Schrödinger, Inc. (SDGR) Earnings Call Transcript & Summary

Thank you. Thank you for standing by. Welcome to Schrodinger's conference call to review second quarter 2026 financial results. My name is Rob and I will be your operator for today's call. All lines have been placed on me to prevent any background noise. After the speaker's remarks, there will be a question and session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. Please be advised that this call is being recorded at the company's request. Now I would like to introduce your host for today's conference, Ms. Jaron Madden, Chief Corporate Affairs Officer and Head of Investor Relations. Please go ahead.

Thank you and good afternoon everyone. Welcome to today's call during which we will provide an update on the company and review our second quarter 2026 financial results. Earlier today, we issued the press release summarizing our financial results and progress across the company, which is available on our website at Schrodinger.com. During today's call, management will make statements that are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to our outlook for the full year 2026 and third quarter 2026, our plans to accelerate the growth of our and advance our therapeutics portfolio, the capabilities and potential advantages of Bunsen, our agentic AI co-scientist, the clinical potential and properties of our and our collaborators' compounds, the use of our cash resources, as well as our future expenses. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies, and prospects, which are based on the information currently available to us and on assumptions we have made. Actual results may differ materially due to a number of important factors, including the considerations described in the risk factors section and elsewhere in the filings we make with the SEC, including our Form 10-Q for the quarter ended June 30, 2026. These forward-looking statements represent our views only as of today, and we caution you that, except as required by law, we may not update them in the future, whether as a result of new information, future events, or otherwise. Also included in today's call are certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and should be considered only in addition to, and not a substitute for or superior to, GAAP measures. Please refer to the tables at the end of our press release, which is available on our website, of these non-GAAP measures to the most directly comparable GAAP measures. This afternoon, Rami Farid, our CEO, will review our recent progress. Then Richie Jain, Chief Financial Officer, will discuss our financial results and 2026 guidance. Karen Akin-Sania, President, Head of Therapeutics, R&D, and Chief Strategy, and the Office of the Energy Officer Partnerships will provide an update on our Therapeutics portfolio. Pat Lorton, our Chief Technology and Chief Operating Officer, will join us for the Q&A. And with that, I will turn the call over to Rami.

Thanks, Jaron, and thank you everyone for joining us today. We're very pleased with our momentum across the business in the second quarter. The biopharma industry is increasingly recognizing that a computationally driven predict first approach is a critical driver for accelerating drug discovery timelines and improving probabilities of success. Our ACV Growth of 27%, driven by broad-based demand, reflects this ongoing shift. In the quarter, we saw continued scale-up within large customers, uptake of new products, an improved biotech sector, and new customers across life sciences and material science. A key driver of our growth strategy is introducing products that expand platform usage and provide access to new budgets. We are excited about Bunsen, our AI co-scientist, which we officially launched in early access last week. We have optimized Bunsen to execute our validated computational methods and leverage our decades of molecular discovery expertise by executing complex multi-step workflows, Bunsen helps expert computational chemists work more efficiently and run more design projects. Johnson will also enable, more broadly, drug hunters to access our software and run advanced simulations expanding our user base over time. Our longstanding collaborators, NVIDIA and Google Cloud, are providing additional tools and compute resources to support early access to Bunsen. Our throughput-based licensing model ensures we are positioned to capture the value of the significantly increased platform usage we expect Bunsen to drive. We are very pleased that Bristol Myers Squibb, a longtime customer and collaborator, is deploying Bunsen and expanding their use of the platform across their research organization. Our new strategic software agreement with BMS, announced earlier today, allows us to deploy Bunsen in conjunction with our computational technologies designed to enable large-scale chemical exploration. We view BMS's implementation as a compelling model for how large-scale deployment can expand platform usage and integration across the industry. Our commitment to scientific innovation is a key component of our strategy to expand our addressable market and access new budgets. Our predictive toxicology solution is a clear example of this approach. Our advanced physics-based technologies predict off-target binding risks before synthesis, enabling customers to address safety losses liabilities early in discovery programs and deliver optimized candidates with substantial time and cost savings. Commercial evaluations are going well, and Predictive Talks has already contributed to our 2026 ACV. As the promise of AI dominates the dialogue in both drug discovery and materials design, I'd like to take a moment to discuss what differentiates Schrodinger's platform. For molecular discovery, AI is a powerful tool enabled by the data used to train it. The more high quality data, the more predictive the models. By using rigorous first principles physics, we generate the accurate, reliable data required for AI models. This integration of the most advanced ground truth physics calculations and cutting edge AI is the foundation of our computational molecular discovery platform. By continually expanding our platform, platform capabilities and introducing new products, we are unlocking new budgets and broadening our user base across the biopharma and material science industries. None of this progress would be possible without our team, and I want to thank our employees for their dedication and hard work in advancing our mission. We are executing well against our strategy, expanding our software footprint, and continuing to build long-term value across our therapeutics portfolio. I'll now turn the call over to Richie to review our financial results. Thank you, Rami, and good afternoon. In the second quarter, we saw strong execution across both our software and drug discovery businesses.

