William Frederick
Thank you, Sean. To recap our second quarter performance, total revenue increased 23% to $22.4 million including a $3.3 million dollar contribution from the ALI and MC business units.
Software revenue increased 16%, representing 60% of total revenue.
And services revenue increased 34%, representing 40% of total revenue.
Turning to the software revenue contribution from our products for the quarter, Gastro Plus was 46%, Modeli Sue was 23%, Adapt Predictor was 17%, proficiency was 7%, and other products were 7%.
For the trailing 12 months, Gastro Plus was 48%, Molich Sweet was 20%, AMA Predictor was 17%, proficiency was 7%, and other products were 8%.
The trailing twelve-month software revenue for the ALI and MC biz products only includes revenue since the acquisition of proficiency in June 2024.
With the proficiency short form merger and the Simulations Plus completed in January, we also rebranded the ALI training platform to proficiency to leverage the name recognition with our customers.
During the quarter, our software customer renewal rate was 90% based on fees and 84% based on accounts.
The renewal rate based on accounts was in line with the prior year, and the decline in renewal rates based on fees was primarily due to one large customer renewal that did not close until the 3rd quarter.
Given the size of that renewal, there was a more significant impact on the fee-based renewal rate than on the account-based renewal rate.
Note that renewals which are recovered in a future quarter are not included within the calculation of our published renewal rates in the future quarter.
Average software revenue per customer for the quarter increased to $124,000 from $113,000 last year.
On a trailing 12 month basis, our software customer renewal rate was 91% based on fees and 83% based on accounts, both generally in line with prior period trends.
Average revenue per customer increased to $101,000 from $95,000 on a trailing 12 month basis.
Shifting to our services revenue contribution by business unit for the quarter, CPP was 39%, MC was 25%, QSP was 19%, and PPPK was 17%.
On a trailing 12 month basis, CPP was 40%, QSP was 26%.
PBPK was 18% and MC was 16%.
Again, the trailing 12 month services revenue for the MC business unit only includes revenue since the acquisition of proficiency last June.
Total services projects worked on during the quarter were $203 and year-end backlog increased 18% to $20.4 million from $17.3 million last quarter.
The largest driver of the backlog growth quarter over quarter was in the CPP and MC business units.
Total gross margin for the quarter was 59%, with software gross margin of 81%, and services gross margin of 25%.
On a comparative basis, total gross margin for the prior year quarter was 72%, with software gross margin of 88%, and services gross margin of 44%.
The decrease in total gross margin was due to a $4.2 million dollar increase in cost of revenues.
The increase in software cost or revenues was primarily due to a $1.2 million dollar increase in software related costs, including $10.8 million in amortization related to the proficiency acquisition, and $0.4 million higher amortization of capitalized software costs.
The increase in services cost of revenues was primarily due to a $3 million increase in service-related costs for the acquired MC business unit and the reclassification of expenses from G&A expense to cost of revenues in connection with the prior year business unit reorganization.
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 17% of revenue compared to 11% last year.
GNA expense was 20% of revenue compared to 30% last year.
And total operating expenses were 46% of revenue compared to 48% last year.
Income tax expense for the quarter was $0.4 million compared to $1.2 million last year, and our effective tax rate was 12% compared to 23% last year.
The lower effective tax rate was primarily driven by the tax benefit associated with disqualifying dispositions during the quarter.
We now expect our effective tax rate for the fiscal year to be in the range of 21 to 23%.
Netcom for the quarter was $3.1 million or 14% of revenue, compared to $4 million or 22% of revenue last year, and diluted EPS was $0.15 compared to $0.20 last year.
Adjusted for the quarter was $6.6 million or 29% of revenue compared to $7.1 million or 39% of revenue last year, and adjusted diluted EPS was $0.31 compared to $0.32 last year.
The reconciliation of non-gap financial metrics to the relevant GAAP metrics is in our earnings release and on our website.
Turning to our balance sheet, we ended the quarter with $21.4 million in cash and short-term 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 Sean.
