SIMULATIONS PLUS, INC. (SLP) Q1 2022 Earnings Call Transcript

SIMULATIONS PLUS, INC. (SLP -0.35%)
Q1 2022 Earnings Call
Jan 06, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Simulations Plus first quarter fiscal 2022 financial results conference call. [Operator instructions] It is now my pleasure to introduce, Brian Siegel from Hayden IR. Thank you, Mr. Siegel.

You may now begin.

Brian Siegel -- Investor Relations

Good afternoon, everyone. Welcome to our first quarter fiscal 2022 financial results conference call. Hosting the call today are Simulations Plus' CEO, Shawn O'Connor; and CFO, Will Frederick. An opportunity to ask questions will follow today's presentation.

Moving to Slide 2, before beginning, I would like to remind everyone that except for historical information, the matters discussed in this presentation are forward-looking statements that involve a number of risks and uncertainties. Words like believe, expect, and anticipate mean that these are our best estimates at this time but that there can be no assurances and expected or anticipated results or events will actually take place. So, our actual future results could differ significantly from those statements. Factors that could cause or contribute to such differences include, but are not limited to, our ability to maintain our competitive advantages, acceptance of new software and improved versions of our existing software by our customers, the general economics of the pharmaceutical industry, our ability to finance growth, our ability to continue to attract and retain highly qualified technical staff, our ability to identify and close acquisitions on terms favorable to the company, and a sustainable market.

Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the Securities Exchange Commission. With that said, I'd like to turn the call over to Shawn O'Connor. Shawn?

Shawn O'Connor -- Chief Executive Officer

Thank you, Brian. We began the first fiscal -- the fiscal year with an excellent first quarter, as both segments of our business delivered solid growth, leading to total revenue growth of 16%. Our software business was up 19% year over year in the first quarter. And we continued to see strength across each of our three core product lines, with bookings exceeding expectations and significant cross-selling progress.

From an innovation standpoint, we continued to release new versions that we will -- we believe will continue to build on our leadership positions. Our service business returned to positive growth, up 13% year over year. This portion of our business also continued to grow its backlog, recovering from the pandemic-impacted challenges of the second half of last year. Diluted EPS grew at a pace -- faster pace than revenue, up 25% from last year, driven by mix in the operating leverage inherent in our model.

Overall, this was a strong start to the new fiscal year. As I mentioned, our software business had a strong quarter. GastroPlus revenue increased 19% year over year this quarter. We had 16 new $100K-plus customers in the quarter, and nine new small biotechs, pharma companies, CROs, and incubators.

This is a rapidly growing segment of the market, and we are experiencing robust growth in this area. We also saw customer success with 21 upsells to existing customers in the quarter. A significant accomplishment that we announced during the quarter was the award from the FDA to enhance and validate mechanistic in vitro-in vivo correlation, or IVIVC, methods for long-acting injectable formulations to accelerate innovator and generic product development and regulatory assessment. This is a joint proposal with the University of Connecticut's Department of Pharmaceutical Services, and we are now engaged with the FDA on four different funded programs, validating the widespread embracing of modeling and simulation technology as an important tool in drug development.

Monolix sales continue to set the pace for our software segment. Sales of this product increased 35% this quarter. Our efforts to expand the addressable market for MonolixSuite in Asia are starting to bear fruit, as we signed our first deals in China and added Northern Science Consulting in Japan as a distributor. Renewals for the MonolixSuite remain robust.

And our recently released updates saw more than 1,000 downloads in the first 10 days. As I mentioned on prior calls, we believe MonolixSuite is taking market share, and we are confident in our ability to innovate and maintain our technological advantages. ADMET Predictor delivered 24% revenue growth in the quarter. During the quarter, we released a new version of the product, APX3, which is generating increased demand from our customers.

We also closed two Artificial Intelligence Drug -- Driven Drug Design, or AIDD, module deals with customers. The Phase 2 of our AIDD collaboration continues to be successful, attracting greater interest from current and potential customers. Turning to our services offering. Our PK/PD services revenue this quarter increased 4% as the relatively high number of project disruptions that impacted the business during the second half of last fiscal year are returning to normalized levels.

