Schrödinger Inc. Q1 2023 Earnings Call
Thank you for standing by welcome to <unk>.
<unk> Conference call to review first quarter 2020 financial results.
My name is Joanna Adelphi your operator for today's call.
Thank you and good afternoon, everyone welcome to today's call during which we will provide an update on the company and review our first quarter 2023 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 Dotcom here with me on our call today are Rami Furry Chief Executive Officer, Geoff Porges, Chief Financial Officer, and Karen Atkins Sanya President of R&D Therapeutics.
Following our prepared remarks, we will open the call for Q&A I'd like to remind you that during today's call management will make statements related to our business that are forward looking and are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095, including without limitation statements related to our outlook for the full year 2020.
Three our quarter ending June 32023, our strategic plans to accelerate the growth of our software business and advance our collaborative and proprietary drug discovery programs, the timing of potential IND submissions and the initiation of clinical trials for our proprietary drug discovery programs, the clinical potential and favorable product.
<unk> of our compounds are expectations related to the use of our cash resources as well as our future operating 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.
Really from what we project today 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, 2023. These forward looking statements represent our views only as of today and we caution you that 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 with that I'd like to turn the call over to Rami.
Thanks, Sharon and thank you everyone for joining us today, we're very pleased with our strong start to the year, we reported quarterly revenue of $64 8 million or 33% increase over the first quarter of last year, we strengthened our balance sheet significantly and we continue to advance our pipeline.
Schrodinger has been pursuing division of conducting molecular discovery through integrating the accuracy of physics with the speed and scale of machine learning.
This presented many challenges when we started 33 years ago, but we remain steadfast and eventually overcame them and even founded companies along our journey to help validate our approach today. We have many success stories that have validated our approach and we believe the benefits of using our platform are becoming irrefutable. We are thrilled with the recent <unk>.
Progress of the drug discovery programs are companies, we co founded including Nimbus structure at Morphic. These programs, which are now in the clinic service very strong validation of our unique approach and gives us tremendous confidence in the potential of our own proprietary pipeline.
As you will hear from Karen we have made very important progress with our pipeline. This quarter. We now have two phase one studies of our <unk> inhibitor <unk> five underway and our IND submission for our <unk> seven inhibitor STR 2921 is on track for the first half of this year, we're also making excellent progress.
Across our collaborative programs, including advancing our <unk> program to development candidate status. This program is partnered with BMS and contributed significantly to our reported drug discovery revenue in the first quarter.
Our computational platform is the engine that enables the discovery of better therapeutics and novel materials faster and at lower costs compared to traditional methods.
We continue to invest in our platform to push the frontier as a molecular discovery. Our initiatives include focusing on expanding the number of addressable targets. We for example, recently published research showing how our computational methods can be used to refine AI generated protein structures to sufficiently high accuracy to be useful in.
Physics enabled drug discovery.
Our Q1 results illustrate the broad opportunities we have to create value from our unique computational platform. We reported strong contributions from our software business significant milestones in new capital from our collaborations and successfully transitioned our proprietary portfolio into the clinic with this strong start we are well positioned.
<unk> to deliver on our objectives for the year.
Before turning the call over to Jeff I want to highlight that last week, we published our inaugural corporate sustainability report, while we've always been committed to doing the right thing. This report represents a major milestone in formalizing our strategy around key ESG matters I would also like to take the opportunity to express my deep gratitude for the.
That occasion and hard work of all our exceptionally talented employees, who are critical to achieving our mission.
Jeff Thank.
Thank you Rami and good afternoon, everyone.
<unk> had an excellent quarter in Q1, we made significant progress with our pipeline we reported a record quarterly revenue results. We showed continued positive trends in our expense and margin performance and we strengthened our balance sheet materially.
Our results were consistent with our overall expectations and financial guidance for the quarter and we remain very positive about our business outlook for the year.
Let me turn to the financial results for the quarter.
Software revenue for the quarter was $32 million, which was just under 33 million we reported in Q1 2020 to Q.
Q1, 2022 benefited from several large multi year deals that were not up for renewal in Q1 2023.
As expected our software revenue declined compared to Q4, which we implemented the multiyear annual software contract that was signed in the last few weeks of 2022.
Drug discovery revenue for the quarter was $32 6 million and more than doubled compared to Q1 2022.
