Thank you for standing by. Welcome to Schrodinger's Conference Call for the Fourth Quarter and Full Year 2021 Financial Results. My name is Charlie, and I'll be your operator for today's call. [Operator Instructions]. Please be advised that this call is being recorded at the company's request.

Now I would like to introduce your host for today's conference call Ms. Jaren Madden, Senior Vice President of Investor Relations and Corporate Affairs. Please go ahead..

Thank you and good afternoon, everyone. Welcome to today's call, during which we will provide an update on the company and review our fourth quarter and full year 2021 financial results. Earlier today we issued a press release summarizing our financial results and progress across the company which is available on our website at schrodinger.com.

Here with me on our call today are Ramy Farid, Chief Executive Officer; Joel Lebowitz, Chief Financial Officer; and Karen Akinsanya, President of R&D Therapeutics. Following our prepared remarks, we'll open the call for Q&A.

I'd like to remind you that during today's call, management will make statements related to our business that are forward looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements related to our future financial performance, including our outlook for the full year 2022 and the quarter ending March 31st, 2022; our strategic goals for 2022 and 2023; 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 relating 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 important factors that are beyond our control, including the demand for our software solutions, our ability to develop our computational platform, our reliance upon our drug discovery collaborators, and other 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 discussed on this call 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.

During this call, we will also discuss certain financial and operating metrics which are further described in our financial results, press release, and SEC filings. With that, I'd like to turn the call over to Ramy..

Thanks, Jaren, and thank you, everyone, for joining us today. We are extremely pleased with our execution across all elements of the business in 2021. We continued to drive scale up and adoption of our software, both Life sciences and material science companies.

We also progressed our collaborative programs, 7 of which are in the clinic, underscoring the impact of our platform, and we nominated 2 development candidates in our wholly own programs.

Total revenue was $137.9 million, a 28% increase over the prior year, and this was capped by fourth quarter software revenue of $38.6 million, a 55% increase over the fourth quarter of 2020. We ended 2021 in a strong financial position with cash resources of approximately $579 million.

These achievements set us up for high-value milestones in 2022 and a very bright future ahead. As you'll hear from Karen, we also made excellent progress on our internal pipeline. Our first 3 internal programs continue to advance toward the clinic, the most advance of which is expected to enter the clinic later this year.

And we added 2 new programs to our pipeline in the areas of oncology and immunology. We now have 5 wholly-owned programs and expect to initiate additional programs this year.

To support our drug discovery efforts, we expanded our structural biology capabilities through the acquisition of XTAL BioStructures, a private company based in the Greater Boston area that provides structural biology services to the pharmaceutical and biotechnology industries.

With this acquisition, we have access to more structures and will leverage our protein structure refinement methods to scale up production of high-resolution structures which are starting points for our physics-based computational platform. We have also expanded our global footprint to support multiple areas of our business.

In January, we established operations in Seoul, South Korea, to enhance competitive positioning and support both life sciences and material science customers in this region. In December, we expanded our operations in Hyderabad, India.

Employees in Hyderabad are focused on a broad range of strategic initiatives across the company, including software development and support of our software platform and our drug discovery programs. I'm also very pleased to announce Karen's promotion to President of R&D and Therapeutics.

The promotion reflects Karen's extraordinary contributions to leading our drug discovery team as well as her strategic contributions to expanding and advancing our collaborative and wholly-owned programs.

We are excited by the many advances we've made over the past year, and we expect continued progress across all aspects of our business, our internal pipeline, our collaborative and partner programs, and our software business to support both drug discovery and materials design.

Looking ahead, we will continue to invest in our computational platform, and we expect continued scale up and adoption of our software as our collaborators and customers continue to experience success in rapidly generating high-quality molecules to advance the next generation of therapeutics and materials.

Before I turn the call over to Joel, who recently announced his retirement at the end of February, I want to thank him for his incredible commitment and service over the past 3 years, during which time we debuted as a public company, secured additional financing and a follow-on offering, and strengthened our balance sheet to support continued investment across our business.

During his tenure, Joel helped create our strong financial profile, contributed to the execution of our strategy, continued to build out our strong finance team, and established the Investor Relations and Corporate Affairs function. We wish him the very best in his future endeavors.

We are actively searching for Joel's successor, and we're very pleased with the caliber of the candidates we have reviewed so far. I will now turn the call over to Joel to review our financial results..

Thank you, Ramy, and hello, everyone. I'm very pleased to discuss our 2021 financial results and provide our outlook for 2022. I'll start with a review of the fourth quarter. Total revenue was $46.2 million, up 40% compared to the fourth quarter of 2020. Software revenue was $38.6 million, representing 55% growth compared to the fourth quarter of 2020.

