SDGR earnings call transcript, November 4, 2026

Thank you for joining us and welcome to Schrodinger's conference call to review third quarter 2026 financial results. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. 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... Update on the company and review our third quarter 2026 financial results. Earlier today, we issued a 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... ...our plans to accelerate the growth of our software business and advance our therapeutics portfolio, the capability and potential advantages of Bunsen, our agentic AI co-scientist, the clinical potential and properties of our compounds and those of our collaborators... ...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 the assumptions we have made. Actual results may differ materially due to a number of important factors, including the considerations described in the Risk Factor section and elsewhere in the filings we make with the SEC, including our Form 10-Q for the quarter ended September 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 an 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. For reconciliations 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 in 2020. 26 guidance. Karen Akinsanya, President, Head of Therapeutics, R&D, and Chief Strategy 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, Sharon, and thank you, everyone, for joining us today. Our third quarter results reflect sustained commercial momentum and strong progress toward the long-range goals. We outlined earlier this year. ACV grew 17%, or 24%, excluding contribution ACV. The key drivers of this growth were broader adoption within large pharmaceutical accounts. Introduction of new products, including Bunsen, our Agentec AI co-scientist, growth among biotech and material science customers, and addition of new customers. Our discovery team continues to generate and contribute to... ...high-value programs, which our partners and co-founded companies will advance through clinical development. During the quarter, we received a milestone payment associated with the clinical progress of Structure Therapeutics' oral small molecules. ...amilin program. On the strength of this performance, we are raising our full-year guidance for both ACV and drug discovery revenue. Looking across the molecular discovery landscape, biopharma and materials organizations... ...are increasingly shifting toward a predict-first computational approach to increase the probability of success and shorten discovery timelines. As industries prioritize spending on the most high-impact solutions... ...our platform remains critical to molecular discovery, enabling us to deliver durable growth. While the promise of AI and molecular discovery is immense, models remain fundamentally constrained by the...

Thank you, Rami, and good afternoon. Our third quarter results highlight the ongoing momentum across our business, marked by strong ACV growth, continued transition to hosted licenses, progress in our drug discovery business, and disciplined expense management. Third quarter ACV was $44.7 million, which represents 17% growth year-over-year and $214 million. a trailing four-quarter basis. Third quarter growth excluding contribution ACV was 24%. ACV growth was broad-based, driven by our top 20 pharma customers, as well as biotech and materials science. Total revenue for the third quarter of 2026 was $64.5 million, a 19% increase. Software revenue was $38.2 million, of which hosted revenue was $17.2 million, a 49% increase. Hosted revenue represented 45% of the software total compared to 32% in the third quarter of 2025. On a trailing four-quarter basis, hosted revenue increased to 32%. of the software total from 23% in Q3 2025. We are pleased with our progress in transitioning customers to hosted licensing. As a reminder on revenue recognition, transitioning customers from on-prem premise to hosted licensing temporarily moderates our reported software revenue because hosted contracts are recognized ratably over the life of the contract. Every 1% increase in hosted revenue results in an approximate two to three million reduction in reported revenue depending on contract length and renewal timing. Software gross margin was 75% for the quarter compared to 77% in Q3 2025.

Thank you, Richie.

Our experienced team of drug discovery scientists leverages our computational platform at scale to design development candidates for high value. targets with a goal of advancing programs through co-founded companies and collaborations through previously co-founded companies like Nimbus, Morphic, Structure and Ajax. We have demonstrated a clear. Record of translating computational drug discovery into successful clinical programs and generating substantial value. In September, we co-founded Tectora Therapeutics alongside NEA and. RE Capital, marking the first time we have built a new company directly around assets discovered in our internal pipeline. We contributed to early stage immunology and inflammation programs. SDGR 4594 and SDGR 8139. In exchange, we received an equity stake in Tektora and are eligible for future development and commercial milestones as well as royalties on sales. Our team will continue to work closely with Tektora, deploying our computational platform and dog discovery expertise to advance both programs towards the clinic. The collaboration with Tektora enables these promising programs. to move forward with dedicated capital while allowing us to retain significant upside. Across our maturing collaboration portfolio, we are seeing significant progress of clinical stage programs. In September, Tektora announced that the FDA accepted its new drug application for Zasacitinib under priority review.

We co-invented Zasacitinib with Nimbus and remain eligible for sales-based milestones. Zasacitinib was acquired... by Takeda from Nimbus in 2023. We also received a milestone payment from Structure Therapeutics, a company we co-founded, following initial dosing in the multiple ascending dose portion. of the Phase I 2A study of ACCG 2671, an oral amylin molecule, in development as a potential treatment for obesity. Zotemtegrast, former known as LY4268989 or MORPH057, which was discovered during our collaboration with Morphic, is currently in multiple Phase II studies. This includes a combination of

in patients with ulcerative colitis. Dose escalation in the Phase I study for our MORP1 inhibitor Xylimaltib, or SGR5, 1505, is now complete, and our abstract was accepted as an oral presentation at the upcoming American Society of Hematology annual meeting. The presentation will detail the favorable safety... ...profile and clinical activity observed in patients with relapsed refractory B-cell malignancies. We look forward to presenting these results in December. In summary, we are seeing strong progress... ...across our entire Therapeutics portfolio, from our early-stage discovery programs to our partnered and co-founded company assets. We enter the final quarter of the year with excellent momentum and look... ...forward to keeping you updated on our progress. I will now turn the call back to Rami.

