SDGR

Thank you for standing by. Welcome to Schrödinger's conference call to review first quarter 2026 financial results. My name is Rob, 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 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, good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our first quarter 2026 financial results. Earlier today, we issued a press release summarizing these 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 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 March 31, 2026. 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. Richie Jain, Chief Financial Officer, will discuss our financial results in 2026 guidance. Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships, will review our therapeutics portfolio. Pat Lorton, our Chief Technology and Chief Operating Officer, will join us for the Q&A. With that, I will turn the call over to Ramy.

Thanks, Jaren, and thank you everyone for joining us today. We are off to a strong start this year, delivering $28.4 million in ACV, a 12% increase compared to Q1 last year. Our growth was broad-based, reflecting usage scale-ups, new customers, and growth from new products. Drug discovery revenue of $23 million was also a significant contributor in the quarter. Lilly's announced $2.3 billion acquisition of Ajax Therapeutics, a company we co-founded and in which we have an approximately 6% equity stake, is the latest example of a multi-billion dollar deal for a Schrödinger co-developed molecule and speaks to the power of our platform. We are pleased with our momentum transitioning customers to hosted licensing. We are seeing positive conversion dynamics upon contract renewals and with new products that are hosted.

In limited cases, we are also seeing the early conversion of multi-year on-premise deals to hosted ahead of the scheduled renewal date. We are encouraged by the improving biopharmaceutical funding environment. While macroeconomic uncertainty remains, it is clear to us that there is a growing recognition of the critical importance of our computational platform as R&D organizations embrace the predict first computational paradigm that offers a demonstrated path toward improving probability of success and reducing the time and cost of molecular discovery. We remain poised to benefit from the evolving regulatory environment with our Predictive Toxicology initiative set to address a key element of the FDA's focus on reducing animal testing and broadening the use of computational methods. Our market-leading position is built on the inherent accuracy and scalability of our physics-based approach and is further reinforced by our unmatched track record.

While standard AI models are limited by the scarcity of training data, our platform generates the ground truth simulations, accuracy, and scale required for AI to precisely navigate the vastness of chemical space. By combining the accuracy of physics with the speed and scalability of AI, we are able to evaluate key properties of billions, even approaching trillions of molecules with a level of accuracy impossible to achieve through models trained solely on experimental data. This capability enables our customers to integrate computation more deeply into their workflows, driving the consistent demand that underpins our long-term growth trajectory. We are committed to technology leadership and evolving our platform to meet customer needs. We are very excited about the upcoming release this summer of an early access version of Bunsen, our new agentic AI co-scientist.

Designed to autonomously execute complex molecular discovery workflows, Bunsen enhances productivity and accelerates the design, predict, make, test, analyze cycle that drives modern molecular discovery. Our material science and therapeutics teams have been successfully using Bunsen internally. We are excited to offer this capability to our customers. Our throughput-based licensing model is well-positioned to capture the value of this expanding utilization. The repeated success of our co-invented molecules and the continued progress of our therapeutics portfolio place us at the forefront of a digital transformation, moving material science and life science industries toward a more efficient, predict first, computationally driven model of discovery. We continue to deliver the technology that transforms the way molecules are discovered. We look forward to updating you on our progress throughout the year. I'll now turn the call over to Richie.

Thank you, Ramy, and good afternoon. ACV in the first quarter was $28.4 million, which represents 12% growth compared to $25.4 million in Q1 2025. On a trailing 4-quarter basis, ACV reached $201 million. As a reminder, we believe ACV provides important visibility into the performance of our business during a period where we expect recognized revenue to be highly variable due to the accelerated transition to hosted. ACV growth was primarily driven by our top 20 pharma customers as these customers broaden their platform access, onboard new products, and integrate our platform more deeply into their R&D organizations. Starting this quarter, we are breaking out contribution revenue as a separate line item to provide better visibility into our software and drug discovery performance.

To facilitate year-over-year comparisons, we have reclassified our historical results to reflect this change as contribution was previously included in software and drug discovery revenue. Total revenue for the first quarter of 2026 was $58.6 million. Software revenue was $35.6 million, of which hosted revenue contributed $12.1 million, or 34% of the software total, compared to 24% in the first quarter of 2025. On a trailing four-quarter basis, hosted revenue increased to 27% of the software total. As we've discussed, the year-over-year software revenue comparison reflects our planned accelerated transition to hosted licenses, for which revenue is recognized ratably over the life of the contract rather than upfront. While this dynamic creates a near-term headwind on recognized revenue, over the long term, it will better align revenue with operational growth, resulting in a more predictable financial profile.

Software gross margin was 69% for the quarter, compared to 80% in Q1 2025, reflecting our planned accelerated transition to hosted software licensing. Contribution revenue was $0.1 million for the period, compared to $4.3 million in Q1 2025. The decline is driven by completion of the initial funding by the Gates Foundation in support of our predictive toxicology initiative. Drug discovery revenue was $22.9 million, compared to $10.2 million in the same period last year. The increase is due to the accelerated recognition of deferred revenue associated with the continued progress of the company's collaboration portfolio and the discontinuation of one collaboration program. Total operating expenses for Q1 were $78 million, a decrease of 4% compared to $82 million in Q1 2025.

This reflects the impact of our efficiency measures and disciplined expense management across R&D and G&A while we continue to invest in sales and marketing to drive long-term growth. Total other expenses were $11 million, primarily due to changes in fair value of equity investments and interest income expense. Net loss for the quarter and for the first quarter of 2025 was $60 million. We ended the quarter with a strong balance sheet of $406 million in cash and marketable securities. We anticipate receiving our portion of the upfront cash payment from the Ajax Lilly transaction when the deal closes. The fully diluted share count was 74 million. Today, we are maintaining our full year 2026 guidance.

For the full year, we continue to expect ACV to be in the range of $218 million-$228 million, representing 10%-15% growth. We anticipate drug discovery revenue between $55 million and $65 million for the year. As a reminder, drug discovery revenue has quarterly variability due to the collaboration and milestone-driven nature of the business. Our operating expenses are expected to be less than 2025 as we maintain overall expense discipline and make select investments in sales and marketing to support growth and the release of new products. We anticipate our clinical activities will be largely complete by the end of 2026 and to incur approximately $10 million-$15 million of R&D for full year 2026 as we wind down these activities and seek partners for mid- and late-stage clinical development.

Our $19 million-$23 million guidance range for Q2 2026 ACV excludes contribution ACV compared to $23.3 million from Q2 2025 that included $5 million of contribution ACV. I would like to hand the call over to Karen.

Thank you, Richie. Our therapeutics business continues to create significant value, most recently highlighted by Lilly's planned acquisition of Ajax Therapeutics for $2.3 billion. By combining Ajax's deep expertise in blood cancer and JAK family structural biology with our industry-leading track record in computational drug design, we discovered AJ11095, a first-in-class type 2 JAK inhibitor, which is the primary driver of the announced deal. Over a 10-year span, Schrödinger has co-founded multiple companies, including Ajax. There have been seven major transactions and liquidity events related to molecules we co-discovered across our biotech collaboration portfolio, including Lilly's acquisitions of Morphic, Petra, and Ajax, the sale of Nimbus' ACC and TYK2 inhibitors, and the successful IPOs of Relay and Structure. The success of these companies and multi-billion dollar exits establishes unquestionable validation of the impact of computational physics-based design and our biotech and pharma collaboration business model.