As was the case throughout the year, the growth in software revenue was primarily driven by increased adoption of our solutions by large customers as well as the addition of new customers during the quarter. Drug discovery revenue was $7.6 million compared to $8.1 million in the fourth quarter of 2020.

Operating expense was $48.9 million compared to $35.6 million in the fourth quarter of 2020, reflecting our investment in R&D to advance the science underlying our platform and to progress our internal drug discovery programs, as well as costs required to support a public company infrastructure.

We recorded a net loss of $30.7 million compared to a loss of $11.6 million in the fourth quarter of 2020. For the full year, total revenue was $137.9 million, a 28% increase over 2020. Software revenue was $113.2 million, up 22% over 2020 with strong growth in both life sciences and material science.

Discovery revenue was $24.7 million compared to $15.6 million in 2020, primarily due to revenue recognized from our collaboration with BMS. Software gross margin was 77% in 2021, compared to 81% in 2020, reflecting our investment to expand capabilities to drive and support large-scale adoption of our solutions.

Full year operating expense was $177.1 million versus $124.4 million in 2020 as we continued to invest in R&D and in the infrastructure to support our operations. In 2021, we recorded other income of $10.6 million compared to $34.6 million in 2020, driven by changes in the mark-to-market value of our strategic investments.

Overall, these results demonstrate the ongoing value creation opportunity of our collaboration strategy. Net loss for the year was $101.2 million compared to a loss of $26.6 million in 2020.

And we ended 2021 with cash equivalents, marketable securities, and restricted cash balances of approximately $579 million compared to approximately $600 million on September 30th, 2021. In addition to the financial results we just reviewed, I'd like to report on our key software performance indicators for 2021.

Total software annual contract value or ACV reached $112.1 million in 2021 compared to $92.1 million in 2020, an increase of 22% year over year. For comparison, we also saw 22% growth in 2020 and 18% growth in 2019. The number of customers with ACV of more than $1 million was 15 compared to 16 in 2020.

It's important to note that this change was driven by timing. Even with this change, the total ACV in this category increased to $40.2 million in 2021, up from $35.5 million in 2020. The total ACV of our top 10 customers was $34.1 million compared to $28.5 million in 2020 for a growth of 20%.

Customers with ACV over $100,000 increased to 190 from 153 in 2020, a 24% increase. We reported 98% customer retention in this cohort similar to the 99% retention rate we reported for 2020. Finally, the number of total active customers, those over $1,000 in ACV in 2021 was 1,647 compared to 1,463 in 2020, a 13% increase year-over-year.

We are pleased with the performance across our business. And as we look ahead to this year, we are focused on executing on our strategy and generating long-term growth. At this time, we'll provide our financial outlook for 2022.

We expect total annual revenue to be in the range of $161 million to $181 million, corresponding to 17% to 31% growth over 2021. Software revenue is expected to range from $126 million to $136 million, representing 11% to 20% growth over 2021, approximately 16% at the midpoint.

With regard to software, we are very pleased with our track record and excited about the opportunity for continued expansion. Consistent with prior years, we anticipate that revenue will vary from quarter-to-quarter.

Similar to 2021, we expect the first and fourth quarters to be our largest 2 revenue quarters with a larger proportion of the annual revenue coming in the fourth quarter, as was the case in each of the last 2 years.

Accordingly, we expect the second and third quarters to be our lowest revenue quarter, also consistent with previous seasonality patterns. For the first quarter specifically, we expect software revenue to range from $28 million to $30 million. The range reflects approximately 10% growth over the first quarter of 2021 at the midpoint.

We expect drug discovery revenue to range from $35 million to $45 million, reflecting 42% to 82% growth over the last year. A significant portion of this revenue was driven by the timing of collaboration programs achieving certain milestones and can therefore vary from period to period.

We are pleased with the continued strong outlook anticipated this year, which reflects progress across our collaborative pipeline and our intention to progress our lead internal programs into Phase I clinical development independently.

In 2022, we expect the first 2 quarters to be at revenue levels similar to the first 2 quarters of 2021, with most of the growth coming in the second half of the year, and in particular, in the fourth quarter. I would also like to comment on how we expect operating expense and software gross margin to trend for the year.

We anticipate that operating expense growth will be similar to the 42% annual growth rate we saw in 2021 as we invest in advancing our internal programs into the clinic. We also anticipate the software gross margin percentage to be in the mid-70s.

