Good Morning, and welcome to the Schrödinger First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to turn the call over to the Schrödinger team. Please go ahead.

Thank you, operator, and thank you all for listening in on our 1st quarter earnings call. Today you will hear from Ramy Farid, President and Chief Executive Officer. Karen Akinsanya, Chief Biomedical Scientist and Head of Discovery R&D, and Joel Lebowitz, our Chief Financial Officer. Before we begin I’d like to remind you that management will make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the private litigation reformat of 1995. Including statements related to the potential advantages of our platform, our strategic plans to accelerate the growth of our software business, and advance our collaborative and internal drug discovery programs, risks generated to the Covid-19 pandemic, our expectations related to the use of our cash, cash equivalents and marketable securities, 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 from those described in the forward-looking statements, and are subject to a variety of assumptions, uncertainties, risks and factors that are beyond our control. Including those risks detailed under the caption, risk factors and elsewhere in our most recent Securities and Exchange Commission, filings and reports. Except as required by law, we undertake no duty or obligation to update any forward-looking statements contained in this release, as a result of new information, future events, changes in expectations or otherwise. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today. With that I would like to turn the call over to Ramy.

Thank you, and thank you everyone for joining Schrödinger’s earnings call to review our results for the first fiscal quarter of 2020. This is an exciting time for the company, and the first quarter was an important one for us. In early February we raised 232 million in gross proceeds through our IPO, positioning us well as we continue to execute on our mission of improving human health, and quality of life, by transforming the way therapeutics and materials are discovered. Our leading physics based computational platform enables discovery of high-quality novel molecules for drug discovery and materials designed more rapidly at lower cost, and with, we believe, a higher likelihood of success compared to traditional methods. We license our software to pharmaceutical and biotech companies, industrial companies, academic institutions and government labs all around the world. We also apply our computational platform in a broad pipeline of drug discovery programs in collaboration form pharmaceutical and biotech companies, and in the pipeline of internal wholly owned drug discovery programs. We achieved record total revenue of 22.6 million of the first quarter, which represented 26% growth over the first quarter of 2019, demonstrating how well we executed on our strategy to invest in our platform, grow our software business and advance our drug discovery programs. Joel will present our Q1 results in more detail later in the call. As companies increasingly recognise the potential impact of our platform, we are seeing deeper engagement from our software customers, feedback on the performance of our software and the value it is bringing to their projects continues to be very positive. Pharma and biotech customers are adopting our platform on a larger scale, and we are adding new customers, helping to achieve record software revenue, this quarter, of 23.8 million, representing 28% growth over…

Thank you, Ramy, good morning everyone. As Ramy just discussed, we continue to make good progress across our diversified portfolio of drug discovery collaborations and our internal wholly owned programs. We have been pleased with the availability of data from our wide network of contract research organizations to support our internal programs, despite Covid-19 related changes to working arrangements. Our globally connected teams, comprised of Schrödinger and external scientist, have been able to continue working together with minimal delays in the design synthesis, and testing of our molecules, by leveraging our LiveDesign informatics platform; this enables global collaboration and large scale data management. A key achievement for the quarter is the strong progress we have made in advancing our internal portfolio. Several programs have met the planned criteria, including improved protein free selectivity, and other properties designed to address limitations of existing clinical stage inhibitors. I’ll take a few moments to highlight some examples. In our next generation we want inhibitor program, we have leveraged our physics based technology, including recent advances in the selectivity predictions to design higher affinity structurally differentiated leads that are selective versus PRK-1, when compared to existing WE-1 inhibitors. Our leads have good drug like properties, including no observable time dependent inhibition of key liver enzymes, like CYP3A4. We believe that this myectomies profile is a key differentiator. Recent publications indicate that selective WE-1 inhibition, or degradation, would diminish or absent PRK-1 activity, is antiproliferative in lung and ovarian tumor model. We believe that in improved therapeutic index can be accomplished through more potent and selective inhibitors. Clinical stage WE-1 inhibitors, being advanced by third parties, have demonstrated efficacy in multiple cancer types, in combination with other agents, but improved tolerability of these regimens is desirable. In addition to the progress we have made on…