While PK/PD bookings were still slow -- slower than prior quarters as the industry continues to navigate the pandemic and its impact on the FDA pipeline, we entered the second quarter with a robust pipeline of sales opportunities for this business. We had some meaningful accomplishments for the quarter that I'd like to highlight with the following two examples. First, we helped a Fortune 100 pharma client develop a treatment for patients with COVID-19. Our work involved performing a population analysis using data collected in healthy individuals and in patients with the virus.

Our goal was to identify and quantify the effects of patient factors on drug exposure in order to confirm and support dose selection for the next phase of development and determine whether dose adjustment was required in any specific population. These analyses were helpful in supporting the achievement of regulatory milestones in obtaining Emergency Use Authorization for the compound. Second, we supported a biotech company by helping them to gain greater understanding and insight into the risk profile for their compound, which is intended to treat patients with Type 2 diabetes and inadequate glycemic control. We developed a population model and used the resulting estimates of individual patients' drug exposure to explore relationships between exposure and efficacy, as well as between drug exposure and the occurrence of a particular type of adverse event.

This understanding was used to support the need for dose adjustments in special populations and to assist in preventing these particular adverse events. These are just two of many examples of the important work we do for customers, large and small, advancing their drug development and regulatory approval efforts. Our QSP/QST revenue was up 31% for the quarter. Even with this strong growth, our backlog increased by 124%, giving us confidence in this business over the next few quarters.

During the quarter, we've released RENAsym version 1A, the novel quantitative systems toxicology software for predicting and investigating drug-induced kidney injury. The information from RENAsym modeling will help guide go/no-go decisions on drug development projects, potentially avoiding the disastrous financial effects of failed clinical trials or better-providing assurances of a path to FDA approval. RENAsym was developed with SBIR funding from the National Institute of Health, National Institute of Diabetes and Digestive and Kidney Diseases division. During November, we presented breakthrough scientific data at a top liver disease conference, helping to explain the relatively high positive response rates in placebo cohorts related to potential treatments of non alcoholic steatohepatitis, or NASH.

Our research found that small changes to the diet patterns and patient behavior can lead to reductions in fibrosis scores, a key metric of efficacy for NASH treatments. This insight can help NASH clinical scientists better understand the clinical trial results and should keep potential treatments on track to be delivered to patients in short order. Finally, our PBPK revenue was also up 37% this quarter, and backlog increased by 56%. Of note, we announced a new grant from the FDA to enhance the Transdermal Compartmental Absorption and Transit, or TCAT, model in GastroPlus.

Overall, our services revenue grew 13%, and backlog increased 31% during the quarter. Good progress and moving beyond the disruptions from the second half of last year. Looking to our fiscal year 2022 outlook, we are maintaining our guidance for the fiscal year. Our software business continues to deliver accelerated growth rates, and we're seeing continued recovery in our consulting business.

Accordingly, we should exit fiscal year 2022 at a pace that supports our longer-term expectations for 15% or better organic growth with any acquisitions incremental to this number. With respect to M&A, we continue to look for strategic opportunities to increase our total addressable market and accelerate our growth rates. Let me now turn the call to our CFO, Will Frederick, to discuss the financial results.

Will Frederick -- Chief Financial Officer

Thank you, Shawn. As you may have seen in our press release earlier today, we have expanded our financial disclosures to give a more complete picture of the business by providing adjusted EBITDA. While this isn't the metric we've previously provided, it has become commonplace with our companies, and we felt it appropriate to provide for our current and prospective investors. Our adjusted EBITDA is currently calculated by adding back stock-based compensation expense.

And in the future, we'll add back any expenses related to M&A or other noncash, non operating expenses that may occur. We provide a reconciliation of this non-GAAP metric to net income to relevant GAAP metric in the press release announcing our results, and it can be found on our website as well. Our total revenue growth rate was 16% in the quarter. The strong growth of 19% in our software business positively impacted our mix, which was at the high end of our 55% to 60% guidance range for the fiscal year.

