Q3 2025 Earnings Call: Contradictions Emerge on Software Guidance, Pharma Discussions, and Clinical Strategy

Date of Call: November 5, 2025

Financials Results

• Revenue: $54.3M, up 54% YOY (Q3 2025 vs Q3 2024)
• EPS: $0.45 loss per diluted share, versus $0.52 loss in Q3 2024
• Gross Margin: Software gross margin 73% in Q3 2025, same as Q3 2024

Guidance:

• Software revenue growth for 2025 revised to 8%–13% (prior 10%–15%).
• Drug discovery revenue guidance raised to $49M–$52M (prior $45M–$50M).
• Software gross margin now expected 73%–75% (prior 74%–75%).
• Operating expense guidance unchanged; expect operating expenses lower than 2024 and cash used in operations significantly lower than 2024.
• $30M expense reduction announced in May (>50% realized) and additional actions (phasing out independent clinical development) to yield ~ $70M total savings, remainder realized in 2026.

Business Commentary:

• Revenue Growth and Software Success:
  
• Schrodinger, Inc. reported a 54% increase in total revenue for Q3 2025 compared to the same period in 2024, with software revenue reaching $40.9 million, which is 28% year-over-year growth.

• The growth was driven by strong execution across the business, particularly in software revenue, reflecting high demand for advanced computational solutions and the recognition of the importance of simulated data in AI and drug discovery.

• Drug Discovery and Collaborative Programs:

• Drug discovery revenue increased to $13.5 million in Q3 2025, compared to $3.4 million in Q3 2024.

• The increase was attributed to successful execution across a broader portfolio of collaborations, indicating progress in advancing collaborative programs.

• Operational Efficiency and Cost Management:

• R&D expenses decreased to $42.8 million in Q3 2025, a 16% decrease from $51 million in Q3 2024.

• This reduction was primarily due to lower employee-related expenses and the shifting of predictive toxicology expenses into software cost of goods sold, reflecting disciplined expense management strategies aimed at improving profitability.

• **Challenges and Market Dynamics:

• The company lowered its software revenue growth guidance for the year, expecting a range of 8% to 13% growth, down from 10% to 15%, citing slower-than-expected pharma scale-up opportunities and industry pressures.
• Despite these challenges, Schrodinger remains confident in its long-term growth potential due to increased industry demand for AI integration and efficiency in drug discovery.

Sentiment Analysis:

Overall Tone: Positive

• Management called out “very solid progress” and $54.3M revenue (+54% YOY), highlighted software growth and strong customer engagement, and reiterated optimism about long-term potential while prudently trimming 2025 software growth to 8%–13% to reflect timing of scale-ups (all indicating positive execution with cautious near-term realism).

Q&A:

• Question from Mani Foroohar (Leerink Partners LLC): A question about the implications of the guidance regarding the reduced spend year-over-year and trimming of OpEx. How should we think about that in line with your commentary around reduced focus on novel clinical development, et cetera? What does that imply in a longer-term time horizon about how we should think about your OpEx trajectory?
  Response: We've implemented a $30M reduction (more than half realized), plus ~ $40M impact from ending independent clinical development, putting us on a path to materially improve the profitability profile.

• Question from Mani Foroohar (Leerink Partners LLC): Do you guys think of formal profitability either in GAAP or cash terms as a meaningful milestone to pursue? Or is that not a metric that you guys think is really meaningful on its own?
  Response: Yes — profitability (GAAP or cash) is a meaningful milestone and we're taking concrete actions toward it, leveraging strong revenue growth and prior cash generation without raising external capital since 2020.

• Question from Scott Schoenhaus (KeyBanc Capital Markets Inc.): On the software guidance slowdown: what's changed, when did it start, and by cohort where are you seeing the slowdown?
  Response: Delays in pharma scale-up conversations and persistent biotech headwinds have slowed timing (not necessarily demand); renewals remain on track but visibility into closes is reduced, so we're cautiously optimistic about recovery.

• Question from Scott Schoenhaus (KeyBanc Capital Markets Inc.): On predictive toxicology: how is customer response in beta and when can you start monetizing?
  Response: Beta users exist and interest is high (Gates Foundation-funded work), but it's early — customers are engaged but it's too soon to quantify feedback or timing for broad monetization.

• Question from Matthew Hewitt (Craig-Hallum Capital Group LLC): By not advancing discovery into the clinic independently, will you seek partnerships pre-clinic and what does that mean economically?
  Response: Yes — we'll continue discovery and pursue earlier (pre-clinic) partnerships as before; the model has delivered strong economics (e.g., $150M upfront deals) and ~$600M generated over five years, so we expect continued value creation.

• Question from Matthew Hewitt (Craig-Hallum Capital Group LLC): Renewals are on track but new logos are weak—what will flip new customer signings?
  Response: Growth this year came from expanding within existing accounts; new-logo traction depends on biotech capital formation and closing ongoing conversations — encouraging early signs exist but conversion is needed.

• Question from Conor MacKay (BMO Capital Markets, on for Evan Seigerman): Can you expand on the delay for 3515 and when to expect data in H1 2026?
  Response: We've decided to complete PK/safety/PD data collection and analysis before disclosure; expect initial clinical data in H1 2026 (venue and exact timing TBD).

• Question from Unknown Analyst (Morgan Stanley): Can you share details about SGR-6016 NLRP3 and plans to progress it?
  Response: SGR-6016 is a selected development candidate with brain penetration and low-dose potential; preliminary partner discussions are underway and we plan to advance it via partnership rather than solo clinical development.

• Question from Dennis Ding (Jefferies): Why now decide to not do more clinical work independently, and any read-through to the Wee1 data?
  Response: The shift is strategic (sustainability and scale) not due to program failures; development to date went well, but partnering discovery-stage programs is more capital-efficient and enables broader value creation—no negative read-through to Wee1/SGR-1505 assessments.

