Schrodinger, Inc. Common Stock 2026 Q2 Earnings Call

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. 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. 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 continued scale-up within large customers, uptake of new products, an improved biotech sector, and new customers across life sciences and materials science. A key driver of our growth strategy is introducing new products that expand platform usage and provide access to new budgets. We are excited about Bunsen, our AI co-scientist, which we officially launched in early access last week. We have optimized Bunsen to execute our validated computational methods and leverage our decades of molecular discovery expertise.

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 longstanding 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 tox 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 Schrödinger's platform. For molecular discovery, AI is a powerful tool enabled by the data used to train it. The more high-quality data, the more predictive the models.

By using rigorous first principles physics, we generate the accurate, reliable data required for AI models. This integration of the most advanced ground truth physics calculations and cutting-edge AI is the foundation of our computational molecular discovery platform. By continually expanding our platform capabilities and introducing new products, we are unlocking new budgets and broadening our user base across the biopharma and material science industries. 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, Rami, 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 material 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 million-$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, compared to $4.8 million in Q2 2025.

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 million-$228 million, representing 10%-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 million-$75 million, compared to our prior expectation of $55 million-$65 million, due to the recognition of a $10 million collaboration milestone payment from Ajax. Our operating expenses are expected to be less than in 2025.

For the third quarter of 2026, we expect ACV excluding contribution to be $41 million-$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.