Our services business grew at 13% and its share of the mix was at the lower end of the 40% to 45% guidance range. Our software gross margin was 90% for the quarter, up from 87% last fiscal year due to increased revenue and slightly lower cost of revenue. Our services margin was 60%, down from 64% last fiscal year due to increased salaries and an increase in lower margin services projects, including training and international workshops in China and Brazil. Our total gross margin increased slightly year over year to 78% as a result of the improving software revenue mix.

We continue to enjoy a diverse mix of software revenue in the quarter with solid growth across our entire product portfolio. For the quarter, GastroPlus represented 54% of our software revenue, MonolixSuite was 21%, ADMET Predictor was 20%, and other software was 5%. This quarter, we saw MonolixSuite climb to our second highest revenue software product. For the quarter, our renewal rate for commercial customers was 96% based on fees and 93% based on accounts.

As a reminder, our renewal rates fluctuate quarter to quarter due to customers who either renew early in the quarter before their license term ends or late in the following quarter after their license term ends. Renewal rates for commercial customers on average continue to be in line with historical rates in the mid-90s. We saw a slight decline in our average revenue per customer this quarter compared to the prior-year quarter, this change reflects our normal price increases and ongoing upselling efforts, offset by changes to our discount structure for multi-year deals. We also now have 92 University Plus customers in 26 countries.

The University Plus Program offers free access to our software for students and educators as part of our ongoing support of academic research, training, and collaborations. And we believe this program will help prepare the next generation of scientists and contribute to the rapid development of safer, lower-cost treatments for patients worldwide. Let me shift now to our services business. For the quarter, our services revenue breakdown was as follows: 46% from PK/PD services.

29% from QSP/QST services, 17% from PBPK services, and 8% from other services. With regard to a couple of key service metrics, total service projects increased 48% this quarter, and we ended the quarter with $15 million in backlog, up $3 million from the prior-year quarter. Now, turning to our consolidated income statement. Total R&D costs for the quarter were $1.7 million or 14% of revenue compared to $1.5 million, also 14% of revenue in the same period last fiscal year.

R&D expenses for the quarter were $0.9 million or 7% of revenue compared to $0.8 million or 8% of revenue in the same period last fiscal year. Capitalized R&D for the quarter was $0.8 million or 7% of revenue compared to $0.7 million or 6% of revenue in the same period last fiscal year. SG&A expense for the quarter was $5 million or 40% of revenue compared to $4.4 million or 41% of revenue in the same period last fiscal year. The increase in SG&A expense was primarily due to higher payroll costs, increased insurance expense, and increased commission costs.

Income from operations was $3.8 million, an increase of 24%, and operating margin expanded to 31% from 29% last fiscal year. Income tax expense was $0.8 million for an effective tax rate of 22% compared to last fiscal year income tax expense of $0.5 million and an effective tax rate of 17%. We saw a lower effective tax rate last fiscal year, primarily driven by the tax benefit associated with disqualifying dispositions. Net income increased 22% to $3 million compared to $2.5 million for the same period last fiscal year.

Diluted earnings per share increased 25% to $0.15 compared to $0.12 for the same period last fiscal year. Expenses for interest, income taxes, depreciation, and amortization and noncash stock-based compensation included in our net income were $2.3 million compared to $1.8 million for the same period last fiscal year. Adjusted EBITDA, excluding these amounts, was $5.3 million, or 42% of revenue, compared to $4.3 million, or 40% of revenue, for the same period last fiscal year. We continue to have a strong balance sheet with significant cash reserves to support our continued expansion through internal investment and potential M&A activity.

At the end of the quarter, our cash and short-term investments balance grew to $124.3 million, and we continue to have no debt. I'll now turn the call back to you, Shawn.

Shawn O'Connor -- Chief Executive Officer

Thank you, Will. In conclusion, this quarter demonstrates improved momentum relative to the end of fiscal 2021. Our bookings generally exceeded expectations, we grew revenue double-digits for both software and services, and we expanded our services backlog, supporting future growth. Our investments in business development are paying off, helping us to capture market share, expand into new regions, and more effectively cross-sell solutions across our installed base.