Overall, we are very pleased with the progress we made last year, which we believe positions us for continued momentum as we look ahead. In addition to the financial outlook for 2022 that we provided today, we have outlined key strategic goals for the next 2 years.

This includes our expectation that we will see further adoption of our software platform with our goal of ACV growth of over 20% in 2023. We also expect an inflection in our drug discovery business with 2023 revenue of at least $100 million.

Notably, the drug discovery revenue goal excludes potential revenue from partnering any of our 3 lead internal programs. I'd like to wrap up on a personal note. I'll be retiring at the end of the month, and I'm looking forward to spending more time with my family before deciding what's next.

It's been an absolute pleasure to be a member of the Schrodinger team over the past 3 years, working with so many great people and to be a part of the company's IPO to help advance our strategy over this time and to build the capabilities required to support a global public company.

I've greatly appreciated the opportunity to work with all of you as well in the investment community, and I look forward to tracking the company's continued success. I'll now turn the call over to Karen for an update on our drug discovery programs..

Thank you, Joel, and good morning, everyone. In 2021, we continued to make important advances on many fronts across our portfolio of collaborative programs and our internal drug discovery pipeline. We are pleased to see multiple programs advance into preclinical and clinical development.

A total of 7 collaborative programs are in the clinic, which underscores the impact of our platform. We are excited about Nimbus's recent announcements highlighting the initiation of a Phase IIb study of the company's TYK2 inhibitor and initiation of a Phase I/II study in their HPK1 program.

Our computational software relies upon high-quality 3D protein structures that are obtained from techniques such as x-ray crystallography and cryo-EM.

Because accurate structures are also core to our drug discovery business, our strategy includes scaling up our structural biology capabilities and our access to high-quality target structures that are fully enabled for our computational platform.

As part of this strategy, last month, we acquired XTAL BioStructures, a private company based in the Boston area that provides structural biology services to the biopharmaceutical industry.

structure-based drug design continues to have a transformative impact on drug discovery, and this acquisition provides a tremendous opportunity for Schrodinger to be at the forefront of this field by combining experimental and computational methods.

Additionally, this acquisition will augment our ability to produce high-quality target structures for our drug discovery programs and in the future expand our offerings to include an advanced and differentiated service that provides customers access to protein structures that have been computationally validated and are ready for structure-based virtual screening and lead optimization.

Now I will highlight the progress made on our 3 most advanced internal programs, MALT1, CDC7, and WEE1. Starting with our MALT1 inhibitor program. We have made significant progress in the last year.

MALT1, a regulator of NF-kappa B that is downstream of BTK, has emerged as a potential therapeutic strategy to treat certain relapsed or resistant B-cell lymphomas and chronic lymphocytic leukemia. In December, we presented preclinical data from this program at the American Society of Hematology annual meeting.

The data presented suggests that targeting MALT1 may expand therapeutic options for patients with certain subtypes of non-Hodgkin's B-cell lymphomas such as ABC DLBCL with the possibility of expanding into other B-cell lymphomas such as mantle cell lymphoma.

Furthermore, our preclinical data has shown that our compounds have strong antitumor activity, both alone and in combination with BTK inhibitors, to overcome drug-induced resistance in samples derived from patients with relapsed and resistant B-cell lymphomas.

We are on track to submit the IND to the FDA for our MALT1 development candidate in the first half of this year. Subject to regulatory clearance, we expect to initiate our first Phase I clinical study of our MALT1 inhibitor in patients with relapsed and resistant lymphoma in the second half of 2022.

As our wholly-owned programs advance towards the clinic, we have enhanced our team in key areas, including early clinical development, CMC, and regulatory affairs. We have also initiated a search for our Chief Medical Officer to support our clinical development strategy and activities. Now I will turn to our CDC7 program.

CDC7 is a protein kinase that is required for DNA replication initiation. CDC7 is also thought to be linked to cancer cells' proliferative capacity and ability to bypass normal DNA damage responses, targeting proteins that play important roles in DNA replication and replication stress is gaining momentum as a therapeutic approach for cancer.

Last year, we selected a development candidate for our CDC7 program. We are very pleased with the profile of our molecule, which has demonstrated strong antitumor activity in preclinical models of AML in combination with venetoclax and other marketed agents. IND-enabling studies are progressing.

However, the timing of some required toxicology studies, which are performed by a CRO, have been delayed due to COVID-19 related issues. We have secured slots to complete these tox studies later this year, and we now expect to submit the IND to the FDA for our CDC7 candidate in early 2023 and to initiate a Phase I clinical study later that same year.

