SLP - NASDAQ

Greetings and welcome to the Simulations Plus Fourth Quarter and Full Fiscal 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce Lisa Fortuna from Financial Profiles. Ms. Fortuna, please go ahead.

Good afternoon, everyone. Welcome to the Simulations Plus Fourth Quarter Fiscal Year 2025 Financial Results Conference Call. With me today are Shawn O'Connor, Chief Executive Officer; and Will Frederick, Chief Financial 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 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. In the remarks or responses to questions, management may mention some non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to those most directly comparable GAAP measures are available in the most recent earnings release available on the company's website. Please refer to the reconciliation tables and the accompanying materials for additional information. With that, I'll turn the call over to Shawn O'Connor. Please go ahead.

Thank you, Lisa, and welcome, everyone. We closed fiscal 2025 with strong execution across the business, delivering on the full-year guidance we set in June. Revenue grew 13%, adjusted EBITDA grew 8% and adjusted EPS grew 8%, demonstrating resilience and operational discipline in a year marked by significant market volatility. Importantly, 2025 was also a strategic reset for Simulations Plus. We completed our transition to a unified operating model, aligning product and technology, scientific R&D, strategic consulting services and business development into a single client focused, functionally-oriented organization structure. This shift is already improving how we prioritize, build and deliver for our customers and positions us to move faster for the opportunities ahead. The external environment remained challenging throughout the year. Client budgets were pressured by broader pharmaceutical headwinds, including the threat of tariffs and most favored nation pricing implementation, which created real disruption starting midyear. As we move toward calendar 2026, we're seeing early signs of stabilization. Large pharma has clearly -- adds clear visibility into pricing frameworks, biotech funding has improved modestly, and our clients have entered their budgeting cycles with more confidence. Proposal activity and conference engagement have both strengthened. That said, we believe uncertainty will persist in the overall environment in the near term. Despite these challenges, the momentum behind biosimulation continues to accelerate. Our biopharma and regulatory partners are scaling their internal model and form development capabilities investing in data curation and digital infrastructure and increasingly incorporating AI into modeling workflows. The convergence of cloud computing, AI and model-informed direct development is reshaping how the R&D teams within our biopharma clients operate, and our validated science puts us at the center of that shift. We started laying the groundwork for this future with the release of GastroPlus 10.2 earlier this year, and we'll continue with portfolio-wide updates in fiscal 2026. As our customers expand their internal biosimulation capabilities, they are turning to partners who can deliver scientific rigor, integrated workflows and AI-assisted efficiency, all grounded in regulatory grade and scientifically-validated models. Our product vision directly aligns with these needs, connecting advanced science, cloud-scale computation and AI-driven services into a unified ecosystem that supports teams through discovery, through clinical development and commercialization. Taken together, these trends reinforce the long-term demand for our solutions and our leadership in the field. What we are hearing consistently from clients is that biosimulation is no longer a set of point solution tools. It's becoming the backbone of how R&D organizations operate. Teams want faster cycle times, stronger interoperability and AI-assisted workflows that reduce manual effort, while preserving scientific rigor. They want systems that help them organize their data, standardize their modeling approaches and deliver reproducible results for regulatory submission. This is exactly where our strategy is headed. Over the past year, we have been building toward an integrated product ecosystem that combines 3 strengths Simulations Plus can offer: validated science; cloud-scale performance; and AI that is grounded in regulatory-grade modeling. In fiscal 2026, that strategy comes into focus. Across GastroPlus, MonolixSuite, ADMET Predictor, our QSP platforms and Pro-ficiency we are enabling advanced science continuous investment in the scientific engines trusted by global regulators and leading R&D teams, a connected ecosystem, interoperability across products, powered by the Simulations Plus cloud to support end-to-end modeling workflows from discovery through clinical development. AI-driven services, tools that enhance data curation, accelerate simulation, interpretation and streamlined regulatory compliant reporting, AI and human collaboration copilots and reusable modules that improve efficiency, consistency and delivery times for scientists and consultants alike. These enhancements are not abstract concepts. They are tied directly to customer pain points and to the direction the industry is moving. And importantly, they position us to bring new capabilities to market with greater speed and cohesion than at any point in our history. We look forward to sharing much more detail about this integrated product strategy at our virtual Investor Day in January, including the road map that unifies our scientific engines cloud infrastructure and AI capabilities into a modern, interoperable biosimulation ecosystem. With that, I'll turn the call over to Will.