Recent successful releases of new software and service achievements demonstrate our scientific leadership. Overall, we are well-positioned for continued organic growth. Additionally, strategic M&A remains an important path to augment our organic growth. And with a strong balance sheet and a growing leadership position in the industries we serve, we continue to evaluate potential acquisitions.

With that, I'll be happy to take your questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Thank you. Our first question is from Francois Brisebois with Oppenheimer. Please proceed with your question.

Francois Brisebois -- Oppenheimer -- Analyst

Hey, thanks for taking the questions, and congratulations on a very nice quarter here. The first question I had was just, you know, your quarter here that you reported ended in November, a lot of people are, you know, announcing quarters here, fourth quarters and calendar year that are ending in December. And in December, you know, we've had a lot of fun with this omicron variant. So, I'm just kind of wondering, on your end, you know, in terms of guidance, it was a strong quarter.

Can you just, you know, talk about maybe how you have seen the variant affect different parts of your business, if at all, at this case?

Shawn O'Connor -- Chief Executive Officer

Hi, Franc. You know, obviously, the results in terms of our booking sales revenue drive were great in the quarter ended November. So, I can't point to any omicron impact in that timeframe, which built up since that point in time in December and here into January. And I think we're, you know, waiting to see what the impact is.

Back a year and a half ago, with other peaks of the virus, we saw, you know, slowdowns in terms of our client companies. And, you know, they're hiring and the need for more software, more licenses impact in terms of the FDA processes and the speed which clinical trials were concluded. Some of that impact may be yet to be seen here in the few months, coming months. But to date, not a lot of impact just yet in terms of through November.

Francois Brisebois -- Oppenheimer -- Analyst

OK. That's helpful. And then, maybe help us understand, last time there was an issue, and you guys have rebounded very well from -- on the services side in terms of, you know, in relationship to the pandemic. But I just wanted to make sure, you know, we understand here that what happened is it wasn't that there was not necessarily enough backlog.

But was it just the timing of the cancellations of certain products and it was difficult to get the backlog involved? Or what was the reason again for the service issue?

Shawn O'Connor -- Chief Executive Officer

You know, the primary source of the problem, Franc, was the number of delays in cancellation and holds that came up during the quarter and especially in the third quarter right toward the end of the quarter, the last half of the quarter, which didn't allow us to reach into backlog and pull other projects forward, move our staff to other engagements of the projects that would maintain the lower revenue there. Our backlog is, you know, a mix of projects that some can be moved forward. Many can't be moved forward because it's waiting on -- project is waiting on data that comes from the client or a CRO on the conclusion of the clinical trial. So, if that backlog is bigger, as we talked to before, then there's, you know, more probability, more opportunities to move some of those projects forward.

Our backlog was short, and the number of cancellations in that third quarter were significantly above what our normal experience is. It happens. It happens every quarter. But the nine that we incurred in the third quarter of last year was well above what would be considered normal.

We've seen cancellations this past quarter, but they were not as significant or as numerous. And therefore, it didn't impact us quite significantly.

Francois Brisebois -- Oppenheimer -- Analyst

OK. Great. And then, maybe, lastly, at a high level here, we talked about -- you know, it's interesting, this is quite a kind of a change here that the use of biosimulation is progressing with the FDA. Can you just talk about the acceptance of biosimulation with the FDA, and whether or not that's accelerated by the pandemic? I understand it makes a lot of sense to save time, especially with the EUA that you guys were involved with.

But have you run into the issue where because of the pandemic, the FDA is so busy that maybe they're not ready to accelerate biosimulation as much as you thought? Or does it make a ton of sense and they're all onboard?

Shawn O'Connor -- Chief Executive Officer

Well, if anything, we see the impact in terms of their processes around the review of drug candidates and submissions. No impact, certainly, in a negative way on their endorsement and use -- their own use of modeling and simulation and endorsement of the industry's usage. Again, areas of expanding application of biosimulation techniques, their acceptance, bioequivalents, waivers, etc., continue to expand. So, you know, pandemic can be, you know, impactful in terms of the flow or workflow.

