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.

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.

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…

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…

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.

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.

Hey, guys. Good morning and thanks for the time here. Maybe I'll start with one, Ross or perhaps Jurgi, you can chime in as well. I think you did a 30,000 sort of monthly run rate here in March. I think that compares to about 24,000 at the end of the last quarter, so really nice tick up there. But you've kept the guide sort of unchanged here. Just wanted to get some color around the degree of like conservatism in light of the recent momentum here. And Ross, I think in your prepared remarks, I caught you mentioning something about a change in volume definition. Does that sort of like play into this sort of monthly run rate dynamic at all? Any color would be helpful. Thank you.

Yes. Good morning Tejas, and thanks for the questions. Indeed, you are touching something we're very excited about. So first, no, there was no change on the definition for the volume of analysis, the change in the definition was for the number of recurring platform customers. So on the volume of analysis, indeed, we end up with a high demand in Q1, almost 30,000 analyses, to your point in March. And all-in-all, 77,918 analysis, including COVID-related analysis in Q1, which is basically 18% up versus Q1 2022. And even more important, I would say, just 9% up versus Q4 2022. I think the demand just really comes from hospitals and labs that are adopting bigger sequencers, right? And I've been traveling recently as well in Canada in Montreal and in New York, and it was pretty fascinating to see how hospitals are moving if we refer to the illumina sequencers beyond NextSeq to NovaSeq. And I think this is primarily now driving a higher volume of consumption as well as the consumption of larger gene panels. When it comes to guidance, maybe I will leave Ross answer to you.

Thanks, Tejas. So in terms of just the start to the year and the full-year guide, I would say, obviously, we're encouraged by demand in general. And we had very strong bookings all throughout last year. And obviously, as we've talked about, that gives us a good degree of visibility. And so I would say relative to our own expectations, we did come in a bit above in Q1 on the volume side. So it was strong overall, and we did close the quarter quite well. It is a consumption-based model, I will remind you. And so it's not as if you get up to that run rate and then you're all of a sudden cagering at that. I think we'll expect some variability, particularly in the third quarter where you typically see in the summer months a bit of a dip. But overall, we're very encouraged by the start. In terms of the definitional change, there was a slight benefit, but obviously, it was de minimis, integrated is a very, very small percentage of our business, less than 1%. So not much change there. This is truly, I would say, underlying volume strength. And again, if you look globally where we're winning some business in some of the new countries, I'm sure Jurgi will talk about it as well, some of these are initial starts are quite high volume. So we're very encouraged overall around sort of the environment and obviously, look forward to be able to continue to deliver on our results for the year. And given it's Q1, we obviously decided not to make any formal change. And we obviously aim to be able to continue to deliver on what we have said. And ideally, if the underlying volume environment continues above our own expectations, we will obviously update you. But at this point, I think it's prudent to leave it as is.

Got it. That's helpful. And actually, it's a nice segue into my next question. Jurgi, you highlighted a couple of sort of marquee wins in India over here, one with Unipath and the other with Krsnaa Diagnostics. How big is that opportunity for you over the medium term? And to what degree are you seeing cross-selling sort of kick in among your existing customers there? You highlighted Unipath having more HRD. Are they starting to adopt some of the other tests as well? And same question for Krsnaa and your other existing customers?

Yes. Thanks for that question, Tejas. First, we're very proud, right? Our pipeline is democratizing data-driven medicine. And so we're very proud to help as well, indeed marquee wins, but in countries which are other than the U.S. and Europe. So as a reminder, we started in India signing Tata Memorial Hospital, so another marquee name with whom we are working on multiple applications, but we started with them on solid tumor testing and a bit similarly indeed with Unipath and the Krsnaa Diagnostics. So these are customers that we have onboarded on our first application. So for one of them, it has been on HRD testing, which is, I think, an application where now we can tell we have unique capabilities, given the adoption we've been having since the year time. But to your point, yes, we have as well upselling opportunities into these centers as we have in any and so just to remind everyone who's listening to us, our model is really land-and-expand. So we penetrate an account most of the time with one application, such as HRD. And then once they start adopting our platform, this gives us the opportunity to expand beyond other applications. And so along those lines, beyond India, where we are actually very enthusiastic. We are as well very happy with the performance of some of the historical centers that we have recently expanded data that we have been talking a lot about and now we've been announcing and celebrating the fact that over the last 12 months, we've been helping them on doing 2,000 analysis on HRD, but as well another marquee name in Europe, maybe the most sophisticated cancer center in Europe, Institut Gustave Roussy with whom now basically, we work so that we help them across all the cancer applications they cover and for which they produce genomic data. So very interested and I would say, very excited about the penetration in India. And I think this will give us ideas as well eventually to go in the future to other similar markets.

