Schrödinger (SDGR) Q3 2026 earnings review
Schrödinger lifts its software outlook, but operations still burn cash
Schrödinger, which sells physics software for designing drugs and materials, grew its commercial software bookings while narrowing its operating loss. Annual contract value excluding grants rose 24%, and commercial software sales grew 6% after shrinking in the first half during the shift to cloud subscriptions. Chief executive Ramy Farid raised the full-year outlook for both contract value and drug discovery revenue, though a single partner milestone drove the drug discovery beat.
| Contract value excluding grants | +24% from a year ago (~$44.7M by our math) |
|---|---|
| Total revenue | $64.5M +19% from a year ago |
| Operating loss | -$26.1M narrowed from -$45.9M a year ago |
| Full-year contract value outlook | Raised $4M middle of the range: 14.4% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because commercial customers drove the 24% bookings growth without relying on related-party Gates Foundation grants, and research cost cuts trimmed the operating loss by $20 million. One caution: operations still burned $48 million of cash in the quarter by our math, and the raised drug discovery outlook implies fourth-quarter drug revenue drops by nearly half.
The question now is whether fourth-quarter renewals keep growing near the 20% nine-month pace or slow to the 11% rate implied by the full-year plan. Either management is leaving a cautious cushion ahead of its biggest renewal quarter, or multi-year pharmaceutical expansions are slowing down. Fourth-quarter contract value and initial 2027 targets will settle it.
🐂 Bull Case
Commercial Contract Value Grew 24% Without Grant Help
Schrödinger measures its software sales using annual contract value (ACV), the yearly billing value of its customer agreements. Last quarter, a $7 million grant from organizations tied to Bill Gates supplied nearly a quarter of that figure. This quarter, commercial demand carried the growth on its own.
- ACV excluding grant contributions: up 24% from a year ago, to about $44.7 million by our math
- Total ACV: $44.7 million, up 17% from $38.3 million a year ago
- Trailing four-quarter ACV: $214 million, up $6 million from last quarter
- Full-year ACV outlook: raised by $4 million, to $222–232 million
Because total ACV and commercial ACV were both $44.7 million, new grant billings were near zero this quarter. Delivering 24% commercial growth against a tougher third-quarter comparison shows that customer demand held up without early contract renewals or related-party grants. That gave chief executive Ramy Farid room to lift the full-year contract target for the first time this year.
What to watch: fourth-quarter ACV, where the full-year outlook points to $119–129 million by our math. Because the fourth quarter makes up more than half of the year's renewals, beating the top of that range would show that large pharmaceutical customers are expanding their multi-year commitments.
Cloud Shift Progresses and Software Sales Grow Again
Schrödinger is moving customers from software installed on their own computers, which it books upfront, to cloud-hosted licenses, which it books evenly over the life of the contract. That accounting shift pushed reported software revenue down in the first half of the year, even while billings rose.
In the third quarter, hosted software revenue rose 49% from a year ago to $17.2 million. Hosted contracts made up 45% of software sales in the quarter and 32% over the past four quarters, up from 30% last quarter. Even with that cloud shift, commercial software revenue rose 6.2% from a year ago to $38.2 million after falling in both the first and second quarters.
The trade-off showed up in profitability: software gross margin slipped 1.5 percentage points from a year ago to 75.2%, "reflecting the company’s ongoing transition to hosted licenses". What to watch: trailing four-quarter hosted share in the fourth quarter. Another step up toward the 75% target for 2028 alongside positive software revenue growth would ease concerns about the accounting drag.
Research Cuts Trimmed the Operating Loss by $20 Million
Last year, Schrödinger stopped running clinical trials on its own and cut staff, aiming for $70 million in annual savings so it can reach positive cash earnings by the end of 2028. The cost cuts are now dropping through to the income statement faster than in the first half.
Total operating expenses fell 13.0% from a year ago to $64.4 million, after dropping 4% in the first quarter and 6% in the second. Research and development — the cost of running lab programs and building software — fell from 78.7% of revenue a year ago to 52.9%, a drop of 25.9 percentage points. General and administrative overhead fell 8.6 percentage points to 31.4% of revenue. Together with higher drug revenue, those cuts narrowed the operating loss from $45.9 million to $26.1 million.
What to watch: fourth-quarter operating expenses. Keeping quarterly spending near $64 million would bring full-year costs in near $281 million, almost $30 million below last year's $310 million base.
🐻 Bear Case
Drug Revenue Still Relies on One-Off Milestones
Farid said the company's sustained track record in drug discovery "gives our partners the confidence to expand their software commitments". Alongside selling software, Schrödinger discovers drug molecules with partners and takes equity stakes and milestone payments in biotechs it co-founds, adding a new $55 million venture called Tectora Therapeutics this quarter.
Drug discovery revenue rose 85.9% from a year ago to $24.2 million, "primarily due to the recognition of a milestone payment from Structure Therapeutics" after its obesity drug entered a clinical study. Management raised its full-year drug discovery outlook by $10 million, to $75–85 million. That repeats the second quarter, when a $10 million payment from Ajax Therapeutics drove a $10 million outlook raise.