But certainly, it doesn't slow the rapid adoption of biosimulation and supporting that from the FDA. Impact, you know, through this process modeling and simulation techniques have been used in some of the COVID treatments available that have been in the review process, and in their core, you know, more opportunity to expand its application into few areas, vaccines, etc.

Francois Brisebois -- Oppenheimer -- Analyst

OK. Great. Well, thank you very much, and congrats again.

Shawn O'Connor -- Chief Executive Officer

Thanks, Franc.

Operator

Thank you. Our next question is from Matt Hewitt with Craig-Hallum. Please proceed with your question.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Good afternoon and congratulations on the good start to the year.

Francois Brisebois -- Oppenheimer -- Analyst

Thanks, Matt.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

First up, it's kind of a two-pronged question. But we've heard a lot about the great resignation that occurred late in the year. Actually, Q3, Q4 a lot of people, you know, switching jobs. And I'm curious what impact, if any, that has had on your customers? Have they seen that type of migration from one company to another? And how does that -- how has that impacted your sales? And then separately, at Simulations Plus, you know, where does your hiring sit? Have you been able to find some good people to fill roles as you continue to grow?

Shawn O'Connor -- Chief Executive Officer

Well, the first part of your question in terms of the activity in the industry and our clients, you know, I don't have a measurement as to comparison to prior time is volume. My sense is that it's up, like it is in a lot of industries out there that movement of staff is more active now kind of as we came out of earlier phases of COVID. As we began -- some of our client companies, you know, began to step back in terms of remote working. You know, a number of drivers in terms of the movement there.

Some impact in terms of the flow of new sales must come from that as they're, you know, losing people and/or searching for other people. Generally, quite frankly, it's a positive thing for us. When a can of the Simulations Plus moves from company A to company B, oftentimes that creates a new sale opportunity for us, both on the software side as that individual is accustomed to using the tools at their prior job and they need them in the new position, as well as on the service side. They are in a position to control the acquisition of service engagements, deliver those, and acquire them from consulting firms like ourselves.

They've been a fan for -- of our team previously, then that often translates to a new opportunity at the company that they've moved to. Mostly, a positive impact. It also, in the company that is losing people, creates opportunity where they need to continue to meet deadlines and may create a need to go outside to Simulations Plus to get work done that they might have otherwise done in-house. So, overall, it tends to be a bit of a positive.

In terms of, you know, its impact on our own environment, this has been for a long time a very competitive marketplace for talent. Historically, demand has exceeded supply in general for computational biologists and scientists that work in this field, and it continues through today. And we have pretty good historical retention rates in terms of our employees. It's not 100% retention.

There are people that we lose from time to time. Often, it is, you know, a consultant that may have come out of a post-doc environment into a company like Simulations Plus, and without any pharma, direct pharma experience, wants to go get that experience into their resume. And in fact, they then become even better consultants down the road with that experience on their resume, and we look forward to them coming back at some point in time. On the recruiting side, we have a very competitive market, but we've generally been able to keep pace with our hiring plan.

But it is a very competitive market and something that we pay close attention to because it is the lifeblood of the business. Our scientific staff and their contributions, both on the software side, as well as the consulting side, key ingredient of our success.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

That's really helpful. Thank you. I guess reaching out or kind of touching base on the Asia-Pacific region, where you are making a little bit more of an effort there, where do you see that business going, given, I guess, kind of the market there has been growing robustly for the past few years? And I'm just curious, can that become 10% of revenues in a couple of years? Where do you see that going over the mid and long term? Thank you.

Shawn O'Connor -- Chief Executive Officer

Yeah, you know, generally, the Asian market in total is -- has been contributing about 15% of our revenue. And so, we've got a good presence there historically with the GastroPlus, ADMET Predictor products, and especially in Japan, where that long-standing relationship with our distributor there has driven, you know, very good revenue growth for many years. Our expansion into other areas in terms of Korea, China, India, those marketplaces, a little bit less developed for ourselves, and we seek more opportunity, expect more opportunity there. And finally, I'd say that actually in Asia, while it is fast-growing, it was probably the most disrupted through the COVID.