The emerging results from our maturing therapeutics portfolio span internal discovery programs licensed to pharma through to co-invented molecules with late-stage clinical readouts like Takeda's zasocitinib, which completed phase III trials earlier this year. To date, our equity and business development activities have resulted in close to $700 million of cash, as well as potential future preclinical, clinical, and commercial milestones of up to $5 billion and royalties on 15 programs. Our wholly owned programs also represent future value capture opportunities. As Ramy mentioned, the therapeutics team has integrated our new agentic solution, Bunsen, across the combined portfolio. Bunsen's ability to execute our powerful predictive models and orchestrate multi-step, multi-skill drug discovery workflows enables us to accelerate the design, predict, make, test, analyze cycle.

This is an exciting development that we expect to have a major impact on the productivity of our team and teams across biopharma once they get access. Turning to our wholly owned portfolio, in April, we presented initial clinical data for SGR-3515, our Wee1/Myt1 inhibitor, at the AACR annual meeting. As a reminder, this is an ongoing phase I dose escalation study with primary objectives of safety, tolerability, and pharmacokinetics. The data presented demonstrate that SGR-3515 was generally well-tolerated on an intermittent dosing schedule of 3 days on and 11 days off. Importantly, the initial clinical biomarker data validated our hypothesis that dual inhibition can overcome compensatory resistance mechanisms. We observed encouraging early anti-tumor activity with a 65% disease control rate among evaluable patients treated at doses of 100 milligrams or higher.

We also remain encouraged by the progress of SGR-1505, our MALT1 inhibitor. We continue to see a 100% response rate and durable responses in patients with Waldenström's macroglobulinemia, where the drug has both FDA Fast Track and Orphan Drug Designations. As we complete these phase I studies, we are actively exploring partnership opportunities to continue the mid and late-stage development of SGR-1505 and SGR-3515. Our track record of generating differentiated discovery stage breakthroughs, clinic-ready molecules, and valuable data packages is well established. We believe our drug discovery expertise, coupled with the use of our computational platform at scale, will enable us to continue unlocking high-potential target product profiles and drive the next wave of successful collaborations and transactions. I'll now turn the call back to Ramy.

Thank you, Karen. As you have heard, we are off to a strong start in 2026. I want to thank our employees for their hard work and commitment to our mission. We are pleased with the momentum across the company and look forward to updating you on our progress throughout the year. 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 to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Scott Schoenhaus from KeyBanc Capital Markets. Your line is open.

Hey, guys. This is Steve on for Scott. Can you talk more about how agentic AI is driving our utilization of high compute calculations and how this is impacting your business? What's the upside potential as adoption of it increases? How would this show up in your customer contracts? Thanks.

Absolutely. Yeah. I assume you're referring to the announcement we just made about the release this summer of Bunsen, an agentic AI system for automating complex workflows. We've already been using Bunsen internally for a number of months. The impact that it's had already on productivity of both our expert modelers and computational chemists as well as non-experts has been extraordinary. We're very excited about it. What it's doing is eliminating sort of barriers to large scale deployment of the technology, and it's very much as we describe it, a co-scientist, a companion that improves efficiency and productivity, again, both for experts and non-experts.

Our collaborators who we're working with are already recognizing the impact, this improved efficiency and our ability to actually use the technology on a larger scale and in a more effective way. Again, as we said, we'll be releasing it this summer. Already feedback that we've been getting as we start to talk about the imminent release of Bunsen has been very positive. I think there's a lot of excitement about the potential.

The last thing I'll say is, and we've talked about this actually, in the last earnings call and we mentioned it again today, that our throughput-based licensing, that is not seat-based licensing, but throughput-based licensing, of course, benefits from solutions like this where an agentic AI has the potential to increase the demand for the technology and the need for our customers to license that technology on a larger scale. Pat, is there anything you wanted to add? Did I cover it?

I think you pretty much covered it.

Yeah.

I think the one thing I would add is that we are seeing customers using more general generic agentic AI, and they are already having access to higher throughput of our technology using other LLM providers. That said, the reason we've built Bunsen is because our tools are such an expert tool that we feel that the LLM has to be trained specifically to how to use our tools to optimize it and to run in the most efficient way, and we think the solution we're putting together will be best for that.

Yeah.

Great. Just one follow-up. You mentioned, you were working with Anthropic last quarter. Just any update on that partnership or collaboration, whatever you, however you wanna refer to it?

Sure. Pat, do you wanna give an update?

Sure, yeah. We regularly work with, and talk with Anthropic as we're building out Bunsen. It is one of the top LLM providers. We are not tied to a single LLM. We are open to using whatever our customers prefer or whatever we think would be working best. We're building an agentic layer on top of LLMs. Anthropic is, you know, obviously a fantastic provider in this space and we've learned a lot from them. We're really excited to continue to work with them.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Mani Foroohar from Leerink Partners. Your line is open.

Hey, guys. A quick question. When you think about the % of customers or % of contract value that are previously on-prem that are renewing, in 1Q, recognizing that we're often recycled for many, can you give us a sense of what % we're able to convert over to hosted? Just so you can give us a little bit of real-time quantitative feedback on how that transition is going.

Yeah. Richie?

Yep, I'll cover that. Thanks, Mani, for the question.

Thanks.

For the quarter, we were pleased with the progress for the revenue. Hosted revenue was 34% of the software revenue in the quarter and 27% on a trailing 4-quarter basis. That compares to 23% just a quarter ago. We're pleased with the early progress. Anecdotally, we're aiming to transition from on-prem to hosted upon the contract date, that's what we achieved in the quarter as well as all new customers, we're deploying them hosted in the first instance. Overall, we're pleased with the first quarter and, you know, still have our same expectations for the year and the 3-year outlook, getting to 75% by the 3-year period.

I think it's also worth mentioning that in a few cases, which I think is quite encouraging, is that we were able to transition some customers to hosted before their renewal dates. Richie, is there worth, sorry.

Yeah. While the primary emphasis has been on transitioning at renewal, in a few instances for larger multiple year contracts that were on-premise, we were able to work with those customers and transition over to hosted well in advance of the renewal date. That you'll start there was modest impact of that in Q1, but you'll start to see more impact in that in Q2 onwards.

Great. A quick follow-up. We're seeing substantial pickup in M&A activity in private biotech markets, Ajax being one example. How much velocity would you have to see in that space to start tinkering with how you think about guidance for drug discovery revenue, given the broad portfolio of co-founded, partnered, et cetera, companies and your equity exposure there?

Yeah. I mean, first of all, we can certainly, and Karen, I'll hand it over to you to answer. Let me just say, on the software side, we're also quite encouraged. We definitely, things look a lot better this year or this quarter, I should say, so far this year compared to last year where we saw lots of biotech companies, of course, shutting down or very significantly reducing their discovery budgets. We're not seeing that. We're even seeing a pickup in new customers, so that's very encouraging and that sort of, you know, dynamic is the premise of your question is certainly impacting, we think the software business. As far as the drug discovery business, Karen, I think you have some thoughts about that?

Yeah, sure. Happy to share. So as you know, we have always had a lot of interest in partnerships, both obviously with the companies we've co-founded, you mentioned Ajax, and prior companies we've co-founded. I will say that your comment about the private market and companies is who are still in stealth even as well as public companies are still reaching out very actively to Schrödinger with respect to collaboration on programs that are in their pipelines, but also on new programs. We remain very enthusiastic about the potential for new collaborations. Obviously, we're not guiding to any specific BD event, but the momentum and the interactions remain very robust both with biotech and with pharma.

Thanks. That's helpful.

Your next question comes from the line of Brendan Smith from TD Cowen. Your line is open.

