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Ramy Farid

Thanks, Jarren, and thank you, everyone, for joining us today. We are pleased with our progress during the first quarter, which builds on the positive momentum from 2024. Our software and drug discovery revenue demonstrated strong growth. We're confident about our revenue outlook for the year and are reiterating our full-year financial guidance. We are having productive discussions with customers and are encouraged about the opportunities for increased adoption of our software, even with the potential challenges of the macroeconomic environment. Total revenue for the quarter was $59.6 million. Software revenue was $48.8 million, representing 46% growth. Drug discovery revenue for the quarter was $10.7 million, with growth driven by milestones from collaborative programs and the recognition of upfront revenue from our collaboration with Novartis.
We are encouraged by the FDA's recently stated goal to reduce pre-clinical animal testing. We have been pioneering computational molecular discovery for nearly 35 years and continue to develop new solutions to integrate physics with machine learning to accelerate the discovery of safer drugs. We already offer our customers solutions that can be used to reduce the potential for toxicity associated with binding to off targets.
We're also continuing to advance our predictive toxicology initiative. We have structure enabled more than 50 off targets and have been leveraging this technology within our collaborative and proprietary programs with highly encouraging results. We expect to proceed with a beta release of the solution to select customers later this year and expect to make it broadly available to customers once beta testing is completed. We are optimistic about its potential to contribute meaningfully to our long-term revenue growth trajectory.
We are also continuing to advance the science underlying other aspects of our platform. This week, we released our second software update of the year. Major enhancements include new crystal structure prediction software to identify stable crystal polymorphs, which has important applications for drug formulation, and we have also expanded support for protein degrader modeling and launched new capabilities to enable machine learning based T-cell receptor structure prediction, which is important for biologics discovery. We're also continuing to advance our collaborative and proprietary pipeline. We look forward to sharing initial Phase 1 data from our three lead clinical programs starting this quarter with SGR-1505, our MALT1 inhibitor.
Overall, we are well-positioned to advance all aspects of our business in 2025. This is a pivotal year for the company, and we look forward to providing updates throughout the year.
I will now turn the call over to Geoff.