And their start-stops in terms of business activity was probably more impactful there than anywhere geographically. That said, we've, on the Monolix side, added a new independent Chinese distributor for the Monolix product several months ago. And the start-up period of time, we reached the end of it, has begun this past quarter with the first licenses through the new distributor, and very recently put the Monolix product into the portfolio of products that our Japanese distributor reps for us in that marketplace. So, expect some uptick there on the Monolix side, which has done some business but not proportionately appropriate for their overall mix of business.

We expect that to be a good growth area for Monolix and, in general, will contribute to at that 15% level, or I think a little bit better than that as we move forward.

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

That's great. Thank you very much for answering the questions, and congrats again on the good start to the year.

Shawn O'Connor -- Chief Executive Officer

Thanks, Matt.

Operator

Thank you. Our next question is from Dane Leone with Raymond James. Please proceed with your question.

Dane Leone -- Raymond James -- Analyst

Thank you for taking the questions, and congratulations on the results. Maybe you could provide a bit more color in terms of the competitive share gains that you quoted with Monolix, just where those share gains are coming from, what the competitive products are. And then, could you just -- you get asked this question a lot, just your view of how active you can be in organic growth in acquiring other businesses, either in the service or software side over the course of 2022. Thank you.

Shawn O'Connor -- Chief Executive Officer

Sure, Dane. You know, I'll go backwards in terms of the M&A question, active search out there in terms of ways in which we can contribute to our TAM in the long run by adding incremental products and services. We've got a pretty strict criteria. It's been applied in our previous acquisitions, and, you know, a lot of activity there, a lot -- like, you know, earlier in the year, we commented on the fact that valuation was a challenge in the marketplace for us.

That has, you know, opened up a bit. It's always a challenge. It never goes away. But I think that barrier has improved.

We're certainly looking at a number of potential acquisition candidates that are out there. And, you know, while unpredictable, I would hope that we are able to find and come to an agreement in terms of an acquisition in this time frame. But it's got to be the right fit and meet our criteria, both in terms of product fit and cultural fit, as well as the accretive and appropriate valuation. And those opportunities do exist out there.

And I'm confident that we will at some point achieve that. First question in terms of Monolix and our market share gain there, the NLME modeling tool market is dominated by NONMEM long-term early product introduction at the beginning of modeling and simulation 20-plus years ago, largest installed base in that software segment. And we believe, today, we are taking -- based upon our growth at 30-plus percent in Monolix, that's much higher than the overall market growth rate for that product area, and therefore, must be taking our market share from the largest candidate in that space in NONMEM.

Dane Leone -- Raymond James -- Analyst

Thank you.

Operator

Thank you. Our next question is from Mitra Ramgopal with Sidoti. Please proceed with your question.

Mitra Ramgopal -- Sidoti and Company -- Analyst

Yes. Hi, good afternoon. Congrats on great quarter. Just a couple of questions.

First, I was just curious, the balance sheet is very strong. And as you're building cash, absent acquisitions, if maybe you can just let us know how you're prioritizing capital allocation as it relates to maybe R&D or expanding sales, etc.?

Shawn O'Connor -- Chief Executive Officer

Sure, Mitra. You know, we certainly are focused, in terms of the capital allocation, first and foremost on finding an acquisition opportunity to utilize those funds in that direction. R&D investments in our business development organization are certainly investments that we're making. We are making those investments really sort of under the profile of our, you know, traditional allocation of expenses to our income statement and maintaining our profitability with them, you know, making our -- doing our investments in business development in R&D within that profitability profile.

And, you know, we're confident that the M&A opportunities will exist near term, and we'll translate those funds into a more revenue-generating asset.

Mitra Ramgopal -- Sidoti and Company -- Analyst

OK. Thanks. And then, quickly on targeting new customer growth and to focus -- I mean, most of the focus is still in the U.S. But as you look toward Europe and Asia, is the pandemic or omicron variant have been affecting you on that front as you look to expand overseas?