$25 million of the revenue was associated with the recognition of a milestone in our BMS collaboration but reached development cabinet status during the quarter.
The rest about discovery revenue came from a variety of collaborations and programs.
Total revenue was $64 8 million, an increase by 33% compared to Q1 last year by 14% compared to Q4 2022.
Our results this quarter reflect the benefits of our balanced business model with software and discovery collaborations contributing similar revenue and driving total revenue to our highest ever quarterly total.
Cost of revenue for the quarter was $19 million decreased by 8% compared to Q1 2022, but increased by 5% compared to Q4, the decrease year over year reflects the progression of our drug discovery business reallocation of internal discovery teams from collaboration programs to proprietary programs and reduced royalty obligations and our software business.
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The overall gross margin increased to 71% this quarter compared to 58% in the second quarter of 2022 as.
As we indicated previously we expect the software gross margin to generally trend in line to slightly higher than last year and also anticipate that the profitability of that drug discovery business will trend positively, although it will bounce around widely from quarter to quarter, depending on milestone payments and revenue recognition.
Total operating expenses were 76 million compared to $57 million in the same quarter a year ago R&D was $41 million, an increase by 46% from $28 million in Q1 2022.
The increase was driven by increased head count as we added staff to support new programs and advance our existing programs into late preclinical and clinical development and as we reallocate our teams from collaborations to proprietary programs.
This quarter, we were also absorbing the forecast of our structural biology solutions organization, formerly known as external who have now been deployed exclusively to the characterization of protein structures for our internal drug discovery and collaboration activities.
<unk> expenses also increased year over year, driven by the progress of our existing programs and the addition of early undisclosed programs to our portfolio.
Technology spending also increased.
As our portfolio broadened and advanced we expect R&D expenses to increase through the year as we progress the most advanced programs in our portfolio into clinical development.
And increase our investment into our earlier molecules and programs.
We intend to outline the progress and potential of the most advanced programs and also discuss several of the earlier programs are first shrugging your pipeline day, which we're planning for September this year.
During the quarter, our sales and marketing expense was $9 million, an increase by 37% compared to the prior year Q1.
The increase was mainly due to increased staffing to support our geographic expansion to commercialize into new industry verticals and to support our growing number of global accounts.
Sales and marketing expense is likely to follow the distribution of our software revenue for the rest of the year.
G&A expense was $26 million in Q1, which is an increase of 19% compared to Q1 2022.
This increase was due to higher head count royalty obligations associated with the nimbus distribution and accelerated amortization of intangible assets related to our external acquisition in Q1 2022.
Travel and lease expenses have also increased and we expect quarterly G&A to be relatively stable through the balance of 2023.
Overall, our loss from operations was $30 5 million in Q1 compared to $28 6 million in Q1, 2022, and $28 5 million in Q4 2022.
Other income items were highly significant this quarter, we recognized a gain of $147 million from Nimbus in Q1 as a result of the sale of the TIK two program to Takeda Pharmaceuticals.
We also reported a gain of $35 7 million from the change in fair value of equity investments, which compares to a loss of $6 2 million. In Q1 2022. This change reflects the mark to market valuation of our equity ownership instructor therapeutics on the market adjustment and evaluation of our ownership stake in <unk>.
Other income was $2 9 million reflects the higher interest we are receiving on our investment portfolio.
Overall total other income was $186 million and we reported noncash tax expense of $26 4 million.
As a result of these items, we reported net income of $129 million and earnings per share of $1 75 on a fully diluted basis.
We expect the tax liability that we reported in Q1 to be progressively reverse through the remaining quarters of the year as we incur expected operating losses in future quarters.
Our non-GAAP net loss for the quarter was $27 5 million in cash used in operating activities. During the quarter was 31 billion based on the results and events in the quarter, our cash balance improved significantly as of March 31st Twin joined three we reported cash resources and marketable securities of $532 million compared to 456.
At the end of December 2022 subs.
Subsequent to the end of the quarter, we received the cash from our partner BMS for the development milestone and the second part of the distribution from Nimbus. While these payments were included in our Q1 2023 results the cash out of the $61 million to our cash and marketable securities balance subsequent to the end of the quarter.
I'll now discuss our financial guidance.