Geoffrey Porges

Thank you, Ramy, and good afternoon, everyone. We're very happy with our financial results for Q1. Software revenue growth was robust and drug discovery revenue was higher than last year as we benefited from the recognition of revenue from our collaboration with Novartis, as well as the recent expansions to other collaborations.
Our operating expenses declined year over year and our cash position was boosted by collections from contracts closed late in Q4, including receipt of the upfront payment from Novartis. Our financial position is very strong, and our business is relatively protected from the turmoil that we are seeing in the capital markets and across many parts of the economy.
Our technology continues to prove its value, and even in these challenging conditions, our customers are increasing their investment in our platform, enabling them to meet their innovation goals at lower cost with better outcomes. We remain very positive about the outlook for the year and are excited to be advancing towards our first clinical data disclosure this quarter.
The Q1 total revenue is $59.6 million, an increase of 63% compared to Q1 2024. The increase was driven by higher software and drug discovery revenue. Software revenue is $48.8 million and increased by 46% compared to Q1 2024. The increase was driven by increased revenue from larger customer renewals in Q4 that were partially recognized in Q1, as well as early expansions and additions to pre-existing multiyear contracts and the increasing contribution of recurring revenue from hosted software contracts.
As expected, most of the growth in our software revenue came from increasing scale of deployments at global accounts. The growth contribution from new accounts and small and emerging biotech customers was minimal.
On-prem software increased by 44% to $25.4 million, and hosted revenue grew by 52% to $10.9 million. Maintenance revenue increased by 15%, and growth was lower due to the continued effect of the transition from on-prem to hosted contracts in prior periods.
Professional services revenue declined by 31%, the service contracts from prior periods were completed, and contribution revenue was $3.8 million this quarter, as we continue to recognize revenue from the Gates funded predictive tox project.
Drug discovery revenue was $10.7 million compared to $3.2 million in Q1 last year. Revenue this quarter was increased based on recognition of the upfront payment from the Novartis collaboration and from other recently expanded collaborations.
Software cost of revenue was $13.5 million in Q1 compared to $8 million in Q1 of 2024. The increase was due to the expenses associated with the Gates predictive tox initiative. We also recognize increases in royalties associated with the Novartis software license and collaboration.
Our software gross margin was 72% compared to 76% in Q1 2024. The lower gross margin was due to the change in revenue mix associated with the Gates grant. Apart from this effect, the software gross margin would have been consistent with the prior year.
Drug discovery cost of revenue increased from $9.7 million to $14.9 million, with the increase being driven by the high costs associated with the initiation of work on the projects in the Novartis collaboration, as well as increased allocation of research staff to collaborations overall.
Our overall gross margin was 52% and was very similar to the overall gross margin in Q1 2024. R&D expense declined $50.6 million in Q1 last year to $46 million in Q1 2025. The decrease was due to the shift in allocation of staff from proprietary drug discovery to collaborations and also lower preclinical CRO expenses for proprietary programs for the advanced to the clinic, all being discontinued.
Sales and marketing expense increased by 2% to $10.4 million based on slightly higher FTE expenses. GNA increased by 1% to $25.8 million, driven by slight increases in professional services. Total operating expenses were $82 million compared to $86 million in Q1 2024. The reduction was made due to lower R&D.
There were no gains in equity method investments in the quarter, and the change in fair value of equity method investments was a loss of $13 million based on the mark to market of our shareholding and structured therapeutics. This compares to a gain in value of $8 million in Q1 of 2024.
Other income was $4.2 million in Q1 compared to $5 million in Q1 2024. The lower other income was due to a lower cash balance and lower yields, partially offset by a favorable effect of currency fluctuations on foreign currency balances. Total other expense was a loss of $8.9 million compared to a gain of $13 million in Q1 last year. Taxes were minimal, resulting in net loss after taxes of $60 million or $0.82 per share, compared to a net loss after taxes of $54.7 million or $0.76 per diluted share in Q1 2024. The fully diluted share cap for Q1 was $73 million compared to $72.3 million in Q1 2024.
Our net operating cash flow was $144 million in Q1 compared to cash use of $39 million in Q1 2024. The reversal of our quarterly cash burn was driven by the receipt of the upfront payment from Novartis in Q1, as well as collections of other receivables that were outstanding at year-end. Accounts receivable declined by $215 million between year end and March 31, and as a result, our cash remarkable securities balance increased from $367 million on December 31 to $512 million at the end of Q1. Current liabilities decreased by 14%, and total referred revenue declined by 5% and remains $210 million.
I'll now provide some comments on the risks and opportunities for our business associated with the ongoing political and economic uncertainty. Schrödinger technology in business is built on a licensing and use platform. As such, at the present time, we do not expect any direct impact on our revenue outlook from US tariffs. It is unclear what form retaliatory tariffs or trade barriers could have, and for that reason it is impossible to forecast if or when they could have a meaningful impact in the future.
We are aware of the risks of new tariffs being applied to the pharmaceutical industry and the impact they could have on industry profitability. At this stage, we are not encountering resistance or reluctance to purchase in our customer conversations, but of course, we are watching carefully for new policies or regulations that might affect the industry's outlook and R&D investments.
Our direct exposure to revenue from China is small, with low-single-digit percentage of our revenue for software in 2024 coming from entities based in China. Although our software ubiquitous in academic institutions, our revenue from that segment is also small, with US academic institutions and government-affiliated organizations such as the NIH contributing less than 4% of software revenue in 2024.
Additionally, we are encouraged by the FDA's public statements about the importance of adopting alternative approaches, including computation for drug discovery and development and believe that our technology is uniquely suited to supporting these goals. While the uneven treatment of biologics and small molecules has been a headwind for our software sales in certain accounts in recent years, that headwind could also be reduced by the executive order regarding the duration of the non-negotiation period for Medicare Part D.
Finally, currency has been a drag on our reported revenue growth from ex US markets for several years. And with the changing exchange rate, we could see some modest benefit to our reported sales from international markets later in the year. Overall, the effect of these variables is hard to quantify at this stage, and they are largely excluded from our financial guidance for the year, although our quarterly guidance reflects our latest and highest confidence expectations for the near-term trends and outlook.
Looking ahead, our financial guidance for the full year 2025 is unchanged. We still expect our software revenue growth to be 10% to 15%, and expect drug discovery revenue to be in the range of $45 million to $50 million. We continue to expect our full-year software gross margin to be in the range of 74% to 75% and expect our operating expense growth to be less than 5% for the year.
Our cash burn this year is expected to be significantly below our cash burn last year, and we remain very confident about our current capital position and a long-range financial outlook.
We expect software revenue in Q2 to be in the range of $38 million to $42 million. We expect that the majority of the year's remaining software revenue will be recognized in Q4, with the balance of drug discovery revenue likely to be approximately evenly distributed through the remaining quarters.
To conclude, Schrödinger had an excellent Q1 with strong financial performance, building on the positive announcements from Q4 and early in Q1. We remain very confident about the outlook for the year and see our business being relatively protected from the volatility and uncertainty affecting capital markets and other businesses and industry segments. We are excited about our approaching clinical data presentations and look forward to talking to you all about those presentations in the coming weeks.
With that, I'll turn the call over to Karen to discuss our therapeutics R&D.