Great. Thanks for taking the questions, guys. Congrats on all the progress here. Actually wanted to first quickly ask about the Predictive Toxicology launch, if you can maybe just give us a sense of, if not relative revenue breakdown between the legacy business and that, and then Predictive Toxicology, at least maybe how new customer adds there are tracking. Just quickly, I guess on the upcoming Bunsen launch, how should we really think about this go-to-market strategy for the agent? I know you gave us some good color earlier. I guess, is this just something that you expect to kind of roll out as an add-in with existing customers, or is there kind of a whole separate base you could potentially reach with this?

I guess just any kind of go-to-market strategy there, stuff would be super helpful. Thanks.

Yep, we can cover both those. Thanks for the questions. With regard to Predictive Toxicology, feedback continues to be really very positive for the results of evaluations now that are being kicked off. It's very clear that there's significant interest in the technology, but also that prospective testing of it in our customers' hands is validating the kind of results that we were seeing when we were developing the technology and using it also prospectively internally. That's really quite gratifying to see. That continues to go well. With regard to Bunsen and the go-to-market strategy and you asked about the base, that's a really good question because, and I sort of alluded to this in talking about it earlier.

Certainly this in some sense democratizes access to very sophisticated technology, and you can appreciate what kind of impact that can have on the business. When this kind of technology, you know, previous to systems like this may just have been inaccessible and, you know, it would take years of training. You know, you need an advanced degree, you're not sure, or you're using the technology and not using it quite right and not getting very good results. That's not a good thing for anybody, for a customer or for us. This obviously, you know, very directly addresses that. This is very similar to image processing. That used to be a thing that was not available to very many people, only people who were expert users at Photoshop, right?

You know, to remove red eye or remove somebody who is in the background of your vacation photo was really difficult. Now you just circle the area and say, "Remove the background," and it's done. It's the same basic idea, now all of a sudden, a very sophisticated image processing or image manipulation is available to the masses. We expect the same sort of thing, well, not masses, but you understand, to non-experts in research. Pat, anything to add to that?

No, I think that sums it up great. The other thing I would just highlight on top of adding additional customers is one thing that is really limiting. I think we've discussed in the past that the amount of computational chemists we have per project at Schrödinger is a lot higher than the industry average. That's part of the reason behind our very high success rate. One thing that's very limiting in our customers is they simply don't have enough people who can run this to get it done, even if they have experts who are good enough. Simply getting this in the hands of those experts and allowing them to get a multiple of their work done, similar to how the agentic coding tools have allowed developers to work much, much faster.

We think even those experts being able to run much, much faster, they'll be able to consume a lot more of our throughput-based licensing before we even have it broadened to a broader user base.

Exactly.

Got it. Sounds good. Thank you, guys.

Thank you.

Your next question comes from a line of Michael Ryskin from Bank of America. Your line is open.

Hey. Hey, thanks for taking the question, guys. First I wanna dig into sort of the new way you're guiding ACV. I wanna talk about the contribution ACV. You called out, you know, for the second quarter, your guide is $19-$23, and that's excluding any contributions. Is that your way of saying we, you know, we don't know what the contribution ACV will be, or are you actually expecting it to be, you know, zero because it was, you know, relatively modest in the first quarter? Sort of the same question for the full year. Anything you could tell us in terms of how much of the full year ACV is made up of that or how much there was in all of 2025?

Yeah. Richie?

Yep. The guidance for the Q2 is $19 million-$23 million, as you noted. The reason we explicitly called out the comparison to last year, Q2 of 2025 was $23.3 million, of which $5 million was contribution ACV related to our grant with the Gates Foundation. We just wanted to call out when you're looking quarter to quarter that on a commercial business or excluding contribution, we're still projecting growth for this quarter. For the full year range, $218 million-$228 million of ACV, we do expect potentially some contribution ACV in there. That's a component of it, in the full year number.

You don't want to break that out or quantify that?

Correct.

Okay. Okay. All right. Fair enough. In terms of Ajax, just how should we think about that flowing through the P&L, and in terms of, you know, use of proceeds, anything like that? Is that in your guide for the year? I don't believe it is. Just timing and pacing of that.

Richie, you should answer that, but let me just say, just to remind, that our equity stake is around 6%. Just wanted to throw that in there. Richie, please go ahead and answer.

The Ajax sale was not contemplated in our guidance framework. Obviously it's a private company sale that we couldn't have included, but its impact to our financials will mostly be to cash. Our cash position at the end of the quarter was $406 million. As Ramy just noted, we own about a 6% equity stake in Ajax, when the upfront portion is received by Ajax, we will receive our 6% of that approximately. The impact to us will be cash. The upfront amount was not disclosed in the Ajax Lilly announcement, as we receive the cash, we'll be able to reflect it in the balance sheet.

But, but the-

Beyond the upfront

Yeah, just in terms of how you think about.

There's also, you know.

Yeah.

There's also milestones, you know, kinda near term and downstream milestone opportunities, in which we would continue to have that 6% participation.

Okay. I guess my question is, does that change in terms of how you think about investment priorities in the second half or just, you know, the fact the balance sheet's gonna be a little bit stronger? Any early thoughts on that or just gonna wait and see for now?

I would say more the latter. I think our path to profitability between growth in software and drug discovery as well as expense management, over the three-year window, that was all based on our cash position at the time. This is just upside to that. We will, once we receive the cash, kind of revisit if anything changes, but I would expect our three-year outlook at the time to be unchanged.

Okay. All right. Thank you.

Thanks.

Your next question comes from the line of Michael Yee from UBS Securities. Your line is open.

Great. Thanks. We had 2 questions. First, maybe for Ramy. Just thinking about your overall P&L, you've got some very attractive 70% gross margins. Overall as an entity, you're EBITDA negative and running operating losses. Given the general shift to reduce focus on moving things to later preclinical or in clinical and looking to partner things, how would we expect the overall operating expense structure to potentially change? In other words, what % of your R&D do you estimate is going towards those types of programs? If I back that out, could think about a more appropriate run rate of where you think your R&D could. That's question number 1. Appreciate, I think you have guided to sort of be EBITDA profitable in 2028, that's helpful.

Wanted to know what % of R&D is related to drugs. The second question relates as a follow-up. I estimate, given I cover Lilly, that Ajax could be like $1 billion upfront. Is the 6%, I think you said is not in your current cash guidance, so we should take 6% of whatever our estimate is and apply that upside to the cash. Does that also, is that booked in the income statement and flows through the income statement? Thank you.

Absolutely. Richie, do you wanna cover the second? Yeah. I'll.

Sure. Exactly. We can't comment on the size of the upfront, but the 6% equity stake we have is not in our cash guidance. I would expect it to run through our P&L as a non-operating gain.

Okay. With regard to the question about R&D and drug discovery. I think we've been very clear about this, that the drug discovery part of our business, which has been in existence for a long time, since the, even a little bit before, but around the founding of Nimbus over 15 years ago, has been an incredibly important part of our business and is highly synergistic with our software business.

We've shown, I think, very clearly that the success, the extraordinary success of these drug discovery partnerships, Nimbus, Morphic, Relay, Structure, Ajax, have had such a huge impact on validating our platform, and they've also had a huge impact on helping us understand what it is that we should be working on, how we should be advancing the platform to have sort of the maximum impact on projects. That will continue to the extent that there is still a huge amount of work to be done in advancing the field. We're obviously incredibly excited about the accomplishments that we've made, and it's really been transformative. We've transformed the way molecules are discovered. That was our mission. I think we've been accomplishing that.

You can see through this initiative, like the Predictive Toxicology initiative and many other initiatives like that, there's more work to be done, and we can continue to improve the way molecules are discovered, both in material science and life science. Again, that's a long way of saying that these businesses are highly synergistic, and it will continue to be an incredibly important part of our overall business model. Karen, I don't know if you wanna add anything to that.