Shawn O'Connor -- Chief Executive Officer

Well, I think we're all hoping that this wave is a quicker wave that passes. But is it impacting us now? Yeah, I mean, to a certain degree, I mean, you know business activity and flow starts to be impacted as, you know, people shut down, depending on how drastic each geography implements their response. Generally, I think the world has gotten -- improved their ability to continue workflow within these environments. But it is disruptive, but, you know, we've managed our way through today without a significant impact.

But we've got to wait and see. That's been the challenge of the impact of COVID throughout, is, you know, it rises and flows up and down there.

Mitra Ramgopal -- Sidoti and Company -- Analyst

OK. Thanks for taking the questions.

Shawn O'Connor -- Chief Executive Officer

Sure. Take care.

Operator

Thank you. Our next question is from David Larsen with BTIG. Please proceed with your question.

David Larsen -- BTIG -- Analyst

Hi. Can you talk about the rebound in professional service revenue? What drove that? And really, what are your expectations for that line item going forward? And then, with respect to omicron and the clinical trial activity, like, it's sort of my understanding that omicron, it's a much shorter duration. When you look at data from South Africa, it looks like maybe one month compared to delta, which was like four months. Like, have you heard of clinical trials being stalled or delayed or shut down at all? Just -- thanks.

Thanks very much for that. Appreciate it.

Shawn O'Connor -- Chief Executive Officer

Sure, sure. No, haven't gotten, you know, big input. You know, where we would see the impact of that is in our delays, cancellations, and holds in terms of workflow on the service side. And, you know, they came down.

They still exist on a quarter-to-quarter basis, but they came down this past quarter. Now, will we see an uptick that in the second quarter, more relevant in the time frame to omicron increasing? You know, perhaps. We're in a little bit better position to respond to that with our backlog, having grown quite significantly versus where it was midpoint of last year. So, I think we'll be able to respond to that a little bit better.

But no big signals as yet. And as you say, the time duration of the impact based upon South Africa experience looks to be favorable. But totally this will be a little bit more short-lived and lesser in terms of its impact. Service revenues, in general, you know, the two -- three sources of our service business, PK/PD, QSP/QST, and PBPK, you know, all stepped up in terms of their revenue growth compared to the latter part of last year.

The step-up to a positive service growth was really on the back of QSP/QST engagements where we grew quite significantly and grew backlog 124%. So, there, the flow of both toxicology projects, as well as QSP projects, both saw improvement versus the latter part of last year. And that backlog pickup gives us a little bit more confidence in terms of their ability to continue to grow quite nicely, and certainly much better than they did last year. PBPK business grew as well.

PK/PD side turned a corner and improved in terms of their growth rate, but probably lags in terms of the increase in sales activity and, you know, backlog growth compared to the other two. But we're seeing pretty full pipeline right now in that area that we anticipate will contribute to more success in the second quarter from their rebound. I mean, overall, after, you know, a couple of quarters of negative growth in the service side, getting to 13% growth in the first quarter is a very good sign and gives us confidence as we move into the remaining parts of the fiscal year '22.

David Larsen -- BTIG -- Analyst

That's fantastic and that's encouraging. Just one other question for me. The EBITDA margin looked really good. Was that 42%? And then, what are your expectations for your EBITDA margin both in the near term and in the longer term? Thanks.

Shawn O'Connor -- Chief Executive Officer

Yes, it's not a line item we give guidance on, but the business has been pretty consistent in terms of its EBITDA percentage over time. A little bit of fluctuation, but we feel very good in terms of the fast-paced growth of our software side, which contributes to, I guess, positive push to our profitability and EBITDA percentage. You know, and so, with the software business growing at a pace faster than the service growth, I think we could see some continued leverage resulting from that.

David Larsen -- BTIG -- Analyst

OK. Great. Thanks very much. Congrats on a good quarter.

Shawn O'Connor -- Chief Executive Officer

Take care, David.

Operator

[Operator instructions] Our next question is from David Windley with Jefferies. Please proceed with your question.