And I would just add, one of the interesting dynamics is obviously, we've seen adoption there both of central labs as well as academic medical centers. So I think that's quite encouraging for the market. We also recently did an event with our partner, GE, there, which I would say was quite good in terms of broad branding across quite a number of hospitals. So obviously, it's a very large country in terms of population. They've come a little bit later, I would say, in Asia Pac to the sequencing game. But obviously, they're bringing a huge population. So even at lower price points, it's a really nice long-term opportunity for us. But again, one of many across the globe where we're seeing really nice adoption.

Got it. And then Jurgi, can you give us a quick update on the Agilent and QIAGEN partnerships that – I mean, they're still sort of early days there, but just curious as to what you're seeing in terms of opening up the opportunity among new customers for you and so on.

Yes. Look, thanks, Tejas. Indeed, we announced partnerships, which are important relationships for our Q4 results in April. And since then, we have been very nicely working with both companies. We were revising the partnership yesterday in our executive team meeting. So we have been able to create a number of opportunities with existing and new customers in the U.S., in Germany, in particular, by combining our platform with the consumables. So we're very excited about those partnerships. And we believe that, to your point, this is early, but if we are successful in the first opportunities we work on together, this should benefit as well to SOPHiA in being able to land new customers and continue to grow significantly the number of analyses quarter-on-quarter.

And I would just add, the engagement up and down those organizations from the field all the way up through the C-suite has been great and really speaks, I think, to sort of the evolution of the market where, obviously, everyone realizes data and analytics or where we play is an incredibly important piece of the puzzle, particularly as sequencing costs are coming down and volumes are likely to go up. And so it's great to have these very large and significant organizations that have quite a significant commercial presence and great product portfolios recognized that we are a very strong partner to them and can help in sort of that market evolution.

Got it. And then one final one on the gross margin side for you, Ross. I mean, I think you did 73% non-GAAP in the quarter, nicely above your long-term goal there. So just curious as to any context you can share in terms of how you're thinking about those long-term targets? I mean you probably don't want to raise them today on this call, but any color on that would be helpful.

Yes, thanks for calling this one, Tejas. This is a result of a lot of discipline. So maybe taking a step back, we're being able to grow year-on-year on constant currency and excluding COVID at 37%, while in the meantime, we're being basically able to improve our gross profit year-on-year by 47%, right? So I think definitively, this highlights the discipline we added in being latter focused on the cost side and basically being pretty selective, targeted in the investments we're making. We're very proud with this gross margin, big improvement indeed. Just as a reminder, the 73% on a gross margin adjusted basis compared to 64% in Q1 2022. So kudos to our team at SOPHiA because they have been working very hard to be, I would say, even more efficient than we have ever been. And when it comes to the guidance, I will leave it to Ross.

Yes. So obviously, really impressed by the team's execution here. It's been a big focus, as you know as we're trying to push toward profitability. There's a number of levers, right? You obviously have revenue growth, you have your incremental gross margin and then you have OpEx controls. And so we've been trying to balance all three. I think here, we're really proud of the gross margin execution on the technology side, our partnership with Microsoft and our efforts around architecture, I think are really playing off there. I think we still have more room to go per sort of GB in terms of cost of hosting and cost of storage. But the other dynamic that's happening is there is a shift, and we'll talk about it, I'm sure, later to larger panels to whole genome sequencing. And so we're also on that path to kind of preparing for a bigger explosion of data. And so in that, we are ensuring we are future-proofed in terms of where all of these different technologies are going. But frankly, some of this is just good old-fashioned rolling up your sleeves and saving money and execution and labor absorption and all of the things that drive gross margins in the software business. And so I'm really proud, as you mentioned, we're not going to be changing the long-term guide. But I do think our obviously, our confidence in sustaining let's say, 70% plus gross margin continues to go up and obviously, at a later date, as we take a look at it, we'll have a formal update for you on sort of the targets. But certainly, you would think relative to where a software business should operate, we're getting closer to what you would normally expect from a consumption-based business. And frankly, if you compare us to some of the players on the technology side, pure tech players, we're actually now above those levels. So I feel really good about our discipline and execution.