Shawn O'Connor
Thank you, Will.
Our strong second quarter results reflected solid performance in both our software and services segment.
The team executed well in the first half of the year, and our results are in line with our guidance, despite the persistent cost constrained and limited funding environment that our customers have been facing for some time.
Our Alley and MC business units continue to show good progress and in fact we recently closed on a multi-drug project for speaker bureau support and training with an existing MC client for just over $5 million.
Revenue from this engagement will ramp up during the second half of our fiscal 2025.
With the rest to be earned over the course of calendar 2025.
Moving on to our outlook for the balance of fiscal year 2025, with our first half, 2025 results aligning with our expectations, we are reaffirming our fiscal year 2025 guidance as follows. Total revenue is expected to be between 90 to 3 million, and we still expect Ali and MC to contribute between 15 to 18 million as previously provided.
Year over year revenue growth is expected to be in the range of 28 to 33%.
Software mixed between 2055 and 60%.
Adjusted EBITA margin between 31 to 33%.
And adjusted diluted earnings per share of between $1.07 and $1.20.
We expect total revenue for our third fiscal quarter to be approximately 25% of our fiscal year guidance range with a year over year growth rate of between 21 and 25%.
We expect a sequential step up in revenues in our 4th fiscal quarter.
As a reminder, our guidance does not include the impact of any future acquisitions.
I also want to reiterate our near term priorities which include continuing the ramp up of our alley and MC business units.
Expanding cross-selling opportunities.
And driving towards our historical adjusted IBITDA margin target of 35 to 40% and corresponding profitability levels.
We believe 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 shareholders.
Thank you for your time today, and with that, I'll now turn the call over to the operator for your questions.
Operator
(Operator Instructions) David Larsen, BTIG.
David Larsen
Hey, congratulations on the good quarter. Can you maybe just talk a little bit about, the software organic revenue growth and the fee renewal rate declined to 90% from 94% just I guess what would the organic revenue growth rate for software if then had that account renewed this quarter? Thanks.
Shawn O'Connor
Yeah, thanks. The software organic growth was good this quarter, 8 % from an organic basis, excluding the proficiency software contribution. The renewal rate, we lost a few points down to 90 % renewal rate on fees related to one large account that was renewed in the week subsequent to the end of the quarter. That was a six-digit renewal and we've been sort of extrapolating that.
David Larsen
Okay, that's great, and then, can we just talk about, you mentioned a couple times some clients might be reluctant to start new projects, but the bookings are good. But the software organic growth seems very good. Maybe just talk a little bit. How do I reconcile that? Like they're buying the software but they're a little bit slow on implementing the service deals, but they're signing contracts for the service deals. How do we reconcile that? Thanks.
Shawn O'Connor
Yeah, you know, our software licensing business or software business is really providing infrastructure to our clients for their undertaking their modeling and simulation deployment within their organization. As our clients tighten the belt and are cautious in terms of spending, they're not whittling away at the infrastructure that they've built. And so the software renewal rates and the software business generally continues to perform buffered against that cost constraint environment.
Their manageable side in terms of reducing costs or managing costs more slowly is in their service budget loans where they can contract and expand that with a little bit more feasibility, quickness in terms of pulling back. Part of the service experience has been both in terms of their slow pace there, but also what we're seeing is time checks that are being signed and those clinical trial related activities that may make up many of those projects are scheduled for later in the calendar year.
So, you know, I'd say over the last couple of years we've seen them hold off and not contract until closer to when the project was going to initiate. Today, we're seeing some contracts being signed for work effort that is scheduled to be initiated later in the year.
David Larsen
Okay, and then just one more before I hop back on the queue. I mean my whole thesis is that biopharma needs your software solutions to increase the accuracy of the clinical trials that they actually start. They want more success rates and that's going to increase their investments in the software, and that's maybe why the CRO market is under a little bit of pressure, but we see good software growth coming from you. That's my thesis just and then just lastly before I happen to you, what are your thoughts on these tariffs? I think BioPharma, maybe, for now, got a pass, but if there are tariffs in the world of biopharma, how do you think that will affect your business? Thank you.
