Schrödinger, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Schrödinger operates software and drug discovery businesses, applying its computational platform to commercial software and collaborative and proprietary drug programs.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $36.6 million | $64.8 million | Down 44% |
| Gross profit | $18.9 million | $45.7 million | Down 59% |
| Operating expenses | $86.3 million | $76.2 million | Up 13% |
| Operating loss | $67.4 million | $30.5 million | Loss increased |
| Net income (loss) | $(54.7) million | $129.1 million | Turned to loss |
| Basic and diluted EPS | $(0.76) | $1.81 basic; $1.75 diluted | Turned to loss |
- Revenue mix: Software products and services revenue rose 4% to $33.4 million. Drug discovery revenue fell 90% to $3.2 million.
- Margins: Consolidated gross margin was approximately 52%, versus 71% a year earlier. Software gross margin was 76% versus 78%; drug discovery recorded a $6.5 million segment gross loss, compared with $20.6 million segment gross profit.
- Operating costs: Research and development rose 24% to $50.6 million, primarily reflecting greater program and personnel spending. Sales and marketing rose 11% to $10.2 million; general and administrative expense declined 3% to $25.5 million.
- Other income: $13.2 million, including $8.1 million of unrealized fair-value gains on equity investments and $5.0 million of other income, primarily interest. Q1 2023 included a $147.3 million realized Nimbus investment gain and $35.7 million in fair-value gains; those items materially boosted prior-period earnings.
Cash, liquidity and obligations
- At March 31, 2024, cash and cash equivalents were $130.2 million, restricted cash $4.6 million, and marketable securities $300.8 million. Together, these totaled $435.7 million.
- Operating activities used $39.3 million of cash, compared with $31.1 million used in Q1 2023. Investing activities provided $5.1 million; financing activities provided $8.0 million, including $7.6 million in net ATM proceeds. Cash, cash equivalents and restricted cash declined by $26.2 million during the quarter.
- The company reported no conventional borrowings in the provided balance sheet. Operating lease liabilities totaled approximately $125.9 million; undiscounted future lease payments were $190.9 million, extending through 2037.
- Current assets were $493.7 million and current liabilities $106.5 million. Deferred revenue totaled $57.5 million, of which the company expects to recognize approximately 86% within the next 12 months.
- Management believes existing cash, cash equivalents and marketable securities will fund operating expenses and capital expenditure requirements for at least 24 months. The company also has $242.2 million remaining available under its $250 million ATM program as of quarter-end.
Material changes and operating developments
- Software growth was led by hosted subscriptions, up 61% to $7.2 million, and professional services, up 32% to $2.7 million. On-premise software declined 12% to $17.6 million, partly because fewer multi-year deals generated upfront revenue than in the prior-year quarter.
- The drug discovery revenue comparison was affected by timing and milestone mix, including $25.0 million in BMS milestone revenue recognized in Q1 2023. In Q1 2024, BMS elected not to advance the SOS1 program; rights reverted to Schrödinger, which plans to assess the program and possible next steps.
- In March 2024, Schrödinger submitted an IND for SGR-3515, a WEE1/MYT1 inhibitor; the FDA cleared it in April, after quarter-end. The company expects to begin a Phase 1 trial in solid tumors in Q3 2024. It anticipates initial data from Phase 1 trials of SGR-1505 and SGR-2921 in late 2024 or 2025.
- The company sold 282,963 shares through its ATM during the quarter for $7.6 million net proceeds, resulting in modest shareholder dilution.
Outlook, risks and unusual items
- Management expects research and development spending to increase as it advances proprietary programs and its computational platform. It also expects drug discovery revenue to fluctuate with milestone timing and collaborators’ program decisions; no specific revenue or earnings guidance is provided in the filing text.
- Schrödinger continues to incur operating losses and negative operating cash flow, and expects losses over the next several years. Management’s 24-month liquidity outlook depends on assumptions that may change; the company says it may need additional financing.
- Key business risks include clinical and regulatory uncertainty, dependence on collaborators and third-party research and manufacturing providers, software customer renewals and competition, and the possibility that proprietary programs fail to demonstrate safety or efficacy.
- Two customers represented 28% and 12% of accounts receivable at quarter-end; two customers represented 41% and 20% of contract assets. No customer accounted for more than 10% of Q1 revenue.
- The company accrued $2.5 million for a probable contingency relating to an audit by a royalty partner. It reported no material legal proceedings. Management concluded disclosure controls were effective at the reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether software revenue growth, especially hosted subscriptions, can offset lower upfront on-premise revenue and volatile collaboration milestones.
- Whether the company can manage its cash burn and maintain the stated 24-month runway as R&D investment increases.
- Clinical trial progress and data timing for SGR-1505 and SGR-2921, and the planned Q3 2024 start of the SGR-3515 trial.
- Consequences of BMS returning the SOS1 program, including future development spending and whether any collaboration or licensing opportunity emerges.
- Potential dilution from further ATM sales, and the amount and timing of the accrued royalty-partner audit contingency.