SOPHiA GENETICS SA (NASDAQ:SOPH) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning, and welcome to the SOPHiA GENETICS’ First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katherine Bailon, Head of Investor Relations. Please go ahead.

Katherine Bailon: Good morning and thank you for joining us on SOPHiA GENETICS’ first quarter fiscal 2023 earnings call. My name is Katherine Bailon, and I am the Head of Investor Relations at SOPHiA GENETICS. Joining me today are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer; and Ross Muken, our Chief Financial Officer and Chief Operating Officer. Before we get started, I’d like to remind you that the management team will make statements during this call that are forward-looking within the meaning of U.S. federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Cautionary Statement regarding forward-looking statements in Form 6-K on file with the SEC.

Except as required by law, SOPHiA GENETICS disclaims any intention or obligation to update or revise any financial or product pipeline projections or other forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of its broadcast on May 9, 2023. This presentation includes non-IFRS financial measures. These measures are calculated by management and do not have any standardized meaning under IFRS. These non-IFRS measures supplement IFRS measures but should not be viewed as substitutes for IFRS measures. We have included a reconciliation of IFRS measures to non-IFRS measures in our press release issued this morning, which is available on our website.

Please note both the replay of this call and the earnings release will be available on our website in the Investor Relations section. And with that, I’ll now turn it over to Jurgi.

Jurgi Camblong: Thank you, Katherine, and good morning, everyone. We appreciate you joining us on our call this morning. I am pleased to share that our first quarter results came in strong, with total revenue for the first quarter, growing 37% year-over-year on a constant currency basis after adjusting for COVID-19-related revenues. We delivered this growth while maintaining our fiscal discipline, resulting in meaningful expense reductions from the prior year period, and so I am equally pleased to tell you that our operating loss on an adjusted basis was $16.2 million, an improvement of $4.8 million for the first quarter of 2022. On today’s call, I will start by reviewing our progress in the first quarter as it relates to our strong business momentum and the continued customer adoption of our market-leading platform.

And I will then turn it over to Ross Muken, our Chief Financial Officer, and Chief Operating Officer, to share our financial results for the period in more detail and our outlook for the remainder of 2023. And then we will end by taking your questions. Let me start with a review of the first quarter highlights. Momentum in our business continues to be robust on a global basis. We added 18 new logos in Q1. Of our more than 750 customers, 437 are core genomics customers that utilize our platform regularly to our dry lab, bundle, and integrated access modes. Our strong Q1 performance is demonstrated by very robust usage numbers across the board. For the first quarter of 2023, analysis volume across our core genomics customers across proxy for patients was 77,819, an all-time high, up 9% sequentially and up 18% year-over-year.

When excluding COVID-19-related volumes, platform analysis volumes were 75,868 for the first quarter of 2023, up 12% sequentially and up 25% year-over-year. We ended the quarter at nearly 30,000 analyses a month, indicating that we are well on our way to being the leader for technology-agnostic software for genomic and multimodal analysis. I will now highlight some areas of particular strength in the quarter. In EMEA, France, a country with one of our largest and longest-standing presence, continues to demonstrate strong growth. Customers such as Institut Gustave Roussy in Paris, among the top cancer centers in Europe, and arguably among the top specialized hospitals in the world for the treatment of rare and complex tumors are expanding their use of our platform.

Institut Gustave Roussy began working with SOPHiA GENETICS in 2017 with a vision to offer patients personalized treatment. They will now be using the SOPHiA DDM capabilities for the analysis of over a dozen cancer-related applications, including solid tumors, and hematological and hereditary cancers, establishing our platform as a core genomic analytics platform. We also recently established for Gustave Roussy a new bidirectional communication link from SOPHiA DDM directly to their database. This will enable them to facilitate a more efficient interpretation of their research data and helps to further grow the internal knowledge database of Institut Gustave Roussy. In the APAC region, I would highlight India, which has usage growth well ahead of our company average in the quarter and well ahead of our expectations.