Karen Akinsanya

Thank you, Geoff, and good afternoon, everyone. Our therapeutics team continues to advance our pipeline of collaborative and proprietary medicines. Across our collaborations, we are making important progress in the discovery of preclinical and clinical candidates for several high-value targets.
We are pleased with the growing number of emerging new medicines designed using our platform across programs initiated at companies we co-founded, such as Nimbus, Morphic, Ajax, and Structure. As Ramy mentioned, this is a pivotal year for Schrödinger, with initial Phase 1 clinical data expected across 3 proprietary programs.
Beginning with SGR-1505, our MALT1 inhibitor, our Phase 1 trial in patients with relapsed refractory B cell malignancies is progressing. And we look forward to reporting initial clinical data from this study at the European Hematology Association meeting in mid-June.
As a reminder, this is an open-label dose-escalation study. We plan to provide initial data describing the clinical profile of SGR-1505. This data cut will include safety, pharmacokinetic, and pharmacodynamic data across doses and schedules, as well as PKPD relationship and preliminary efficacy data from patients across a number of B cell malignancies and dose levels. We look forward to sharing the abstract when the EHA embargo lifts next week. The EHA poster will include additional data collected after the cutoff date for the abstract submission.
Following EHA, we will also present data at the International Conference on Malignant Lymphoma taking place later in June. In the second half of this year, we expect initial data readouts from the ongoing Phase 1 clinical studies of our CDC7 inhibitor, SGR-2921, and of our Wee1/Myt1 co-inhibitor, SGR-3515. SGR-2921 is advancing in a dose-escalation study in patients with acute myeloid leukemia or myelodysplastic syndrome.
We are also evaluating SGR-3515 in patients with advanced solid tumors predicted to be sensitive to Wee1/Myt1 inhibition, including ovarian, uterine, and breast cancer, in addition to other solid tumors. These studies are progressing well with multiple dose escalation steps completed.
As with the SGR-1505 Phase 1 trial, the goal of the 2921 and 3515 studies is to evaluate safety, tolerability, preliminary clinical activity, and to determine the recommended Phase 2 dose and schedule. We look forward to updating you on the progress of these studies later this year.
Last week at the annual American Association for Cancer Research meeting, we presented preclinical data demonstrating that SGR-3515 showed improved anti-tumor activity in preclinical models compared with other known Wee1 and Myt1 inhibitors. We also presented preclinical data showing how the dosing schedule for SGR-3515 can be optimized to preserve efficacy while also allowing for complete recovery from target-related side effects.
Additionally, at AACR last week, we reported preclinical data for SGR-4174, our SOS1 inhibitor, demonstrating differentiated potency, selectivity, and drug-like properties, as well as evidence of monotherapy and additive activity in combination with MEK inhibitors or G12CK RAS inhibitors. This data along with the well-tolerated profile of SGR-4174 in GLP tox studies supports further development potential. Over the past three years, we have advanced several programs into the clinic and partnered some of our early-stage programs. We continue to see additional opportunities for value creation from our portfolio through out licensing, new ventures, and collaborations.
2025 is poised to be an exciting year for Schrödinger. We expect broad pipeline progress and are very much looking forward to sharing Phase 1 data from all three clinical programs throughout the year.
I'll now turn the call back to Ramy.

Ramy Farid

Thank you, Karen. As you heard, we are off to a strong start in 2025. I'm optimistic about the rest of the year and look forward to updating you on our progress. At this time, we'd be happy to take your questions.