by robust ACV growth, a rapid acceleration in hosted revenue percentage, continued portfolio progress, disciplined expense management, and a strong balance sheet. Second quarter ACV was $29.6 million, which represents 27% growth year over year. The ACV excluding contribution was $22.6 million, a 23% increase compared to Q2 2025, and at the upper end of our expectations. On a trailing four-quarter basis, ACV reached $208 million, and first half 2026 ACV of $58.0 million represents 19% growth compared to the first half of last year. ACV growth was broad-based, driven by our top 20 pharma customers, as well as from biotech and materials science customers. Contribution ACV was $7 million in the second quarter, $5 million as a result of the Gates Foundation extending its funding for our Predictive Toxicology Initiative, based on the progress we've made, and $2 million from Gates Ventures in support of our continued work in battery research to develop and apply atomistic simulation methods to improve battery. performance. Total revenue for the second quarter of 2026 was 58.9 million. Software revenue was 32.5 million, of which hosted revenue contributed 15.2 million, or 47% of the software total, compared to 31% in the second quarter of 2025. On October trailing four-quarter basis, hosted revenue increased to 30% of the software total from 23% in Q2 2025 and 27% last quarter. Overall, we are pleased with the progress we are making with transitioning customers to hosted licensing. Our year-over-year revenue growth continues to be impacted by our planned accelerated transition to hosted licenses, for which revenue is recognized ratably over the life of the contract rather than mostly upfront. We are pleased with the conversion dynamics we are seeing so far, and our priority remains converting customers as their contracts come up for renewal. As a reminder, increasing the percentage of revenue from hosted contracts will have a temporary negative impact on revenue, with every 1% increase in hosted revenue resulting in a 2-3 million reduction in reported revenue, depending on renewal quarter and contract length. Software gross margin was 71% for the quarter compared to 76% in Q2 2025, reflecting our planned accelerated transition to hosted software licensing. Contribution revenue was $3.4 million for the period compared to $4.8 million in Q2 2025. The decline is driven by by the completion of the initial funding by the Gates Foundation in support of our predictive toxicology initiative, partially offset by the Gates Ventures grant supporting our battery research. Product discovery revenue was $23 million compared to $13.9 million in Q2 2025. The increase is primarily due to the receipt of a $10 million collaboration milestone from Ajax Therapeutics. Total operating expenses for Q2 were $74 million, a decrease of 6% compared to $79 million in Q2 2025. The decrease was primarily driven by lower headcount, CRO, and professional services fees, and reflects our commitment to disciplined expense management. All other income was $48.9 million, primarily due to a gain associated with the completion of Eli Lilly's acquisition of Ajax. Net income for the quarter was $6 million compared to a net loss of $43 million in the second quarter of 2025. We ended the quarter with a strong balance sheet of $419 million in cash and marketable securities. The fully diluted share count was $75.8 million. According to our full year 2026 guidance, we continue to expect ACV to be in the range of $218 to $228 million, representing 10 to 15% growth over 2025. As a reminder, Q4 is our largest quarter and typically greater than 50% of annual ACV. We remain pleased with how opportunities we expect to close this year are progressing. We now expect drug discovery revenue to be in the range of 65 to 75 million, compared to our prior expectation of 55 to 65 million, due to the recognition of a $10 million collaboration milestone payment from Ajax. Our operating expenses are expected to be less than in 2025. Finally, For the third quarter of 2026, we expect ACV excluding contribution to be 41 to 45 million, compared to 38.3 million in Q3 2025, which included 2.2 million of contribution ACV. To wrap up, our performance in the second quarter reflects continued momentum across our business, backed by a strong balance sheet. Given the combination of robust ACV growth, disciplined expense management, and accelerating hosted software adoption, we remain very well positioned to execute on our strategic priorities.