I'll now move on to our WEE1 inhibitor program, which also targets cancer through replication stress and DNA repair mechanisms. We have identified multiple highly-selective WEE1 inhibitors with desirable drug-like properties that show strong pharmacodynamic responses and antitumor activity in preclinical models.

We believe the profile of our compound supports evaluation in the clinic as monotherapy as well as in combination with other agents. We are on track to select a development candidate later this year and expect to submit an IND to the FDA next year. We are also planning to present preclinical data from our WEE1 program in the first half of this year.

As our first 3 internal programs advance towards the clinic, we are adding new programs to our pipeline. In 2021, we added 2 new programs, one in oncology and the other in immunology. We now have 5 wholly-owned programs and expect to initiate additional programs this year.

In summary, our diverse portfolio of collaborative and internal programs is rapidly advancing towards the clinic.

Activities to support expansion of our pipeline into additional disease areas are well underway, and we have acquired internal structural biology capabilities that will allow us to produce high-quality target structures that are fully enabled for our computational platform.

We are excited about the progress that we and our collaborators are making and look forward to updating you on our R&D activities throughout the year. I will now turn the call back over to Ramy..

ongoing growth in adoption and scale-up of our software platform with ACV growth of over 20% in 2023; inflection in our drug discovery business with 2023 drug discovery revenue of at least $100 million, which does not include potential revenue from partnering our 3 lead internal programs; IND submission for our MALT1 program in the first half of 2022 and IND submissions for our CDC7 and WEE1 programs in 2023; Phase I clinical study initiation for our MALT1 program in the second half of 2022 and Phase I clinical study initiation of our CDC7 and WEE1 programs in 2023; publication of data from internal programs in peer-reviewed forums; initiation of multiple new internal programs that leverage our structural biology capabilities; initiation of materials science collaborations in multiple verticals such as clean energy and sustainable materials.

We have an exceptional team committed to transforming the way therapeutics and materials are discovered. And we look forward to providing updates on our progress throughout the year. At this time, we'd be happy to take your questions.

Operator?.

[Operator Instructions]. Your first question comes from the line of Do Kim with Piper Sandler..

Great. First, Karen, congrats on the promotion. And Joel, I wanted to wish you well on your retirement.

On the fourth quarter earnings, Joel, is there anything specific that you could point to in the quarter that drove the strength in software revenue? And as we look at the number of customers with over $1 million in ACV, you said the difference from 2020 to 2021 was a timing.

What does that exactly mean?.

Sure. Thanks, Do, and thanks for those comments. Appreciate it. So with regard to software, we're obviously very pleased with the quarter of 55% growth, the year 22% growth.

And in the fourth quarter, in particular, we continue to see the trends that we've been seeing all along, which is continued progress of our existing customers, many of whom are our largest customers continuing to increase adoption of our solutions.

And in the fourth quarter, we saw some really good examples of that, and some of them were pretty large. And so that really did help drive the business. But I'd say the performance in the business in the quarter and the year was also broad-based. We had growth in both life science and materials.

We had -- if you look at our customers that are over $100,000 in ACV, we had 24% growth not just in customer count but also in spend. And so we clearly had broad-based growth leading to the -- and culminating in the really strong fourth quarter that we reported.

And I'd also point out that, that fourth quarter and the full year was on top of a base year in 2020 that was also very strong. So really good performance, and we're really pleased about the momentum there.

With regard to the timing aspect that you asked about with regard to the customers over $1 million, it happens to be a contract that was renewed in late 2020 and then was renewed again in very early 2022. So just by virtue of a couple of weeks slipped from that count, but it's still a customer and a significant customer..

Okay. Got it. And I also wanted to ask about the drug discovery revenue guidance for 2023 of at least $100 million.

How confident are you on that number? And could you provide some details on the number of underlying programs that it accounts for?.

Sure. Thanks, Do. So we're confident in any time we give guidance, we are pretty thorough when we try to look at our business and forecast it out both in 2022 and 2023. Obviously, there's a number of things that can vary, particularly as you go further out. However, what I would say is we have a portfolio of collaboration programs.

It's about 20 programs now, plus or minus. And so the portfolio is pretty broad. We also have seven that are now in the clinic. That's collaboration programs. And then we have a host of programs behind that in the collaboration portfolio that are approaching the clinic.

So, in general, the opportunity to earn larger and larger milestones comes as these programs progress. And we map out program by program what our opportunities are and we risk-adjust and we're providing an outlook that we believe that we will achieve.

And it's really important to note that, that's really the baseline for the collaboration business, that goal that it does not include any potential revenue from if we partner our lead -- any of our 3 lead internal programs..