Geoffrey Porges

Operator, can you queue up the questions?

Ramy Farid

Operator, if you're speaking or somebody else is speaking, we can't hear anybody on our end.

Geoffrey Porges

Yeah. Operator, can you allow us to speak, and we will read out the questions as they submitted to us by email? (technical difficulty)

Question and Answer Session

Operator

Pardon the delay. We are now going to start the Q&A session. (Operator instructions)
Michael Yee, Jefferies.

Michael Yee

Hey guys, great. Thanks for taking two questions. One is thinking about your first ever presentation of your wholly on drug MALT1 coming up soon. Maybe we'll guess which conference it is. But can you rightsize our expectations around any meaningful single agent activity? Do you expect it? What is good, or is this about safety in combination with other therapies in lymphoma? Maybe talk a little bit about what is more important and what should we think about in terms of what is great.
And the second question is financial, maybe for Geoff, you've given guidance on cash burn this year, which is fantastic. If you continue to want to push forward on R&D for your cancer drugs, should we expect that should be a consideration for growing expenses and growing burn, or would you consider other options and when is the right time to partner?
So those are two important questions as we come upon this data. Thank you.

Karen Akinsanya

So first of all, on the 1505 update, we are very pleased that we have both EHA and ICML abstracts. So with respect to what we plan to share, we're really excited to share an update on the profile of SGR-1505.
As you asked, we are providing an initial update, of the dose escalation study. This is a dose escalation in a variety of B cell malignant -- malignancy patients, where we've been exploring safety, PK/PD, and initial signs of activity. We're excited to present that, and we will be providing an initial part of the data which will be in the abstract and then obviously an update once the poster is presented in the middle of June.

Geoffrey Porges

And then Mike, to your question about cash flow, we haven't guided to cash flowing for next year, but I really think that we're in a position where we're maintaining optionality with respect to all three of the leading programs.
As Karen pointed out, these are interim looks at ongoing Phase 1 studies, and those Phase 1 studies don't finish at the end of the calendar year. So I don't see a scenario in which our cash burn goes up substantially next year. And we still have a lot of options with respect to those programs.
So with sort of giving a specific guidance or range for next year, I think that we're in very good shape. And I don't see a significantly greater draw on our cash next year than the investment we're making in expenses this year.

Michael Yee

Perfect. Thank you.

Operator

Brendan Smith, TD Cowen.

Brendan Smith

Great. Thanks for taking the questions, everyone, and congrats on the quarter. I just want to actually ask about the upcoming predictive tox model that you've referenced a few times now. So when you look at what FDA is initiating with the new animal testing guidance and kind of the broader implications there, how should we think about potential points of differentiation for your offering versus maybe some of the other preclinical non-animal stimulators that are out there today? And just any thoughts on how you might price this software relative to the existing offerings that you have. Thanks.

Ramy Farid

Sure. Yeah, we're obviously very excited about the FDA's goal of reducing animal testing. We're also, of course, excited about the solution that we've been working on, that we've been using actually, in a very -- in a prospective way on our collaborative and proprietary programs.
And what's differentiated is the same thing that I think differentiates almost everything that we do in our platform. We're developing highly accurate models that leverage both physics and machine learning where we have the benefit of physics-based methods in the form of accuracy, very high accuracy, and predicting binding to off targets. And the benefits of machine learning, which is, throughput, being able to do it on a large scale. So we think that's what the differentiation is accuracy and is the key.

Brendan Smith

Okay, great. And any thoughts on how you might price it relative to what you do today?

Ramy Farid

Yeah, we have not talked about pricing as we often do with solutions like this is, first, get feedback from customers on the level of accuracy, on the impact, and then we make determinations on the price after that. As we said in our prepared remarks, we are going to be releasing it in a data form to customers this year. So we will start to get that feedback and make a determination on the pricing following the results of the beta testing.

Brendan Smith

Got it, okay. Makes sense. Thanks, guys.

Operator

Mani Foroohar, Leerink Partners.

Mani Foroohar

Thanks for taking the question. Congrats on another great quarter. A couple of quick ones. Some of your competitors admittedly are more leverage towards late-stage elements of drug development, have reported challenges of customer dynamics. They've pointed to large pharma companies delaying decision-making and some smaller players facing budget constraints hasn't shown through in your numbers. Could you elaborate a little bit on the trends you'd observed the year to date and how you'd compare these dynamics versus what you're seeing where you play? And then I have a quick follow-up.