Shawn O'Connor
Thank you. Yeah, I don't think that they feel that they've escaped maybe at the tariff level, but they've certainly been dealing with the IRA and other issues for some time, which have focused on their business. The tariff scenario, pharma businesses are global entities. Manufacturing is dispersed around the world. And so they could be subject to the tariffs at some point and have some impact. I just saw, you know, from an M&A sort of perspective, recent tallies of significant increase in terms of assets, development programs, molecules that are being developed, the acquisition of those assets out of China has stepped up tremendously. So there is a global dynamic that may be impacted by terrorist down the road that adds to the cautiousness, I would say, of many of our clients as they map out their futures here.
David Larsen
Okay, I'll hop back on the queue. Congrats on a good quarter.
Shawn O'Connor
Thanks, Dave.
Operator
Scott Schoenhaus, KeyBanc Capital Markets.
Scott Schoenhaus
Hey team, thanks for taking my question. I wanted to touch on the services side clearly you're.
This from proficiency just wanted more color on these, are these legacy?
That are finally seeing revamping from last quarter in terms of demand for the MC services are these new logos and then Sean, you mentioned some cross selling at the end of your prepared.
With the opportunity there, thanks.
Shawn O'Connor
Yeah, Scott, you were checking in and out in terms of your call there, but I think I got the gist of the question. Proficiency and medical communications contribution was good this quarter. On the proficiency side, their business, software initiates its license upon clinical trial start.
So this was a slow quarter in terms of clinical trial start that their book of business and outlook for the year is in the range of our guidance that we gave previously. Activity is quite an active pipeline in that business segment. Medical communications, yeah, had a very significant win.
The client was an existing client of Medical Communications. They provided services to them in the past, but the business was a combination of some continuation of previous drug support, a particular specific drug that they'd been supporting in the past but was most importantly expanding it to another drug entity that we will be supporting them with our medical communication services. It's a good example of a nice contract signed. Certainly, will contribute to our back half of the year revenue, but a contract that extends through the entirety of the calendar year of 2025. So a contract that will contribute revenue this year but also seeping out into next year.
Your last point was with regard to cross-selling, is a significant component of our strategy as we've built over the years quite a portfolio of products and services. The opportunity to sell through to existing clients more of our product suite and service capability obviously is a leverage point in terms of versus acquiring new logos. Both are important, but know, our expansion of our average revenue per customer with existing clients is a significant leverage point for us and that continues to be a focus on our part now enhanced with the addition of the alley and medical communication products and services.
Scott Schoenhaus
That's very helpful, Sean. I guess my follow up would be, on the preliminary kind of fiscal 3rd quarter. And the steep ramp in the 4th quarter, can you just walk through all the assumptions, as we think about how the year progresses going forward? Thanks.
Shawn O'Connor
Thanks. Yeah, you know, it's a bit of a change, as we've alluded to, in terms of our seasonality, which typically saw peaks in the second and third quarter with a bit of a step down in the fourth quarter not to first quarter levels, but a step down in terms of fourth quarter. know, that traditional seasonality primarily driven by our book of renewal business on the software side, where our renewing accounts were more, know, a larger population in the middle two quarters of our year.
The change and shift there is driven, A, by -- excuse me, a more continuous flow of revenue from the acquired businesses, alley and Medical Communications, which does not have that same profile in terms of seasonality as our software business. And contributed to as well by what we've seen in terms of as we entered calendar year 25 and our step up in bookings with our clients on the service side.
The scheduling, timing of those projects being more back half loaded than typical service seasonality of the past. And therefore, see a little bit of level, leveling of our second, third and fourth quarter revenue contribution on a confined consolidated basis.
Operator
Matt Hewitt, Craig Hallum.
Matthew Hewitt
Good afternoon. Thanks for taking the questions. Maybe a couple on proficiency for starters, maybe if you could talk a little bit about the pipeline and specifically what you're seeing from a cross-selling opportunity standpoint and then maybe and you know as a follow up or you know congenially to that.