Okay. That's great. And a question for Karen.

What's left in the 1 IND filing before you get to that? Have you done a pre-IND meeting with the FDA as one planned?.

Thanks, Do. We are complete with our GLP tox studies, and we are in that last phase of planning for the IND submission. We have actually had an opportunity to interact with the agency, as you're pointing out.

And so we think that gives us a lot of opportunity to submit a package that's well considered, and we expect that to happen as we said in the first half of this year..

Great. And congrats on the quarter..

Your next question comes from the line of Vikram Purohit with Morgan Stanley..

So the first one was on the software sales guidance for 2022. So you guided to a range of an 11% to, I believe, a 20% increase over 2021 at the bookends. Could you just talk about what you think drives performance to either side of those bookends of guidance? And then I have a follow-up..

Sure, Vikram. We can talk about that. So, again, we're coming off of a strong year. We see these underlying trends in both our larger existing customers continuing to increase adoption of our solutions. We have had pretty steady addition of new customers for a long time now.

And so, we think we can continue growing at a strong pace over a multiple-year period. And in 2022, as you said, we've guided to a range of -- that equates to 11% to 20% growth.

And the bookends, as we've described before, really center around how much progress we can make in getting our largest customers to really significantly commit fully and extensively to our approach to drug discovery.

As we've talked about in the past, the gap between even our largest customer's deployment of our solutions, those are -- they're getting larger and larger, but the gap between their deployment of our solutions and the level at which we deploy our solutions on our internal programs and our collaboration programs is still very large, and it's still at a fraction of what we think is optimal that is the deployment by our customers.

So we're working continuously to move customers along that path. We're making great progress. We showed a lot of that in the fourth quarter, and we're excited about the conversations we're having around that, and we think there's a lot of opportunity there.

Obviously, the more that happens, the more towards the top end of the bookend you are, but it's unpredictable. So if for whatever reason, those decisions take a little longer or the upsizing is not quite as extensive as we will be working towards, that sends you towards the bottom end. So that's the natural variation in the software outlook..

Okay. Understood..

Sorry, I would also add, Vikram, we're very pleased with the track record of execution we've had, though, over the last 2 years. And I think we're confident that we can continue to have these discussions and succeed in getting them to move along that path, not just this year in 2022, but over the longer term as well..

Great. Understood. That's helpful. And then I had a follow-up on your wholly-owned pipeline. So you mentioned that there were 2 molecules added recently, I think one in immunology, one in oncology.

And I'd just be curious to get your thoughts on how you prioritize, which mechanisms and which molecules you decide to add to your pipeline and how you weigh the mix of scientific rationale, development pathways, and commercial opportunity when making these decisions.

And on a related note, what is the cadence at which you think you could be expanding this pipeline further in 2022 and 2023?.

Vikram, thanks for the question. In terms of the selection of programs, we're really focused on targets and mechanisms that we believe have preclinical and, more importantly, human evidence. That means some evidence from initial clinical studies for a particular mechanism or indeed human genetics or both.

We don't think it's appropriate for us to take a lot of risk on the biology. And so the targets that we select are both well positioned for our platform in terms of our ability to solve specific design challenges.

And we also look very closely at the clinical landscape, the biomarker opportunities, our ability to generate compelling clinical data in early trials. And obviously, the longer-term potential of the mechanism as it relates to the broader landscape for the indication. So all of that goes into consideration.

And as I said, these key design challenges that we think we can solve with our platform. I think your second question was regarding capacity and growth with the pipeline. We have added the 2 programs in immunology and oncology.

We're looking at a number of programs right now in feasibility that we believe will be replacements for the programs that are graduating out of the pipeline or the discovery pipeline into IND-enabling and clinical studies. So that means that we'll be keeping a steady-state of around wholly-owned programs. Over time, that may change.

But for now, we think that's a good number for us in the discovery portfolio..

Understood. Appreciate it..

Your next question comes from the line of Michael Yee with Jefferies..

This is Andrew Tsai on for Michael Yee. First question is on the software guidance again for 2022. I'm just trying to gauge whether you think your current guidance is conservative.

So maybe talk about whether you think your business is fundamentally accelerating and maybe kind of discuss whether there's even more upside to what you've guided to? Or do you think the bookends that you provided is fair based on what you're seeing out there? That's my first question..

Thanks, Andrew. Yes, we establish our guidance based on what we believe our outlook is. And we're confident in our guidance.