Geoffrey Porges

Sure. Hi, Mani. Yeah. Well, obviously, we're paying close attention to what's going on in the marketplace with all the noise, and I highlighted my prepared remarks. The small so of emerging biotech segment is that's not growing. We're -- I think we're sort of level pegging in terms of the customers that are growing is offsetting the customers that are declining, new customers are offsetting, the customers who are terminating their contracts and scaling back on their R&D. So I'd say we're holding our ground there, and then the growth is being driven by the large accounts.
Interestingly, we are not seeing any bumps or pushback on our renewals, and that includes the software contracts that we have with some of the largest companies in the industry. They're actually going through restructuring. Not just in response to all the issues that we're seeing right now, but for their own reasons because of their portfolio status and things.
So we think that the level of spend on our software is small compared to the scale of their R&D budgets. I think they generally view this as necessary to have not nice to have. And for those reasons, we are seeing that pushback, and that's consistent with the guidance that we maintain. So hopefully, that's helpful.

Mani Foroohar

That is. And you have told me approximately 1,100 times that Schrödinger is not an AI company, but as a company that is native -- that natively uses AI. That being the case, obviously, we've seen a lot of concerns around incumbent industry being disrupted by [AI followers], et cetera. Even companies as large as Google/Apple and Today's News. How do you think about threats that you might face from companies native to -- that are also native AI users, and how do you think about threats to your base business or growth, and what metrics do you follow to make sure that you are defending yourself from these emerging threats most effectively?

Ramy Farid

Yeah, thanks for the question. So first of all, of course, there's no evidence of any threat at the moment. We're very well aware of what other people are working on.
And I think the other thing that's really important to keep in mind is that we have a very deep understanding of what the domain of applicability of AI is, where it's advantages are, and what its limitations are. And I think we've addressed that very well by developing well -- first of all, remember we have tens of thousands of users of our software. We have all these internal programs that we're working on so we have a really good understanding of what's required to advance programs and what's required to make accurate predictions.
So I think our main thesis that machine learning is only as powerful as the training set is it's not something that's all of a sudden going to change. That's a fundamental fact of machine learning whether it applies to ChatGPT, LLMs, self-driving cars, image processing, or chemistry. Machine learning is only as powerful as the training sets, and nobody can just sort of magically produce a training set that will replace the kinds of predictions and the level of accuracy that's possible with the physics-based methods that we've been developing over the last 35 years.
So I think the key is that deep understanding of the fundamental aspect of the technology and making sure that we're always using the state-of-the art technology both in the physics but also of course in machine learning and AI.

Mani Foroohar

Thanks, guys. I'll hop off. I know you've got a lot of other questions in the line.

Ramy Farid

Thanks, Mani.

Operator

Evan Seigerman, BMO Capital Markets.

Evan Seigerman

Hi guys, thank you so much for taking my questions. I want to follow up on some comments that you may Geoff around your conversations with your pharma partners. We asked differently, what could break their sentiment and maybe change their approach to investment in a platform like yours? Like, what are they really looking for?
And secondarily, when you look at kind of the FDA guidance on reducing animal testing, can you just remind us what you guys have done in this space that contribute to this goal? Thank you so much.

Ramy Farid

What are customers looking for? We'll start there. What they're looking for is impact. Is the technology allowing them to design better molecules with a higher success probability? And that takes a little bit of time to determine that, and it requires using the technology on a really large scale as we've talked about many times. So there's a little bit of a chicken and egg problem where you have to be sort of convinced that the technology will have an impact in order to scale up the usage. But in order to scale up your usage, you need to be convinced that it's that's going to have an impact.
So what we're finding is, of course, we've succeeded in doing that quite a number of times. But what we're finding now is that something new is happening, which is the companies that are taking a little bit longer than other companies are to sort of break that cycle and start using the technology to large scale are listening to those other companies. These companies now that are using the technology at scale and seeing this enormous impact are starting to talk about the impact that technology is having more widely, and we think that's going to start to have a really big impact on transforming the industry and how companies deploy this technology at scale, but that's what it is, it's impact. And that can either come internally from them using it themselves or of course by attending scientific conferences and seeing the impact that other companies that have scaled up and are willing to talk about it and that's just happening right now.
So I think the other question you asked was about predicted tox, but I don't remember --