Thank you, Karen, hello everyone. It's a pleasure to be speaking with you to share our first quarter results. As a reminder we report revenue for both our business segments, software and drug discovery. Our software business includes pharmaceutical and biotech customers as well as a large number of academic and government labs. And an increasing number of industrial companies for material science application. Our software is generally licensed through annual subscriptions paid up front. We record a majority of our revenue from these licenses when the contract period begins with the remainder recorded as deferred revenue. For revenues associated with ongoing software maintenance and support we recognize revenue over the contract period. We also record revenue for our drug discovery business. Currently this segment reflects revenues from research fees and milestones associated with our collaboration programs ranging from early discovery to clinical stages. Our wholly owned programs which are all in discovery are not yet generating revenue. As Romney indicated we are executing on our strategy across our business. In the first quarter we recorded total revenue of $26.2 million and increase of twenty 26% versus the first quarter of 2019. This was powered by record software revenue of $23.8 million representing 28% growth versus the first quarter of 2019. This growth reflects the continuing trends of the increased adoption of our software by pharmaceutical biotech and industrial companies. We believe our solutions can be especially beneficial in the current environment. We continue to see expanded adoption of live design, our enterprise solution that enables full project access and interactive collaboration among discover teams at multiple sites and across many traditionally siloed areas of research. As we look forward to the rest of the year, it is important to note that typically the first quarter tends to be our…

[Operator Instructions] The first question comes from Do Kim with BMO Capital Markets. Your line is open. Do Kim your line is open please check your mute button. Our next question comes from David with Morgan Stanley, your line is open.

Thank you very much for taking my question. Given the pretty big step up in revenue from Q4 toQ1q for the software business. I guess how we should look at that business going forward considering. I would imagine that a lot of that business is probably already in a lot of ways in the books for the rest of the year. So, is that kind of a starting point for Schrödinger software business? And then as far as your commentary on Covid-19 impacts look at that as potential -- this potential impact on incremental revenues, is that, I guess how we should look at that number against vis-a-vis what occurred in 4Q.

Joel you want to take that?

Sure, so thanks David for the question. So clearly, we’re pleased with the first quarter but I think more than that we're also very happy about the underlying momentum that we saw in the first quarter. So, we saw a growth from across the business including most of our regions primarily driven by the US and Europe which are largest two regions. We also saw strong growth in both the life sciences and material science business. So, as customers continued increased adoption of our solutions including live design which I mentioned in my comments. And we also saw the new customers in both life science and material science. So, all of these are key growth drivers of our business and set up strong momentum for the rest of the year. That being said, I'll make a couple of comments as we look forward. First, the first quarter is typically the highest revenue quarter for software for the year. And I do expect that to be the case again this year. Second, you referenced, I didn't, I did mention Covid related risks. We think these are going to be company specific over the next couple of quarters as the specific companies come under pressure. And we do believe they're going to be short-term but we're monitoring them. And we're continuing to a gauge. But it could impact our growth rate over the next couple of quarters. But I will point out though that the crisis highlights the continued need for efficiency and speed and drug discovery and materials design. And of course, that's central to our strategy. And we believe we're well positioned to execute on that strategy. And we have ample resources to do that over the long term.

On in the drug discovery business you had mentioned the comments about the deferred revenue, is the deferred revenue in large part related to drug discovery business being the cadence from that? I guess how can we have perspective for the remainder of the year on how we could look at revenues from that particular business?

Thanks David. Yes sure I'll answer that, so in fact our deferred revenue is mostly the majority of it is from our software business partially because it's mostly it's the majority of our revenue in general this quarter. I'll just make a few comments about our drug discovery revenue and how might we be able to think about it. So we did get -- we did achieve 11% growth this year which and just a reminder it's highly dependent on the timing of individual project milestones. So last quarter we had a contract -- in the fourth quarter we had a concentration of multiple programs hitting milestones and but that won't be linear quarter-to-quarter or a period a period as I've talked about and at the same time the emerging Covid related risk that I mentioned, we could start seeing specific program related delays and we're monitoring that but at the same time as you heard from Karen we are very happy with the portfolio progress both on the collaborations and the internal pipeline. So we're really felt good about our ability to drive value over the long term and we have the resources necessary to do that.

Our next question comes from Dan with BMO Capital Markets. Your line is open.