I'd say that at the same time, as we look at the business over a longer period of time and what we think is possible over a multiyear period, we think that, as I said, the pathway for our largest customers to continue to upsize their deployment is significant, and we have a lot of opportunity for growth there.

We have proven that we're able to attract new customers to the business pretty consistently. And we anticipate that both those trends, as evidenced by the overall ACV growth of 22% in 2021 will -- has the opportunity to continue over a long period of time.

And if you look at 2023, the strategic goal that we've outlined of greater than 20% ACV in 2023, that's an indicator that we are confident in the strong continued growth in the business..

And on the drug discovery, again, I know you expect that inflection there in 2023, which excludes partnerships for your lead compound. So I'm curious what your latest thinking actually is for these lead compounds.

Do you have any intention to partner them out even in 2022, if not 2023? And would you be considering like a multi-target thing like the Bristol deal? Or would you, at this stage, partner out a specific program? Your latest thinking would be helpful..

Yes, I can take that, Andrew. So we continue speaking with potential companies who would partner with us in the way that we did with BMS. There's obviously a lot of interest in accessing this platform at scale as we have done across our existing collaborative portfolio.

As you know, for the BMS collaboration, we partnered some programs really early on in the lifecycle of those efforts. And so, yes, there's obviously potential for us to do similar partnerships. With regard to our wholly-owned advanced asset, we have intentions to take those into the clinic, as you've heard today.

We do, though, continue to talk to companies who have synergistic agents, PARP inhibitors, BCL2 inhibitors, for example, that we think will combine well or BTK inhibitors for that matter for MALT1. Our intentions, as I said, are to generate initial clinical data with these.

But in the event that a partner that we think makes sense for us is interested in partnering earlier than that, we certainly have those conversations and make the right decision for the company at that time. A very quick last question is just the inflection in 2023.

Is that going to be like a one-off thing? Or is that like the new sustained level beyond 2023?.

Yes. So, Andrew, we're not providing guidance beyond 2023 at this point. But what we'll say is that we do see, because of the business and the portfolio progressing, that there's a real opportunity to drive very strong revenue in the discovery business. And we've indicated a level for you in 2023 to think about.

And I think that shows you the kind of business that we think it can be, both in terms of the very strong growth rate that that would imply but also just in terms of the size of that business as our portfolio continues to mature, remember, I said that we have 7 programs that are collaboration programs that are already in the clinic and a whole slew that are right behind them.

So it's a robust business that is starting to emerge, and we're excited about the revenue growth opportunities going forward..

Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital..

Yes. This is Lucas on for Matt Hewitt.

I guess for my first question, when we look at the large expansions that were signed in Q4, did all of that revenue get recognized during the quarter, or do some of those licenses not switch on until January?.

Sure. Lucas. Fourth quarter is our largest volume quarter in terms of renewals. And also, we did have some large expansions as well this quarter.

Some of those are for fourth quarter recognition and fourth quarter contract starts and some are for contract starts that flip over to the new year and, therefore, get recorded in deferred revenue at the end of the year. And you can see that our deferred revenue software balance increased by 22% year-over-year versus the fourth quarter of 2020.

So that also shows a large increase and that's reflective of the fact that some of the bookings that we have in the fourth quarter do in fact get recognized in the first quarter as revenue..

Excellent. That's helpful. And then for my second question, historically, customers have had to do some crystallography work on their own before adopting your software.

Now that you've acquired XTAL and can do that work for them, do you foresee an increase in adoption for the software?.

Yes, that's a really great question. This is Rami. I'll answer that. So that's a really great question. Absolutely, that's a big part of the strategy that we saw when acquiring the company. That's not necessarily something that you'll see right away, of course. That will take time.

But our expectation is not just also from the acquisition, but it's from many efforts that we've undertaken in increasing the availability of high-quality structures. And as we succeed in that endeavor, then we will certainly see an increase in the demand for the software..

That's all I had..

Your next question comes from the line of Gary Nachman with BMO Capital Markets..

On your software growth in '22, in an inflationary environment, can you take price on your software programs? Is that baked in there at all to your guidance and the growth in the ACV, I guess, that we saw in '21 and maybe that would spill over into '22? And how much of the growth should be from new business versus existing customers? You're talking at a high level.

Maybe you could specify that a little bit more.

And how much in terms of the life sciences versus the materials, how much is the materials really accelerating maybe over the next year or 2?.

Sure. Thanks, Gary. I can take that. So with regard to new versus existing business, the -- when we see these opportunities for really large increases in a particular quarter or a year, it tends to be more driven by the upsizing decisions of some of our largest customers.