Our revenue guidance for the year is unchanged at 13% to 17% growth for software revenue of 70 to 90 million for drug discovery revenue.
We anticipate that Q2 software revenue will be in the range of $27 million to $31 million and I expect the balance of our drug discovery revenue guidance to be distributed more towards Q3 and Q4 than Q2.
Compared to Q4 Q2 office relatively few of the large customer renewal and new business opportunities that drive our incremental revenue.
That reason, we do not forecast has been growth in the quarter.
Our expectations for profitability and expense growth are unchanged and we continue to expect our cash position at year end to be above our cash position at the start of the year.
I'll now provide a brief update on corporate and business development activity.
The last few months have seen remarkable progress for sure I think as partner companies.
Our partners Nimbus Therapeutics, Morphic therapeutic unstructured therapeutics of all advanced as companies and this drug developers.
All three of these companies shredding, who was a founder and desktop and drug discovery partner.
They've all been long standing beneficiaries of our technology and our scientists had key roles in the discovery of the drug candidates that are in clinical development.
We congratulate all three companies on their success and are proud of the contributions of our staff and technology have made to their organizations.
As equity holders in these companies they remain significant sources of value for Schrodinger.
And we see opportunities for further success and value creation for each of them in the future.
More importantly, the success of these companies provides even more validation for our technology platform and it's the same technology platform and team that are building a proprietary portfolio.
We have other equity investments in emerging companies in our portfolio now and are actively considering more opportunities to invest that time technology and capital into other entrepreneurial ventures.
Beyond that new company activity, we continue to be engaged in discussions about new collaborations and specific program partnerships with companies across the industry.
With the value of our inventions, becoming even more apparent we plan to be selective and thoughtful about our commitments to new partners.
We have the resources and increasingly the capabilities to advance programs on our own account and will only partner them. When we believe the terms match our assessment of the risk adjusted value of the program, including the value of the unique product attributes and features that that technology could first.
We see many opportunities for adventure corporate and business development activities to continue to add value to assure that you were in 2023 I'm willing to the future.
I'll now turn the call over to counter discuss our collaborations in our pipeline.
Thank you, Jeff and good afternoon, everyone.
We are really pleased with the advancements we've made so far this year across our pipeline of proprietary and collaborative programs.
We continue to see success from our drug candidates discovered with our collaborators such as more fixed alpha four beta seven inhibitor. We currently have nine collaborative programs in the clinic, highlighting our strong research team, who work with our partners to design differentiated molecules leveraging the full power of Viacom.
<unk> platform.
This quarter, we also reported that the Southland <unk> precision oncology program, which we licensed to BMS as part of a multi target collaboration has advanced the development candidate status.
Now the China Therapeutics team has transitioned the program to BMS for preclinical and clinical development, we have the opportunity to an additional development regulatory and commercial milestone payments as well as royalties on sales as the program progresses.
We are continuing to work with BMS on oncology immunology and neurology programs within the collaboration and we are pleased with how these programs are progressing.
The achievement of the significant milestone payment represents an important turning point for our therapeutics business and shows the value creation opportunity from our more recent drug discovery business development activities and continent programs.
Turning to our wholly owned programs I'll start with an update on STL 15, one five hour more one inhibitor.
Our clinical development team is pursuing a global development strategy to gather safety pharmacokinetics pharmacodynamics and preliminary antitumor activity. We are pleased that dosing is underway in patients with advanced B cell malignancies. We've also begun dosing and a second study of S. G. L 55.
In healthy subjects. This study is designed to generate additional data on the profile of S. G. F 15 F. Five to support our clinical development plans. The healthy subject study includes drug drug interaction and food effect cohorts and we plan to leverage the data from these pharmacology assessments to inform our.
Ongoing and planned trials in B cell malignancies, and potentially other indications.
Moving to S. G. R 29, 21 hour C. D. C. Seven inhibitor, we are nearing the completion of our IND, enabling studies and are on track for an <unk> submission to the FDA in the first half of this year.
<unk> 29, 21 exhibit strong antitumor activity in multiple preclinical patient derived AML models independent of genetic drivers both as monotherapy and in combination with standard of care agents base.
Based on these data we are planning to initiate a phase one study in patients with relapsed refractory AML.