Thank you, Shawn. To recap our fourth quarter performance, total revenue decreased 6% to $17.5 million. Software revenue decreased 9%, representing 52% of total revenue and services revenue decreased 3%, representing 48% of total revenue. Fiscal year total revenue increased 13% to $79.2 million. Software revenue increased 12%, representing 58% of total revenue and services revenue increased 15%, representing 42% of total revenue. Turning to the software revenue contribution from our products for the quarter Discovery products, primarily ADMET Predictor, were 18%. Development products, primarily GastroPlus and MonolixSuite were 77%, and clinical ops products, primarily Pro-ficiency were 5%. For the fiscal year, Discovery products were 17%, Development products were 75% and Clinical Ops products were 8%. We ended the quarter and fiscal year with 311 commercial clients, achieving an average revenue per client of $94,000 and an 83% renewal rate for the quarter. For the fiscal year, we achieved average revenue per client of $143,000 and our renewal rate was 88%. During the quarter, software revenue and renewal rates continue to be impacted by market conditions and client consolidations. Specifically, ADMET Predictor declined 10% for the quarter compared to the prior year and grew 5% for the fiscal year. GastroPlus declined 3% for the quarter compared to the prior year and grew 1% for the fiscal year. MonolixSuite grew 3% for the quarter compared to the prior year and grew 14% for the fiscal year. Our QSP/QST solutions grew 22% for the quarter compared to the prior year and grew 26% for the fiscal year. Pro-ficiency declined 63% for the quarter and grew 206% for the fiscal year with the prior year reflecting on fourth quarter revenue following the June 2024 acquisition. Shifting to our services revenue contribution by solution for the quarter, development, which includes our biosimulations solutions, represented 77% of services revenue and commercialization, which includes our Med Comm services, represented 23%. The revenue contributions for the fiscal year were 76% and 24%, respectively. Total services projects worked on during the quarter were 191 and ending backlog increased 28% to $18 million from $14.1 million last year. Overall, we have a healthy pipeline of services projects and we continue to expect at least 90% of the backlog to convert to revenue within the next 12 months. Services revenue for the quarter declined compared to the prior year is expected and grew 15% for the full year, primarily due to the addition of the Med Comm business. Specifically, PBPK services declined 10% for the quarter compared to the prior year and 14% for the fiscal year. QSP services declined 50% for the quarter compared to the prior year and 26% for the fiscal year. PK/PD services grew 18% for the quarter compared to the prior year and 5% for the fiscal year. Med Comm services grew 70% for the quarter and 622% for the fiscal year with the prior year reflecting only fourth quarter revenue following the June 2024 acquisition. Total gross margin for the fiscal year was 58% with software gross margin of 79% and services gross margin of 30%. On a comparative basis, total gross margin for the prior year was 62%, with software gross margin of 84% and services gross margin of 30%. The decrease in software gross margin was primarily due to an increase in the amortization of developed technology with the acquisition of Pro-ficiency and higher amortization expense for capitalized software development costs related to the release of GastroPlus in May 2024. Turning to our consolidated income statement for the fiscal year. R&D expense was 9% of revenue compared to 8% last year, reflecting our continued investment in product innovation. Sales and marketing expense was 15% of revenue compared to 13% last year, deliberately supporting initiatives to drive growth across our expanded portfolio and increased market awareness. G&A expense, excluding nonrecurring items, was 25% of revenue, down from 28% last year. Total operating expenses, including a noncash impairment charge of $77.2 million were 148% of revenue compared to 53% last year. Other income was $1.4 million for the fiscal year compared to $6.3 million last year. Primarily due to a decrease in interest income and a decrease in the fair value of the Immunetrics earnout liability. Income tax benefit for the fiscal year was $4.7 million compared to income tax expense of $2.5 million last year, and our effective tax rate was 7% compared to 20% last year. We expect our effective tax rate for fiscal 2026 to be in the range of 12% to 14%. Net loss and diluted loss per share for the fiscal year, including the $77.2 million noncash impairment charge were $64.7 million and $3.22 compared to net income of $10 million and diluted EPS of $0.49 last year. Adjusted diluted EPS was $1.03 this fiscal year compared to $0.95 last year. Fiscal year adjusted EBITDA was $22 million compared to $20.3 million last year at 28% and 29% of revenue, respectively. Moving to our balance sheet. We ended the year with $32.4 million in cash and short-term investments. We remain well capitalized with no debt and strong free cash flow to continue to execute our growth and innovation strategy. Our guidance for fiscal year 2026 remains the same as we provided in October. Total revenue between $79 million to $82 million, year-over-year revenue growth between 0% to 4%, software mix between 57% to 62%, adjusted EBITDA margin between 26% to 30% and adjusted diluted earnings per share between $1.03 to $1.10. We also anticipate first quarter revenue to be approximately 3% to 5% lower than the same period last year. Our fiscal year and first quarter guidance assumes a stable operating environment with market conditions in FY '26 expected to resemble those at the close of FY '25. Should market conditions improve and our clients' increase spending in FY '26, we will be poised to respond. I'll now turn the call back to Shawn.