Thank you, Karen.

...therapeutics portfolio, we head into year-end with immense confidence in our trajectory. At this time, we are happy to take your questions.

We will now begin the question and answer session. Please let me... ...yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We ask that you pick up your handset when asking a question. To allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your next question comes in the line of Matt Hewitt with Craig Hallam. Your line is open. Please go ahead.

Good afternoon.

Congratulations on all the progress. Maybe first up, a lot has been mentioned over the past quarter or two regarding the funding environment and how especially the smaller farm. And biotech companies have been able to garner better funding and therefore hopefully starting to invest. I guess the first question is, are you starting to see some of that? Or at this stage of the game, is it still the large pharma that's primarily coming in with new orders and new contracts? Yeah, we're definitely seeing that. Great question. One of the things that's so obvious this year compared to last year, that's a reflection of what you're saying is that we're just not seeing the sort of difficulty that biotech companies were having last year in raising money and investing in their research, you know, efforts. That's very different this year. Very, very few companies running into that sort of problem that they were running into before, which is obviously the result of them being able to raise money and continue to focus on their pipeline. Not just, you know, on the one clinical asset that they might have. So, we're definitely seeing it, and it is a major contributor to the results that we presented today. Got it. And then... Maybe a follow-up question, a little bit different angle, but you mentioned the material science business a couple times in your prepared remarks. You obviously had the nice press release here recently regarding the Nature article. I'm just curious, how big of a contributor is that?

market today for you, and how should we be thinking about that over the medium and longer term? Do you see that becoming a much bigger driver? You mean all of material science, not just the sector that's covered by the nature paper, correct? Correct, yes. All, yeah, just beyond pharma and biotech, yep. Good, yeah, yeah, yeah. So, I think you know we reported at the end of, well, in, you know, the end of 25, we reported what fraction of our revenue was material science already, but we see material science, we're still, material science companies are a little bit behind pharma biotech companies with regard to adoption of computation, but that's changing. That's definitely changing. We can clearly see, I think it's possible, by the way, that material science companies are seeing the success of deploying computation in drug discovery, and they're increasingly adopting the sort of predict first . late first mindset, and we're seeing that. So we believe that the TAM for the business is quite large, and we're still sort of in the early days of fully realizing that. Pat, you want to add something? Yeah, I think it's also really important to note that because they're earlier in the technological adaptation, we spend a lot more time early on in services helping them predict the exact price. properties they want. It's not quite as cookie cutter as life science, but this is a place actually where Bunsen can be really transformative because they'll potentially be able to get more done with off the shelf solutions. Whereas in the past.

To predict a novel property, you know, in the giant world of materials, you might have to spend months with us on services, and now Bunsen might be able to help you put together your workload, build that property very quickly. Makes a lot of sense. Thank you. Great. Thanks.

Your next question comes from the line of Evan Seigerman with BMO Capital Markets.

Your next question comes from the line of

Great.

Thanks for taking the questions, guys. And congrats on the quarter here. Appreciate all the color on the customer and market breakdown between drug development and material science. So maybe as just kind of a follow up to one of the earlier questions here, even maybe qualitatively, how much of that kind of 10 to 15 percent growth for the next couple of years would you expect, at least at this point, to come from material science customers? versus drug development if we kind of just draw some of those bigger buckets and can you also, as kind of a second question related to this, but you mentioned pretty solid growth from biotech and material science, but can you speak a bit more to any trends you're seeing kind of within that? Top 20 pharma bucket specifically, and just if there's any notable differences in the order patterns from those guys versus the other customers. Thanks. Yeah. I think you're hearing from us, of course, optimism about the future growth of material science. We see this as a huge opportunity in front. As we said, we're sort of still relatively early days with regard to the whole industry's adoption of computation. But we're very optimistic about what we're seeing. But we're not prepared right now to guide to what fraction of the growth will come from material science or life science. So let me answer your question about the top 20. Customers. We are, even though we're talking about here, growth from material science and growth from biotech companies who are in a better funding environment, there's certain

still significant enthusiasm among the top 20 pharma companies in broader adoption, sort of bigger deployments of the technology. Bunsen has played a big, big role. excitement around Bunsen among the top 20 pharma customers, and as we've talked about before, there's still a fair discrepancy between the spend of annual spend among the 20 pharma customers. So we still see big opportunities to get pharma companies that are maybe on the sort of lower half of that spend up to where the top handful or 10 pharma customers are. Anything to add to that?

Your next question comes from the line of Scott Schoenhaus with KeyBank Capital Markets. Your line is open. Please go ahead.

quality of the results that customers are getting when they're, when they're testing it and that it's already contributing to ACB. But that's as much as I think we can say at this time. All right. Thank you. As a reminder. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

There are no further questions at this time.

Thank you for attending.

You may now disconnect. Good day.