I would now like to hand the call over to Karen. Thank you, Richie. The therapeutics team is experiencing a boost in productivity across our portfolio following the integration of our new agentic AI co-scientist, Bunsen. While Bunsen has clearly accelerated the day-to-day productivity of our computational chemists, its impact extends to the rest of our cross-functional drug hunting team. Bunsen is enabling target analysis and structural biology workflows as our structure-based programs begin, as well as the integrated analysis of DMPK, pharmacology and toxicology data during the mature stages of programs. These capabilities are helping our scientists drive rapid, data-driven decisions and to accelerate the predict, design, make, test and analyze cycle. Our new global collaboration with Simseer Pharmaceutical Group, announced in July, combines our complementary, predict-first design approach with Simseer's preclinical and clinical execution. This collaboration allows us to rapidly translate discovery breakthroughs into clinical stage opportunities consistent with our evolving strategy for our therapeutics portfolio. We are eligible for development and commercial milestone payments, as well as tiered royalties on net sales. The growing track record for Therapeutics designed using our platform provides the ultimate validation of its impact. Since 2020, we have realized over $750 million from our therapeutics activities across collaborations, co-invented drugs, and co-founded companies including Nimbus, Morphic, Structure, and most recently Lilly's $2.3 billion acquisition of Ajax. In June, data presented at the European Hematology Association for AJ1-11095, the phase 1 type 2 JAK inhibitor, which was the most advanced asset in the AJAK's portfolio, provided initial clinical evidence that the characteristics of this selective molecule align with the desired differentiated target product profile. With multiple programs eligible for future milestones and royalties, our pipeline continues to represent the potential for substantial long-term value. We look forward to keeping you updated on our progress and thank our team and partners for the advances across the combined portfolio of important innovations for patients. I'll now turn the call back to Rami. Thank you, Karen. As you've heard today, the first half of 2026 has been marked by innovation.

innovation, and strong execution. From robust ACV growth, to the launch of our AI co-scientist Bunsen, to the continued advancement of co-invented development candidates now in the clinic, we are fundamentally transforming how drugs and materials are discovered. At this time, we are happy to take your questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 in your telephone keypad. If you would like to withdraw your question, again press star 1. Your first question today comes from the line of Michael Riskin from Bank of America. Your line is open.

Hi, this is Alexa Chan on for Mike. Thank you so much for taking your questions. I have a couple here. Maybe to start, can you give a bit more color on end market health in BioPharma and biotech, as well as customer activity overall? Kind of sounds like funding is moving in the right direction. And then for my follow-up, can you talk about how much maybe predictive tox has contributed to ACV so far and what are the expectations for that going forward?.

Sure. I'll take the first question you were asking, I think about the health of the biotech sector. We've noticed what I think a lot of other people have noticed, that certainly things are better this year than they were last year. I think a good reflection of that is the number of IPOs that we've seen this year compared to last year. I think we're already at two times where we were last year. And we're also noticing a trend, a better situation with regard to customers just in the biotech sector, where last year we saw what I think a lot of people were seeing is a number of biotech companies struggling to raise funds. And that impacted our business as it did a lot of companies that were selling technology to biotech companies. And we're just not seeing that. this year at anywhere near the same rate as we were seeing last year. So these are all encouraging signs that I think are consistent with what a lot of other people are reporting with regard to predictive tax. We're not disclosing, of course, we haven't broken down the ACV from individual products, but it has contributed, as we said, to ACV this year. And it's part of our guidance that we provided for the full year. Rich, is there anything else to add to that? No. Great. Thank you.

Thank you so much. Thank you. Our next question comes from a line of Matt Hewitt from Craig Hallam Capital Group. Your line is open.

Good afternoon. Thanks for taking the questions. Maybe first up on Bunsen, obviously, congratulations on getting that first collaboration or contract signed. I'm just curious what the pipeline looks like and if you could provide any details on maybe what the pricing model for that looks like. Is it similar to the rest of the software or? Is there some other angles with Bunsen? I'll start and maybe hand it over to Pat. Yes.

We have, as we said, we're, well, thank you, first of all. Yes, we're excited, of course, about the agreement with BMS. They're one of our large customers, and as a result of the agreement of the collaboration, they significantly scaled up their access to our technology. And I think that answers sort of the second part of your question is that that's how we see Bunsen or how we think we'll recognize the value of Bunsen and translate all the excitement around the gentrification of these complex workflows flows is through the increased demand of our technology. And again, that's sort of what was borne out in the collaboration with EMS. Has anything else to add to that or? Pretty much. Yes. Yes.

And then maybe as a follow-up, obviously some nice progress on converting customers to hosted. And I recognize that probably a big chunk of that's going to come in Q4 when contracts renew. But as you're having those discussions now, what is the feedback? Is your sense that you could get a...

a lion's share of customers converted, say within the first two years, or is this going to maybe take a little bit longer than that? Thank you. Rich, you will cover that. Thanks Matt. So overall, we're still tracking towards the same goals of 75% hosted by the end of 2028. So far, we've been pleased with how we're progressing. We were 47% hosted this quarter. So I'd say we're on track towards our goals. As a reminder, we did transition a few customers prior to their renewal date, which did have an outsized impact on the hosted revenue percentage for this quarter. But overall, the customer engagement has been really strong and we're progressing towards our three-year goals.