Thank you, Will. As we look ahead to fiscal 2026, our 30th year as a company, we're energized by the opportunity in front of us. Simulations Plus is evolving from a set of pioneering modeling tools into a unified ecosystem supporting discovery, development, clinical operations and commercialization. Our acquisitions, our investment in science and our integrated operating model have expanded both our reach and our impact. What remains unchanged is our core purpose. Helping our partners bring safer, more effective therapies to patients through science-driven innovation. What is changing and accelerating is how we deliver on that mission? With validated scientific engines, expanding cloud capabilities, AI-assisted workflows and a coordinated road map, we're positioned to support our clients with more speed, consistency and interoperability than ever before. We look forward to sharing more about this strategy, our product road map and the next phase of our evolution at our virtual Investor Day on January 21. We're excited to give you a deeper look at how our ecosystem comes together and how it will create value for clients, investors and patients worldwide. Thank you for joining us today. And with that, we'll open the call for questions.

[Operator Instructions] Our first question comes from Jeff Garro with Stephens Inc. You may proceed with your question.

Maybe start by asking about the demand environment. I was hoping you could give us an update on recent trends and some of the underlying factors that can translate to bookings and revenue, like RFP volumes pipeline development and SLPs win rate?

Yes, Jeff, thanks for the question. I can give global metrics that have been cited often, certainly an uptick in biotech funding is a positive. So another funding announced today, up modestly from where it's been over the last 6 to 12 months, continued funding in that sector would support that element of our business, which is about 25% of our client base or revenue drivers is out of the biotech sector. On the large pharma side, mixed bag, mostly positive, but sporadic challenges from some of the large pharma and their encountering of program success or failure, but certainly, an uptick there. We come out of our heavy conference window of time with our clients and budgeting activity for next year seems to have some momentum. I'm cautious about that. There was momentum there last year and new surprises came after the first of the year. So I feel very positive in terms of the discussions we're having with customers, setting up proposals. And budgeting activity for next year, it looks pretty good. And so we enter our fiscal year '26 here on good footing, being cautious, watching for an evolving marketplace where certainly, announcements often cause pause in the activity of our clients, but mostly great lines.

Great. I appreciate all those comments. And then to follow up, I don't want to get too far ahead of ourselves in front of the Investor Day, but I am curious on the feedback for the GastroPlus release that's been infused with some AI capabilities. And what that might mean for that key product as well as demand for AI infusions and other products. You hit the kind of macro details, I would love to hear about how the innovation plan is starting to impact your client discussions even at an early stage.

Yes, it is early stage. The announcement of GastroPlus was followed with webinars and some training and visibility provided to clients, much visibility prior to its delivery as many of our clients participate in the development programs and provide input during the course of its activity. And the response has been positive. They're digesting it. We're seeing a lot of evolution in terms of clients and their internal IT infrastructure and many of the cloud and AI capabilities that are being released now will fit into those new ecosystems that they're building internally. And so initial response is good as with most releases in our space, their adoption and installation in our clients fit into their timetables and process. But I think everyone is looking for ways to leverage AI capabilities. Our clients are very focused in terms of their data management internal to their organization that feeds the analytical tools that we provide them. And so great excitement in terms of they're saying that our platforms are staying ahead of the curve in terms of functionality that they're looking to deploy in the coming months and years.