Geoffrey Porges

Animal testing, if there's guidance on animal testing and what we have --

Ramy Farid

Okay, yeah. Because we did, yeah, sure, of course. So obviously, the predictive tox initiative that we've been focusing on is going to have we think a really dramatic impact on that. And like I -- like we said, we're already seeing a pretty big impact from that on our collaborative and proprietary programs.
But there are many properties of molecules that dictate the success in preclinical studies and animal studies and even in the clinic, and we have many solutions in that area, bioavailability, oral bioavailability, solubility, per even efficacy, by the way.
So efficacy has a big impact on therapeutic window. So that's also something that is going to have a really big impact on the success in in preclinical and clinical studies.
In the area of predictive tox and/or toxicity associated with off-target binding, recall that we have had solutions for some of those really key off targets available to customers already, most notably we published on this is [Herb], which is a ion channel that has disrupted preclinical and clinical trials quite a bit by molecules binding to it. So we already have solutions available for predicting selectivity against some of the really bad actors like Herb, is a good example. Of course, the predictive tox project is meant to scale that one or two off targets that we already have to hundreds. That's the goal of the project.

Operator

Michael Ryskin, Bank of America.

Michael Ryskin

Hey, thanks guys, and congrats on the quarter strong start to the year. I want to follow up on one of the earlier questions that kind of touched on opportunity for incremental spend, but I want to phrase it differently. I think that question was sort of in regards to ability to continue to support your three or four leading programs.
I want to ask about maybe sort of broadening the pipeline. You've got the MALT1, CDC7, the various programs that are already in the clinic where you've got Phase 1 readouts upcoming this year, but you've also got pretty healthy pipeline, a lot of which you haven't disclosed openly. Just talk about given the balance sheet and the $150 million you've brought in from Novartis, your thoughts on sort of broadening that pipeline, moving more programs sort of your ability to scale your R&D expense and to expand your clinical assets.

Geoffrey Porges

Yeah, thanks for the question, Mike. I'll just talk about the sort of balance sheet and the cash use, and then Karen talk about some of the preclinical, programs.
So you're right, we are continuing to make a significant investment in identifying and advancing more proprietary preclinical programs that's in effect to sort of backfill the existing clinical programs. That's an investment that we plan to continue. I don't foresee that investment having to step up materially. It's the research group has been very productive already. And frankly, between what we're advancing ourselves and what we're putting into collaborations, I think we're getting a good yield from that. But we're not sensing that we need to make that much larger.
So I think that we're, as I said, In response to the earlier question, we're in pretty good shape in terms of our expense outlook for the next couple of years, not just this year, and therefore, I think that we shouldn't be anticipating a materially higher cash burden as a result of that, even though we have a lot of options available to us with the clinical programs and then also with that next wave of preclinical programs.

Karen Akinsanya

Yeah, certainly. So as you heard AACR, we did present data on some of the emerging programs in our portfolio. Obviously, we're very happy with the profile of those compounds as we described at that recent cancer meeting. However, for the next batch, I think what I'll say is today, we're super focused on the releases that we'll be making in our clinical portfolio this year. The decision around what to do with those next programs in oncology, I think, we will continue to evaluate that and we'll provide you with updates, in due course.
But I also want to emphasize something that Geoff just said. Over the last three years, we have actually taken several of our wholly owned programs and partnered them with companies like Novartis and with Lilly. And so those programs actually have already been funded to some degree through the next stages, and we have a ready-made partner as the programs include discovery. And so obviously, those will not necessarily be transparent because they're partnered already. But we do continue to identify new programs that we think have high potential, and we will consider as they progress whether to partner them early on in discovery or whether to advance them. So I think more to come over time.

Michael Ryskin

Okay, that's all really helpful. And then for my follow-up, I hate asking this question, but I still want to make sure I get it right. It's going to be about the quarterly pacing through the year. I know we've talked about this ad nauseam, just sort of how we shouldn't worry too much about quarterly volatility both in software and drug discovery. Think about it on a more 12-month basis. But still one software came in a little bit better than the guide and then that we had expected once your drug discovery came in a little bit better.
Geoff, I think I caught in your prepared remarks saying that you expect drug discovery for the rest of the year to be a little bit more even throughout the year, 2, 3, 4Q. And then you got it to about $40 million at the midpoint on software. So just in terms of where how those quarters fall versus how they may have looked three months ago, this is just confirming is this just the usual some of the noise and unpredictability, or is there any significant change in how we should think about quarterly pacing timing?