You can imagine $1 million customer can -- if they triple the size of the contract, then obviously that's a pretty big increase and has an outsized impact on the overall growth rate. But that being -- and that has been a steady pattern for the last couple of years.

But we shouldn't ignore the fact that we are attracting new customers, and it's been really steady. We are seeing growth in both life sciences and materials. And in 2021, did attract -- even though we have a lot of life science customers, did attract new customers on that side of the business as new biotechs were formed, a lot of them were formed.

We're also focusing on different geographic markets as well. So we're growing both sides -- we're pursuing both strategies for growth. We haven't really given out -- we haven't broken out the 2 separately.

I would say that the opportunities for these real big jumps though are primarily driven by existing customers deploying our solutions at a much higher level. And can you just remind me what your first question was, Gary? Sorry..

It was on pricing in an inflationary environment, like are you able to take price on your software programs? And also, if there are input costs maybe that go up. We hear other companies that are doing it..

Sure. So we have a product offering that is quite valued in the discovery activities and scientists really need it. We're the largest player in our field. And we certainly have -- we're recognized for being able to charge a fair price that reflects the value of our products.

We do have the ability to increase price, and we do marginal increases generally from time to time. And we don't see that though as the primary strategy to drive growth because we really -- the idea that we really want our customers to increase the number of licenses to the level that we believe they should.

And if they do that, we'll see a multiple effect on our revenue line. And so that is really our strategy. Okay, great. And then just a couple more for Karen.

Can you talk about what the Phase I will look like for MALT1 that you're going to start in the second half of the year you mentioned for relapse and resistant lymphoma? If you could give some specifics on that if you have it. And then just back to you, Ramy.

Just on expanding operations into South Korea, I'm assuming that's to serve not just South Korea but maybe the whole Asia Pac region. So maybe you can just talk a little bit about the type of opportunity that you're seeing there..

Karen, do you want to take the MALT1 program?.

Yes. So Gary, we'll be discussing the design of our Phase I study in more detail as we progress through the year. What I can tell you is that this study is focused on safety, tolerability, as you can imagine, in all-comers with B-cell lymphomas. That's going to be the initial focus of the study.

We are also, of course, thinking about the cohort expansions and how we'll be assessing proof of target engagement as well as proof of biology in this trial. But again, I think we'll reserve comments on the design of the Phase 1 until we're a little bit further along at some point this year..

Yes. And then just rest really quick on the question about South Korea. We already had actually a few distributors in South Korea. So we've been there. We understand the opportunity both on the life science and material science business.

We saw the opportunity and recognized the obvious thing that if we established our own operation there, we can capitalize on the significant opportunity there more effectively. We already have operations in a number of other Asian countries. We have a KK, of course, we have distributors in China.

We do have a pretty significant operation in India and other countries in that region through distributors. So we -- so I hope the answers the question. The South Korea was specific to the South Korean market for now. Okay.

And just in general, when do you think we'll see more of an inflection, I guess, from that overall region in general? Is that -- could that happen this year or will it take a couple of years? Yes. So it does take a little bit of time to establish your presence there and build up the team.

So we're not guiding to any particular inflection in a certain region. But we've seen, for example, what happened in Japan when we did the same thing a number of years ago when we replaced, in some sense, the distributors we had there.

This was quite a while ago with our own operation there, and we've seen that through investment over many years, we can see pretty significant growth there, but it does take some time to build up the presence when you're entering into a new country..

Okay. Great. And I also wanted to wish the best of luck to Joe and also congrats to Karen..

[Operator Instructions]. Your next question comes from the line of Derik De Bruin with Bank of America..

Just to go back on the -- sorry to beat the '22 guide for software and circle back on that. But I'm just curious. What do you think is the driver to get your customers to spend more and to -- how do you upsell them and how they scale up with it, right? You've got a number of programs currently in the clinic.

There's clear use case for using structural biology. The methods are getting better. You've got AlphaFold, you've got other things out there.

So what is that inflection point that drives your customers to say, okay, now we have to do this on a much larger scale?.

Yes. So there are a couple of things. One thing is that we think we've really accomplished is what you are talking about, which is it's clear that the technology works and it's having the impact that we, I think, had always hoped that computational methods would have.

And you see that in our own programs, you see it in collaborative programs, and customers are definitely starting to see it in their own projects. So that kind of check that box off. Now what remains is a couple of things.

One is that you need people to run the software and this is software that a lot of it, and we're working hard to do this to make it as easy to use as possible and I think we've made a lot of progress in that, but there's still -- you still need experts. You need computational chemists to run the software.