Our next question comes from Matt Hewitt with Craig-Hallum.

Maybe first up, and you've touched on this a little bit, but you had most favored nation pricing, you've had tariffs, you've had a soft funding environment. And it seems like we're getting either clarity or improvement in all three of those. Is there anything else that would result in large pharma being cautious? Or is it just more confirmation on those three buckets and that's when you'll start to see kind of the increase in spend.

Yes. I mean there's a number of factors there, and it's anecdotal with each client in their own specific factset in terms of their drug programs and top line patent expirations, each entity has their own guidepost that they've got to manage and strategize around and we'll respond. I mean generally, it's an industry that responds to its budgeting cycle. So budgeting for the calendar year '25 is in place, not changing, and now they're looking at '26 and putting budgets in place there. So there's sort of a more positive there doesn't necessarily translate to this quarter, but they're budgeting into next year. I think we all check our -- hone periodically to see if there's been a tweet today or not. So there's still that cautiousness and foreboding of what may happen tomorrow. But yes, generally, I think outlook is positive, momentum into the budget preparation for '26 is positive. And I think if we get some quarters in a row without any surprises, they tend to put the shock wave into the system. We see a few quarters without that, then I think that confidence grows and spending gets more firmly committed.

Got it. And then maybe the follow-up to that is if we do see the improvement and you see a ramp in bookings and backlog, do you feel like you've got the right headcount now to support a higher revenue base, at least over the near term? Or do you feel like depending upon how things shake out, you might be in a situation where you're having to backfill some roles that given the kind of the reductions over the past 2 years.

Yes. The software side of the business is leverageable in terms of immediate needs to -- that are created to help business uptake. If it uptakes, there's not an immediate need in terms of people side. It's certainly a fair question on the service side of our business, and we feel very comfortable with the capacity we have now. It's utilization, supporting the guidance we've given into '26. If that side of the business accelerates more quickly than we're planning for our ability to grow that capacity is much better today than it was in the past when the resources were a little bit scarcer in terms of the scientific profile that does this type of work. We made our reduction in force last year with a little bit more confidence that, hey, if we need to step up in terms of our team there that we can do so relatively timely in support of business volumes increasing. So I think we're well positioned today for our business in '26 as anticipated. If it accelerates our ability to meet that demand is what we should be capable of doing so.

Our next question comes from Scott Schoenhaus with KeyBanc Capital Markets.

Shawn, I wanted to ask about the guidance, which you reiterate it, obviously. Maybe parse through, if anything has changed underneath that guidance. I believe there was some caution around the services side. Software was sort of -- there was headwinds in the first half. Mostly related -- or I think partly related to proficiency growth, comps, but that eases in the second half. Maybe just walk us through if anything has changed on the background of the guidance and maybe parse through the first quarter guidance that you just spoke about on the prepared remarks.

Sure. No, I mean, in a short interval, since we delivered the guidance in October, nothing significant has changed underlying. The assumptions underlying that -- we entered fiscal year '26, having post our adjustment back in June, July time frame, bringing down our guidance for the back half of the 2025 time frame. We achieved that back end fiscal year '25 guidance, which reflected a little bit of a stability in terms of the flow of revenues, both on the software and service side is albeit at a reduced level. We see some progress on an absolute dollar basis moving into the first part of the year. Normal seasonality patterns exist. First quarter is not our most robust quarter for renewals. Most of those are timed in the second and third quarter or at least peaks in those 2 quarters. And in the first part of the year, we've got reduced levels of Pro-ficiency revenue contribution, both in software with the Pro-ficiency platform as well as Med Communication service revenues that their comparable timeframe in '25. Those were their most highest revenue contribution, post-acquisition. And so some challenging comps there. So as we indicated, 3% to 5% first quarter revenue below the comparable year in the first quarter. that fits into our 0% to 4% growth for the year. And so no change in expectations or assumptions underlying the guidance we provided.