What was the $5 million dollar win that you just signed, was that contemplated in the 13 to $18 million that you expected from the proficiency business this year?
Shawn O'Connor
Yeah, I'll work backwards, Matt. No, we haven't, we didn't change our guidance, so, it adds to our Medical com communications contribution for this year but doesn't put us in a position where our expectations have increased in terms of the 15 to 18 million from the combination of Ali and medical communications this year, as I said, it's a recurring client. We've done work for them in the past, so it's not entirely unanticipated business out of that segment of the business.
Matthew Hewitt
And then as far as the pipeline is concerned are you having some early success on the cross-selling front?
Shawn O'Connor
We're having success in terms of filling the pipeline with new opportunities. The two business units on the alley side, it's been identifying the time to clinical trial opportunities for them to engage in.
And on the medical communication side, it's getting to know and establishing credibility there, introductions and networking. So I think we've been very successful in terms of upping the pipeline activity and seeing that bolus go through the snake, if you will, and expect that down the road we'll see that cross-selling contribution from the EMC alley business units.
Matthew Hewitt
Got it and then maybe separately regarding the contract starts on the services side is there anything that you can do, maybe not so much from a pricing perspective, but is there anything that you can do to help your customers kind of speed that process up a little bit I guess I look at it if it ends up being more 4 weighted, is there a risk there that either they decide to hold off until they're, until your Q1, or conversely they say, okay, we're ready to go, but you have everybody do that at the same time and you maybe don't have the people and support in place to be able to run all of those programs.
I'm just trying to think is there anything that you can do to kind of speed that process up. Thank you.
Shawn O'Connor
Yeah, I'm not being facetious when I say, everything that we do is trying to assist our clients in terms of to decisions more quickly, get to protocols and clinical trial activity that is more assured of being successful. A lot of that which we do is try to accelerate the programs know, it's not something that you can, we'll give you a 10 % discount if you start your clinical trial a couple of months earlier or something of that nature.
That's not how PIF operates in terms of drug development. You know, are we prepared, you know, if we get the flood of green wines and starts in terms of projects? Obviously, there's a ceiling to saying yes to that question, but as we've communicated pretty consistently, we're poised to step up if the market picks up and the gates open in terms of spending in general, or specifically with regard to those things that we've contracted for in our backlog, our ability to respond is not unlimited. But I'd love to be in that position, and B, I don't think we'd have an issue in terms of responding to that sort of demand.
Matthew Hewitt
Got it. All right, thank you very much.
Operator
Max Smock, William Blair & Company.
Max Smock
Hi, it's Christine Rain on for Maxima. Thanks for taking our questions. So kind of building on the last question, I appreciate the commentary you gave on services visibility. So just assuming these bookings burn as you contemplate in the second half, how much of second half services revenue do you have in hand today versus how much do you still have to go out and win?
Shawn O'Connor
Yeah, as it's typical, I mean, we map out the backlog, and I don't recall we usually are running at about 80% to realizable in 12 months, so that extends beyond our year end, obviously our detail reflects, the timing and schedule of what's in the next 6 months. And that's not a number that we've technically disclosed in the past, but our characteristics today are no different than they have been in the past in terms of what needs to come out of backlog and what needs to be booked and built in the second half of the year.
Max Smock
Great, thanks. And turning more on the kind of disruption side of things at the FDA, do you see any impact from the recent layoffs and turnover at the FDA and if there's any adoption on biosimulation moving forward just in general, are you using people who are pushing for adoption of biosimulation, and therefore accept acceptance. And are you worried there at all that that might cause kind of a stall out in biosimulation adoption?
Shawn O'Connor
You know, first and foremost, it's very disruptive and distracting and, you know, people's speed of work effort is no doubt impacted at the FDA. I would point out that most of the drug development approval process interaction with drug sponsors and the approval of drugs is funded through fee-based sources and not funded by federal funding.