And so companies have to scale up their computational chemistry groups and there's -- that's something that that's going to take some time. It doesn't happen overnight. We're seeing, by the way, an interesting trend where more and more chemists are transitioning into that field which is I think a really great sign. So that's one thing.

The other thing is what we've been touching on which is the availability of structures and the prioritization of programs that are structurally enabled, prioritizing those programs. So that again is something that takes time. But we're seeing that trend occurring very clearly.

You see now essentially every pharma company investing in all sorts of structural biology technologies, including cryo-EM, right? Pharma companies are buying their own electron microscopes to do cryo-EM. They're continuing to invest in methods including methods that we provide in structurally enabling projects. But that, obviously, also takes time..

Got it. That certainly makes sense based on some of the other technologies that we cover. So I have -- as a CRO analyst as well I have to ask the question about the delays in sort of like booking space like that.

Could you just talk a little bit more about that? This is something that you've seen Is it with multiple clients that you're seeing this just some sense of what's going on in that area right now in terms of like what's -- what really is like the underlying driver? Just nonavailability, people coming in on top of you spending more, just curiosity?.

Sorry, I'm not sure, were you asking about the delays that Karen mentioned..

Yes, the delays that Karen mentioned. You mentioned you're having [indiscernible]..

Go ahead, Karen..

Yes. This has been an emerging story I think across all of biotech over the last 6 or 7 months.

We've been along with everyone else, there's a couple of species that are required for GLP tox studies that are simply backlogged around the world, the supply of some of these species is limited and that pushing a cue as it were or access to a smaller cohort of animals for those studies.

So we and I think a lot of other companies have been in queue, and we're slowly getting access to those slots. So as you can imagine, a lot of this work has been going on in China, for example. And some of the restrictions that have been imposed around COVID-19 have also had an impact.

But we feel we're on top of it, and we, as I mentioned, have access to our slots for our current DC..

And then just one final question. It's again on the $100 million in '23 target.

Is that a floor number for' 23, right? Or it's basically it's like what's the bookend on your confidence level around that?.

Yes. Well, the way we've described it is at least $100 million for our collaboration business. So we see the portfolio continuing to advance. And as I talked earlier, it's a pretty large portfolio now.

So we have some diversification and can forecast out with some degree of confidence that we're going to hit that level that we said at least $100 million and then obviously have the opportunity if we choose to do so to capture additional value through outlicensing or partnering any of our lead 3 internal programs which is not included in that $100 million..

Your next question comes from the line of Gaurav Goparaju with Berenberg Capital Markets..

Just a quick one for me. Of the 190 customers that you guys reported that had over $100,000 ACV, how many of them are new customers versus customers who may increase their software consumption to exceed that $100,000 level.

I'm just really trying to get an idea of how many customers are actually increasing the consumption versus new customers that are acquiring licenses that are, I guess, exceeding that level?.

Yes, good question. So we don't actually break that out, but I will say this that if you look at the total active customers, clearly, the customer count continues to increase. I know -- we certainly know the customer list that's included in that $190 million, and there are new customers.

There are a lot of biotech companies that were formed in 2021, and we definitely signed up some of those, and those are new customers. And interestingly, we're seeing some of them come in at fairly sizable levels relative to levels that maybe new customers might have started at in the past.

And certainly, that's the case on the materials side as that's dominated by new customers. Although our largest customers on the material side are getting pretty large as well. So really, it is both. But as I said, upsizing does play a large role among our largest customers and also in this broader group..

Got it. And then I guess just piggybacking off of that, right.

Just generally, are you seeing new customers come in, regardless of size, just on average, are they coming in? And I guess, coming in with a large ACV or are they gradually increasing their ACV year-to-year?.

That's interesting..

[Indiscernible]..

Go ahead, Joe. You take it..

Oh, sorry..

No, no, please go ahead, Joe. No, go ahead..

Okay. I was just going to say that it really depends because I think we would have answered that question a couple of years ago that they start lower and then they start to gradually upsize. But as I said before, we've seen examples this year where we -- there were new customers that came in at a much higher level than had been typically the case.

Now clearly, there are smaller companies where they need 1 program or 2 programs that will come in at the lower end of the range. And as they achieve success and build out their discovery efforts, we'll continue to upsize. But I think there's a broad understanding in the marketplace of the power of our technology.

And as people move around and as people form new companies, sometimes the initiation levels are higher than they have been in the past. I don't know, Rami, if you had other things to add..

That's exactly what I was -- exactly..

Perfect. And again, best of luck, Joel, and congrats, Karen..

I'm showing no further questions at this time. This concludes today's conference call. You may now disconnect..