Hi. Good morning. Can you hear me? Sorry about that earlier. Great thanks for taking my questions. I know you've talked about the coming risks caused by Covid, could you speak more to what you saw in the first quarter, were you seeing any changes in the utilization of your software by customers? I mean we have a pretty good visibility on Covid's impact on the clinical side of things and how patients are having trouble enrolling or getting assessments how is Covid business affecting the drug discovery side in the industry?

Yes. So I can take that this is Rami. So a couple of things. One is on the software side what we saw was a pretty significant increasing in for example the number of requests for support from the software, which was a pretty good indication of increased usage. We've seen a huge increase in the number of people signing up for example for courses that we hold online obviously now on molecular design. So there seems to be an increased interest and in using the software and learning how to use it and in actual usage. Karen, can address the question about the impact on the drug discovery part of the business.

Yes. Thanks Ramy. So with respect to the drug discovery business in the conduct of drug discovery studies, we have not seen any slowdown in terms of access to data. The results that we require from app for our program come from a distributed network of contract research organization. And as such those contract research organizations are actually using live design with us and we've been able to access those results and compounds are being synthesized around the world. We don't have visibility into obviously what other companies are doing, but with they're using live design we anticipate that there's a similar story there in terms of synthesis of compounds analysis of results using these sort of online data management platform.

Great. And in your recent expanded deal with AstraZeneca could you speak more to the opportunity and biologics drug discovery and where are the extents of their software capabilities in that direction and what limitations you still have to work on?

Yes. Sure. That's a great question. So as you know and as was reported in the press release a component of that partnership does involve biologics research. As I've said a number of times and other venues on the -- one of the sort of exciting advantages of physics based methods is the fact that they're really agnostic to the system or to the modality, physics is physics and if there are atoms involved then the technology and principle should work. And so we're seeing the same thing as we expand small molecule discovery into biologics discovery. We were finding that the technology is working now that the challenge of course is going from essentially from the sort of software development phase into real world drug discovery programs. There are always things that you learn from that and that's what is happening in the collaboration with the partnership with AstraZeneca where we're able to take technology that's working in our hands and apply it on real programs and as is always the case with any sort of any type any time that transition occurs, it's very helpful to have access to experimental data to validate the models and to improve them and to continue to improve the technology. And so that's what that partnership is about. Does that answer your question? Yes. Good.

Yes. Definitely. And my last question is on the internal program. When you look at your lead drug the CDC7 where that is in terms of licensing and partnership talk?

Yes. Karen, you want to take that?

Yes. I'm happy to answer that. So we have a number of programs in late stage discovery and as such we have been interacting with a number of companies around the profile of our molecule. We as we've described in the past we like to select a candidate for our preclinical development by the end of this year with the goal of initiating and the enabling studies in the first half of 2021. We continue to discuss the programs actually all of our late stage programs with potential partners. And despite the situation where people are working remotely we've been pleased with the pace and intensity of discussions that we've been able to have.

Our next question comes from Michael Yee with Jefferies. Your line is open/

Hi. Thanks. I will keep it to two questions. One is just trying to understand sequential revenue growth, how to think about Q2 versus Q1 when you look back last year. Of course, seasonality decline there in Q2. So how do you think of link Q2, either sequentially or year-over-year? And then second question is thinking about what happened in Q1, how to think about that software revenue and what percentage recurring versus big quarter, was there any sort of specific must have that happen there that might have resulted in such a big jump up. So just to think about that as Q2. Appreciate it.

Yes. Thanks Michael. Thanks for the questions. Joel, would you like to --

Thanks Ramy. Sure. Thanks Mike. I'll talk about that. So -- so I assumed both questions around the software business. First of all, we're excited about as I said not just the results but the underlying momentum that we saw in the first quarter. The key growth drivers of increased customer count and increased adoption by our customers of our solutions really drove the quarter. And that's fundamental to our strategy going forward. As I mentioned the first quarter is the highest, it does tend to be the highest quarter of the year for software revenue. We do expect that to be the case again this year. So there is some seasonality there, which you mentioned that you saw last year. So that's how we expect the -- and then there's the additional risk for from Covid that could affect the next couple of quarters of growth. But again because of the underlying momentum of the business, we are excited about the continued prospect for being able to drive growth over the longer term. I think your other question was also about was there any major drivers or step-up drivers in the software growth in the first quarter, major milestones or deals that we may have signed in the first quarter. Actually it was really broad-based growth. It was -- as I mentioned really across the entire business both regionally I mentioned U.S and Europe being primary drivers as our largest markets also very strong growth in both the life science segment and the material science business. And increased customers and increased adoption in both so really broad-based growth and not overly dependent on any one particular event.