As we've shared in the past, the vast majority of our portfolio, the combined portfolio of collaborations with our co-founded companies, with biotechs and with large pharma, are an important part of the business, as Ramy just described, both from a scientific point of view, but also, as you saw this quarter, generating revenue. I would say that the vast majority of our activities actually in the R&D space are actually those collaborations. It's a small portion of the overall effort that is allocated to wholly owned research. As you heard previously on prior calls, we will not be taking programs into the clinic.

We are also obviously partnering programs early, as you saw with the Novartis deal, partnering a program that hadn't even reached lead optimization yet. You know, our investment in R&D is partly obviously on the science side, as I'll say again, it's also to create value. As you heard, we have 15 programs now with royalties on sales and revenue coming from these programs. As you heard across the whole portfolio, close to $700 million generated from collaborative activities in the R&D drug discovery efforts.

Thanks, Karen.

Got it. We have guidance for 2028. That's helpful and positive. Thank you.

Yep. Thanks.

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

Hi there. This is Connor on for Evan. Thanks for taking our question. We just have a follow-up on how we should think about the rollout of Bunsen and maybe kind of the phasing over the next couple of years. Of course, you have the upcoming early access launch this summer. We're just, you know, trying to think about maybe which types of accounts you'll be sharing access with in kind of the early summer launch. Maybe as we think longer term, thinking about kind of, you know, understanding the throughput-based licensing, we're wondering kind of the functional rollout of Bunsen. Will this be kind of a premium add-on or come included as a part of your standard software offering? Thank you.

Yeah. We're still working out all of the details of that, as we typically do with our early access versions of our technology. We work with our close partners, and we will do that the same thing here, where we can work together to work out the sort of mechanics of integrating it into their workflows, but also checking on the science. Everybody listening to this call and all of us have had experiences that are mixed with LLMs. Sometimes they're extraordinary, sometimes they do some pretty crazy things. There's a lot of work that has to be done to make sure that we optimize and maximize the former and minimize the latter. That requires working with close partners, of which, again, we have a large number.

As far as the future, our expectation, of course, is that this will be ubiquitous and, you know, this technology will be available to all of our customers. Exactly how we price it is still to be worked out. That has a lot to do with this feedback that we get as we roll out this early access version. Yep. I think that's as much as we can say unless Pat Lorton has anything more to add.

Nope, that covered it perfectly.

Yeah. Yep. Great.

Thanks.

Thank you.

Your next question comes from a line of Matthew Hewitt from Craig-Hallum. Your line is open.

Good afternoon. Thanks for taking the questions. Maybe first up, given that Q4 is such a big renewal period for you, and you spoke to it earlier that you're starting to see some of those earlier conversions, is it your hope and intention that you can get through some of that or maybe half of that before you get to Q4 just to kinda ease the burden or the rush that you would see at year-end? How should we be thinking about maybe the conversion over the course of the next couple of quarters before you get to Q4?

Richie, do you wanna try?

Yes.

Yep.

Let me start. Hey, Matt.

Yeah.

Thanks for the question. I think the examples that we gave were more anecdotal and not the base case, but they were large contracts, and they, we had a dedicated effort, I think, to try to convert those in advance. More broadly, though, the natural time for us to address a transition is on the contract renewal date. I still would expect Q4 to be our largest quarter of the year for ACV. Having said that, I think you'll see, you know, where there's opportunities, we will pull them forward ahead of the renewal date. Sometimes that relates to a new product, sometimes that relates to a new offering.

I think here, on the margin, you may see we'll do what we can to kind of pull forward, and drive ahead of, Q4, but I'd still expect Q4 to be our largest quarter of the year. Yeah.

Got it. Maybe separately, with the strategic shift where you're not going to be taking internally discovered molecules into the clinic, besides the ones that you've already got there, will you provide an update on how that is progressing? I mean, will you give us a, "Hey, we've discovered," or, "We've got 17 molecules that are, that we're working on right now," and maybe three quarters later, "Now we're up to 20"? Like, how will we monitor, how will we know the progress that you're having on that internal molecule discovery side? Thanks.

Yep. Karen?

I mean, I think we have in the past kept our pre-LO pipeline relatively quiet for a number of reasons. Obviously, you want to be progressing the program before you start announcing the identity of the program or the progress. What we have been announcing, obviously, is the deals that we've been doing. I will say we don't plan to kind of expand and expand and expand the size of this portfolio without actually transacting some of these programs as they move through the discovery space. Again, as you saw us do with Novartis, we felt that those programs were well-positioned to partner with that particular company because of their expertise and the synergy with those programs. You'll see us do more of that.

I don't think you should be expecting an ever-growing, early stage portfolio, but updates as we identify partners for them.

Yeah.

Understood. Thank you.

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

Thank you standing by. Welcome to Schrodinger's conference call to review fourth quarter and full year 2025 financial results. My name is Rob, and I'll be your operator for today's call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] 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 fourth quarter and full year 2025 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 medium-term objectives, our plans to accelerate the growth of our software business and advance our therapeutics portfolio, the timing of readouts from our clinical trials, the clinical potential and properties of 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-K for the year ended December 31, 2025. 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 and 2026 outlook. Then Richie Jain, Chief Financial Officer, will review our financial results and discuss our 2026 progress and 2028 objectives. Then Karen Akinsanya, President, Head of Therapeutics R&D and Chief Strategy Officer, Partnerships, will review our therapeutics portfolio. We'll then open the call for Q&A. With that, I will turn the call over to Ramy.

Thanks, Jaren, and thank you everyone for joining us today. Schrodinger is the leader in advancing and deploying computational methods for molecular discovery. We have developed a highly differentiated computational platform that integrates physics, AI and a scalable data infrastructure that is dramatically accelerating molecular discovery across life sciences and material science R&D globally. Our software business generated approximately $200 million in annual contract value in 2025. We also have a collaborative and internal therapeutics portfolio that leverages our computational platform at scale. We have an extensive and unmatched track record of delivering high-quality development candidates that has generated a high-value portfolio of future milestones and royalties on sales. Before highlighting our 2025 results and 2026 outlook, I would like to take a few moments to describe our vision for the future of molecular discovery. Our goal is to virtually generate all relevant molecules, computationally assay their key properties, and select the optimal molecule. We have made significant progress toward this ambitious vision, already achieving substantial reductions in the time and cost required to discover differentiated drugs and materials. This progress is powered by our unique computational engine that is an integration of the most advanced ground-truth physics and cutting-edge AI. Our platform's value is clearly validated by our high customer engagement, clinical success in our therapeutics portfolio, and the success in our research collaborations and the biotech companies we have co-founded. The AI landscape is expanding rapidly, but the fundamental challenge remains the same. AI models require massive amounts of highly accurate training data. Because chemical space is nearly infinite, experimental data alone cannot provide the scale needed, and therefore ground-truth physics simulations are often the only way to overcome this data scarcity problem. This physics-first strategy is already a proven standard in complex fields like autonomous vehicles, weather prediction, chip design, and aerospace. By leveraging this proven physics-first approach, we are pioneering the next frontier in drug and materials discovery. Schrodinger is the only company with a physics engine accurate and validated enough to power the next generation of AI for drugs and materials. We are uniquely positioned to lead the next era of molecular discovery by scaling our physics plus AI platform across a multi-billion-dollar growing market. Several industry tailwinds are accelerating demand for our technology, from deeper biology insights and a surge in available protein structures to the evolution of faster compute and agentic AI. At Schrodinger, we are leveraging these breakthroughs to provide the ground-truth calculations essential for training next-generation models. Additionally, as agentic AI drives higher utilization of high-compute calculations, our throughput-based licensing model ensures capture of that expanded consumption by our customers. Our strong performance in 2025, highlighted by 23% total revenue growth and a strong cash position of $402 million, provides significant momentum as we enter 2026. In 2025, we expanded our platform capabilities for biologics and materials, released the beta version of our predictive toxicology solution, and advanced our portfolio of proprietary and collaborative programs. We were also pleased to see molecules we co-invented advancing within our partners' clinical pipelines. Karen will discuss this in more detail shortly. Looking ahead, we are focused on achieving 10% to 15% software ACV growth, operating with expense discipline, and accelerating our transition to a primarily hosted model, which Richie will discuss shortly. We expect to continue to drive increased adoption of our platform through product innovation, addressing both our well-established and newer markets in life sciences and material science. Within our therapeutics portfolio, we plan to complete the Phase I studies for SGR-1505 and SGR-3515 while advancing our collaborative programs. Our software sales strategy is focused on scaling platform adoption and broadening our reach. Among our existing customers, we are focused on supporting them in leveraging computation at scale and have consistently observed customers increasing usage as they experience firsthand the outcomes of our predict-first approach. We are also targeting additional budgets within existing customers and unlocking opportunities in large markets such as biologics, toxicology, synthetic chemistry, drug formulations, consumer packaged goods, chemicals, energy capture and storage, and electronics. At Schrodinger, we do not just follow AI trends. We are leading the way with our gold-standard platform, where physics-based simulations provide the ground truth required for AI to navigate the endless universe of molecules with precision. We are therefore uniquely positioned to leverage AI in a way that cannot be replicated or replaced by a global AI model. We have set the standard for molecular discovery, one that delivers faster design cycles, higher success rates, lower costs and fundamentally better molecules. We have significant opportunities in the year ahead and look forward to updating you on our progress in the coming months. I will now turn the call over to Richie.