Because nine-month drug discovery revenue is already $70.1 million, the new full-year target leaves just $5.0–15.0 million for the fourth quarter by our math. At the middle of the range, fourth-quarter drug revenue would fall 48% from a year ago. The segment's growth is coming from lumpy partner payouts rather than a rising quarterly baseline.
What to watch: fourth-quarter drug discovery revenue against the implied $10 million middle of the range. A drop back to single digits would confirm that ongoing research service revenue shrinks as older upfront payments wind down.
Core Operations Burned $48 Million of Cash This Quarter
Narrowing the accounting loss on the income statement has not stopped cash from leaving the business. Even after cutting operating expenses by 13%, Schrödinger posted a $26.1 million operating loss and a $37.7 million net loss for the quarter.
Through the first nine months of 2026, operating activities used $96.5 million of cash. By our math, that means operations burned $47.6 million in the third quarter alone, and free cash flow was negative $48.9 million. Total cash and marketable securities dropped by $45.4 million over the three months to $373.4 million. In the first half of the year, $67.5 million in cash payouts from selling biotech stakes hid that operating burn, but no new equity sales arrived in the third quarter.
What to watch: fourth-quarter operating cash flow, which benefits from year-end software renewal collections. If fourth-quarter collections do not cover the nine-month deficit, Schrödinger will finish 2026 burning cash from operations.
Risks this quarter didn't answer
Four standing concerns from prior quarters could not be checked from the earnings release alone.
- Sales from new AI products: the release gave no contract value for Bunsen, its AI assistant for drug workflows, or its toxicology tool for a fifth straight quarter; the year-end commercial launch of Bunsen is the next test.
- Contract length in the cloud shift: remaining contract backlog by segment was not in the release, so the quarterly filing must show whether multi-year deals are shortening.
- Customer concentration: two customers made up 42% of revenue last quarter, and the quarterly filing's footnote will show if that reliance eased.
- Competition from pure AI models: Schrödinger published battery research in Nature using machine learning force fields, and the conference call Q&A is the next place to check how it defends its pricing.
👓 Other Themes
Grant Revenue Split Out as Related-Party Funding Shrinks
Schrödinger changed how it presents its income statement this quarter by splitting "contribution" revenue and costs onto their own lines and restating prior periods. The company said this line "relates to grant agreements accounted for as non-exchange contributions, rather than commercial software contracts". All $2.2 million of third-quarter contribution revenue came from related parties, down 60% from $5.4 million a year ago as older Gates Foundation grants wind down.
💲 Other KPIs
Total deferred revenue — cash billed to customers for software and drug research not yet delivered — edged up $1.3 million from last quarter after falling in both the first and second quarters. It remains down 21.1% from $191.7 million at the end of 2025 as upfront collaboration payments are recognized into revenue.
The value of Schrödinger's stakes in partner biotechs fell from $73.6 million at year-end after it cashed out $67.5 million in the first half and recorded a $14.8 million mark-to-market loss this quarter. Excluding those stock-value swings, by our math the third-quarter net loss was $23.0 million.
Share count rose 1.7% from 73.6 million a year ago due to employee stock options and stock grants. The molecular software group paid $7.9 million in stock-based compensation during the quarter, down 26.9% from a year ago, and did not buy back any shares.
🔮 Guidance
Raised. The company lifted its full-year contract value target by $4 million after holding it steady for two quarters, calling for 12–17% growth over 2025 (14.4% at the middle of the range). By our math, that leaves $119.3–129.3 million for the fourth quarter, or 11.5% growth at the middle of the range against 17% in the third quarter.
Raised. Management lifted its drug discovery target by $10 million for a second straight quarter after booking the Structure Therapeutics milestone, pointing to 41.9% full-year growth at the middle of the range. By our math, with $70.1 million already booked in the first nine months, the plan leaves $5.0–15.0 million for the fourth quarter, down 48.2% from a year ago at the middle of the range.
Unchanged. The biotechnology software group still expects full-year operating costs to come in below last year's $310 million total. With nine-month spending at $216.7 million — down 7.8% from the first nine months of 2025 — the full-year ceiling looks comfortably within reach barring a fourth-quarter spending jump.
❓ Key Questions
Why Did Schrödinger Stop Giving Next-Quarter Contract Targets?
After giving a one-quarter-ahead ACV target in both the first and second quarters, the release gave only full-year numbers this time. Because the fourth quarter carries more than half of annual billings, investors need to know whether the omission is just calendar practice.
How Much Contract Value Comes From Bunsen and Toxicology?
Management has declined to size sales from its predictive toxicology tool and its new Bunsen AI assistant across five quarters. With Bunsen's full commercial release due by year-end, a dollar figure is needed to prove the new products add to growth.
Are Cloud Contracts Shortening Overall Backlog Duration?
Total software backlog fell in the first half even while annual contract value grew, suggesting customers may be trading multi-year on-premise deals for one-year cloud subscriptions. What was the average contract length in the third quarter compared with a year ago?
What Was the Dollar Size of the Structure Milestone?
Drug discovery revenue beat its implied second-half pace because of a payment from Structure Therapeutics, and the full-year outlook rose by $10 million. Knowing the exact payment size shows how much of the $24.2 million quarter came from recurring partner research.