This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Thank you for standing by. Welcome to Schrodinger's conference call to review third quarter 2023 financial results. My name is Eric and I'll be your operator for today's call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. 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, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead.
Schrodinger
Thank you and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our third quarter 2023 financial results. Earlier today, we issued a press release summarizing our results and progress across the company, which is available on our website at schrodinger.com. Here with me on our call today are Rami Fareed, CEO, Jeff Porges, Chief Financial Officer, and Karen Akinsania, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A. 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 2023, our quarter ending September 30, 2023, our plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of initiation of and relapse from our clinical trials, the clinical potential and properties of our 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 filings we make with the SEC, including our Form 10Q for the quarter ended September 30th, 2023. 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 for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. And with that, I'd like to turn the call over to Rami.
Rami Fareed
Thanks, Sharon, and thank you, everyone, for joining us today. We had a successful and exciting third quarter marked by several important milestones for the company. We reported total revenue of 42.6 million, representing 15% growth compared to the third quarter of 2022, and we are on track to deliver on our full year revenue guidance. We began patient dosing for our phase one study of SGR 2921, and we received CTA approval to open clinical trial sites for our SGR 1505 patient study in Europe. Additionally, STR3515 is advancing, and we also have a number of exciting discovery programs just behind our lead programs, which we'll discuss at more length at our pipeline day in December. Today, we reported that rights to two related oncology discovery programs within the BMS collaboration reverted to us after BMS elected not to proceed with further development for strategic reasons. These programs were making excellent technical progress, and our team is assessing the next steps for these programs in the context of our overall portfolio strategy. BMS continues to be an important partner. We have three active research programs in the collaboration, as well as SOS1, which reached development candidate status and transitioned to BMS earlier this year. We are also discussing the potential for additional discovery programs with BMS. Collaborations are an important part of our business, and we continue to evaluate new partnerships where the science, overall scope, and value are consistent with our strategy. Turning to our software business, we remain confident about the opportunity for significant revenue growth among our largest software customers this year. The interest in computationally driven drug discovery is quite high, and we are seeing more customers increasing their utilization of our platform. We're continuing to invest in the development of new capabilities to enhance the value of our platform, and we expect these capabilities to support continued growth in our software business for many years to come. Our latest quarterly software release incorporates a number of key technologies, including the ability to more accurately predict certain ADMET properties, such as binding to cytochrome P450s and HERG, and technology that allows for prediction of antibody affinity as a function of pH. We are pleased with the progress we have made this year, and we're very excited about the opportunities that lie ahead. I greatly appreciate the hard work and commitment of all of our employees who are instrumental in our mission. I will now turn the call over to Jeff.
Sharon
Thank you, Rami, and good afternoon, everyone. It's been a strong quarter for Schrodinger, and this is reflected in our quarterly results and financial guidance. Our software business is growing despite a challenging biopharma industry environment, and our proprietary portfolio is progressing nicely. Today, I'll share details of our financial results and then close with some comments about our financial guidance. Our revenue results for the quarter were above our expectations and reflect the impact of the changes in our collaboration portfolio that Rami explained earlier. We remain very positive about our outlook for the year and continue to expect significant growth in software revenue in Q4 and in both drug discovery and software revenue for the year overall. Software revenue for Q3 was $28.9 million, up 17% compared to Q3 2022. The revenue growth was driven by existing customers increasing their investment in our technology, with a number of additional customers reaching the $1 million per year threshold during Q3. Hosted software grew strongly as some large customers elected to initially increase their access to technology on a hosted basis. Services revenue declined due to the shift away from our structural biology services and towards our proprietary programs, and our contribution revenue increased to $1.8 million, driven by the expanded renewal of our battery chemistry research project with Gates Ventures. Drug discovery revenue increased by 11% to $13.7 million, compared to $12.3 million in Q3 last year. There was a $10 million