Thank you, Ramy, and good afternoon. Schrodinger had a strong 2025 delivering $256 million of revenue or 23% growth against a challenging backdrop of tight pharma budgets and challenging biotech capital markets. The software business generated $199.5 million of software revenue and $198.5 million of software ACV with strong growth from our commercial customers. The drug discovery business generated $56.4 million of revenue from our portfolio of collaborative programs. With over $400 million in cash, we have a strong balance sheet to invest in growth while targeting positive adjusted EBITDA by 2028. Our full year results demonstrate balanced growth. Software revenue increased 11% and drug discovery revenue more than doubled compared to the prior year. Software growth was primarily due to an increase in hosted and maintenance revenues, and drug discovery growth reflects the continued successful execution across our portfolio of first-in-class and best-in-class discovery collaboration programs and the continued progression of these molecules. Software gross margin was 74% compared to 80% in 2024, reflecting higher costs associated with contribution revenue from grants in 2025 compared to 2024. Total operating expenses were $310 million, a decrease of approximately 9% compared to 2024. This reflects rationalizations in R&D and G&A from our 2025 cost reduction initiatives, offset by a modest increase in sales and marketing to continue investing in long-term software growth. Total other income was a gain of $65 million compared to $24 million last year due to mark-to-market changes in our equity investments and currency fluctuations. We'd like to congratulate our partners at Structure Therapeutics, a company we co-founded, for their December announcements related to GLP-1 and their Phase I amylin program. Net loss for the year was $103 million versus a net loss of $187 million in 2024. The fully diluted share count was 73.4 million compared to 72.7 million in 2024. I will now turn briefly to our fourth quarter 2025 results. While the ACV for Q4 2025 and Q4 2024 were similar, software revenue for Q4 2025 was $69.3 million, a decrease of 13% compared to fourth quarter 2024. This is partly a function of the upfront recognition of revenue from a large multi-year on-premise deal signed in Q4 2024 compared to fourth quarter of 2025 in which portions of several multi-year deals were deployed as hosted, deferring most of the revenue recognition into 2026 and future years. This had the impact of reducing our software revenue recognition in Q4 2025, but reflects the accelerating transition of customers to hosted. The other line items for the fourth quarter reflect the same trends as described previously for full year results with a gross margin of 81% and operating expense discipline. Given our focus on driving software growth and the expected near-term volatility in reported revenue due to our accelerated transition to hosted, we are introducing a new set of software KPIs that better track our business objectives and enable the measurement of our progress. Total ACV increased to $198.5 million from $190.8 million in 2024, representing 4% overall growth. We continue expanding our top 20 pharma relationships, and ACV for this cohort grew by 15%. Commercial ACV, which includes the rest of life sciences and material science, grew 7% to $177.4 million. We continue to focus on growing existing commercial relationships with $1 million as a key threshold that demonstrates adoption of our platform at scale. Our average ACV in this cohort increased to $3.9 million from $3.3 million, or 16% growth. Within this cohort, 2 of our largest customers were acquired in 2025 by top 20 pharma customers. These acquisitions are a strong reflection of the impact of large-scale adoption of our platform. And while these acquisitions reduced our customer count by 2, their throughput and value were largely retained. From a retention point of view, we are shifting to dollar-based metrics focused on our commercial customers. Net dollar retention, which measures growth less churn from existing customers but excludes the growth from new customers, fell to 100% after several years averaging over 110%, reflecting the incredibly difficult environment for pharma and biotech in 2025 that impacted our ability to meaningfully expand relationships last year. We continue to see strong renewal performance as demonstrated by 96% gross dollar retention, which only measures churn from existing customers, underscoring the essential nature of our platform. In drug discovery, the successful expansion of our partnering activities since 2018 across 20 separate collaborators has increased the number of programs from 13 to 16 that are eligible for royalties on sales that mostly range from high-single-digits to low-double-digits. We believe there is significant embedded long-term value in the milestones and royalties associated with our portfolio that Karen will review later in the presentation. Overall, we remain pleased with our performance in 2025 looking across the composition of our ACV. As discussed previously, we achieved 7% growth across commercial customers and 15% within top 20 pharma. The rest of life sciences, including our biotech customers and government academic, reflected a well-understood challenging funding environment for 2025 that we were able to withstand. Our materials science business continues to scale up, growing from $15 million to $17 million as we introduce new capabilities. Finally, we continue to make great progress on the predictive toxicology and battery chemistry modeling initiatives that are partially funded by the Gates Foundation. Building upon several years of gradually increasing our hosted revenue mix and building out capabilities and processes to support our largest and most sophisticated customers, today we are announcing an accelerated transition to industry-standard hosted contracts that are increasingly preferred by our customers. Our business mix today is predominantly on-prem, resulting in lumpy revenue from mostly upfront recognition of contracts, in particular, multi-year contracts. Starting this year, we have begun prioritizing hosted deployments that support the continued trend toward cloud-based solutions and allows for faster deployment, enhanced renewals and licensing and support efficiencies. From a revenue recognition perspective, this will also result in more predictable revenue. Over the last several years, we have transitioned several of our largest customers from on-prem to hosted deployments, supporting their audit and service level requirements and resulting in 23% of our software revenue as hosted for 2025. The goal is to transition approximately 75% of our software revenue to hosted by 2028, factoring in that for some regions and some customers, a transition to hosted is not likely based on our current expectations. Given the accelerated transition, I will highlight the key accounting considerations for revenue recognition while noting it will have no impact on total ACV or cash flows. Hosted revenue is recognized ratably over the duration of the contract. So for deals booked later in the year or that have longer duration, this will result in reduced revenue recognition in the year the contract is booked with a corresponding increase in deferred revenue or backlog for future year revenue recognition. As a rule of thumb, we expect each 1% increase to hosted revenue percentage to result in a $2 million to $3 million reduction in current year revenue. The acceleration of this transition began in January, but because the majority of ACV is booked in Q4 of each year and our largest customers are on multiple-year agreements, many of which do not renew in 2026, we expect to see a modest increase in hosted revenue percentage for 2026 and greater acceleration for hosted revenue percentage for 2027 and 2028. We expect revenue to begin converging with ACV by 2028, but that ACV will generally be a leading indicator of revenue as the business continues to grow. Given the near-term reduction in expected revenue, we expect this will also compress gross margins and adjusted EBITDA without any impact to cost of goods sold or operating expenses. Reiterating that the accelerated transition to hosted has no impact to ACV or cash flows, we expect a more predictable financial profile as we target 75% hosted revenue by 2028. This hypothetical illustration captures the differences in revenue recognition for theoretical zero-growth $1 million annual contracts that vary in renewal quarter and duration between on-prem contracts on top and hosted contracts on the bottom. As you can see in the yellow box, $1 million in ACV will ultimately result in $1 million in recognized revenue regardless of the deployment. However, on-premise deals result in significant upfront revenue recognition with only maintenance for the remaining quarters, while hosted deals result in ratable $250,000 per quarter. This contrast becomes even more extreme for longer duration contracts, and the chart also demonstrates the revenue recognition straddling fiscal years for deals booked in Q4. Today, we are providing 2026 guidance as well as outlining our financial objectives that collectively result in a target of achieving positive adjusted EBITDA by the end of 2028. Given our accelerated transition to hosted revenue, we are providing ACV expectations rather than software revenue guidance for this year. While we will continue reporting software revenue, we believe ACV will provide important visibility into the performance of our business during a period where we expect revenue recognition to be highly variable. For full year 2026, we expect ACV to be in the range of $218 million to $228 million or 10% to 15% growth. Our expectation for Q1 is ACV of $24 million to $28 million compared to $25 million from Q1 2025, which implies $197 million to $201 million on a trailing 4-quarter basis. We anticipate drug discovery revenue between $55 million and $65 million for the year as we continue to advance our collaborative portfolio. As we have said previously, drug discovery revenue has quarterly variability due to the collaboration and milestone-driven nature of the business. Our operating expenses are expected to be less than 2025 as we fully realize the annualized impact of expense reductions and efficiencies announced in 2025 and maintain overall expense discipline. Looking over the next few years, we are targeting annual software ACV growth of 10% to 15%, substantially completing our transition to hosted contracts, and returning gross margin percentage to the high 70s. In drug discovery, we anticipate approximately $50 million of revenue annually, again, noting potential variability each year due to the collaboration and milestone-driven nature of the business. Our organization is aligned around these near-term and longer-term objectives. And our strong balance sheet with over $400 million in cash supports the path to positive adjusted EBITDA by 2028. We've taken deliberate actions to manage expenses, invest in the platform to fuel software growth, and prioritize discovery-focused therapeutics that drive our multi-year financial objectives of 10% to 15% software growth, $50 million of annual drug discovery revenue, an accelerated transition to hosted, maintaining expense discipline, and targeting positive adjusted EBITDA by 2028. We are really confident about our future and the opportunities ahead and look forward to updating you on our progress. Now I would like to hand the call over to Karen.

