Scott Schoenhaus: Hi, team. Thanks for taking my question. So I just wanted to follow up on Vikram’s question on the software. So it seems like the wide guidance range has to do with whether or not you can or how much of the book you can shift from on-prem to hosted. Is that correct? And would you be able to… Is it easier to shift these sort of contracts from on-prem to hosted with larger clients, mid-sized clients, or smaller clients? Just trying to get a sense of the scale here on this shift from on-prem to hosted.
Geoff Porges: I just want to clarify something. The hosted on-prem shift is a small component of the trends in our business. I mean, it’s what I call without deliberately, but the bigger factor is whether our business materializes in the form of multi-year contracts or single-year contracts. Because if we do an on-prem annual renewal, then all of the revenue is recognized or almost all of the revenue in the year in which that contract is signed. And most of it in that quarter. But if we do a multi-year on-prem, it’s even more of the revenue is recognized in that quarter. So the biggest variable is the mix of duration of contract. The second biggest most important variable is the size of contract, whether we’re scaling up big contracts or small contracts.
And then probably the least influential variable is the hosted versus on-prem shift. But to the extent that there is a shift to hosted in the year in which that occurs, it reduces the reported revenue growth rather than increasing it. So that does have some effect, but I don’t want to convey that that’s most of the effect.
Ramy Farid: Yeah, and then just the answer to the other, that’s absolutely right. And just to touch on the last part of your question, there’s really no barrier to companies shifting, for us to shift companies from on-prem to hosted because it’s not actually the software itself or the compute engine that’s being hosted. It’s just the license server, which is a trivial piece of code that just controls the licensing. So it doesn’t matter large, small, and it’s completely under control and there doesn’t seem to be much resistance. In fact, a lot of companies like it when that’s being managed because we can serve them better. But just to be clear, 99.999% of the computation that’s being run is still on-prem. It’s just that tiny little bit of code. And when that little bit of code is hosted, then the whole entire contract is considered hosted. That’s not our rule. That’s the rule. Okay, I hope that helps.
Scott Schoenhaus: Yeah, that’s all very helpful. Can I just sneak in one follow-up? Geoff, you mentioned about the opportunities in the smaller biopharma biotech potentially developing. Is any of that baked into that growth range on the software side for this year?
Geoff Porges: We have taken a cautious approach to the outlook in the emerging companies. We haven’t accounted for any recovery in capital availability or new companies showing up. Let me give you a little bit more color. What we saw in 2020 and 2021 was a lot of new customers who were relatively recently capitalized companies showing up and saying, we need to discover molecules against our proprietary targets quickly and setting up software contracts with us. That slowed down in 2022, and the natural flux amongst that population of smaller companies, more companies dropped out than came in. So we are assuming that that reverses itself and we go back to 2020 or 2021.
Scott Schoenhaus : Great. Thank you so much.
Operator: Our next question comes from a line of Chad Wiatrowski with TD Cowen. Your line is open.
Chad Wiatrowski: Hey, everyone. This is Chad Wiatrowski on for Steven Mah. I guess on the software revenues, how does a validating expansion of an agreement like with Lilly, for example, in the fourth quarter, how does that translate when you’re looking into that tier two customer expansions and what does that specifically validate about the platform itself?
Ramy Farid: Yeah, that’s a great question. We really see that as highly validating and the beginning of an important trend of adoption of our computational platform at scale by the pharma industry overall. It’s extremely unlikely that, and it’s not just Lilly, there are a number of customers that are, you see what our KPI is for, for example, customers spending over $5 million. We believe a critical number of pharma companies that have scaled up their usage of the software and using it at a scale that’s approaching what we’re doing internally as, again, as a beginning of a trend and it’s extremely unlikely that it’ll just be those handful of customers that will do that. And the reason we’re saying that is sort of the obvious thing, but also the level of engagement from the other companies that are working their way up to that is really quite positive and we’re sure that it’s going to happen.
It’s a matter of, as Geoff was saying, we’re saying just sort of, when exactly is it going to happen? Is it going to be in multiple stages where they go from one tier then to the next over a couple of years? That’s where the uncertainty comes from, but it seems pretty clear that that trend that we’re seeing, and we’re obviously very encouraged by those handful of customers spending at that level, that trend will continue. I should mention one other thing that’s actually, sorry, go ahead, please.
Chad Wiatrowski : No, I was just going to kind of pivot. You can continue on that question.
Ramy Farid: Yeah, I was just going to say one other really important thing, but I’ll be very brief and let you ask the other question. It’s important to point out that we continue to advance the platform. We have a very significant effort. We continue to make breakthroughs in the science and we expect that to continue as well. So that’s another thing that over the next several years and really beyond, we will continue to see more and more breakthroughs in the science that we think will continue to increase the value and the impact that the software will have, and I think that’s something else that the industry will continue to react to.
Chad Wiatrowski: And so you have partnerships with NVIDIA and Google Cloud, and like, for example, NVIDIA’s BioNeMo platform is an emerging marketplace for fine-tuned AI tools for drug discovery. Is there any type of incentive structure for you to launch software on these marketplaces? Is that a way that you could further monetize this growing capabilities?