So, you know, it's the other areas outside of drug development and certainly within drug development, there is impact of the federal funding cuts, but they are in the research and leadership and so on and so forth. The drug development approval process is funded primarily through fees. So, you know, difficult environment. it conceptually reduce, you know, support for biosimulation? No, don't think it does.
Their support has always been positive and a contributor. But this is not an early-stage advocacy for biosimulation out of the FDA to start adoption in the industry. The wheels of adoption are flowing and motivated by the significant impact that we can have in terms of efficiency and time and cost in drug development disruptive, no doubt, distraction and not without its concern, but does slow down the adoption of biosimulation? I don't think it's a big speed bump in that.
Max Smock
Great thanks that makes sense. And then last one for us, I know it's very early, but just trying to get a handle on how you're thinking about the range of outcomes for fiscal 2026, just from a high level, given the macro head headwinds that are, impacting large pharma, should we think about the best case for next year being more of the same as what we're seeing in fiscal 2025?
Shawn O'Connor
I get the crystal ball out here, Christine. Yeah, I think the biggest impact is the market environment. Do we get a settling out of the challenges? Do we see a sorting out and more normal flow of development activities? I think our software business is insulated from these as we've seen over the last couple, three years. And we'll continue to see good growth there. Can we see an uptick and perhaps more consistency on the service side? The biggest impact is really going to be the market environment.
Max Smock
Great thank you so much.
Shawn O'Connor
Sure.
Operator
Jeff Garro, Stephens Inc.
Jeff Garro
Yeah, good afternoon. Thanks for taking the questions. I wanted to ask about the January press release announcing the PBPK partnership with the Enabling Technologies Consortium that has some key large pharma members. So a few to throw at you here. How long was this in the works? What are the possibilities to expand over time and how should we think about timing of deliverables for this partnership?
Shawn O'Connor
Yeah, Jeff. I think it's a project that extends out for 12 or more months of that nature and it's you know review process or engagement process prior to coming to its conclusion was probably a 6-month window of time in terms of pulling together the consortium of players that are involved and working towards the agreement.
So again, we've historically looked for opportunities like this. It's a tremendous means to develop technology that ultimately lands into our product Astro Plus in this case and it brings us the expertise of the partners that are involved, the data that can be provided and the advancement of the technology and capability of our gastrous product enjoys the benefit of that.
Jeff Garro
Great, appreciate those comments and wanted to ask a more discreet question around proficiency and just how we should think about seasonality by revenue line there, slightly surprised to see a quarter over quarter decline in the software revenue attributed to. Efficiency and then also thinking through that larger $5 million contract that in the back half of the year I believe will contribute to the services that we would allocate to that to the proficiency acquisition. Thanks.
Shawn O'Connor
Yeah, you know the proficiency acquisition and its two components now as we manage the alley and MC the alley quarter to quarter step down not an anticipated based upon again. It's tied to clinical trial starts and as we looked at the project for the pipeline, if you will, anticipated that the second quarter was not a robust startup quarter for them and anticipate that will pick up in three and four.
The medical communications, again, they historically are kind of first quarter is a slow quarter for them in terms of revenue drive from a seasonality perspective. And it builds second, third, and fourth quarter. That's as opposed to the bookings, which typically are higher in the fourth and first quarters. And then that flows into the second, third, and fourth quarter revenue flow from medical communications. And hence, you know, with a differing pace of business on a consolidated basis combined with SLP legacy revenue sources.
It had that effect of changing our seasonality from a low first quarter, up second and third quarter, and down fourth quarter to, as I described, a little bit more contribution, even keel second, third, and fourth quarter, and even as we anticipate now, a little bit of an uptake, but not great uptake in the fourth quarter.
Jeff Garro
Understood, thanks for taking the questions.
Shawn O'Connor
Sure, thanks you.
Operator
Constantine Davides, Citizens.
Constantine Davides
Thanks, appreciate the color on the revenue cadence 3Q to 4Q in terms of, the step up, but is that consistent with how should we -- how should we should also be thinking about EBITA as well.