Thank you, Richie. Our therapeutics activities comprise 4 key value generation opportunities. Equity stakes in companies we co-founded over the past decade and a half have led to M&A transactions and cash distributions from Nimbus, Relay, Morphic, and Petra. We maintain equity positions in Nimbus, Ajax and Structure Therapeutics. Licensing of our proprietary discovery programs and collaborations with biotech and pharma companies generate upfront payments and milestones. As Richie noted, the $56 million of drug discovery revenue for 2025 reflects the progress of our collaborative programs. Potential future milestones of up to $5 billion and royalties on 16 programs, as well as future value creation from wholly-owned discovery programs represent longer-term opportunities. Our diverse ecosystem of collaborations continues to expand. This includes multi-target collaborations with pharma and biotech companies that we co-founded and were later acquired. This is resounding evidence of the impact of our platform, and successful drug discovery and financial outcomes for the molecules we co-invented. The impact of our predict-first approach to drug discovery, pursued by Schrodinger's design and discovery experts and our partners, has resulted in a growing portfolio of optimized compounds. There are more than 25 active programs across the combined portfolio. Multiple oncology drugs across the portfolio have received Fast Track and Orphan Drug Designations, and approximately $650 million in cash, upfronts and milestones have been generated to date. In addition to best-in-class compounds like Takeda's Phase III Tyk2 compound, zasocitinib, we have successfully discovered oral versions of injectable antibodies and peptides. We refer to these as modality switches, and they represent a powerful application of Schrodinger's platform and expertise in structure-based drug design. Modality switch programs represent large market opportunities, and are associated with lower clinical translation risk, given that the mechanisms have already been validated through to commercialization. Oral drugs have a lower cost of goods, greater ease of access, and importantly, enable combinations of incretins or combinations of immunomodulatory mechanisms to enhance responses and achieve durability in patients with cardiometabolic and inflammatory diseases. The portfolio of programs that are eligible for royalties continues to grow and advance, with 7 clinical programs from Phase I through Phase III. The programs span a diverse range of disease areas and many undisclosed and disclosed modality switch programs, including oral Entyvio, the small molecule alpha 4 beta 7 compound being developed by Lilly after the acquisition of Morphic, and first-in-class oral amylin being developed by Structure Therapeutics. We believe there is an increased probability of success for modality switch programs to achieve the royalties for these collaborative programs. In 2025, we were very pleased with the release of the Phase 3 data for zasocitinib, a best-in-class Tyk2 inhibitor co-invented with Nimbus, prior to its sale to Takeda for $4 billion. Takeda reported that they expect to launch the product in 2027. We are eligible to receive up to approximately $100 million in additional future cash distributions from the payments made to Nimbus based on global sales milestones. In addition to the progressing collaboration programs, we are finalizing the Phase I studies for SGR-1505 and SGR-3515. We expect to report initial Phase I data for our Wee1/Myt1 co-inhibitor at a medical meeting in the second quarter. Finally, our inflammation and immunology programs, including our best-in-class brain-penetrant and peripheral NLRP3 inhibitors and several modality switch I&I programs, continue to demonstrate promising profiles. I'll now turn the call back to Ramy.

Thank you, Karen. As you have heard, 2025 was a year of significant progress across our business. We delivered strong financial performance despite a challenging macro environment and took decisive steps to position the company for long-term success. We are confident the strategic pivot we initiated last year, combined with the 2028 targets we've shared today, puts us on a clear path to achieving our financial and operational goals. As always, I want to thank our dedicated employees for their exceptional work and accomplishments. We are energized by the momentum heading into 2026 and look forward to sharing our progress with you throughout the year. At this time, we are happy to take your questions.

[Operator Instructions] Your first question comes from the line of Mani Foroohar from Leerink Partners.

Guys, thanks for walking us through some of the impact of that transition, which is one that many software companies have to go through and does require a little remodeling work on our part. I want to hop over to think about strategically how you think about potentially the ongoing process of partnering out assets in your own pipeline, continuing to rationalize across your own pipeline programs as necessary or appropriate, and how to think about what impact that could have on potentially pulling forward the 2028 profit metric?

Mani, so with respect to partnering, as you know, this is an ongoing and active component of our business. Over the last 5 years, we have essentially done collaborations and licensed programs from our wholly-owned portfolio on a fairly regular basis, so it remains a very important part of the business. And as you know, we're constantly in conversation with potential pharma partners and others. So that will remain something that we will be very active in. As you've seen from the portfolio, there are a number of assets that are available for us to partner, both now across oncology and immunology. I'll leave it to Ramy and Richie to talk about the potential impact, but obviously, we're not guiding to any BD today. So Richie, I mean, do you have any...