Ramy Farid: Yeah, we’re not prepared to discuss that now, but I’m glad you brought up those collaborations. They’re extremely important and longstanding, by the way. These aren’t recent. They’ve been in place for a long time, and I’m sure we will continue to be able to leverage those collaborations to benefit not just us but really benefit the whole industry.
Matthew Luchini: Thanks for the questions.
Operator: Our next question comes from a line of Matt Hewitt with Craig-Hallum Capital Group. Your line is open.
Unidentified Analyst: Hi, guys. This is Jack on for Matt. Thanks for taking my questions. Firstly, with the former Bristol-Myers and ZAI Labs program now being solely Schrödinger assets, will that alter the timing of trials and how should we think about those assets? And then my second question, when you previously mentioned that Eli Lilly renewed and expanded their software agreement, are there any other large customer renewals this year we should be monitoring? Thanks.
Karen Akinsanya: With respect to the first question about the BMS and ZAI program, obviously we’ve described in the past that some of these are for commercially targeting, commercially validated targets, whereas others were more novel targets. We have been looking at how we will incorporate these into our portfolio. Right now, there is no impact of those programs on our pursuit of clinical programs. The three programs, or the two that are in the clinics and the one that’s about to enter, are all wholly owned, proprietary programs that came from our own efforts. We continue to look at some of the programs that have been returned as potential opportunities in the future, but we have not made a decision on that yet.
Ramy Farid: And then with regard to your other question, we’re, as I said, really engaged in a number of discussions with large companies and, as Geoff said, emerging companies. That’s very important to keep in mind. It’s not just the top 10, 20 pharma companies that have the potential to scale up their usage of the software. The conversations are encouraging. We’re certainly having them, but at this point in the year, we’re certainly not prepared to name the next company that’s going to be, if you want to call it the next Lilly. We’re certainly having those conversations.
Unidentified Analyst: Understood. Thank you.
Ramy Farid: Yes.
Operator: [Operator Instructions]. Our next question comes from the line of Michael Ryskin with Bank of America Securities. Your line is open.
Unidentified Analyst: Hi, thanks. This is Wolfe on for Mike. I appreciate you taking questions. So the multi-year renewal dynamic that you have going on in software is pretty well understood, but also software only came in modestly above your guide and 3Q, even with these big renewal benefits and your 4Q outlook is fairly well below. So kind of backing out these timing and comp-related dynamics, have you seen some change in the underlying markets or what’s it going to take for software to get back to that 20% plus multi-year – profile? I had then follow-up.
Geoff Porges: Okay. No, I understand the question. So we highlighted some of the flux in the smaller customers that have been affected by financing, consolidation in the industry, et cetera. And there is no doubt that that was a significant, if one phrases it the right way, a drag on what we reported in 2023. We think that there is a path to more than offsetting that and the growth opportunity in what I refer to as the sort of mid-cap companies, let’s just say greater than 500,000, the 50 are there, more than offset the effect of that drag, if you like, in the smallest accounts. So, and we’re not counting on those small accounts coming back, although theoretically that’s a possibility. Now, we deliberately called out the multi-year contribution in Q4 and specifically highlighted the Lilly deal because of the size of that and the impact that it had.
That was something that we were working towards throughout the year and there are a number of other multi-year agreements that we worked towards through the year, some of which became closed contracts and generated revenue, but others that we’re still working on. So, there is plenty of wood to chop and plenty of opportunity to drive things this year, but we’re being pretty careful not to suggest that there’s another Lilly out there right now because clearly that was a major opportunity for us that we pulled out in the fourth quarter. Ramy, do, you want to add?
Ramy Farid: I think that’s perfect, yes.
Unidentified Analyst: Okay, got it, thank you. And then on the other side of the business in drug discovery, I think the change in guidance methodology is pretty clear there. I’m not going to ask you to guide to 25 or the out years, but given that there was kind of this inflection expected for drug discovery previously, should we now be thinking of more of a kind of steady ramp there barring any clear indications and milestones or just how should we think about the trajectory for that segment?
Geoff Porges: I hope that we conveyed the challenges we find in forecasting this segment in my answer to questions and prepared remarks. It is difficult because of the nature of this business and of our business there and the programs to estimate when programs will go ahead, particularly as they become more advanced. And of course, as they become more advanced, the milestones become larger, and so the outside effect becomes even greater. We continue to be very confident that if we keep initiating those programs and advancing them and they continue to progress that there are opportunities for that revenue to grow. But the other way we are thinking about this, of course, is that we are shifting our capital allocation towards our proprietary programs.
And as we advance our proprietary programs into the clinic or even to advance preclinical development, we believe consistent with industry standards that they’re going to be worth more in partnering transactions. So we are planning that a number of our programs will be partnered in the foreseeable future because obviously we couldn’t take everything in our very rich portfolio already forward and our therapeutics group is continuing to come up with promising new development opportunities. So we do think that there’s a very significant revenue opportunity there, but given the methodology and the approach we’re taking, we think it’s prudent to be not guiding to the timing or value of those transactions.
Unidentified Analyst: Got it. Thanks for your time.
Operator: I’m showing no further questions at this time. That concludes today’s call. You may now disconnect.