David Windley -- Jefferies -- Analyst

Hi. Good afternoon. Thanks for taking my question. Shawn, there's been a number of new -- a lot of new company formation in your biotech target customer base and moreover, you know, funding to those companies that are moving forward.

Is there a size or a maturity sweet spot where they become a really kind of -- they become kind of the perfect target for your salesforce and software sales? Or kind of is anybody fair game? I'm wondering, like, how mature do they need to get before they really are ready to expend capital on your software?

Shawn O'Connor -- Chief Executive Officer

Yeah, good question. You know, we saw in this first quarter some increase in terms of the biotech companies segment of our sales, as well as incubator sales, which was very pleasing to see. I think it's indicative of adoption of modeling and simulation in those early -- earliest of stages, which historically hasn't been that great. You know, when do they become a candidate for a software sale? Well, they got to have someone hired and brought onboard to operate the software.

So, you know, that's the litmus test in terms of whether we send a software expertise business development person on that -- into that account or a service business development person to the account. But we've been very pleased to see their use of modeling and simulation picking up. And that often begins with service engagements. but they are more quickly, in their timeline, hiring a modeling and simulation person into the group.

We see -- to the earlier question on the call here, we see a good flow of, you know, large pharma modeling and simulation scientists stepping out of large pharma to become the department, the modeling and simulation department, at earlier-stage smaller biotech companies. And that's a good sign, and an example of where, as I mentioned before, movement of a good Simulations Plus user into a smaller organization creates a very positive sales opportunity for us.

David Windley -- Jefferies -- Analyst

Great. I appreciate that answer. Another question, kind of a slightly different access around growth is I'm wondering -- thinking about the phases of the molecules development life cycle, where is the peak intensity of use of your products? And maybe it's different by product, but more importantly, to the question, are there areas of the life cycle where there are use case opportunities but the intensity of modeling is really -- you know, hasn't picked up yet that you see as, I'll call it, the next frontier -- although that's maybe a little too Pollyanna, but the next frontier for the intensity of modeling use to really increase?

Shawn O'Connor -- Chief Executive Officer

Yes, it's a fair question. You know, our products and services span from discovery to submission and approval. So, you know, it's sort of anecdotal in terms of the use of our products. You know, discovery space is very fast growing in terms of its adoption of modeling and simulation.

We're seeing a lot of new biotechs. I think that's where those start. And so, there's a robust growth in that phase of development. You know, translation into clinic is one of the pain points in the drug development process in terms of being more predictive of successful candidates and improving the batting average of those that began the clinical process and succeed.

And modeling and simulation is a primary tool in terms of improving that batting average and selection of candidates to move into the clinic, identifying through clinical trial phases, and looking for improved dosing regimens for patient populations. We're developing drugs that are a little bit more smaller markets, and that often means drugs that are applicable in smaller populations. And modeling and simulation has great application in that regard. And then, obviously, you know, improving the success of clinical trial is where the disproportionate amount of drug development expenditure takes place.

And that translates into the biggest opportunity to save money. If you take the right candidate into Phase 3, you design the trial appropriately, and then, as is often the case, the results of that clinical trial, how can they be fashioned in a way that improves probability of the FDA approval afterwards. So, you know, I -- we see growth in all areas and modeling and simulations of application in each space.

David Windley -- Jefferies -- Analyst

Got it. I appreciate the answers. Thank you. I'll leave it at that.

Shawn O'Connor -- Chief Executive Officer

All right.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Shawn O'Connor for closing comments.

Shawn O'Connor -- Chief Executive Officer

Very good. Appreciate you joining us today and hearing our news, and we look forward to updating you again in a few months with our second quarter results. Take care, everyone.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Brian Siegel -- Investor Relations

Shawn O'Connor -- Chief Executive Officer

Will Frederick -- Chief Financial Officer

Francois Brisebois -- Oppenheimer -- Analyst

Matt Hewitt -- Craig-Hallum Capital Group -- Analyst

Dane Leone -- Raymond James -- Analyst

Mitra Ramgopal -- Sidoti and Company -- Analyst

David Larsen -- BTIG -- Analyst

David Windley -- Jefferies -- Analyst

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