Yes. Mani, just on the second part of the question, I think the goal for profitability on an adjusted EBITDA basis by 2028 is a function of growth across the software business of about 10% to 15% a year and drug discovery revenue of about $50 million a year, and then continued operating expense discipline over the 3-year time period. As we have further updates on the portfolio, we'll keep you updated on those goals as well.

That's helpful. And as a quick follow-up, when we think about the ACV guidance, which we're reaching out all the way to 2028 now on that growth rate, I recognize one of the things that could drive additional growth, whether on revenue or ACV, however one wants to think about it, is additional tools flowing into the products such as the predictive toxicology platform. Is there any value baked into that growth for monetizing the value of predictive toxicology, or is that entirely incremental? Should that become a meaningful driver, that would be incremental to the 10% to 15%?

Yes, thanks Mani for the question. We certainly expect to generate additional growth from the new products that we're releasing this year. As you mentioned, predictive tox is one of them, but there are a number of other new products that we mentioned in our prepared remarks. In particular predictive tox, we're very excited about it. The feedback so far from the beta has been very positive. In fact, it's actually outperformed our expectations. So we're definitely looking forward to that. I mean, the launch is underway, so we're excited about that and we're looking forward to realizing growth again from predictive tox as well as new products that we're releasing this year and that we will be releasing in the future.

Well, the right interpretation is that there is at least a little bit of value for incremental growth from predictive tox baked into that 10% to 15%, or any incremental value -- or any value would be incremental to 10% to 15%. Just to clarify in case I missed it.

Yes, Mani, it's Richie. As in the slides that we presented today which we will make available on our website, we listed out a number of new products that are launching. And our growth expectations over the 3-year time period include the impact of those new products.

Your next question comes from the line of Scott Schoenhaus from KeyBanc.

And yes, thanks for all that color as we make this transition in our models. I guess I want to start on the first quarter ACV versus the full year ACV on the software side, 10% -- a little bit above 10%. And I understand you're still going through the transition and that 4Q is still your big renewal season quarter. But maybe walk us through the dynamics of the first quarter ACV for this year relative to the full year, please.

Richie?

Thanks, Scott. So as you noted, Q1 does tend to be one of our smaller quarters following the Q4 season, which is customary for software companies and a reflection of our customers' budgeting cycles and our contract renewal dates. ACV, as we shift to that as our metric, it only reflects the value of the deals that we closed in the quarter, whereas revenue, where we have guided to in the past as a financial metric, reflects deals closed in the quarter but also revenue from prior quarters. So that's why we've guided to that range, thinking through those considerations. Also, given it is Q1 and it's a smaller quarter, the achievement of it is much more sensitive to each individual contract. So we do expect to grow in each quarter, but that's some of the thinking that went into the range that we set for Q1. I would reiterate that over the course of the year, inclusive of Q4, which is where the majority of the business is booked, we are expecting that $218 million to $228 million of ACV or 10% to 15% growth.

That's helpful. So any upside utilization would drive revenues above that ACV number reported in the first quarter. How are your customers dealing with this transition? We've always talked about in the past that you're never forcing this model, that customers sometimes preferred this, but now it's a clear adoption of a hosted platform. Can you just give us how your customers are engaging with this or reacting to this strategy now?

Yes. Hosted cloud-based solutions are an industry standard and allow us to deploy faster and also support in an enhanced fashion. Customers are actually increasingly preferring hosted deployments, and we've had a track record over the last several years of being able to support our largest and most sophisticated customers with hosted deployments. From an investor point of view, 23% of software revenue today is hosted, which we've been gradually increasing over the past several years. Because the revenue is ratable versus upfront or on-prem contracts, this will also result in a smoother and more predictable revenue profile as we target 75% by 2028.

Your next question comes from the line of Michael Ryskin from Bank of America.

This is Alex on for Mike. My first question is on AI. So there's been the focus of AI playing a bigger and bigger role in R&D processes and Schrodinger fits neatly into that. Have you noticed any changes in your conversations with pharma customers in recent months regarding this? Are they open to engaging and leveraging your solutions to drive efficiencies and become more computational? So in other words, is Schrodinger an AI winner in the R&D space? Or is pharma shifting funds and focus away from these traditional methods and prioritizing new solutions pioneered by maybe Anthropic or OpenAI? And then I have a follow-up question.

Yes. Thanks for the question. Yes, we view AI and the sort of new revolution of agentic AI absolutely as a tailwind. It's very clear that, that is -- the adoption of AI and the scale-up that it results in is actually increasing the demand for our software. The fact that we license our software using a throughput-based licensing model obviously means that we benefit from that scale-up. The other thing that we've said, and you've heard us talk about this for years, is that one of the barriers to adoption of our platform at scale is know-how and just availability of humans to run the software at scale, and obviously, agentic AI solutions address that. We've actually -- we're working with Anthropic directly to explore ways to integrate agentic AI with our computational solutions. And we're -- and this is now implied in your question, we're actually excited about the broader adoption of these types of methods, again, because it increases the demand for our technology, not the other way around.

Great. Thank you. That's helpful. And my second question is about -- you talked about 2 largest customers being acquired. Can these customers kind of disappear in terms of usage over time? Or could this be a beachhead in terms that maybe it'll lead to more major pharmas like, learning about Schrodinger and helping to grow the business with pharma acquirers?

Yes. We -- despite the fact that it reduces the number by 2 on a KPI slide, this is actually a great fact pattern for us. It's a recognition of the predict-first approach and using computation at scale in the molecules that they're able to develop and resulting in M&A traits. It's no surprise that the companies that acquire them also have the same approach. So it is -- actually, we view it to be, despite the interim loss of a customer, we were able to retain the throughput and the relationship there and view it as a positive long-term signal.

Your next question comes from the line of Brendan Smith from TD Cowen.

I wanted to ask just a little bit more actually about your go-to-market strategy for this predictive tox launch this year. I hear you on the 10% to 15% kind of blended growth, including existing and upcoming product launches. But just curious if you're thinking that predictive tox will largely be an add-on within existing customers or if it will honestly require new touch points at some of those accounts or even if reps will largely come from exposure to brand new customer accounts altogether? Just kind of wondering how you're thinking about that initial sales outreach and potential impact on SG&A through that lens.

Yes, it's a very good question. Actually, it's both. One of the use cases for predictive tox is using it very early in discovery projects and to the extent that that is the case, we expect existing customers to acquire the technology. Of course, it is an add-on, so that requires them to pay more for it. And by the way, that's also a throughput-based hosted web service, which is the way it's being delivered. So from that respect, we'll see growth that way. But it also will be used by researchers later in discovery and preclinical development by toxicology groups who we currently do not -- or we don't -- they're not currently among our customers. So it will result in growth from tapping into those new budgets. So it's really both.

And Brendan, I'll just add quickly to that. A number of the new products that we're launching fit the same profile, which is they're reaching new end customers, new touch points within existing customers. This obviously will have the impact of adding to our total addressable market. You had touched upon how we operationalize this in your question; we have made some investments in sales and marketing. You'll notice it in our 2025 results to account for this and be able to execute against getting these additional products into the hands of customers.

Great. And if I could just stick with a quick follow-on, just when you're talking about the transition to hosted contracts and flagging the impact on margins, if we maybe just zoom out a bit from just the software margins, how should we think about the concurrent impact of that transition against overall blended margins kind of versus the backdrop of winding down the internal pipeline and presumably some of the OpEx savings you could see from that?