Earlier this year, we selected our we one development candidate STR thirty-five 15th which is shown durable antitumor activity in preclinical models used to study more advanced we want inhibitors.
Clinical data from other companies. We won programs has provided encouraging evidence of clinical activity in several forms of cancer with high unmet need including proof of concept and nutrient and ovarian cancers. We are excited about the profile of S. G. F 35, 15 and believe it may offer advantaged.
Is over prior inhibitors, including minimal drug drug interaction potential and optimized kinase selectivity.
In addition, our translational work has progressed substantially within the identification of potential synthetic lethality and relationships and sensitive tumor types to inform our phase one trial design. We are continuing to characterize S. G. F 35, 15, as we move through IND, enabling studies to enable a 90 submit.
<unk> to the FDA next year.
To date, we have primarily proceed programs and design challenges for targets with previously known proteins stretches following the integration of our structural biology capabilities. In 2022, we are making important strides in obtaining novel protein structures to further support best in class products opportunity.
Cheese, so targets with strong evidence of activity in humans.
We are continuing to initiate new programs that we may elect to partner or advance independently to key inflection points. We have several undisclosed programs at various discovery stages in multiple areas, including oncology and immunology.
In summary, we are very pleased with the progress we have made this quarter and expect continued advancements in 2023 across our pipeline of collaborative and proprietary programs.
We're excited about the work we are doing to advance better medicines to patients and we look forward to sharing more details about her work at pipeline day in late September I will now turn it back over to Rami. Thank you Karen as you can hear we are off to a strong start this year and are very well positioned to deliver on our <unk>.
Goals for the year, we look forward to keeping you updated on our progress over the coming months at this time, we'd be happy to take your questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone. If you would like to withdraw your request. Please press star followed by two.
If you are using a speaker phone please let the handset before pressing any keys.
First question comes from that Quinn head of Morgan Stanley . Please go ahead.
Hi, good afternoon, thanks for taking our questions. So we had two on drug discovery revenues first do you still hold a $100 million as a potential target for this line item and then secondly for the $70 million to $90 million guidance could you just remind us what the book into this guidance contemplate.
Yes.
Sure.
So yes, we still have.
The goal of achieving $100 million this year guidance of 70 to 90.
Really good quarter as you can see in Q1 with the achievement of the source one milestone from BMS.
We see a number of paths to Kevin to.
Into the guidance range, yeah, but also to get into that strategic goal as we indicated when you provided the guidance.
We are.
Contemplating significant business development activity.
GE as they go.
No.
But it is not necessary to.
Kevin significant contribution to get to the low end of the guidance right.
No.
Yes.
We're still maintaining that guidance.
As I indicated my commentary, though.
The revenue outlook.
Towards the back half via just because of the timing of all the elements that contribute to that range.
Understood and if I could ask a follow up on that on that question. Then so if there is a point in the year at which you could revisit the guidance and think of potentially moving it upwards would it then be in the second half of the year when you'd have that clarity.
As I just suggested.
All of this is contingent upon progressing business development discussions, we don't want to signal.
The cadence of those discussions or the timing.
If there's something to announce them.
But then of course, we would.
To update our guidance on a quarterly call just as we would normally do throughout the year.
Okay got it thank you.
Thank you. The next question comes from Michael Yee of Jefferies. Please go ahead.
Hey, Thanks, guys that's it.
For Michael and thank you for the update I have a question on software guidance for next quarter. So I'll, let you got previous years, the cadence and decrease in Q2 is not unusual but just curious on the year to year guidance mid point, which is just below your last year revenue, which I believe was.
30 million for software.
Well what are some factors here that might have driven this increase then.
Do you have any comments on whether this.
Might be the trend for the rest of the year keeping in mind.
Full year guidance is unchanged at 13% to 17%.
Sure.
So yes. Thanks for the question Q2 guidance reflects our current expectations for our renewals and continuing software contracts during the quarter.
The outlook is affected by the size and number of contracts that are up for renewal in the period and the opportunities that.
The significant increases in scale and value.
Put simply the customers in Q2 are relatively small in terms of their annual contract value because of this mix of customers. The absence of biotech IPO and follow on financing activity is most acutely felt in this period.
The opportunities for growth in our business.
Also the alignment with our commercial activities are increasingly focused on the large global customers.