contribution in the quarter from the acceleration of previously deferred revenue associated with the two BMS programs that reverted to us. There are four remaining programs in the BMS collaboration, including the SOS1 program, that transitioned to their portfolio in Q1 2023. Total revenue for the quarter was $42.6 million compared to $37 million in Q3 2022 and $35.2 million in Q2 2023. For the first three quarters of the year, our software revenue was $90.5 million compared to $88 million for the first same period last year, and our drug discovery revenue was $52 million compared to $36 million for the same period a year ago. Our gross margin performance was positive this quarter, with higher revenue producing improved product profitability. Software gross margin was 76% compared to 72% in the same period last year and 77% in Q2 2023. Drug discovery gross margin was 13% compared to a 5% loss ratio for the same period a year ago. Combined reported gross margin was 56% compared to 47% in the same period in 2022. Our software gross margin should continue to improve slowly and our drug discovery margin will be volatile depending on the timing and amount of milestone payments associated with collaborations. In general, we expect our costs for collaboration programs to trend down, thus increasing the potential gross profitability of successful achievement of milestones and collaborations. R&D expenses were $46.8 million in Q3 compared to $33 million in the same period a year ago. A significant portion of this increase is due to redeployment of our existing employees from collaborations to proprietary programs and from customer-facing structural biology services to internal programs. CRO expenses and headcount also contributed materially to the increase as we supported the progress of our most advanced programs into clinical development. Compared to Q2 2023, R&D expenses increased by 10%, again driven by shifting allocation of our staff to proprietary programs and by higher CRO expenses. For the first three quarters, our R&D expenses were $130 million compared to $92 million in the same period in 2022. Sales and marketing expenses were 9.1 million in Q3 compared to 7.2 million in Q3 2022, with most of the increase coming from increased headcount and associated costs to support our software business. Sales and marketing expense was flat compared to Q2 of this year. G&A expense was 24 million in Q3 compared to 23 million in Q3 2022 and 23 million in Q2 2023. Increases in headcount were offset by savings in professional services compared to prior periods. Total operating expenses were $80 million compared to $63 million in Q3 2022 and to $75 million in Q2 2023. Operating expenses increased due to higher R&D and somewhat higher sales and marketing expenses. Our reported loss from operations was $56 million in Q3 compared to $46 million in the same period in 2022. Our other income was once again affected by significant changes in the value of our equity positions in publicly traded biopharma companies. Changes in these valuations resulted in a $14.5 million loss in Q3. Other income also included $5.8 million in interest income, and our tax provision was a benefit of $3 million, which was the anticipated reversal of the tax estimate we reported in Q1 2023 associated with the member's distribution. Our net loss was $62 million or 86 cents per basic and diluted share for the quarter compared to it at loss of $39.9 million or 56 cents per share in Q3 2022. A non-GAAP net loss for the quarter was $50.4 million, compared to a net loss of $44.9 million in Q3 2022. Our weighted average basic and diluted share count increased by 1% compared to the prior year. Our total cash used in operating activities for the quarter was $49.9 million, and our cash in marketable securities decreased from $554 million on June 30th to $503 million on September 30th. I'll now turn to our financial guidance for the year. Our guidance for software and drug discovery revenue for 2023 is unchanged. We continue to expect full-year software revenue growth to be 15% to 18% and expect drug discovery revenue to be in the $50 million to $70 million range. We continue to expect total operating expense growth in 2023 to be below operating expense growth in 2022. We now expect cash use for operating activities to be somewhat higher in 2023 than 2022 based on the mix of revenue, the timing and size of milestones, and our expectations for new business development activity this year. Our net cash position at the end of the year is likely to be similar to our net cash position at the end of 2022, with the cash distributions in the first half of the year from our investment in Nimbus offsetting our expected full-year cash use for operating activities. The major uncertainties for our financial outlook are our ability to predict changes in the strategic priorities of our partners and customers, the timing and value of new business development activity, and the timing and probability of development milestones. These uncertainties are reflected in our updated guidance. Overall, we reported strong financial results for the quarter and are maintaining our revenue guidance for the year. Our proprietary portfolio is maturing. Our capital allocation is shifting towards supporting the progress of our proprietary programs and to capturing the value generated by our technology in emerging companies such as Structure and Morphic. I'll now turn the call over to Karen to comment on the progress in our drug discovery and development portfolio. Karen?