And then does your guidance assume any biotech end market recovery? And then also, I know that there were some degree of cancellations baked into the guidance has -- it sounds like that the biotech environment is still cautiously optimistic. What would it take you to view the cancellation projection or caution for the full year, what would it have to take for you to sort of moderate your expectations there?

Yes. I mean two components to your question there in terms of biotech funding. If it continues, it certainly will prove a positive in terms of contributing both on the software and consulting side. There's not an immediate translation in terms of funding today and purchase order issued tomorrow there -- it depends on the circumstance of the stage of that particular funded biotechs programs where they are in the development time line to driving what type of services that can support them. Obviously, if it continues in a positive way here that will bring back that segment that contributed certainly, a greater percentage of revenue and revenue growth back a year or 2, 3 years ago when it was a relatively robust funding environment by tech contribution to our revenue flow was growing at a much steeper rate than it has of late during the funding trough, if you will. And as we've projected into '26, we've not projected a significant uptick in the biotech funding leading to uptick in biotech revenue contribution in '26. So that would be potential upside. Second part of the question in terms of cancellations certainly in the -- cancellations can be two different things. I'm not sure what you were pointing to. But we've had some consolidation in terms of our software renewals acquisitions that had led to one and one not equaling two in terms of two clients that have consolidated in terms of their renewal. That is an ongoing thing that we've always experienced, encountered from quarter-to-quarter. It was a little bit higher in the back half of fiscal year '25, certainly keeping an eye on our client base in that regard. We've got no known cancellations of any magnitude that are on the horizon in '26 acquisitions that have been announced with the effective date down the road. Nothing out there visible at this point in time. But we have, in the past, always had those and no doubt there will be some of that into the future. Cancellations will also occur on the service side in terms of programs that are sometimes just delayed, but sometimes canceled if that REIT outcomes and the program is curtailed, we had significant one in the back half of '25 that impacted us relatively unusual circumstance, both in terms of its -- well, in terms of its magnitude size of contract there. No standout risk of that nature in our backlog right now. But no doubt, there will be programs that have bad readouts and delays that will occur out of the contracts that sit in backlog. Our forecasting process of metering out when that backlog revenue will be taken to revenue, certainly includes a discount factor, a risk factor that those delays will occur. And believe we've been cautious in terms of an estimate of that impact in our assumptions underlying our guidance going forward. And again, that will always be there. We're in the business of helping our clients curtail programs quicker if the predicted outcome is not high. So that's something that will always occur in our business, and we just need to be adept at managing around them, which in fact, we did very well in the fourth quarter that large cancellation, we had put a very large gap in our fourth quarter service schedule there. And the team did a very good job of replacing, reallocating resources to other projects that were current and able to be worked on. Our sales team did a good job of closing business in the quarter that could be started in the quarter and silver lining there that was also all done with a pretty good flow of bookings during the quarter. So our backlog was not depleted in fact we've seen an increase in back year-over-year. And so on the cancellation side, yes, it will continue to occur into '26. That's a normal part of our business. We've implemented discount factors in our forecasting at the sort of levels coming out of the back half of the year, maybe potential upside if there's slowdown with that.

Our next question comes from Max Smock with William Blair.

It's Christine Rains on for Max Smock. First one, I imagine it touches on the answer for the previous question a little bit just in terms of large pharma consolidation. But we noticed that the renewal rate in software remains below previous years and last quarter on a fee basis. So hoping you can provide some context on what it was on an account basis in the fourth quarter? And what factors are weighing on renewals and just kind of if and when we can expect renewals to return to the 90% ballpark?

Yes. Good question. We encountered renewal on fee, step down into the high 80s, mid-80s really driven by couple 3, maybe 4 impactful consolidations that hit us in the back half of the year, the third and fourth quarter, driving that down. The other element in there is that while our clients are generally not reducing their staffing and modeling its simulation and that, if you will, ties to the amount of software, the number of seats, if you will, that they're licensing from us. They -- in this constrained budget environment, they do take a very close look at configurations. And while not reducing the number of platforms that they're licensing from us or generally the seats for them. They do look at the modules that are associated with each seat and platform. And can they save some money there. And so we saw a lot more scrutiny of that nature in the back half of '25 that also contributes to that renewal on fees number coming down a little bit. It will drive back towards 90 as we see the absence of as many consolidations, I think having gone through their scrutiny on a module-by-module basis last year, the potential for that impacting the renewal rate this year is less. They've done that once, and we'll have done that review and filtered out things that maybe they don't need as many of these modules or those modules. So I think that will help improvement going forward as well. And the other factor will be price increase, all things being equal, that renewal on fees percentage is also impacted by the uptake of our annual price increase, which has been a bit more aggressive this year than it was last year. And so that should have a positive effect on renewal on fee rates as well.