So those customers are increasingly concentrated at the end of the year.
No.
Look towards the end of the year, we're already actively discussing new million dollar plus software contracts and increases in existing contracts with more than a dozen global biopharma customers.
A number of these are likely to be multimillion dollar multiyear contracts.
We also expect a large multiyear contract that we signed in Q4 2021 to be renewed in Q4. This year. It's these discussions and they are potential without the PNR confidence in our guidance for the full year.
Is there anything you'd like to add thanks, Jeff that was.
Perfectly stated I agree with all of that I just want.
I want to emphasize that we're feeling.
Really confident about the outlook for the year given the stage of these discussions a number of them and the enthusiasm that we're seeing from our customers to really deploy our platform on their discovery programs at scale.
The key I think you know I've been doing this for a long time and I can see a real clear shift.
And the nature of these discussions I think it can actually be summarized.
By saying that companies are feeling more of a sense of urgency.
To fully deploy our technology on their programs and this is really giving us increased confidence that these deals will close.
They come up for renewal later later in the year.
Great. Thanks, so much.
Thank you. The next question comes from David Lebowitz from Citi. Please go ahead.
Thank you very much for taking my question.
Specifically on on cadence as we go through the year on the software side I know that.
Second quarter and third quarter historically, it had been down quarters.
Relatively speaking.
Uh huh.
You've given you gave guidance for four.
<unk>.
For the full year.
<unk> maintained does the balance of.
But I guess guided that shift from <unk> to <unk> is that something we think of is moving towards all towards the yearend or does.
Does some of that gross find its way into <unk>.
Thanks for the question David.
Not giving guidance for Q3 at this stage, but I think from my answer too.
Great question.
You can tell but where we have line of sight to really substantial renewals in Q4, and we do think there are opportunities.
In Q3 that can contribute to the quarter end.
Just to give some of that growth, but at this stage. We're not updating you are providing guidance for Q3, it's relatively early days, but we're very confident about the back half of the year and about our full year numbers.
Would it be fair to say I mean every every year pretty much since 2019, the fourth quarter as a percentage of annual as ticked up would it be fair to say that trend is probably going to continue in 'twenty three as well.
That's definitely a fence I don't worry.
Give you a sense of that.
That percentage only because.
The conversations that I mentioned is it Rodney alluded to.
So looking at the timing for those conversations come into fruition.
But I think as a general observation I think youre correct.
Right.
Thank you for taking my questions.
Thanks, David.
Sure.
Thank you. Your next question comes from Ben Siegelman at BMO Capital markets. Please go ahead.
Alright. Thank you so much for taking my questions and congrats on all the progress on the quarter, so with some meaningful pay us some from some of your partnerships success with more fed.
Success with some of your partners I guess, how are you thinking about capital allocation now that you've had some more revenues coming in are you more focused on acquiring assets that you can maybe you utilize your platform or.
Clearly investing in R&D in your own capabilities, how do you think about that going forward. Thank you.
Thanks for the question Evan I think.
We've signaled in my prepared remarks.
Comments were.
Continuing to invest substantial capital into our platform.
And.
My sense from being here for about nine months now is that we're in a very dynamic environment with lots of opportunities.
Two to continue to prosecute this platform, but we're also very excited about the proprietary portfolio in particular.
And the opportunities that we have there so our first priority.
Above all others is to continue to invest.
Platform and our own portfolio.
As you pointed out very well capitalized to do that.
We are looking at additional opportunities you can hear from Charles comments about enabling more targets for our platform. We think that's a very sensible adjacency.
Bookings active way.
Putting capital there and you've seen us already do that I'm, not telegraphing anything specific but that's a logical.
<unk> of the.
Value creation from our platform.
Beyond that.
Well capitalized company in an industry thats going through a fair amount of disruption right now so.
We're always engaged in conversations but.
I don't think that.
We were most excited about what we're doing ourselves on our own account, we think we have a highly differentiated platforms.
Yes, exactly and I'll just add.
We see ourselves and I think.
The industry sees us as the gold standard in really the leader in this space and we very much intend to keep it that way.
Continuing to invest in the underlying science and continue to make the kinds of breakthroughs that are having such a huge impact on on discovery projects.
Thank you for that I appreciate it.