During the quarter, Krsnaa Diagnostics, a Central Lab, went live on SOPHiA DDM technology. Krsnaa Diagnostics is India’s largest diagnostic service provider in radiology and pathology. They will be expanding their current next-generation DNA sequencing offering by adopting SOPHiA DDM for their hereditary cancer need. In addition, we announced that Unipath, a leading diagnostic brand in India, has launched HRD testing capabilities with SOPHiA DDM. The SOPHiA DDM HRD solution will enable Unipath to retain full ownership of their data, saving time and expense while offering comprehensive genomic insights powered by deep learning algorithms. In LatAm, Brazil is a country that delivered usage growth in the quarter, well above the company average.

In this region, I would highlight for you DASA as an example of an expanding customer within our land-and-expand strategy. DASA is the largest diagnostic company in Latin America and the largest integrated healthcare network in Brazil, serving approximately 10% of the Brazilian population. DASA has been a long-standing customer and partner of SOPHiA GENETICS. A year ago, DASA launched HRD testing capabilities on SOPHiA DDM. And we are pleased to tell you that just one year after implementation, DASA has now analyzed over 2,000 samples using HRD on SOPHiA DDM, a true testament of the democratization of data-driven medicine. Next, turning to Maryland customer momentum. I would like to highlight a recent win at the University of Maryland Medical Center, UMMC, who selected SOPHiA DDM to enhance their capabilities around rare disease detection through the combination of Whole Exome plus mitochondrial DNA sequencing.

Thanks to SOPHiA DDM, UMMC can maintain their samples in house and using our artificial intelligence and machine learning capabilities, find a more efficient way to analyze and interpret data, further developing their expertise in rare disease. Looking at the first quarter from the standpoint of application areas on the SOPHiA DDM platform, in rare diseases, we saw Whole Exome sequencing data volumes growth above the company average year-over-year, which supports the broader view that as sequencing costs continue to grow up, customers will shift to larger panels at higher volumes. We are encouraged that this trend supports increased value for those that enable large-scale data production within an increasingly complex workflow. In cancer applications, hereditary cancer and solid tumors grew volumes above the company average and some newer areas like HRD and liquid biopsy grew analysis volumes in triple digits.

On the biopharma front, we continue to be very active in our engagement with top biopharma companies. The more we discuss our capabilities with the top 20 players, the more we realize their need to have real-world and real-time data. At the recent American Association for Cancer Research AACR meeting, we noted high interest in new applications and a particular focus on MSK-ACCESS liquid biopsy, not the last of which included discussions around DX and global commercial partnerships to support upcoming drug launches with several top 20 pharma. At the AACR meeting, we gave a talk on the decentralization and collective intelligence in precision medicine, highlighting the benefits of having a harmonized platform approach to promote the greater switch in the 70-plus countries we serve while simultaneously collecting key data in real-time and the real world that can benefit decision-making.

Interest in our multicentric DEEP-Lung-IV study was high, particularly with respect to multimodality and predictive analytics, with discussions at the conference looking to apply a similar approach but beyond the lungs and into additional indications such as prostate and breast cancer. As you know, SOPHiA GENETICS started 12 years ago on the clinical side, and clinical has been our primary customer focus today. Biopharma is a new class of customer for us and while other informatics players have approached the market launching initially with biopharma, we feel confident about our approach and its uniqueness and value. As we introduce biopharma to SOPHiA GENETICS and provide them with this unique pathway to anonymize real-time and real-world data not previously available, we believe in our differentiation and its likely success over time.

On a related note, we are very much looking forward to attending ASCO, the conference of the American Society of Clinical Oncology next month in Chicago, where SOPHiA GENETICS technology will be featured in several poster sessions. Of note, our collaborators at [indiscernible] French, will provide an important update on the clinical validation of HRD using samples from the PAOLA-1 study, which was the study supporting the approval of AstraZeneca PARP inhibitor olaparib in the first-line treatment for ovarian cancer. Additionally, SOPHiA will be showcasing exciting new results in the multimodal analytics space as applies to kidney cancer and highlighting how our proprietary multimodal capabilities enable next-generation sequencing stratification of patients according to the risk of progression.