Got it. That makes a lot of sense. Then just one on margins for us, given the number of moving pieces on the cost side, hoping you can walk through what is baked into your EBIT margin guide for gross margin overall and in software versus services? And then just broadly, any color you can give us on your EBITDA margin cadence over the course of fiscal 2026 maybe similar to the revenue guide you gave in terms of down or up in Q1, I imagine down, but anything you give would be helpful.

Yes, from a kind of overall perspective, we come in and as we're looking at quarter-to-quarter on the expense side comparisons are reduction in course contributes -- we announced the $4 million impact from the reduction in course, $1 million quarter starting in the fourth quarter. So the first 3 quarters of our fiscal year '26 guidance anticipates that benefit when you're looking year-over-year there. Secondly, in a world in which your top line growth is 0% to 4% where we're out -- where we're at, that does not give a lot of leverage in terms of EBITDA in an environment where you've got other expenses that inevitably are going to rise in terms of the compensation increases for your staff on board and medical benefits and things like that. So our guidance in terms of adjusted EBITDA, 26% to 30% adjusted EBITDA shows a little bit of improvement to see some greater improvement than that. I think we need to see some -- get back to where we were in terms of top line growth at 10% or above. Our expectation is still targeted at 35% EBITDA. And I think our ability to get there does exist. It will need some time or some upside to the top line guidance that we have provided this next year.

Our next question comes from David Larsen with BTIG.

Can you talk a little bit about the Pro-ficiency asset? I think you said in the fourth quarter, revenue was down fairly substantially I guess, can you maybe just talk about why that is? Is it the software business or the service business? And what's driving that? I think it was down, was it 63% year-over-year in the quarter. Is that right?

I would say 63% in terms of the Pro-ficiency platform on the software side. Services were -- commercial Med Comm services from the Pro-ficiency acquisition were up 70% for the quarter. So the 2 contributions of revenue from the acquisition on the software side, as we've indicated, in the back half of fiscal year '25, clinical trial starts and other factors have shown a slowdown in that side of the business. Medical Communications has been impacted somewhat, but still growing quite nicely and their year-over-year was much higher in terms of fourth quarter, their first quarter contribution last year versus this year.

Okay. And can you just remind me what percentage of Pro-ficiency revenue is software?

It's -- I don't have the exact percentage. I don't know well if you've got it, but generally, it's about 40% software, 60% service or something of that nature.

Yes we've definitely included in the investor deck, kind of the percentage of total software revenue and percentage of services revenue that the Pro-ficiency software contributes towards the Med Comm business, really integrating it as we sell the solution across the entire ecosystem.

Okay. And then for the 1Q revenue guide, I think that's through November. So you probably have very good visibility into that. Still a year-over-year decline. I mean, in order to meet your full year guide for fiscal '26, I would -- I mean, you're going to have to see some ramp-up in bookings. I mean do you have -- how much visibility do you have into that? Is it -- are those deals booked? Any sense for what percentage of the software or service revenue is under contract?

Yes, like any period, obviously, our earnings release here on December 1 is later given the change in reporting status and whatnot, gives us an ability to reaffirm our guidance for the year with good visibility, obviously, into the first quarter here. And so that is all tracking to those numbers. Yes, I think the dynamics of the quarter-by-quarter contribution for fiscal year '26 here shows better year-over-year growth percentages. But the absolute dollar revenue uptick, if you will, on a quarter-to-quarter basis is pretty consistent. Given our seasonality, first and fourth quarter, well, we're on software and whatnot. And the percentage growth has really impacted significantly by the strong first and second quarters we had in '25 and the weak third and fourth quarters that we had in '25 presents a percentage growth dynamic that will show a big step up in the back half of the year. It isn't quite as big a step-up when you look at it on an absolute dollar basis from our starting point coming out of the back half of '25.