Yes. Thanks.
Thank you. The next question comes from Chris <unk> at Goldman Sachs. Please go ahead.
Yes. Thank you very much two questions Jeff since you've joined now for nine months and had a chance to sort of look under the hood at the books and thinking about how contracts are structured and whatnot I think historically what investors have struggled with is.
Trying to get an understanding of visibility about how that you know.
How you have visibility in the guidance get shake the Q&A discussion from this earnings report that seems to also be the case is there something that you're observing I see that youre doing a poor quarters rolling cumulative revenues for the company. But then you think about the approach to the way your contracts are structured that we see as a potential way for you to strengthen your visibility and in turn improve.
And then a second question.
Much congratulations on all of the clinical development and success of the collaborators Marshfield, that's certainly a tremendous outcome. There is there some way that you can translate that in any quantify what form. It's clearly has a halo effect, but is there anything that somehow Ken.
Quantifiably generate greater conviction in your potential customers cause <unk> do one, but then is there an assurance that that can be replicated on the forward I suppose would have to be in their mind, just curious how youre thinking about presenting that beyond the obvious success the revenues to the collaboration.
Okay.
Yes, Chris.
I'll start off and talk a little bit about the visibility on software.
A contract and then maybe Rob you could talk about the sort of secondary effects that we're seeing from from things like water. It can have that spilling over to our participation in the market or industry.
Industry.
So just following up on the physical himself.
As you can imagine Chris.
I prefer that we had like a very steady sort of through the year revenue ramp up.
Yes of course.
Mike.
Allies your lives easier.
Thank you ever think more predictable.
The reality is that our current call site.
That revenue is heavily driven by those large customers and they tend to make this step ups at the end of the year. We go through the full year R&D cycle do we like this that we felt like.
How much how many more people who want to use it how many more programs have many more licenses and thats what bonds.
As you know there are a number of different <unk>.
<unk> for software.
Sales and licensing and revenue recognition contracts currently drive.
Revenue recognition that youre seeing in that.
Every skewing upfront.
Yes, certainly.
Contemplating whether they are things that we can modify contracts, particularly as we're shifting.
More and more over time.
Sure.
Loud hosted relationships.
That that could alter that.
Got it that's been smooth it out a little bit.
Yes.
Not something that we are ready to implement now.
We're in trials and changes to our contracts and how we go to market.
I think that it would certainly.
It would behoove us to take a hard look at that so you can imagine with join that but again.
Reiterate.
There is a huge amount of excitement about that technology and those largest customers.
We're not going to hold up realizing the potential of that excitement.
So China and drive it to a certain format of contract revenue.
Primary focus is growing the business.
And capitalizing on these opportunities yes, Robert you want to talk about yes, I will add that.
Anything that.
Jeff said was right, but also I think it's important to point out that we have we have gotten pretty good at predicting.
The quarter's end and we've been really really good about meeting our guidance and we have a long track record of that so I hope that we've gotten to a point where you.
You can trust us when we when we talk about.
Our guidance and what we see in future quarters.
Full year now I'm going to try and answer. The question you asked the second question, Chris, but I won't go for too long in case I'm not answering your question and please tell me if im not so.
The.
It's really become I mean, we're really excited about the validation that we're getting from our partners.
They go back quite quite a ways, we talked about nimbus at Norfolk and structure, but also our collateral our more recent collaborations and of course, our internal programs.
And we're that's pretty expensive really overwhelming.
Set of validation that I think is unique.
For a platform company and we're really putting a big effort into getting that story out talking about them and you know we're so fortunate to have fantastic partners that are not shy about participating now we have a lot of our partners are joining us in those discussions and talking about our role in the technology and expertise that's been incredibly high.
So as you can imagine we have lots of internal lots of meetings in various venues in which we can present that data and I can tell you that and this is what I was saying before there is no question that our heads of research and pharma companies are noticing and it's really changing the.
The nature of the discussions I think there's enthusiasm we're talking about is the direct result of us getting those those really compelling.
Stories out there.
Did I answer your question sorry, Yeah, no that was helpful. I appreciate the perspective, Jimmy and Jeff Yes.
Okay.
Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Next question comes from Michael Vice Skin at Bank of America. Please go ahead.
Great. Thanks for taking the question guys.