Rami
Thank you, Jeff, and good afternoon, everyone. During the quarter, we continue to make strong progress across our pipeline. We are close to completing our SGR 1505 Healthy Volunteer Study. We initiated dosing in our SGR 2921 Oncology Trial, and the IMD submission for SGR 3515 is on track. We are also preparing to present four posters at the ASH Annual Meeting next month. These presentations will include data on 1505 and 2921, as well as two clinical trial-in-progress posters. In addition to our proprietary programs, several collaborative programs are advancing, and nine molecules have transitioned to the clinic through our collaborations. As Rami and Jeff reported earlier, two collaborative programs which target the same protein reverted to Schrodinger from BMS, and our team is assessing next steps in the context of our overall proprietary portfolio. I'll now review recent progress on several of our proprietary programs in more detail. First, beginning with our MORT1 inhibitor, SGR1505, we are continuing to advance our development program to further characterize the clinical profile of our molecule, Earlier this year, we initiated a study of SGR 1505 in healthy volunteers to assess initial safety, pharmacokinetic, and pharmacodynamic relationships. This study is nearing completion, and we expect to share data from this study at upcoming medical, scientific, and investor events. In our patient study, we recently opened additional sites in Europe and the U.S. to support recruitment. In addition to the CTA approval in Europe, In the third quarter, the FDA granted orphan drug designation to SGR1505 for the potential treatment of mental cell lymphoma. Our CDC7 inhibitor, SGR2921, has also entered the clinic, with patient dosing underway in the U.S. The primary objectives of this study are to evaluate the safety, pharmacokinetics, and pharmacodynamics and established the recommended Phase II dose for SGR2921 in patients with acute myeloid leukemia and myelodysplastic syndrome. Preclinically, SGR2921 exhibits monotherapy and combination activity in AML patient-derived models independent of genetic drivers and resensitizes AML models to standard of care agents such as FLT3 inhibitors. Turning to SGR3515, Today we provided new details on our development candidate. SGR 3515 was selected based on its inhibition of both WE-1 and MIT-1. Concurrent loss of function of these two proteins confers selective vulnerability in cancer cells. In addition to this mechanistic advantage, termed synthetic lethality, SGR3515 has a favorable pharmacologic profile. We are on track to submit the IND for SGR3515 in the first half of 2024 to support initiation of a Phase I study by the end of next year. Beyond the disclosed programs, we are working on a number of other programs in oncology and immunology at various stages of discovery. Today, we disclosed that one of these programs is PRMT5-MTA. PRMT5 has been shown to be a synthetic lethal target for MTAP-deleted cancers with potential roles in the treatment of both hematologic and solid tumors. In summary, Our proprietary portfolio is advancing and we are very excited to be sharing our first clinical data from Healthy Subjects for SGR 1505 later this quarter. We look forward to sharing more information about our proprietary programs at our pipeline day on December 14th. I'll now turn the call back to Rami.
Rami Fareed
Thank you, Karen. As you heard, we've made excellent progress across the business this quarter, and we look forward to providing further updates on our discovery and clinical programs later this year. At this time, we'd be happy to take your questions.
Operator
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Michael Yee with Jefferies. Please go ahead.
Michael Yee
Hey guys, thank you for the question and appreciate all the detail. Two questions for the team, one on software and one on drug discovery. On software, there's been prior commentary around how your customers are accelerating use. I think you mentioned that word, utilization. Can you just talk about how much visibility and how you are seeing those things come through both in the third quarter and presumably what we would see in the fourth quarter, other metrics or things that would show that. And I ask that in the context of, you know, Wall Street likes to see beating numbers and beating by one or two million. And so I just wanted to understand that because you came in the middle of your guidance for the quarter. And then on drug discovery, can you clarify if there was a payment from Bristol in this quarter for the handback of the two compounds? And what would explain the large $20 million range for drug discovery then in the fourth quarter? That's a pretty large range. Thank you.
Rami Fareed
Thanks, Mike, for the question. This is Rami. I'll take the first one and then hand it over to Jeff for the second one. So first of all, let me be very clear that the visibility we have into the fourth quarter is very high. We've had very productive discussions that have been going on, as we've been saying, all year with our largest customers. And there's very clearly significant interest in scaling up their usage. And again, I just want to emphasize that we have a lot of visibility into that.
Sharon
And Mike, just to answer your question on drug discovery, of the reported drug discovery revenue in Q3, $10 million of that was from BMS associated with the return of the two programs that we disclosed. Now, there was also a program decision by them in the prior year in the third quarter that contributed then. So that was a smaller payment, but that was a payment in Q3 of last year. And then to the range of the guidance, I think it should be fairly clear by now that our revenue, the bug discovery side, is chunky, and we've kept the guidance range wide to encompass what we think is a reasonable range of probable outcomes. To just state the obvious, we don't think there's going to be a reversion of revenue to the low end of the guidance range. But equally, there's still a number of things that can occur in the fourth quarter that can push us to different points in that range. So that's why we put the range in text.