Our next question comes from Constantine Davides with Citizens.

I just want to clear something up. Am I right to infer that your 2026 guidance contemplates an extension of recent renewal trends kind of in the low to mid-80s. I just want to be sure I heard that right.

It does. I would say it does in the sense of the consolidations, that sort of activity. As I mentioned earlier, we have implemented a more higher price increase this year. And so that on a year-to-year consistency basis, that contribution to the renewal rates and our revenue guidance is baked in there.

Got it. And then, Shawn, you guys talked about the strength of the balance sheet as well as cash flow? And I guess two questions on that. One is, what's a good way to think about cash flow in fiscal '26? And then I know you kind of always talked about being on the hunt for interesting assets. And just wondering if you can talk about your level of interest in terms of assets in your core markets, a newer market like clinical ops and even the potential for a transaction outside of those markets?

Yes. Cash flow runs the seasonality pattern of our revenue. driven by that seasonality of when our clients renew and that drives the revenue into quarter buckets. Our outlook there is robust as it has been even in our challenging times, so cash flow is very positive. Turning to acquisition side of your question. Yes, our scoping of opportunities out there no change in expectation that we will, as we have in the past, continue to grow through both organic contribution as well as acquisitions into our future opportunities exist and the two landscapes that we operate in, primarily biosimulation as well as clinical ops and lots of opportunity there as we move forward into '26. '25, I'd say it was -- would be characterized as a year of integration of our large proficiency acquisition, '26 should give us an opportunity to take a look at how we can get to the next acquisition, if you will, in our history.

Our next question comes from Brendan Smith with TD Cowen.

Maybe just quickly expanding on some of the earlier questions here. But can you speak to -- really how we should be thinking about pricing flexibility that you all have? And I guess, maybe any plans at this point to lean into some of that next year, especially as some of the AI capabilities roll out across the platform. Really just trying to understand a little bit to what extent the '26 guide includes any of those pricing assumptions kind of versus new customer add expansions of existing customer licenses? I mean just really what kind of levers we should think about that could kind of drive rev versus 4% or even more within that framework next year?

Yes, Brendan. Good question. Yes, our pricing is a little bit more aggressive and it is part and parcel with the upgrades and new platform, AI and cloud capabilities that are planned to be delivered during the course of the year. The monetization of that functionality comes through a combination of separately priced modules and some of that technology integrated into the base platforms, which supports a more aggressive price increase this year. The stickiness of the product has been such that we have and do raise prices on an annual basis and when we've delivered significant improvements to the platform, we've thought to share the benefits of that with our clients, if you will, in terms of more aggressive pricing. Much of the AI, certainly, the automation components of it will provide them greater efficiency and make their organizations that much more productive in modeling and simulation. And therefore, a price increase is justified. So in terms of sharing the wealth there a bit with them. How much of that is baked into our guidance going forward. It's -- keep in mind that it's -- the answer is it's baked in, but discounted at a couple of different steps of the way. There's always a yield to a price increase. You don't get the full price increase from every single one of your customers out there, and as well, it still through the course of the year when licenses are renewed. And so it's paced and discounted, I guess, I think it's that phraseology. Price increase on the service side is it in an environment like this where there are fewer shots on goal, meaning there are fewer projects that are offered up in the marketplace makes for a little bit more price competition in that space. So while there inevitably is some price increase in terms of the standard, hourly rates of our staff and whatnot. We've anticipated a very competitive still market to remain in fiscal year '26. So I wouldn't say that any of what we normally do on a pricing basis on the service side, there's no step-up baked into the guidance on the service side.

This now concludes our question-and-answer session. I would like to turn the call back to Shawn O'Connor for closing comments.

Well, thank you again for joining our call and your interest in Simulations Plus. On December 11, we'll be attending the TD Cowen Third Annual Diagnosing Tomorrow Tools and Technologies For The Next Decade in New York. During the week of January 12, we'll be attending the JPMorgan conference in San Francisco. I hope to see many of you at either of these on the calendar coming up in the near term here. Other than that, I appreciate your interest and take care.