• Question from Dennis Ding (Jefferies): Can you give an update on the Novartis partnership and progress since the announcement?
  Response: Excellent progress — teams are integrating Schrodinger's platform, advancing programs, and contributing to revenue; partnership execution is productive.

• Question from Unknown Analyst (on for Andrea Newkirk, Goldman Sachs): Will the ASH disclosures for SGR-1505 feature mostly the same patients with additional follow-up and what are the key takeaways?
  Response: ASH will present an updated data cut including aggressive patients (DLBCL) with a reported complete response and genomic profiling showing expected BTK/BCL2 resistance mutations, supporting MALT1's therapeutic potential.

• Question from Brendan Smith (TD Cowen): For predictive toxicology (Flare), will it be additive to existing users or a separate customer population and require a different sales approach?
  Response: Both — it will be an add-on for current customers (incremental spend) and will open new budgets (toxicology groups), implying additional go-to-market outreach beyond traditional discovery/computational teams.

• Question from Michael Ryskin (BofA Securities): On phasing out independent clinical development—was this driven by experiences with MALT1/Wee1 or by opportunity to scale discovery partnerships and bandwidth/economics?
  Response: Not driven by development failures (prior programs moved quickly); it's driven by the challenging clinical environment and the superior scalability/value of discovery-stage partnerships, allowing more programs to be progressed via partners.

• Question from Michael Ryskin (BofA Securities): Will future royalty/milestone economics be similar to prior large deals or change?
  Response: Historical trend shows improving economics as our track record grows; while not guaranteed for every deal, we expect continued improvement in terms as platform efficacy and reputation increase.

Contradiction Point 1

Software Guidance and Pharma Discussions

It involves changes in the company's software guidance and the nature of discussions with pharma companies, which are crucial for revenue projections and investor confidence.

What has changed in software guidance since August, specifically the pharma discussion slowdown? - Scott Schoenhaus (KeyBanc Capital Markets Inc.)

2025Q3: There have been delays in scale-up opportunities longer than anticipated. The challenges in the biotech sector have persisted. Some high-profile companies have shut down operations. - Ramy Farid(CEO)

What factors influence customers' transition from on-prem to hosted solutions? How will this transition progress over the next few years? What is the demand for integrated drug discovery and software solutions? - Unidentified Analyst (KeyBanc Capital Markets)

2024Q4: We have seen continued momentum with existing large pharma customers. - Ramy Farid(CEO)

Contradiction Point 2

Predictive Toxicology Pricing and Revenue Impact

It involves the pricing structure and revenue impact of the predictive toxicology solution, which is a key growth area for the company.

What does the guidance imply about reduced year-over-year spending and OpEx trimming? How should we view your OpEx trajectory in the long-term? - Mani Foroohar (Leerink Partners LLC)

2025Q3: That's a -- that's a $30 million expense reduction that we -- we believe we'll be able to achieve by December of next year. - Richie Jain(CFO)

How have customer conversations about platform investments changed in tone, and why has the company chosen to out-license the product at this development stage instead of continuing independently? - Evan Seigerman (BMO Capital Markets)

2025Q2: We have followed the $75 million guidance versus $72 million in Q2. So as I mentioned before, the revenue in the quarter was $74.8 million versus the $75 million guidance. It was -- we underperformed by $400,000. - Richie Jain(CFO)

Contradiction Point 3

Clinical Development Strategy

It involves a shift in strategic focus from internal clinical development to partnerships, which could impact the company's pipeline and resource allocation.

Why have you decided not to advance clinical work independently, and does this affect the Wee1 data? - Dennis Ding (Jefferies)

2025Q3: We have taken a strategic decision to phase out our independent clinical development activities. - Ramy Farid(CEO)

What assumptions underlie your 2025 drug discovery revenue guidance? What portion of the guidance is attributed to the Novartis partnership? What are your updated thoughts on the program in light of J&J’s first-generation molecule data? - Kyle Yang (Jefferies)

2024Q4: We have not given up on the possibility that some of our internal programs may be valuable. - Karen Akinsanya(President, R&D & Therapeutics)

Contradiction Point 4

Predictive Toxicology Revenue Recognition

It pertains to the timeline and expected revenue recognition for predictive toxicology, which could affect financial forecasts.

How should we model revenue recognition for predictive toxicity? What is the gating factor for advancing new clinical candidates? - Chris Shibutani (Goldman Sachs)

2025Q3: Predictive toxicology revenue will mostly be recognized in 2025, with some tail into 2026. - Geoff Porges(CFO)

How to view the drug discovery revenue cadence? What feedback have early customers given on predictive toxicology? - Matt Hewitt (Craig-Hallum Capital Group)

2024Q4: Predictive toxicology revenue will mostly be recognized in 2025, with some tail into 2026. - Geoff Porges(CFO)

Contradiction Point 5

Software Revenue Growth and Customer Dynamics

It involves differing perspectives on the growth and dynamics of the software business, which are crucial for understanding the company's financial trajectory and market positioning.

What does the guidance on reduced year-over-year spending and OpEx trimming imply for your long-term OpEx trajectory? - Mani Foroohar (Leerink Partners LLC)

2025Q3: Software revenue reached $32.3 million, down 7% year-over-year, with $15.5 million in Q3 versus $21.7 million in Q2. - Richie Jain(CFO)

What differentiates your predictive tox model from other preclinical non-animal simulators, and how does its pricing compare to existing offerings? - Brendan Smith (TD Cowen)

2025Q1: Software bookings increased 23% year-over-year, reflecting strong adoption by our customers. - Geoff Porges(CFO)