Michael Yee
Okay. I'll let someone else ask if it could go from 52 to 50, Jeff. But assuming that's not happening, it's still a wide range. So I will take a look and figure that out. But I look forward to the results for the fourth quarter. Thank you.
Operator
Thank you. Your next question comes from the line of Vikram Purohit with Morgan Stanley. Please go ahead.
spk01
Hi, this is for taking on questions. So I want to ask two questions regarding the MLT1 inhibitor. First, what is the current sense of timing towards, like, Phase I data? Because I know you are going to release some data in ASH, but what are the Phase I data on the patients? The timing, roughly your sense. And second, what's the bar or hurdle on efficacy for the initial data set? Thank you.
Rami
Hi, yes, so the health volunteer study is nearing completion, and we do expect to share data from that study at upcoming medical conferences and investor events. As far as the study in advanced hematologic malignancies is concerned, that study is ongoing, and we are continuing to add new sites to support enrollment. But we expect initial data from the patient study to be available in late 2024 or 2025, depending really on enrollment. And so with respect to your question on the ORR hurdle, we will not be discussing that today. I think we do have Pipeline Day coming up later on this year, and I think we'll be giving a lot more color on our strategy and thoughts about the program at that time.
Operator
Sure. Thank you. Thank you. Your next question comes from the line of Evan Siegerman with BMO Capital Markets. Please go ahead.
Evan Siegerman
Hi, I'm Mark Mothman on for Evan. We just want to ask with your recently announced PRMT5 acid, are you able to comment how long this acid has been in development and whether recent interest from other biotech players might have influenced the decision to pursue the program? And then how should we think about the indications or treatment settings you're targeting for this acid? Thank you.
Rami
yeah thanks for the question um so we just first of all we will be providing an update on the progress of our program again at pipeline day however we had initiated that program some time ago as we stated on the on the call this program was one of our undisclosed programs and today we're updating you on the status of that obviously we and everyone else is pretty excited about the data that's been coming out on that mechanism. And so, you know, we're looking forward to progressing the program and updating you all later on this year.
John
Thank you.
Operator
Your next question comes from the line of David Leibowitz with Citi. Please go ahead.
David Leibowitz
Hi, guys. John for David. Thanks for taking our question. Just a quick one building off the previous question of the BMS collaboration. Can you just clarify if there are any other potential financial implications of that decision going forward beyond this quarter as well?
John
Sure.
Sharon
Thanks for the question. So the first is that for several quarters now we've been transitioning our employees over from collaboration programs to proprietary programs. That's reflected in our reported expense results, both the cost of services for the drug discovery side being slightly down, and then the R&D expense going up. That's a result of that shift in deployment of those employees in the R&D organization. That's going to continue in the future after this BMS decision, but that trend is going to continue going forward. The second is, of course, that we are no longer eligible for the downstream milestones associated with those programs from BMS. And as Karen mentioned in her remarks, we still believe there are opportunities for us to capture value from those programs, either as proprietary or potential partnering opportunities in the future. We still have to resolve that and come to some sort of final decision, but that's an opportunity for us that could potentially offset the milestones that will be foregone because they're no longer in the BMS collaboration.
John
Got it. Thank you very much.
Operator
Thank you. Your next question comes from the line of Michael Riskin with Bank of America. Please go ahead.
Michael Riskin
Great. Thanks for taking the question, guys. First, I want to ask on the updated guide, I just want to make sure I'm understanding everything properly, maintain revenues across the various segments, maintain margins, et cetera, but you are talking about more cash, operating cash use than last year. I think you flagged mix, milestones, new business activity, but clarify why is that showing up on the cash rules but not on the P&L? Or maybe it is showing up on the P&L and it's just sort of not moving that basket of operating expense growth being lower than last year. Any color there?
Sharon
Absolutely. Really good question. It's because of the disconnect between when we book actual debt cash from our partners in part and when we actually recognize revenue. That's the first thing. It's also to do with the actual mix of revenue that we reported during the third quarter. um the shift between for example prior payments or you know uh that versus new business development activity for example so it's it's really in the mix of revenue advice and in the prepared remarks but also the timing and size of milestones and our expectations for business development activity all three of those things contributed um i will say that the operating cash use in the third quarter was around $50 million. And so year-to-date, through the third quarter, it's roughly $100 million. We do expect the fourth quarter operating cash use to be lower than the third quarter, which is giving you a sense of what the outlook for the year is. But it's really those factors that I mentioned to you, Mike, that have changed the outlook on the cash side, even though we've maintained revenue and the operating expense outlook.