Geoffrey Porges

Yeah, no, good question. I understand the sort of background. So we've been talking about the transition to hosted revenue for some time, and that puts a base into our revenue, particularly in the early quarters of the year. And I think you're seeing that consistently in the early quarters. We're north of 20% of our software revenue coming from hosted contracts, and that base is going to continue to build. So that will help, Q1, 2, and 3.
We still think that the majority of the remaining revenue for the year will come in the fourth quarter. But if I was looking ahead, I'd be saying that maybe, there was a big fourth quarter last year, and with the transition to hosted, maybe we won't have quite the same degree of fourth quarter concentration for software this year that we had last year. But it's still going to be the largest quarter.
And then with respect to drug discovery, yeah, we don't -- I don't want to get into guiding to individual quarters for drug discovery, but I think it's reasonable to assume that the balance to our guide is spread out through the remainder of the year. As you know, that revenue is a mixture of recognizing over an extended period of time, the upfront payments associated with conflicts such as Novartis and that, of course, is going to build and then recognizing smaller milestones as they come along. And in some cases, large milestones when they occur. But those large milestones if we have confidence about them, we'll be included in that in our guidance. So that's the way I would think about why.

Michael Ryskin

Okay. Very helpful. Thanks a lot.

Operator

Scott Schoenhaus, KeyBanc.

Scott Schoenhaus

Hey, team. Thanks for taking my question. I guess it's really a follow-up, Geoff, on that last question that you noted the a large customer pushed forward a renewal. I'm assuming that would have happened in fourth quarter. Can you maybe give us a call on why they did that customer decided to do that?
And then it's the second part of that, was that contract renewal shifted to a hosted versus on-prem? Thanks.

Geoffrey Porges

Yeah, no, good question. So that particular contract had multiple elements to it, and most of the renewal occurred in the fourth quarter, and then there was a part of that contract that was stood up and renewed in the first quarter. So that contributed principally to what contributed a portion of the growth in the on-prem revenue in Q1 compared to the prior year.
And then separately, on the drug discovery side, of course, there was a significant step up as we started to recognize the upfront payment of the Novartis upfront contract. Once we geared up to work on those projects, then we saw that revenue start to be recognized and that will continue throughout the duration of that contract.

Scott Schoenhaus

Thanks. And then I'm following up on just the phasing out -- potential phasing out of animal testing. Are you seeing more demand or inbounds from interested parties, clients broad-based? Is it more biotech given sort of the monoclonal antibody first kind of direction here, or is it broad-based in large pharma also coming to you guys? just curious about sort of how broad-based that demand is. Thanks.

Ramy Farid

Yea. What we can tell you is that since that announcement in early April, we have had inbound interest from -- or questions, I should say, about our initiative which, of course, was widely known to learn more about it. It's very clear that there's significant interest in a solution like the one that we're building. And I think there's exciting because, of course, they're hearing that we've enabled already 50 targets and that the beta is coming out soon so that has drummed up interest.
I think you're asking something else though in addition, which is there somehow increased interest in antibodies? Is that what you're -- no, you're not asking that. Okay, good. Just the predictive tox. Go ahead.

Scott Schoenhaus

No, I was just saying if the demand --

Ramy Farid

What I said answered your question, right?

Scott Schoenhaus

Yeah.

Ramy Farid

Good.

Scott Schoenhaus

Well, I was wondering if it was more pronounced by tier of your clients, like is it broad-based or is it more -- are you seeing more demand in one specific faction of your client base?

Ramy Farid

Yeah. I think it -- I'm not sure I would call it demand. I would say significant interest in the solution from biotech companies. I think pharma companies were already so deeply engaged in those discussions. We've already been talking to them for quite a while actually about this so nothing has changed. We've been talking to them about it since last year actually, when the grant was actually announced, the significant grant from the Gates Foundation. So that interest is already there. What's built up since that announcement is now continued interest from even from smaller companies.

Scott Schoenhaus

Yeah. Got it. Thanks.

Operator

Vikram Purohit, Morgan Stanley.

