Schrodinger, Inc.

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 mute to prevent any background noise. After the speaker's remarks, there will be a question and answer 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. Jaren 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 software business 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, for reconciliations of these non-GAAP measures to the most directly comparable GAAP measures. This afternoon, Ramy Farid, our CEO, will review our recent progress. Then Richie Jain, Chief Financial Officer, will discuss our financial results and 2026 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 Ramy.

Thanks, Jaren, and thank you everyone for joining us today. We are 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 a continued scale-up within large customers, uptake of new products, an improved biotech sector, and new customers across life sciences and material science. Thank you for joining us. By executing complex multi-step workflows, Bunsen helps expert computational chemists work more efficiently and run more design projects. Bunsen will also enable, more broadly, drug hunters to access our software and run advanced simulations, expanding our user base over time. Our long-standing 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 also 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 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. Thank you for watching. Thank you for joining us. 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, Ramy, and good afternoon. In the second quarter, we saw strong execution across both our software and drug discovery businesses, characterized 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. 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 a 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 to 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, The decline is driven 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. Drug 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. Total 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. Turning 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, Thank you for watching. 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 I Type II JAK inhibitor, which was the most advanced asset in the Ajax 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 Ramy.

Thank you, Karen. As you've heard today, the first half of 2026 has been marked by 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 one in your telephone keypad. If you would like to withdraw your question, again, press star one. 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? And then for my follow-up, can you talk about how much maybe Predictive Talks 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. Yeah. 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 You know, 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 tox, you know, 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. Richie, anything else to add to that? No? Great.

Thank you so much.

Thank you.

Our next question comes from the 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. We have, as we said, well, thank you, first of all. Yeah, 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 is through the increased demand of our technologies. And again, that's sort of what was borne out in the collaboration with BMS. Has anything else to add to that or?

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... 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's been really strong, and we're progressing towards our three-year goals.

That's great. Thank you.

Your next question comes from the line of Scott Schoenhaus from KeyBank. Your line is open.

Hey, team. Thanks for taking my question and congrats on the results. So you mentioned that Predictive Talks is now being included in ACV, and I know part of your growth strategy was to unlock more pharma budgets by expanding product scope and capabilities. How much are we seeing in terms of ACV growth as a function of new product launches? And how should we think about areas for the next wave of product launches to unlock more of the budget? Thanks.

Yep. Yeah, no, that's correct. A major... Thank you for joining us. a very productive R&D group at Schrodinger that continues to make scientific breakthroughs that result in these sort of exciting new products that continue to solve the kinds of problems that our internal therapeutics group Thank you for joining us today. and contributing to the growth in addition to not just new products, but of course, customers, existing customers scaling up their usage of those products is also a contributor. But new products is certainly a big part of it.

Thanks. And as a follow-up, maybe this is for Richie. You guys noted reduction in operating expenses. Maybe talk about the areas where you're able to gain efficiencies. It sounds like you're applying Bunsen internally to drive some efficiencies on the drug discovery side, but maybe some other areas you could talk about on how you're controlling costs here.

Thanks for the follow-up question. In addition to just enhanced productivity inside the company, operating expenses are down 6% year-over-year and also sequentially. We've seen some reductions in personnel costs as well as CRO costs and professional services. So this is a reflection of just the plans that we've put forward and the execution and that stuff.

Thanks, guys.

Again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from a line of Evan Siegerman from BMO Capital Markets. Your line is open.

Hi there, this is Connor on for Evan. Thanks for taking our question. I have one for Karen. You noted in your prepared remarks today that your therapeutics team is already seeing productivity increases from the integration of Bunsen. Being as Schrodinger is on the cutting edge of computer aided drug design, I'm wondering if you can just speak to the specific areas of your workflows where you're seeing the greatest benefits from the technology as we all kind of try to wrap our minds around maybe what the ultimate benefits of sort of AI and computer aided drug discovery could be. Thank you.

Yeah, happy to answer that. So as you know, we participate in structure-based drug design, and there's an explosion now of structures available because of a lot of what's going on broadly in the industry. And I think this is a great lift for Schrodinger. In particular, our teams are now not just using Bunsen to help us with running Schrodinger's platform, running the workflows for computational chemists, But analyzing structures, analyzing binding sites, a lot of the products that we use are not just about predicting the properties of molecules, but they're also about characterizing, refining, and accurately predicting protein structures, but also preparing those structures for use by our platform. And I would say that that work has been accelerated. Those workflows have been accelerated by the use of Bunsen, which is now sort of trained or expert in running our workflows. So we're seeing that on the preparation of programs for structure-based drug design, but we're also seeing it at every stage of the drug discovery process. which includes chemistry but it also includes a lot of ancillary functions who interface with the platform so yeah just pretty excited about what we're seeing and I think this is going to be as you heard today adopted by our peers in the industry.

Maybe I can add too, I think this concept of a co-scientist isn't just the sort of word that we throw around. In every sense of that word, Bunsen acts as a co-scientist and that allows users to initiate A number of tasks and projects in parallel and doing a number of things at the same time. Just like you could imagine a co-scientist. So we like to think of sort of, you know, every computational chemist, drug hunter in the group, all of a sudden has a team of people that are helping them perform some of the routine tasks that end up taking up a lot of human time. And so those routine tasks... being performed by Bunsen is also, in addition to what Karen said, is contributing to this efficiency and productivity.

One thing that's really important is that, as everyone knows, AI doesn't sleep, but a lot of our users do. And one common problem in this space, both nights and weekends, you'll set up a bolus of work and you'll kick it off using your very expensive supercomputer. And one hour in, something goes wrong and it dies. And now you've lost that night's work or that weekend's work unless you're actively monitoring it. But if you're working with Bunsen, it will see that the job has died. It will try to figure out the problem automatically. and we'll be able to restart it. And the throughput of work you're able to accomplish just from that optimization, ignoring all the other benefits of working with a co-scientist is really incredible.

Yeah, exciting time. Thank you.

Thank you. Your next question comes from a line of Brendan Smith from TD Cowan. Your line is open.

Great. Thanks for taking the questions, guys. Maybe just one more follow-up on predictive talks. I appreciate all the color there so far. I think I wanted to ask maybe how we should think about kind of the 10% to 15%, you know, medium-term growth expectations you've noted previously. I guess does that kind of factor in some assumptions about predictive talks already? And maybe similarly, I guess based on your broader market and feedback in the launch so far, how are you kind of thinking about predictive talks relative to kind of the core software business just as some of this starts to get Thank you so much for joining us.

Thank you for joining us. and safety is often tied to selectivity and binding to off targets. And that's what predictive tox aims to do. So we're pleased with the discussion so far. We're happy about how the evaluations are going. We're happy that it's already started to contribute. But as with technology like this, we're very used to introducing new technologies that are sort of transformative. There's a long lead time. It takes time to introduce the technology for customers to evaluate the technology, get their own results, which involves, by the way, running calculations, but also then validating those with experiment. And that obviously takes time. So we expect to continue for predictive talks to continue to contribute to growth for quite a number of years.

I'm showing no further questions at this time. That concludes today's call. You may now disconnect.