Michael Riskin
Okay. Thank you. And then if I can take a follow-up on the software side of the business, again, I know that you reiterated the guide and 3Q was pretty much right down the middle of your outlook, but still, there's been a lot of chatter and a lot of updates among other biopharma players in terms of program reprioritization, some cost cutting, some reevaluating of their spend across various baskets. Obviously, when they use Schrodinger software, it's a very small part of their total OPEX spend. But I'm just wondering, you know, anything you're hearing from your customers in terms of reevaluating spend levels, whether it is company-specific updates or something related to IRA or whatnot. Could you just talk about those conversations?
Rami Fareed
Yeah. So first, I just want to emphasize again that we have very high confidence in achieving the implied growth in Q4 that's implied from the maintaining of the 15% to 80% overall growth for the year. And what I'll tell you is the same thing that we've been talking about before. We think in this environment of this cost-cutting, as you described, environment, it appears, and again, I don't think this is surprising, to be resulting in higher demand for technology that improves efficiency and reduces costs and improves probabilities of success. So we certainly are aware of what you're talking about, but we can tell you that it does not appear to be having an impact on the interest and scaling up of the usage of our software, and it is not impacting our sort of confidence in achieving the growth that's That's required in Q4 to hit the 15% to 18% overall growth for the software business.
Michael Riskin
Super helpful. Thanks so much.
Operator
Thank you. Your next question comes from the line of Matt Hewlett with Craig Hallam. Please go ahead.
Matt Hewlett
Good afternoon. Thanks for taking the questions. Kind of following up on that regarding the software, and you've commented on this a couple different times, but significant growth potential this year. I just want to clarify, it's not just about this year. You're also talking about the conversations you're having with your larger customers and what that'll mean for next year's commitments from those same customers, correct?
Sharon
So we're definitely not giving final financial guidance for next year or giving an indication about next year. The discussions that we've been having throughout the year have been very positive, continue to be very positive, very supportive of the revenue guidance that we've provided or updated, reiterated today, but equally about the opportunity for us to continue to grow the deployment of our software into our largest customers going forward. I also want to highlight in the comments that I've provided about the third quarter, we did see a number of smaller customers actually stepping up their use of our software. So even in a part of the market that many people think is particularly stressed as a result of capital markets, et cetera. We are seeing customers coming forward and stepping up their use of our technology to become larger customers, not necessarily at the scale of the global customers, but definitely contributing.
Rami Fareed
Yeah, and let me add one more thing. It's very important to keep in mind. Remember, we are advancing the platform very aggressively. We continue to make very important scientific breakthroughs. to continue to improve the software. As we said many times, we have four releases a year. So there are many more opportunities associated with just continued improvements to the platform, expanding its domain of applicability, expanding the types of targets we can work on, expanding the number of properties we can predict. We actually made a statement about that in our prepared remarks. So that's another important thing to keep in mind and I think addresses your question.
Matt Hewlett
That's really helpful. And to hear that you're even having smaller customers stepping up, that actually is not what we're hearing from other companies. Other companies are talking about the scaling back, the cutting of perceived cost places. So that's actually a very positive development. I guess the second question for me regarding the two BMS programs that have reverted back to you, And I realize this might be still early days, but is this something where you will now take over those programs and look to re-outlicense those or re-partner those? Or do you put them on a shelf and kind of wait for the market to improve or change? What happens to those two assets? Thank you.
Rami
Thanks for the question. So these programs actually address precedented targets and you know, we were progressing according to the agreed upon target product profile. As we've discussed, BMS selected not to proceed with further development for strategic reasons. We have a high degree of confidence in the work that's been done in this collaboration. And we are going to evaluate as we discuss the fit of those programs with our portfolio. But as you point out, The targets are very interesting, and we believe that there may well, as Jeff put it, be an opportunity to create additional value from those programs, but we're still discussing that internally.
Matt Hewlett
Understood. Thank you.
