlus, obviously a very good quarter in the year-ago period. And then, how much of that growth came from the renewal harmonization sort of process? How far along are you in that renewal harmonization process? Are you like 80% of the way through it? And will you be through it by the end of the fiscal year? Thanks.

Yes, fair question. GastroPlus, unlike the contrast here is Monolix that had a great quarter with 80%-plus growth in the third quarter. They benefited from the harmonization process by seeing more of the license renewals dislocate out of first and second quarter and a little bit forward from fourth quarter into the third quarter, and so they saw that benefit, we saw that benefit with Monolix from harmonization in the third quarter. That's teed up on the GastroPlus side for the fourth quarter where we see a lot more of those focal dates of when licenses will be renewed, dislocating to the fourth quarter. So from a price increase perspective, from a upsell perspective, from a cross-selling scenario, new customers, pretty good statistics in terms of the GastroPlus performance, but the harmonization has pushed some revenue into the fourth quarter. I mean, that being said, again, would we like to have seen some more logos -- new logos and some larger upsells in [indiscernible] and other product lines? Sure. The market is growing a little lesser this year. But GastroPlus in the third quarter is -- primary impact was the harmonization.

Okay, great. And then just my last question. I guess visibility into fiscal 4Q revenue sounds like it would be pretty high, especially on the software side. Is that correct?

Yes. We've always have a good view to the renewal process, good book of our business. 80% plus or minus of our software revenue in any given quarter comes from renewal. We've had pretty good predictability in terms of the harmonization, which has moved those license renewal dates around. So pretty good eyesight in terms of the software business. The service business, as we start getting into the summer months, which can be disruptive, but coming to the quarter with good backlog to support expectations in the fourth quarter. Our visibility is pretty good fourth quarter this year.

Okay. And then just a quick one for Will. Will, did I see that this was the best cash flow quarter of the past seven quarters?

From a cash flow standpoint, we mentioned the free cash flow for the year. But I mean, we continue to have pretty good free cash flow that we're paying dividends out from.

Okay. I appreciate it. Thanks. I'll hop back in the queue.

Thanks.

Our next question comes from the line of Yuan

All right. Shawn and Will congrats on the quarter, and thank you for taking our question. Just one from us. Can you provide more clarity on that $16 million backlog? Are those project time-sensitive? Does it mean or does it make sense to hire more consultants to complete the backlog sooner? Thank you.

Yeah, sure. Thank you. Backlog is good. We've made a transition really post-COVID timeframe here, transition in terms of contracting business that often comes in multiple stages and initial upfront discussion and contracting those in pieces as opposed to one large amount. The benefit of that is that the -- really the quality of the backlog is much stronger. There is a reduction in the amount of backlog that is eliminated through a drug cancellation, for example, because these contracts are shorter term. And the metric there is that this backlog pretty high content that is deliverable within 12 months. There's not much that exceeds the 12 month factor. And most of it still is in that three to six months' time window of expected performance. In terms of the headcount capacity required to deliver on that backlog, certainly in the near term, in the fourth quarter sort of horizon, we have capacity on hand to deliver to our expectation in that sort of short-term expectation as we look out beyond the next quarter. It's a continuous process of managing our capacity to our needs. We've had a good year this year in terms of bringing on, I think, it's seven or eight new consultants to add to the team. And it's always something we have to manage closely, but we've got a little bit of time to prepare for that short-term needs ought to be addressable right now.

Got it. Thanks for the insight. Thank you.

Take care.

Our next question comes from the line of Francois Brisebois with Oppenheimer. Please proceed with your question.

Hi, thanks for the question. So just to be clear in the guidance there, I think you mentioned, but just to be clear on it, the fiscal year '23 guidance does include the Immunetrics acquisition, correct?

Yes. Their contribution into the stub window of the fourth quarter is going to be positive, but it'll still keep us in that 10% to 15% range.

Okay. And if you -- have you discussed at all Immunetrics the kind of mix of software to services in terms of that business and maybe on its own? And then once completely integrated with you guys, does that change the mix of software and services?

Yes, it's very much like our existing QSP business, which delivers maybe a 20/80 split: 20% of the revenue generated is licensing of those models, the client who brings it in-house and uses it; and 80%, service-based revenues, client that are asking us to do the heavy lifting and perform projects using the model for them. And very similar between our existing QSP business and Immunetrics business. Will that change? I don't think it will change dramatically. Quite frankly, they've been a little bit more successful in giving some technology fees where projects are essentially service engagements. They've established arrangements with the client to license the model during the project window of time. Maybe there's something we'll learn from them in that regard. But I don't think it'll change that mix of 20/80.

Great. And then just lastly -- last one here. In terms of the percentage, do you disclose the percentage of your business just in relation to all the funding headwinds, the percentage of your business that comes from pharma versus small biotech? And any color on the stickiness? I think we had talked about a 95% kind of stickiness. Any added color there?

Yes, I mean, it's where do you draw the line, Frank. I mean, where we stumble a bit is small biotech, where do you draw the line and weed out the Genentechs and Amgens of the world and identify just small biotech. So I do know that biotech as a overall label represents maybe 20% of our business, but again it includes those large players that aren't subject to these funding issues that exist out there. So it's something much less than that in terms of the total segment. In terms of the renewal rates, yeah, certainly the smallest of biotechs are the ones that we see the most churn in that are not redoing. But as you can see in terms of the differential between the renewal rate for fee and the mid-90%-s, that's held pretty steady, which, in the end, means that we've overcome any shortfalls there with incremental price increases. And by account renewal fee in the mid-80%s, that one's come down from maybe more typically in the high 80% down to the mid-80%s. That's reflective of these smaller biotechs, not the new one on just sort of a churn number of accounts basis.

Thank you.

Very good, Frank.

There are no further questions in queue. I'd like to hand the call back to Mr. O'Connor for closing remarks.

Well, thank you everyone for joining us here on our third quarter earnings call, and look forward to racing through the fourth quarter here and speaking again in due time in October. Take care, everyone.