Vikram Purohit

Hi, good afternoon. Thanks for taking our questions. We had two. The first on the MALT1 data expected in the next couple of months here. Understood that it's regarding to it being a bit of an early read, but what sort of read through do you think is fair to draw between the data you'll show here versus the data we'll get from your other molecules later on? I know investors often try to draw like a sense of platform potential and R&D productivity from one molecule to another, so I just was curious if you have any thoughts on what this data set for the first from the first read I might tell you about other molecules.
And then secondly, on business development and partnerships outside of your currently internal oncology programs, what is your appetite towards BD broadly throughout the year, and are there specific therapeutic areas that you would find more interesting than others? Thanks.

Karen Akinsanya

So first of all, on the clinical update, we are sharing initial data as you point out, monotherapy dose escalation study, it be some malignancies for SGR-1505. We will be sharing, as we said earlier, a safety PK and PD. We think the PD is really important. It lets us tie back to the healthy volunteer study, the results we saw there and now assess that patients, but it is an early read. It is across multiple dose levels, multiple different tumor types, and so it is just that initial read, but we are excited to share the update.
Now, your second part of the question with respect to how this reads through potentially to the other studies, I will say that one was our first R&D, therefore, it is a bit more advanced than the others. What we are proposing to share across all three of these programs is really just the initial profiles of these compounds. But one is more advanced, we've obviously accumulated a bit more data there, and so that will be the first one that we share. And then later this year, we'll have the opportunity to share an update on, I would say, just the preliminary again, PK/PD safety, and we will determine whether there is additional information that we'll be able to share about those molecules.
And these three assets are all different indications. So while CDC7 and MALT1 are both [hemo], they are in different settings, so AML versus B cell malignancy, so it's very difficult to compare and contrast there. But I think that we feel the molecules are performing well and therefore will give people a sense of the original goals of the program, the goals of how we use the platform, and so that will be something we can comment on as we go through the year here.
With respect to BD, I mean, I think we say this often, but it's correct that we are constantly in conversation because of the nature of obviously having a platform that is embedded so broadly across the industry. We're constantly in conversation with other companies that is across disease areas. I think you're aware that we have programs across many disease areas including immunology in our whole pipeline. We are partnering across disease area historically across the deals that we've done.
I mean, I think I've said in the past that neuro is a tough space with respect to translation because there aren't great benchmarks in the clinic or on the approved landscape, and we like to do those types of targets, neuros in particular in collaboration, but that doesn't restrict us from collaborating across all different therapeutic areas.

Vikram Purohit

Fair enough, thank you. Appreciate you taking the questions.

Operator

(Operator Instructions) David Lebowitz, Citi.

Ike Lee

Hi, there. This is Ike Lee on for David Lebowitz. Thanks for taking our question. Two for us. One, your gross margins on the software side have come down slightly from years ago, used to be in the low-80s, now we're looking at guiding for mid-70s in the short term. In the long term, as you're looking to add on these additional products, the prementioned toxicology products and other software products in the future, what do you expect gross margins will be on the software side?
And then two, with regards to the FDA guidance on shifting attention away from animal testing, other than the theoretical benefit to your company and the programs you've had, have you had any conversations with regulators before or after the announcement as to what that actually means for a different business segments you might be thinking about? Thank you.

Geoffrey Porges

Okay. I'll jump in on the gross margin question. We think that our gross margin should revert to that prior range after we have completed the Gates funded predictive tox project. We had signaled that revenue was contribution was going to negatively affect gross margin for the period that we are recognizing that revenue and funding that project. Currently, I think we're expecting that to be mostly completed by the middle of next year, unless of course, it's extended for some reason, which would be fine, too.
So and then we -- over a longer term, I would expect the gross margin to be similar to the that range that you mentioned, or perhaps slightly better. Over time, I think as the scale of our software deployments go up. And also, some of the royalties drop away a little bit, you could see, a slight -- I'm not talking about multiple percentage points, but a slight increase in that gross margin performance.

Ramy Farid

Yeah. And with regard to speaking with the FDA, absolutely, just very simply we are, of course, engaged with them at multiple levels, and we fully expect to continue to increase that engagement as our predictive tox solution essentially comes online.

Operator

And it seems that there are no further questions at this time. That concludes today's question-and-answer session and today's conference call. You may now disconnect your lines at this time.