Certara, the self-proclaimed "global leader in biosimulation," is a company riding the wave of a powerful secular trend: the increasing reliance on computer modeling in drug development. Their Q1 2024 earnings transcript paints a picture of robust software growth and a hopeful, if cautious, outlook for their services business. Yet, a deeper dive reveals a curious anomaly, a discrepancy that could point to a potential blind spot in Certara's strategy.

While the narrative revolves around end-market recovery and exciting new AI integrations, a quiet shift in key performance indicators (KPIs) suggests a potential underestimation of their core software engine's true strength. Certara is stepping away from the Aggregate Renewal Rate (ARR), a traditional metric of customer retention, in favor of the Net Retention Rate (NRR). This seemingly technical change might be dismissed as mere accounting nuance, but it reveals a compelling subplot within Certara's growth story.

The ARR, simply put, measures the percentage of recurring revenue retained from existing customers. Certara reported an 88% ARR for the full year 2023, a figure that might raise eyebrows in a business boasting 14% software revenue growth. This apparent contradiction is explained by Certara's evolving product mix: increased SaaS conversions, Vyasa options, and expanding Pinnacle 21 features. These factors, while positive, skew the ARR downward by obscuring the full extent of revenue expansion within existing customer accounts.

Enter the NRR, a metric that captures precisely this revenue expansion, painting a more comprehensive picture of customer loyalty and growth. Certara's 109% NRR for both Q4 2023 and the full year tells a different story: one of robust upselling and cross-selling within their existing customer base. This indicates that Certara is not just retaining customers, but actively growing their wallet share within these accounts.

"Key Takeaway: The shift in focus from ARR to NRR highlights a crucial aspect of Certara's business model: the power of its platform to drive not just customer acquisition, but also customer deepening."

This ability to expand within existing accounts represents a potent engine for sustainable growth, an engine that the ARR, with its focus on purely retained revenue, fails to fully capture.

Customer Deepening: A Potential Growth Lever

While market recovery and AI advancements are undoubtedly important drivers, Certara's focus on the NRR indicates a recognition that their core software platform is a powerful growth lever in its own right. This shift in emphasis, a subtle whisper amidst the pronouncements of macro trends and AI potential, might hold the key to unlocking even greater value within Certara's existing customer base, a hidden reservoir of growth that could propel the company to new heights.

Hypothesis:

Could Certara's shift to NRR signal a strategic pivot towards customer deepening, potentially leading to higher software revenue growth than currently projected?

Crunching the Numbers

If Certara maintains its 2023 NRR of 109%, even with stable customer acquisition, its organic software revenue growth would be significantly higher than the projected 5%. This suggests that the company might be deliberately under-promising and over-delivering, allowing for potential upside surprises in future earnings.

Visualizing the Potential Impact of NRR

Certara is unifying its software offerings through Certara Cloud, a platform that integrates access to its entire software suite. This platform enhances collaboration, data security, and user experience, making it easier for customers to leverage Certara's comprehensive solutions.

"Fun Fact: Did you know that Certara's software has played a role in the development of over 90% of all novel drugs approved by the FDA in the last six years? This staggering statistic underscores the company's pivotal role in the pharmaceutical industry, highlighting the widespread reliance on biosimulation in bringing life-saving therapies to market."