Operator
Thanks. Thank you. Your next question comes from the line of Joel Catanzaro with Piper Sandler. Please go ahead.
Joel Catanzaro
Great. Hi, everybody. I appreciate you taking my question. Maybe just one quick one for me on the pipeline side. So, for 3515, I think this is the first time you're disclosing that it's actually a dual inhibitor of WE-1 and PK-MIT-1. So, just wanted to see whether this feature was an explicit goal of your drug discovery efforts or whether this was kind of serendipitously realized after the fact and, you know, what benefit you see over hitting both of these targets relative to one or the other. Thanks.
Rami
Yeah, sure. Actually, we identified MIT-1 as an important synthetic lethality gene for WE-1 inhibition in our patient-derived models during the course of the program. We ended up selecting SGR3515 from a number of series that were in our discovery lab as our development candidate who chose it because of its WE-1 and MIT-1 activity. but also because of its differentiated pharmacological properties. We're excited about this because of the information on synthetic lethality, and we decided to disclose it because of that activity and our excitement about taking this into the clinic.
Joel Catanzaro
Okay, great. That's helpful. Thanks for taking my question.
Operator
Thank you. Ladies and gentlemen, as a reminder, If you wish to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Chris Shibutani with Goldman Sachs. Please go ahead.
Chris Shibutani
Great. Thank you very much. Jeff, I know that Q4 has seasonally tended to be the time of year when you're getting renewals happen with your existing customers. If I'm to read into your comments about confidence and visibility, and while I know you're not going to be guiding on 24, we are now a month in. Can you give us any sense for particularly maybe the higher velocity, those greater than 5 million average kind of utilization customers? How is that going? And that would be helpful. And then to be absolutely clear for your December, mid-December analyst event, We should expect the focus to be entirely on the pipeline. Definitively, the timing for when you would expect to provide that 2024 guidance would be when. Would it be the fourth quarter report? Is there a chance at the annual kickoff conference in January? Just some perspective would be helpful. Thanks.
Sharon
Thanks for the questions, Chris. Look, I think we've made it clear throughout the year that we're having very constructive discussions with our largest customers. And I think Robbie has made it clear that those discussions have progressed very nicely throughout the year and give us a lot of confidence about our guidance for the year. Equally, if we were certain that we were going to be outside the guidance range, we would obviously be updating our guidance. And we think that those discussions position us well for next year, but we're certainly not in a position to be providing guidance for next year. In terms of the timing for that guidance, because so much of our revenue, or at least our renewal activity, is at the very end of the year, where our large customers say, okay, we've used our licenses for this year, and this is the level of activity and utilization, and therefore we're going to step up or change whatever next year, that happens at the very end of the year. So I certainly don't want to set an expectation that there will be a financial component, on the pipeline day in terms of any sort of revenue commentary. We need to close out the year, and we'll be providing financial guidance when we report the fourth quarter in March because the fourth quarter outcome influences the outlook for next year as well.
Chris Shibutani
And can I ask one expense follow-up question? You talk about redeploying within R&D sort of your employees from the collaborations to proprietary programs. Can we get a sense for sort of what that relative balance and that shift that's ongoing, is that more or less complete? Is that going to be a continuous process? I know that Karen is working to develop the proprietary pipeline, but just some perspective there, because it does sound as if the sort of cost per head when you go to the proprietary programs is incrementally more costly, I believe, versus being in the collaboration. Thanks.
Sharon
yeah um but but just a quick comment chris the the cost of the head is the same um it's it's just that they're they're they run through the income statement in a different part of the income statement if they're working on a collaboration project versus if they're working on a proprietary program so um they're sort of it's it's to a certain extent it's it's accounting convention shifting from a cost of goods line to to an r d line In terms of your question about the trajectory, I do think that I would suggest that in the fourth quarter, that trend is going to continue because obviously we have some programs that we were actively deployed on in the fourth quarter that will not be actively deployed on collaboration programs in the fourth quarter and beyond. I think we still believe in collaborations. We still think that's an important part of our business mix, so that we will continue to be engaged in collaborations, and so there will continue to be expense for the part of the therapeutics group going through that line in the income statement. I hope that gives you at least a directional answer.
John
Yeah, no, that's helpful perspective. Thank you.
Operator
Thank you. Ladies and gentlemen, there are no further questions at this time. This concludes today's conference call. Thank you all for joining and you may now disconnect your lines.
Disclaimer