Got it. Thanks guys. Appreciate the time.

Thank you, Tejas.

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

Hello. Thank you for taking the questions. This is Marta on for Julia. So I have two quick questions. Maybe you could discuss macro headwinds you experienced in the quarter. I know towards the end of the call, you mentioned that FX has traded better, but what are you seeing perhaps in terms of customer funding constraint? And are there any differences that you're seeing geographically? Thank you.

Yes. Thank you, Marta. So first, I would start highlighting that there is demand everywhere, right? So when it comes to the macro level, but in genomics, right. So from the recent visit I had personally in the U.S. and in Canada or in Europe, it's obvious that the demand is growing. And I would say from one out of two meetings we're doing, it's clear that there is an opportunity for SOPHiA to either expand the usage of the platform for a new application or otherwise land the platform with the new customers. So in that sense, I would say, at the macro level, when it comes to clinical genomics, huge excitement, a lot of excitement as well on the biopharma side, where I would say there is a growing demand on getting access to tech capabilities that are combining multimodal offerings. So genomics, radiomics and clinical in particular. But beyond that as well, a lot of excitement on being able to work with a tech player that can get access to real-time and real world data through a network of 750 plus hospitals and labs in 70 countries. Beyond that, maybe on the macro level when it comes to the currencies and so on, I will leave Ross to comment.

Yes. So obviously, for us, just given the ex U.S. exposure, currency movements, which I would say have been quite volatile, continue to pump around. I wouldn't say it's had an effect on demand. It's more on a reported basis. And so again, just sort of something outside of our control. But certainly, as we think about sort of the remainder of the year, there's no reason for us to think you're going to see anything different than sort of what we saw in the recent period, which is strong underlying demand, but then quite a bit of noise on the reporting side. I will say, at the customer level, we certainly see economic pressures in certain parts of the world, particularly in the U.S. for a number of the customers on the labor side. Labor markets for a lot of our folks are still quite tight where some of the larger central lab players are obviously moving to cut costs. I would say, in some of that, frankly, for us, it's a positive, whether that means they need us to help them with menu expansion or with cost savings or on the COGS side. We've had a lot more of those conversations with a number of different players. But frankly, the underlying dynamic for the industry overall, at least as we can see, is still quite good. We're certainly though, always prepared for changing the environment, right? And so we're in the field all the time. We obviously have a very large presence globally. And so we're small, but our ears are to the street, but we don't know much more in terms of whatever happens over the remainder of this year economically will sort of play out. But I would say for us, we're prepared for any environment. And we're also thankfully in a business where the visibility remains quite good. And so overall, while not everything plays out exactly as you want, we tend to be able to also attempt to pull different levers to make sure we're hitting our results, and so we're going to obviously continue to attempt to do that for the remainder of this year.

Great. Thank you. And I guess the second question more on the modeling front. How should we think about revenue and gross margin pacing for the rest of the year? Any color you can share there? Thank you.

Yes. Thank you, Marta. So indeed, that as well answer to Tejas, we're very proud about the gross margin performance for Q1, which was 73% on an adjusted basis versus 64% in Q1 2022. This has been the result of definitively growing the business 37% year-on-year on constant currency, excluding COVID versus Q1 2022. But this has been as well the result of a lot of focus on targeted investments as well as continuous improvement on better controlling costs and, in particular, our indirect costs. So again, Kudos to our teams. I think this is a strong quarter, and we need to recognize all the hard work of our SOPHiA colleagues. And beyond that, Ross, I don't know if you want to give some color on how you see that evolving in the future.

Right. So obviously, our business being consumption-based, it tends to follow a bit of what you would think of as the utilization cycle, which tends to be sort of building over the course of the year, a seasonal dip in 3Q and then I would say, a bit stronger results in the fourth quarter, and this is similar to what we've seen in the past. I would say this year, the one caveat I would give is just given some of the timing of some large contracts coming on, I would expect the third and fourth quarter to be even a bit stronger than it's difficult for us just in terms of overall payments. But overall, I would say we follow on an analysis basis, the more of the normal sequencing of our year. Now on the gross margin side, we did call out about a $300,000 benefit from the cloud side in Q1 that will cease in Q2. So you will see now sort of, I would say, the new run rate of gross margins in the second quarter for us that we hope to obviously build off of it but certainly some degree of variability in either regional demand or in product demand can always influence that number. So I'm not going to give you an exact amount for 2Q or the remainder of the year. But I would say you certainly want to pull out that $300,000 benefit as you think about Q2 and then again, think about that being sort of the new rebasing for where we are as we now come out in this period where we spent quite a bit of energy on gross margin expansion.