Okay. Can I just also follow up? When you look at software revenues for Q2, I'm appreciating their seasonality. Do you essentially still expect growth year-over-year, so Q2 over Q2 and Q3 over Q3 that would be a helpful starting point for looking at where revenues could be each quarter. Thanks so much.

Sure. Thanks. I think again I would just point to the underlying business momentum in the first quarter and that we were able to drive growth and pretty robust growth through the increased customer adoption. And also through adding new customers. Of course, we're not giving general guidance I mean we're not giving specific guidance on the rest of the year, but I think that underlying momentum is a great business indicator for us.

Our next question comes from Michael [Riesman] with Bank of America. Your line is open.

Hey. Guys. Thanks for taking the question. Can you hear me? I want to follow up on your earlier comments on coronavirus potential impact to your customers sort of across your customer base. I think it's pretty clear you're alluding to some of your smaller customers potentially coming under budget pressure. These obviously aren't the large guys that are over a $1 million in annual contract value, but have you seen anything in terms of pace of workflow sort of demand on the licenses and how much people are tapping into the network as a lot of these labs shifter mode. And what I'm getting to is we expect some labs are not able to operate at levels those they that would have been previously prior to quarantine levels. Just wondering if that has any sort of lingering impact on the business. And then I got a follow-up question.

Yes. What we're seeing, it is a great question. What we're seeing and we've been alluding to this but let's be more specific about it. In a situation where chemistry resources, experimental chemistry resources are diminished for a period of time that is obviously a situation where the demand for better prioritization of a synthesis cue is actually more important right. If you're going to make fewer compounds you need to make-- you need to put more effort into making sure that the compounds that you do make are progressing the program. And we've gotten that feedback from customers so that is sort of indicating that it's actually a time where the demand for computationally prioritizing synthesis is going up and as I said before there are these other indicators about the interest in the software the actual usage which is something that we can track appears to be robust. So hopefully that answers that question. Does that make sense?

Yes. That's helpful. And you talked about your potential work on antibody development and R&D. I was wondering could you expand a little bit on your agreement or sort of your work you're doing with Twist, it seems like a Twist Bioscience it seems like a really interesting approach and a coupling of a couple novel technologies, obviously, some near-term applications there for Covid as well. But could you talk about the work you're doing there and how that fits into this or the bigger picture?

Yes. I think we can't get into the details of course of the partnership but you're right it that does -- it is another example of a partnership that is sort of helping us get into new air, new modalities and biologics and in particular, we, it's an early project, it's something that's that sort of pretty early in the stages. Karen is there anything else that you think you can add to that and to answer Michael's question?

No. I think you use address mostly but I would say that we remain as many others are interested in the potential for peptides and biologics to benefit from our technology and so working with a company like Twist gives us the opportunity to pressure test those approaches. And find new ways to design those molecules that still hold an important place in new modalities for treating patients.

Okay. I appreciate that. Perfectly understand that you may not be able to get into details with specific. Can I squeeze in one more sort of on the [Indiscernible] announced for the rest of the year given the equity raised and how that went earlier this year but also the more recent updates from Covid. Can you talk about any changes to your prior expectations to pacing of R&D or salesforce investments as you get through the rest of the year?

Sure. I can address that. So we've been investing steadily in R&D through 2019 and in the first quarter of this year. And the way I would think about that is we're investing directly in the underlying technology and are continuing to develop those capabilities which power our business. And also in advancing our under our-- internal wholly-owned programs and so as we think about the resources that we have relative to our execution on our long-term strategy we believe we have ample resources to continue to execute on that study. And I would expect as we look forward through the rest of the year a gradual sequential quarterly increase through the year in overall expenses, driven by growth and research. And in terms of your question about sales and marketing, it was actually down; the expense was actually down slightly versus prior year and I think when we think about our business model, we don't believe it requires a large incremental increases in the sales force to drive the kind of growth that for instance we saw in the first quarter. So rather we will look in a focused way towards targeted investments when opportunities arise.

Thank you and I'm currently showing no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.