We expect this work may open many promising avenues for further collaborations with biopharma companies. Taking a step back, I would like to touch on our continued scientific innovation. On this topic, I would like to review for you today a recent publication we made, which was accepted in translational medicine. It involves the topic of molecular barcoding, a genomics technique that allows labs to detect mutation signals with low tumor content, which is becoming quite popular in applications such as somatic genomic profiling or MRD tracking. However, its benefits in different application contexts is not well studied. At SOPHiA GENETICS, we use DNA sequencing data generated by molecular barcoding from various types and quantities of input materials such as fresh-frozen DNA for maltreated DNA and cell-free DNA to evaluate the performance of mutation detection in different clinically relevant contexts.

We have demonstrated that the benefits of applying molecular barcoding systems are not uniform across different genomic applications. We are excited that our work has been accepted in the Journal of Translational Medicine, a peer review journal, and will help clinical labs to understand better their experimental settings and how such will affect analytical performance. In light of this work, we also established a proprietary molecular barcoding system called [indiscernible] that encodes the barcode in a novel way and is combined with probability-based variant calling algorithms. This technology has already been incorporated into our offering, notably liquid biopsy, and will facilitate the detection of mutation signals with low tumor traction.

Now moving from scientific aspects of our business to technology. I think it is worth highlighting that last month, we attended the HIMSS conference, which is perhaps the most influential health information technology event of the year, a gathering of approximately 40,000 attendees. This year, we were thrilled to attend alongside Microsoft, where we share the boot and the cost is a learning launch. Teams development in generative AI and LLM will highlight teams in the provider space. The large language model is a type of artificial intelligence algorithm that uses deep learning techniques and massively large data sets. Our new collaboration with Microsoft will leverage these same technologies as well as conversational AI technologies from Microsoft’s 2022 acquisition of Nuance to create a scalable approach to integrate various structures and structure multimodal data to train and test the AI in our CarePath module.

Ultimately, the goal is to enable the collection and sharing of large data assets historically found not just within the EMR but also in doctor notes as well as other unstructured formats. With all this momentum, you can sense what makes us super excited about the investments we are making today and their potential in the future. Allow me to wrap up my section by telling you about two honors that we were bestowed on the company since we last spoke. In March, SOPHiA GENETICS was named to Fast Company’s prestigious annual list in the World’s Most Innovative Companies for 2023, and in April, SOPHiA GENETICS joined the ranks of Actelion and Lonza in accepting the Swiss Biotech Success Stories Award for our standing contribution as a leader in data-driven medicine.

So to conclude my section, I feel as excited today as ever that SOPHiA GENETICS has the elements in place that will enable us to accomplish what we set out to do 12 years ago to harness data from the global community, to generate actionable insights that contribute meaningfully to patient care and patient outcomes, insights that contribute meaningfully towards our customer success and that deliver outstanding performance of SOPHiA GENETICS in 2023 and beyond. And now I will turn the call over to Ross to discuss our financial performance in more detail.

Ross Muken: Thank you, Jurgi, and good morning, everyone. I’m pleased to share that we started 2023 on a strong note, continuing our commitment to sustainable growth. Turning to the financials. Total revenue for the first quarter of 2023 was $14 million compared to $10.9 million for the first quarter of 2022, representing year-over-year growth of 29%. Constant currency revenue growth was 34% and constant currency revenue growth, excluding COVID-19-related revenue was 37%. Platform analysis volume, including volumes from our integrated access customers, was 77,819 for the first quarter of 2023 compared to 65,694 for the first quarter of 2022. The 18% year-over-year growth was attributable to the strength of our core platform analysis volume, offset by the expected continued decline of our COVID-19-related analysis volume.

Excluding COVID-related volume, platform analyses grew a healthy 25% year-over-year in the period. Core genomic customers grew to 437 as of March 31, 2023, up from 426 in the prior year period. This included 14 new routine customers in the quarter. Of note, our definition of core genomic customer now includes all three access modes, including integrated access versus only bundle and dry lab previously, and is a better representation of DDM land adoption. Annualized revenue churn rate was 4% during the first quarter of 2023, in line with our expectations. Net dollar retention for the quarter improved sequentially on a reported basis to 107%. Constant currency net dollar retention, excluding COVID-related revenue, was 118%. Strong NBR and a healthy level of backlog continue to provide us with a high level of revenue visibility going forward.