A couple for me real quick one is.
The past you've sort of given us a lot of color on your customer mix and your customer exposure.
Certainly recognize that a lot of it is biased towards.
Larger pharma and larger bites on the software right.
Im just wondering what the tail end of that the smaller biotechs are you seeing any change in terms of conversations in terminals <unk> towage.
And just in the last couple of months, obviously, there's been a lot of that.
Get there.
It's a small part of your mix, but still I'm. Just curious have you seen any deterioration in that part of your customers.
Alright.
Jeff do you want to take the FERC, where you're able to yes, and then just to come back.
The customer mix.
As we've said in the past normally if I take the full year of the smaller biopharma companies as a relatively small component of our revenue but.
Well to give you a little bit of context. The Q2 average customer size is less than half of the full year average customer size.
So that's just.
Makes a wind customers.
Renewing those contracts.
That's why I highlighted in my earlier answer.
Emerging companies being financed.
Is most felt in that sort of a quarter now what we're seeing.
So it's the absence of new meaning we're not seeing a.
New competition show up and say, Okay, we want to sign a significant software contract and start add like discovery activities.
We are definitely positioned to have accomplished have conversations with.
Venture capitalists with investors in some kind of companies that are always virtual companies that would like to use our software to go after a particular target we're engaged in those discussions, but the volume of them and the opportunities really are what they had been in prior years, but the counter to that is that the existing customers.
Generally sticking.
Yes.
Increasingly they have been using our technology for their drug discovery efforts for 2345 years and they're not going away. It's just the absence of good new that is.
Giving out contributing to that revenue guidance. So that's about it so hopefully that helps answer your question.
Okay.
I think it was there a second part I think that was it right.
Yes, well second part I'm sorry.
Sorry.
That was the first part the second part is unrelated to that but second question is sort of if.
If you look at your drug discovery revenue this year and you look at sort of the mix.
Cash inflows you've recognized year to date and some of the comments you made about <unk>.
Really positive contributors to the balance sheet and as we think about drug discovery going forward.
We continue to be.
Meaning full and that's a growing part of the business. So you roll that together and you're rolling you add in the gross profit dollars generally from software.
Sure.
<unk> the area, where your free cash flow breakeven, sometimes positive, sometimes a little bit negative, but starting this year and potentially going out.
Is that change your perspective in any way in terms of your rate of spend on internal programs. If you think about it from a we are now essentially self sufficient.
Yes.
Really really good question.
So let me a question.
We all think about.
Quite a lot.
A conclusion I think from those discussions is that we have a unique technology.
Our unique time point, and probably a unique opportunity to invest in our technology and investing in the programs that are emerging from the technology.
So.
Youre right.
Kind of look ahead at some trajectories.
How do you see the picture that you described.
But I think that we.
<unk>.
If we failed to capitalize on all of those uniques that I described.
We will fail to achieve the value that we think that we can achieve them, we can deliver for investors. So.
I think that.
<unk>.
We want to really take advantage of all of these opportunities.
Okay.
Alright, thank you.
Thank you. The next question comes from Gaurav <unk> from Bank and Bank. Please go ahead.
Hi, Thanks for taking my question. This is Anna on for Gras and.
Two questions one regarding nimbus and Takeda given the $147 million cash received which was 4% of the 4 billion upfront payment.
Should we assume a similar percentage to schrodinger.
The potential $2 billion in sales based milestones, which would imply around $74 million in cash if you.
If achieved.
And then also to start the year are you seeing more software revenue.
<unk> from existing customers, increasing their consumption and new customers licensing software for the first time.
Okay.
Let me.
The first question.
Yes is the answer.
We aren't.
We are assuming that we get the additional distribution for those last two revenue milestones.
The significant revenue tranches that will trigger those milestones, but yes, if those milestones occur we would assume that the distribution as you calculated.
And then yes go ahead, yes.
Sorry, you go ahead no go ahead.
So really really simple and it's what we've been saying that the answer to the question about where the growth is coming from absolutely coming.
More and more from existing customers, increasing their usage of the software and more and more from larger customers, which again is why we're seeing this shift to Q4.
Okay. Thank you so much.
Yes. Thanks.
Thank you I'm showing no further questions at this time that concludes today's call you may now disconnect.
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