That’s very helpful. Thank you.

Thank you, Marta.

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

This is Kyle on for Dan. Thanks for taking the questions here. Maybe starting on just the composition of the guidance. Can you just remind us what is implied in your guide for volume and pricing this year? And can you provide any color on what the average revenue per platform customer was in 1Q? Thank you.

So in terms of the guidance, right, and we're focused really on that 30% to 35% ex-COVID growth. I would say there, we're still expecting volumes to be in the high teens. And then the remainder obviously come from ASP and, I would say, mix in pharma, right? So that sort of contribution today, there is really no change to that even though, obviously, we had better-than-anticipated volume growth in the first quarter. Certainly, as we think about our business, again, it is consumption-based. And so there could be timing elements, which is, for us, why again, given we're in Q1, we want to remain conservative on the outlook. But again, we're constructive with how things have kind of developed in terms of the full year picture. In terms of the other portion, I don't know, Jurgi, if you have anything else you want to add there. But for me, we generally feel quite confident with what we've communicated.

Got it. And then maybe just an update on the pharma partnerships. When do those become more meaningful? Is that something that happens way in the back half of this year and into 2024? Or when should we see a notable contribution?

Yes. So as you remember, Kyle, we started our journey by first building our platform, serving customers, which are in the clinical space, right? And this is because we wanted to own a network of connected hospitals and labs that would be computing real-time, real-world data that are then being computed through the platform and our algorithms and on which basis we are being paid as we compute the data. And as a second, we knew that when we would have been able to build such a network, this would be extremely valuable to help patients working with the biopharma companies pre and post-approval of drugs. So this has been a more recent market to us, but a market where as we're being, I would say, announcing a number of deals, we have been seeing great traction since a year now. And maybe I will call two of the announcements we made last year and beginning of this year with Boundless Bio and AstraZeneca. So these partnerships are being well executed. But as you know, unlike our business on the clinical side, which is consumption-based and purely, if you like, based on the volume of data we compute, this type of partnerships are sometimes based as well on specific type of milestones where we need to deliver some objectives. And we're basically getting access to the data may be a step where computing data might be another step. So what basically I'm telling you is that while indeed these opportunities and partnership we signed are being well executed. You should indeed consider that they will come rather towards the end of the year in terms of revenue recognition.

And as a quick reminder, particularly relative to the pharma customer base, right? As you remember, as we've reported previously, ARPU had been around, let's say, 100K roughly. And that's more indicative, I would say, of what a clinical customer would look like. On the pharma side, it's multiples of that, right? And many times, a significant 7-figure or 8-figure even contracts potentially over time. And so with that, obviously, start date and sort of when they ramp is really important from a cadence perspective. And so you can imagine with the visibility we have on the clinical business, obviously, there, we feel quite good, even though it's consumption based on how that will fall. On the pharma side, we're still early enough where even a month or two-month or three-month change in the start date will have a pretty material impact quarter-to-quarter on sort of recognition. Again, overall, the contracts are quite visible. But in that, that's why I would say for this year with some of the ramping, you do see a little bit more recognition of revenue likely in the second half of this year, but that will continue in terms of some of those moving parts dependent on pharma starts. And again, there is we have more pharma contracts that will start to average out and will be less noticeable to you on the reported side. But remember, we don't also give analysis volume relative to pharma. And so you typically will see that as many of that is around data development on the ASP side. And so just from a modeling standpoint, keep that point in mind.

And I would add a tail beyond the modeling side for the revenue recognition, which is definitively important and where I think you understand that we have already this opportunities in the bag and we're executing them. Even more maybe important to highlight that the demand on the pharma side continues to grow. I think the strategic offering of SOPHiA along the 3D, which is from discovery to development to deployment, all around the data is more and more understood. And at ASCO, we already have a lot of activities that are being planned with a top pharma company to discuss about potential deals.

Got it. Thank you, guys.

Thank you, Kyle.

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

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.

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