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    Schrodinger Inc (SDGR)

    Business Description

    Schrödinger, Inc. is a company that focuses on transforming the discovery of therapeutics and materials through its proprietary computational platform. The company develops and licenses a physics-based computational platform that accelerates the discovery of high-quality, novel molecules for drug development and materials applications. Schrödinger sells software solutions for molecular discovery and design, and engages in drug discovery collaborations and proprietary drug discovery programs.

    1. Software Products and Services - Provides on-premise and hosted software, software maintenance, and professional services for molecular discovery and design, marketed to biopharmaceutical and industrial companies, academic institutions, and government laboratories globally.

    2. Drug Discovery - Engages in collaborations with leading biopharmaceutical companies to advance drug discovery programs, generating revenue through milestone payments, option fees, and potential future royalties. The company also develops a pipeline of proprietary drug discovery programs, including its lead program SGR-1505, a MALT1 inhibitor for treating relapsed or refractory B-cell lymphomas.

    Q2 2024 Summary

    Initial Price$27.10April 1, 2024
    Final Price$18.76July 1, 2024
    Price Change$-8.34
    % Change-30.77%

    What went well

    • Schrödinger's new enterprise software, LiveDesign for Biologics, has received a "fantastic" reception and "the feedback is quite positive" from customers, indicating strong market demand and potential for revenue growth.
    • Clinical programs are progressing well, with enrollment "going well" in both advanced programs, initiation of dosing in a third program, and "we are very happy with the way things are going," which sets the stage for potential value creation from the proprietary pipeline.
    • Despite a turbulent environment for emerging biotech companies, Schrödinger is seeing "more new accounts than accounts that are not software customers" and "significantly more growth accounts than we are seeing reducing accounts," reflecting robust demand for its software offerings and fueling revenue growth.

    What went wrong

    • Clinical data readouts for key assets have been delayed to 2025, which may impact the company's proprietary pipeline progress.
    • High cash burn rate may deplete cash reserves within a year without additional capital, necessitating partnerships or other financing options to fund operations.
    • Growth in the software business is being hindered by a turbulent environment for emerging biotech companies, affecting the company's smaller biotech customers and potentially impacting software revenue growth.

    Key Metrics

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    Questions to Ask Management

    1. "Given the significant decrease in drug discovery revenue this quarter compared to the same period last year , can you provide more clarity on the specific factors contributing to this decline and how you plan to address them going forward?"
    2. "With the lower gross margin in the software segment this quarter, partly due to the initial revenue recognized in the Gates predictive tox collaboration , how do you anticipate gross margins evolving in the coming quarters, especially considering the shift towards hosted contracts?"
    3. "Can you elaborate on the potential risks associated with the timing of the milestones that led to the reduction in drug discovery revenue guidance for the year , and how confident are you that these milestones will be achieved in the next fiscal year?"
    4. "Operating expenses have increased compared to last year, primarily due to higher R&D expenses , how do you plan to manage operating costs moving forward to achieve operating leverage, especially in light of the ongoing investments in your proprietary programs?"
    5. "As the proportion of hosted contracts continues to grow in your software business , how are you addressing potential customer concerns about data security and integration, and what impact might this shift have on your renewal rates and average contract values?"

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Software Revenue Growth: Narrowed from 6% to 13% to 8% to 13%.
      2. Drug Discovery Revenue: Lowered to $20 million to $30 million from $30 million to $35 million.
      3. Operating Expense Growth: Expected to be significantly lower in 2024 than in 2025.

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Software Revenue:
        • Q3 2024: Expected to be $32 million to $34 million.
        • Full Year 2024: Reiterated, but no specific number provided.
      2. Drug Discovery Revenue: $30 million to $35 million, weighted towards Q4.
      3. Software Gross Margin: Slightly lower than last year, similar to 2022 levels.
      4. Operating Expense Growth: 8% to 10%, at the low end of the previous range.
      5. Cash Use: Expected to be greater than last year.
      6. Clinical Data Readouts: Phase 1 data readouts expected in 2025.
      7. Impact of Gates Foundation Grant: Modest negative effect on gross margins.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Software Revenue Growth: 6% to 13% year-over-year.
      2. Drug Discovery Revenue: Variable quarter-to-quarter, no specific numeric guidance.
      3. Total Revenue: Confidence in achieving full-year growth, no specific number.
      4. Software Revenue for Q2 2024: $31 million to $33 million.
      5. Operating Expenses: Consistent trajectory, no specific number.
      6. R&D Expenses: Expected to increase at a slower rate.
      7. Clinical Data Readouts:
        • SGR-1505: Initial data in late 2024 or 2025.
        • SGR-2921: Initial data in late 2024 or 2025.
        • SGR-3515: Enrollment in Q3 2024, no specific data timeline.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Drug Discovery Revenue: $30 million to $35 million.
      2. Software Revenue Growth: 6% to 13%.
      3. Software Revenue for Q1 2024: $33 million to $35 million.
      4. Gross Margin: Similar to 2023, with potential variance.
      5. Operating Expense Growth: 8% to 12%, lower than 28% in 2023.
      6. R&D Expense Growth: Expected to moderate compared to 44% in 2023.
      7. Operating Cash Burn: Higher than in 2023, with reduction goal for 2025.
      8. Capital Allocation: Shift towards proprietary programs.
      9. Customer Metrics: Positive trends expected for accounts with ACV of at least $500,000, $1 million, and $5 million.