Shawn O'Connor
Yeah, you know our expense load is you know linear but much, you know, no seasonality to it so as we get into the back after the year as those revenues took up you see that flow through to even Don's home.
Constantine Davides
Okay, and then, in the second quarter, the sales and marketing line, a pretty sharp step up is that headcount addition or some other type of, spend at work there?
Shawn O'Connor
I'll ask Will to comment. But I don't think it's head count driven but conference cost driven but will you you've got maybe better visibility to the details.
Yeah, you're spot on. It's timing of conferences and when they occur in the year, so it's usually a little bit low in Q1 when we were running 15% of revenue for sales and marketing this quarter, 17%, just conference time.
Constantine Davides
Got it that makes sense and then. Lastly, will, I heard you kind of reaffirm that 35 to 40% margin objective, and I guess how much of that is dependent on an inflection in the macro.
Environment that is to say if you can kind of keep grinding out this level of organic growth, is that something that's within reach in the next, year or so, or does it, again, really hinge upon the macro factors kind of changing a bi
Shawn O'Connor
Yeah, I'll jump in there. Yeah, we've operated at that level in the past, and that's our objective to get to it. At whatever revenue growth level we're looking at, its achievement is contributed to by both revenue growth levels, but more significantly by management in terms of our costs, in capacity, matching capacity to top-line service revenues, improvements that we're making in terms of the service organization. Overall, their use of AI as an example, the impact in terms of the advancement of AI tools and the development of the proficiency training modules, all of these come together to contribute and really the bigger drivers on the expense side not necessarily on the revenue side.
Operator
Francois Brisebois, Oppenheimer.
Francois Brisebois
Hi, this is Dan on for Frank. Thanks for taking our questions. I guess firstly on the 89% growth in QSB due to the addition of atopic dermatitis, could you add some color on the customer profile here? Are these mostly existing clients or? Customers working in the atopic dermatitis space and related to that, how should we be thinking about QSB growth moving forward and are you sharing at this time what other indications you see as additional opportunities for QSB?
Shawn O'Connor
Yeah, in this case, you know, the QSB model of this nature is a pretty healthy ticket item. This is a license that can be a half million or more in size. And so, as we've always indicated, they are more discreet in terms of their occurrence. don't occur every quarter, if you will, although we've had success in terms of QSP, Therapeutic License, CPEES model licensing in each of the first two quarters this year, which has led to that robust growth rate on the on the QSP software side.
The nature of them is usually to large pharma accounts. And underneath the large disease models, we've got smaller licensing that takes place for Ardilescent software, as an example. And that can be across large medium-sized pharma biotech as well.
So on a forward basis, it's best to look at in an annual year over year growth. The haphazard large license size is not, I wouldn't project out 89% growth for QSP, but QSP software disease model licensing is a very good growth area for us. And our smaller license will be more consistent on a quarterly basis. And hopefully on a year-over-year basis, we'll see good growth from the large disease models just on a quarter-to-quarter basis. It's not so consistent.
Francois Brisebois
Sure.
Operator
Thank you. And with that, there are no further questions at this time. I'd like to turn the floor back to Sean O'Connor for closing remarks.
Shawn O'Connor
Well, thanks again, everyone, for joining the call today. In the next few months, we'll be attending some important industry events, including 20th Annual Drug Discovery Chemistry Conference in April, a key event for our chem informatics business, and the American Society for Clinical Pharmacology and Therapeutics.
Their annual meeting is in May. And I'm currently here in Boston at the BioIT World Conference Expo. In the financial community arena in May, we'll be attending the 22nd annual Craig Allen Institutional Conference in Minneapolis. And as well, the JMP Citizens Medical Devices and Healthcare Services Forum, again, back here in Boston in June. I hope to see many of you there and appreciate your continued interest in Simulations Plus. Thanks a lot, everyone.
Operator
Thank you.
And with that does conclude today's conference call. We thank you for your participation. You may disconnect your lines at this time.