Gross profit for the first quarter of 2023 was $9.7 million compared to gross profit of $6.7 million in the first quarter of 2022, representing year-over-year growth of 44%. The gross margin was 69% for the first quarter of 2023 compared with 62% for the first quarter of 2022. Adjusted gross profit was $10.1 million, an increase of 47% compared to adjusted gross profit of $6.9 million in the first quarter of 2022. Adjusted gross margin was 73% for the first quarter of 2023 compared to 64% for the first quarter of 2022. Of note, in the period, we did again benefit from an expected one-time credit of approximately $300,000 related to our previously disclosed cloud optimization efforts. Overall, I remain encouraged by our progress on gross margin expansion, and I’m increasingly confident in our medium-term goal of sustaining adjusted gross margins in excess of 70%.

Total operating expenses for the first quarter of 2023 were $29 million compared to $31.7 million for the first quarter of 2022. Adjusted operating expenses were $26.3 million compared to $27.9 million in the first quarter of 2022. Headcount, our most significant expense was down versus the prior year, but remained relatively flat sequentially. We continue to make progress on containing our discretionary expenditures and remain hyper-focused on maximizing capital efficiency while sustaining targeted growth levels. Turning to operating loss for the first quarter of 2023. It was $19.3 million compared to $25 million in the first quarter of 2022. Adjusted operating loss for the first quarter of 2023 was $16.2 million compared to $21 million for the first quarter of 2022.

Cash and cash equivalents were approximately $162 million as of March 31, 2023. Now turning to our 2023 outlook. Based on our strong start to the fiscal year 2023, we are reiterating all elements of our annual guidance. We continue to expect reported revenue growth to be at or above 30% in 2023. Constant currency revenue growth, excluding COVID-19-related revenue for 2023 is expected to be between 30% and 35%, in line with our previously highlighted long-term expectations. Of note, we continue to expect a headwind to 2023 reported revenues of approximately $1 million related to a ceasing of COVID-19-related contribution, which was minimal in the first quarter. This will equate to a headwind of approximately 19,000 analyses to reported volumes.

Furthermore, we would note that exchange rates remain highly volatile, but at the moment, we anticipate a modest impact to reported results, albeit I would note that they have improved slightly from our fourth quarter call. Lastly, following on strong cost performance continuing in the first quarter of 2023, SOPHiA GENETICS expects 2023 operating losses to be below 2022 levels. With that, I’d like to turn the call back over to Jurgi for the closing remarks before we take your questions.

Jurgi Camblong: Thank you, Ross. We’re extremely proud of our performance, which we believe reflects our continued ability to execute on our vision and the opportunity ahead. SOPHiA’s success stands on our ability to delight customers and continue driving more and more usage of our platform. I am encouraged and as confident as ever about the long-term path that we are on. We have a fantastic opportunity to drive compelling returns and shareholder value. In closing, thank you to our SOPHiA colleagues, partners, customers, and investors for joining us in our journey. Without you, none of this would be possible. Please note next month, we are attending the William Blair Growth Conference in Chicago. I look forward to continuing to update you on SOPHiA’s future success of democratizing data-driven medicine. Operator, you may now open the line for questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Tejas Savant of Morgan Stanley. Please go ahead.

Operator: The next question comes from Julia Quinn of JPMorgan. Please go ahead.

Operator: The next question comes from Dan Brennan of TD Cowen. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Jurgi Camblong for any closing remarks.

Jurgi Camblong: Well, thank you all for joining us today. Q1 has been a very strong performance for SOPHiA, and I really would like to thank all the SOPHiAns who have been working very hard and being very disciplined, very passionate so that our performance could be such. Stay tuned. We’re going to be at the ASCO conference in beginning of June in Chicago. Following that, we will be as well at the William Blair Conference. And so we will be very eager to meet partners and investors while we are in these conferences. Thank you so much again, and have a good day.

Operator: The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.