Yes, there's -- I'll tackle that. There's kind of 2 elements of the question. I just want to reiterate that the transition to hosted has no impact on ACV or cash flows. So while we expect there to be some interim variability in revenue because of the accounting recognition, and that will have an impact on margins, in particular with gross margins and adjusted EBITDA. The actual cost of goods sold and the actual operating expenses are -- have not changed at all by this impact. So we did want to give a longer-term view of gross margins returning to the high 70s, which is where we've been prior to the last few years when we took on the predictive toxicology grant that temporarily lowered gross margins and also give you a view of the adjusted EBITDA opportunity for 2028. When we're looking at it from that lens, it's not only the growth in the software business and the transition to hosted, but it is also reflecting some of the operating expense reductions and efficiencies across the whole business, including the software business, the therapeutics business, and the overall enterprise that gets you to that adjusted EBITDA profitability benchmark out in 3 years.

Your next question comes from the line of Matt Hewitt from Craig Hallum.

This is Toph on for Matt. So just getting an idea on your 2028 goal of adjusted EBITDA break-even. What assumptions do you have baked in there about a biotech rebound? And then, do you consider for capital allocation any buybacks?

I'll take the second one first. We always think about capital allocation. We're very pleased to have the balance sheet to support our growth opportunity and also support our pathway to adjusted EBITDA. We -- from a buyback point of view - I mean certainly, the stock price is not one that we think reflects our intrinsic value, but we see a long growth pathway ahead of us and would rather invest our cash into growth in the business, as opposed to buying back shares. In terms of the 3-year outlook on growth, biotech has been a challenge obviously for the last few years. We are assuming over that 3-year window to see a recovery there to normalize levels and growth within that segment.

Your next question comes from the line of Michael Yee from UBS Financial.

This is Kyle Yang for Michael Yee from UBS. So you guided software ACV to $218 million to $228 million in 2026 or roughly 9% to 14% year-over-year growth. It would be helpful if you could remind us and the Street, how do you define ACV? And how does it differ from reported revenue? Help us understand how this ACV guidance could potentially translate to reported software revenue in 2026. And so given the transition from on-prem to hosted, and that's -- we would assume that's not going to be fully completed in 2026, would you expect this reported revenue could come higher than software ACV guidance? And finally, just help us understand the puts and takes that would ultimately determine whether your revenue could land towards the lower or upper end of the revenue guidance range?

Okay. There's a lot of questions in there that I'm going to try to take one at a time. So ACV, annual contract value, it is reflecting the value of a contract. If it's a 1-year deal and we book it in Q1, for example, the ACV will be fully reflected in Q1. If it is a multiple-year deal, we will reflect the annual bookings of that deal for each year of the deal. So that is the definition of ACV. ACV and revenue are actually quite different. We will post our deck to the website, but if you look at Slide 19, we have a pretty detailed visual explanation of the difference. You can see from a revenue recognition point of view in on-prem deals, there is a significant acceleration in the quarter the deal is booked, and then very little revenue in the quarters that follow. Whereas in hosted revenue deals, it's ratable across the 4 quarters. So you had asked about expectations for 2026. We do not expect that revenue will be greater than ACV this year, given that we are very busy at work trying to transition our contracts over to hosted. For all the deals that renew this year, and for all new customers, our goal is to move them over to hosted. Our goal over the 3-year time period is to get to 75%, not 100%, because there are customers in certain regions and certain sectors where they have not been as aggressive in embracing cloud-based solutions, and so we don't think that they will convert over to hosted. But given that the majority of our ACV is booked in Q4, and we intend to transition those over to hosted, it will result in reduced revenue recognition for that quarter, but you will see an increase in deferred revenue and backlog to capture the amount of revenue that will be recognized in the following year. We actually have not guided to revenue for this year, so I don't know how to respond to that comment, but we are guiding to ACV for the year of $218 million to $228 million.

And just to correct some math, probably there's a rounding problem, that corresponds to 10% to 15% growth not 9% to 14%, I think as you stated in your question. I just want to add one more thing just because it's sort of a math thing. If we are successful in transitioning our customers to hosted on this path to getting to 75% transitioned by 2028, mathematically the revenue has to be lower in '26 than it was in '25. That's just a mathematical consequence and again that table reflects that. I hope that's clear.

Great. And to the last question, could you please help us understand what could be some key puts and takes that could determine whether your revenue is going to land toward the lower or upper end of the guidance?

Okay. So just to reiterate, we are not providing revenue guidance for this year. We are providing ACV guidance. In terms of our ACV outlook for the year, it is based on expanding relationships within our existing customers and embracing the AI workflows and the demand that is generated out of that for our platform. It is based on rolling out new products that address different workflows for our customers and different budgets. And it's based on expansion within our material science business. As a rule of thumb, which may help address your question, we are at 23% hosted software as a percentage of software revenue. In any given year, as we increase that percentage, each 1% increase will roughly result in about a $2 million to $3 million reduction in revenue for that year. So as we've put out a 3-year view to getting to 75% hosted revenue percent, we will make progress towards that. I expect in 2026 the progress will be rather limited on that basis because of the amount of business that's booked in Q4. But that should help give you a rough guide on a way to measure our progress. But the -- what this is revealing is why we have focused the guidance this year on ACV, which is an operating metric, and hosted revenue percentage; we think those 2 metrics will help evaluate our performance this year.

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

This is Conor MacKay on for Evan. We found some of the color that you provided on Slide 16 as it relates to ACV composition pretty helpful. We're just wondering if maybe you can share more on how you're thinking about the evolution of customer split as you look towards your annual software ACV growth goal of 10% to 15% by 2028. Maybe how might a gradually improving biotech funding environment and the addition of some of your newer products impact your customer split?

Yes. I'll take a crack at that. I think you're sort of asking about ACV growth of each of those segments, and we're not guiding to that. So -- I mean, as Richie just said, we do expect to see some recovery in biotech. We're seeing tailwinds from a lot -- bigger adoption of agentic AI. We have new products that are being released this year that we expect to see revenue from that should impact all of those segments, both in life sciences and in material science. So hopefully that answers your question without getting into details of each individual segment. Richie, do you want to add anything to that?

No, that's perfect.

[Operator Instructions] Your next question comes from the line of Sean Laaman from Morgan Stanley.

This is [ Morgan ] on for Sean. I had a question related to the last one, but more so dialing into the $1 million and above customers. So we saw this year that the ACV on average went from $3.6 million (sic) [ $3.3 million ] to $3.9 million. What were some of the key actions or key measures that resulted in that increase and what can you do to continue to increase that average ACV exponentially at this point?

Yes. So within that customer cohort, we think that $1 million threshold we think is a reflection of a customer adopting our technology at scale and embracing a predict-first approach. We grew that segment -- we grew customers within that segment from an average relationship of $3.3 million to $3.9 million, or 16% growth. And this customer cohort, you can say, includes a lot of our top 20 pharma customers, as well as a handful of biotechs that are adopting the technology at scale. And so within those 2 groups, top 20 pharma customers have been our longest-standing customers, that's where we are introducing new products and growing relationships, as well as increasing the adoption, closing some of the adoption gaps between our largest customers in top 20 pharma and our smallest customers in top 20 pharma. Outside of top 20 pharma, there's a handful of customers that have embraced this predict-first approach. Fortunately or unfortunately, 2 of them got acquired last year, but there are many companies that understand the power of computation and are fully embracing it across their organizations to predict fully optimized molecules.

Another encouraging thing in that cohort is, actually, there's a fair amount of variance within the cohort of customers spending over $1 million. So that's an exciting opportunity that even within that group there's still significant potential for the customers that, obviously there are ones that are spending under $3.9 million, otherwise that wouldn't be the average to spend significantly more, which there already are customers in that cohort that are. So we're encouraged by that as well. I hope that makes sense.

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