A：Simulation Plus's second quarter fiscal year 2026 saw a revenue of $24.3 million, exceeding the top line guidance communicated in the previous quarter. Adjusted EBITDA was $8.7 million with a 36% margin, and adjusted diluted EPS was 35 cents, in line with internal expectations.

A：The macro environment continues to support Simulation Plus with global encouraging market conditions, ongoing most favored nation pricing agreements, reduced tariff concerns, and a more supportive funding environment for customers. On the regulatory front, the new Approaches Methodologies (Nams) guidance issued late last year was further clarified, leading to a pickup in client spending, solid software renewal rates, increased new logo activity, and strength in service bookings.

A：Simulation Plus is responding to the AI impact by focusing on the practical application of AI across its ecosystem. At its investor day in January, the company outlined a roadmap for leveraging AI and continues to make progress executing against this plan. The company has announced strategic collaboration programs with major pharmaceutical companies to integrate AI into real-world drug development workflows, advancing software and services into a unified modeling ecosystem. These collaborations are intended to move beyond experimentation to practical implementation and support long-term growth plans.

A：For the quarter, total revenue increased by 8% to $24.3 million, with software revenue up 9% (60% of total revenue) and services revenue up 8% (40% of total revenue). Discovery revenue, primarily from Admet predictor, grew 19% for the quarter and 6% for the trailing 12 months. Development revenue, primarily from Gastroplus and Monolith suite, increased 12% for the quarter and 3% for the trailing 12 month period. Clinical operations revenue, primarily from proficiency, declined 54% for the quarter and 58% for the trailing 12 month period. The company ended the quarter with 297 commercial clients, achieving an average revenue per client of $124,000 and a 91% renewal rate for the quarter. On a trailing 12-month basis, the average revenue per client was $148,000 and the renewal rate was 87%.

A：In fiscal 2025, 50% of clients with software revenue greater than $100,000 purchased two software products, 23% purchased three software products, and 15% purchased four or more products.

A：For the quarter, development services increased 12% and commercialization services increased 66%. Total services revenue grew with projects worked on increasing to 199, and the ending backlog increased 18% to $24 million from $20.4 million the previous year.

A：The gross margin for the second quarter was 66%, with software gross margin at 89% and services gross margin at 33%, compared to the prior period's gross margin of 59% with software gross margin at 81% and services gross margin at 25%.

A：Income tax expense was $1.4 million compared to $0.4 million last year, with an effective tax rate of 23% compared to 12% last year. The increase in the tax rate is primarily due to discrete items in the prior year that did not recur, and a less favorable jurisdictional mix of earnings.

A：The updated guidance for fiscal 2026 is total revenue between $79 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 now ranging between 75 cents to 85 cents. For the third quarter of 2026, revenue is expected to be between $20 to $22 million, adjusted EBITDA margin of 27% to 33%, and adjusted diluted EPS between 20 to 27 cents.

A：Simulations Plus is transitioning from a set of innovative modeling tools into an integrated AI-driven biosimulation company, supporting the full drug development life cycle from discovery through commercialization. The company is combining validated scientific engines with enhanced cloud capabilities, AI-powered workflows, and a coordinated roadmap to deliver greater speed, consistency, and interoperability to clients.

A：New logo opportunities are expected to contribute to the stability of the client base, particularly among the large top 20 and billion-dollar large pharma companies, which are considered to be at the lower end of the environment or size of the clients.

A：The services backlog is 75% service revenue-based in the development space and 25% in the communication space. It has performed well, with a good pipeline activity and closure, resulting in service revenue in the first quarter and continues to do so in the second quarter.

A：The acquisition of proficiency has contributed to the service revenue stream, with good performance in the first and second quarters. However, the run rate of software revenue contribution decreased in the back half of 2025 and has stabilized at a good starting point in the first half of the year. The company expects reasonable growth from proficiency going forward.

A：There are opportunities for upselling at all levels, from getting single product customers to two or more products. The company has historically seen a good linkage between Avent predictor and Gastro plus, and the monolith acquired 55 years ago complements the PKPB space for clients. The opportunity for upselling is expected to accelerate with a reorganization of the business development organization and the development of the ecosystem which enhances the scientific engines and access for smaller and medium entities.

A：Halfway through the year, the company is performing better than its initial guidance at the end of the previous year, despite a cautious approach due to an environment that is still fragile with global political issues and specific client-related challenges. Momentum seems to be building, and the company has greater confidence in the guidance provided, although it remains cautious not to identify any single quarter as a trend.

A：The momentum the company is experiencing is not just due to an overall recovery in the macro environment or biopharma spend but also to the growing interest in and adoption of NAND (not mentioned in the transcript but implied in the context). The animal testing announcement and the support for biosimilar and AI methodologies are anticipated to be positive factors in the future, although the timeline is a couple of years out.

A：The momentum in AI within large pharma companies is building out of partnerships with AI discovery companies, which are now prompting pharma firms to reconsider their internal implementation of AI. The speaker indicates this is a broad-based trend.

A：Collaborations have expanded the budget and opportunity for AI within clients by leveraging strong modeling and simulation relationships into connections with AI leaders within these clients. This has led to new budget allocations outside of traditional modeling and simulation, specifically in the AI budgets of large pharmaceutical companies.

A：AI monetization is not expected to contribute significantly to the P&L in fiscal year 26. Discussions are ongoing with collaborators to establish the economic model for monetization, and the groundwork for value and monetization is currently visible and accepted by clients. The exact mechanics and timing of monetization are still under discussion, but it is anticipated that this area will start contributing to the P&L in fiscal year 27.

A：Yes, the company does have large AI organizations such as Google DeepMind among its clients, and these entities, including Recursion and DeepMind, are primarily focused on drug discovery and use AI technology.

A：The revenue from AI market licensing for large AI organizations stems from the use of the company's software, which includes data dictionaries and models that enable these organizations to conduct their research. Additionally, AI organizations evolve into drug development companies that move into the clinic with the company's discovery platform, Ame predictor, which is valuable for property prediction. Other software solutions, like Monolith and GastroPlus, are also used in the development cycle of their drugs and could become preferred platforms for large pharmaceutical companies.

A：The year-over-year comparison in service metrics reflects the natural evolution and progression of projects, which can consume a high percentage of staff in certain quarters and shift to smaller and medium-sized projects in others. Growth in backlog is a positive indicator of the pipeline and is returning to prior-year levels.

A：The segment breakdown of software solutions is expected to remain relatively stable over the next 12 months. However, there could be some shifts, particularly with the larger clients adopting monoliths for their preferred platform in the PKPB space, which could contribute to the growth of software revenue. Discovery, development, and clinical solutions are expected to continue to contribute to software revenue, but monoliths could see faster percentage growth.