Simulations Plus: An AI-Fueled Rebound at a Small-Cap Biosimulation Pure-Play
Backlog up 18%, a 41% stock rally in three months, but a conservative guide—the market is starting to believe the AI story.
SLP · Earnings Call · 2026-04-09
Simulations Plus (SLP) reported fiscal Q2 2026 on April 9, 2026, beating its own top-line guidance with $24.3M in revenue, up 8% year over year. Adjusted EBITDA surged to $8.7M (36% margin) and adjusted EPS of $0.35 matched expectations. The market immediately rewarded the results—the stock has gained more than 41% in the trailing 90 days, breaking out from a long-term drawdown that had crushed shares from a 2021 peak.
The quarter's numbers tell a recovery story: software revenue grew 9%, services 8%, and total backlog jumped 18% to $24M. Gross margin expanded 7.9 points to 66.5% as software mix improved, and the company generated $5M in free cash flow with no debt. Gross margin hit 66.5%, up from 58.6% a year ago, a clear sign of operating leverage returning.
The real narrative, however, is not just financial—it's AI. CEO Shawn O'Connor opened the call by addressing the existential threat many software investors fear: “We believe it's important to separate short-term market perception from long-term fundamentals.” — Shawn O'Connor, Chief Executive Officer · 2026-04-09 He argued that AI is a net positive for biosimulation, enhancing rather than replacing validated scientific engines. The company announced strategic collaboration programs with three large pharma companies to embed its AI agents directly into drug development workflows.
The scientific engines—GastroPlus, MonolixSuite, ADMET Predictor, and Thales—are the foundation on which these AI agents are built. O'Connor stressed that This is a direct counter to the market's recent de-rating of software companies on AI disruption fears. The collaborations also hint at a new monetization path. When asked about AI monetization, O'Connor noted that discussions are underway with those partners and that "the recognition of the value of the incremental technology is very visible and accepted on the part of our clients." But he cautioned: “We certainly not anticipated in fiscal year '26, significant contribution from this arena at all.” — Shawn O'Connor, Chief Executive Officer · 2026-04-09 Instead, expect AI to be a contributor to fiscal 2027. This cautious stance on AI monetization suggests the near-term financial payoff remains uncertain, but the strategic positioning is for the longer run. Another recurring theme is renewal rates. The company reported a 91% renewal rate for the quarter and 87% on a trailing-twelve-month basis, down from historical highs. CFO Will Frederick acknowledged the decline but provided important context: “For top 20 pharma clients, we've historically had 100% logo retention. For $1 billion-plus pharma, we've seen 90% logo retention.” — William Frederick, Chief Financial Officer · 2026-04-09 The churn is concentrated in precommercial biotech and smaller commercial biopharma, a reflection of a still-challenging funding environment. Management is now providing deeper insight into cross-selling: "50% purchased 2 software products, 23% purchased 3 software products and 15% purchased 4 or more products." This is the new logo opportunity—not just acquiring new customers, but expanding wallet share within the existing base. The tax line added a wrinkle to the quarter. While revenue guidance was maintained, adjusted diluted EPS guidance was lowered because the effective tax rate jumped from a prior 12–14% range to 23–25%. As Frederick explained: "We now expect our effective tax rate for fiscal 2026 to be between 23% to 25%... certain items affecting the current year effective tax rate relate to accelerated deductions elected under the One Big Beautiful Bill Act." These deductions accelerate cash tax benefits, so the cash flow impact is favorable even as the GAAP tax rate rises. This is a classic case where reported earnings per share could lag underlying economics. What has actually changed at Simulations Plus? Compared to prior calls, management's tone on AI has swung from cautious to confident. In January, O'Connor described early GastroPlus AI adoption with “webinars and some training and, visibility provided to clients” — Shawn O'Connor, Chief Executive Officer · 2026-01-08 and that "adoption and installation in our clients fit into their timetables." A quarter earlier, he noted pricing was “a little bit more aggressive and it is part and parcel with the upgrades and new platform, AI and cloud capabilities.” — Shawn O'Connor, Chief Executive Officer · 2025-12-01 Now, with three named collaborators and an explicit AI roadmap, the company is moving from experimentation to implementation. The stock's 41% rally suggests the market is starting to pay for that vision. Yet the company's own guidance remains conservative—revenue growth of 0–4% for fiscal 2026, with adjusted EBITDA margin of 26–30%. The payoff from AI budgets within pharma is still expected to be modest this year. That tension—between an enthusiastic product story and a cautious financial outlook—creates the core investment debate. Is this the beginning of a genuine re-rating as AI becomes a growth catalyst, or is the conservative guidance a signal of continued uncertainty? For now, the tape is saying the former, but the fundamentals will need to catch up.our customers are not looking to replace biosimulation engines. Instead, they are looking to enhance their value using AI to improve efficiency, broaden deployment and accelerate drug discovery and development.