SOPHiA GENETICS Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Sofia Genetics First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode.

Speaker 1

After

Operator

Please note this event is being recorded. I would now like to turn conference over to Catherine Baylon, Head of Investor Relations. Please go ahead.

Speaker 2

Good morning, and thank you for joining us on Joining me today are Doctor. Georgi Kamblag, our Co Founder and Chief Executive Officer and Ross Muken, our Chief Financial Officer and Chief Operating Officer. Before we get started, I'd like to remind you that the management team will make statements during this call that are forward looking within the meaning of U. S. Federal securities laws.

Speaker 2

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Cautionary Statement Regarding Forward Looking Statements in Form 6 ks on file with the SEC. Except as required by law, Sophia Genetics disclaims any intention or obligation to update We'll advise any financial or product pipeline projections or other forward looking statements whether because of new information, future events or otherwise. This conference call contains time sensitive information and is accurate only as of its broadcast, May 9, 2023. This presentation includes non IFRS financial measures.

Speaker 2

These measures are calculated by management and do not have any standardized meaning under IFRS. These non IFRS measures supplement IFRS measures, but should not be viewed as substitutes for IFRS measures. We have included a reconciliation of IFRS measures to non IFRS measures in our press release issued this morning, which is available on our website. Please note both the replay of this call and the earnings release will be available on our website in the Investor Relations section. And with that, I'll now turn it over to Jyrki.

Speaker 1

Thank you, Catherine, and good morning, everyone. We appreciate you joining us on our call this morning. I am pleased to share that our Q1 results came in strong With total revenue for the Q1 growing 37% year over year on a constant currency basis after adjusting for COVID-nineteen related revenues. We delivered this growth while maintaining our fiscal discipline, resulting in meaningful expense reductions from the prior year period. And so I am equally pleased to tell you that our operating loss on an adjusted basis was €16,200,000 an improvement of €4,800,000 for the Q1 of 2022.

Speaker 1

On today's call, I will start by reviewing our progress in the Q1 as it relates to our strong business momentum And the continued customer adoption of our market leading platform. And I will then turn it over to Ross Muken, our Chief Financial Sir and Chief Operating Officer to share our financial results for the period in more detail and our outlook For the remainder of 2023, and then we will end by taking your questions. Let me start with a review of the Q1 highlights. Momentum in our business continues to be robust on a global basis. We added 18 new logos in Q1.

Speaker 1

Of our more than 7 50 customers, 437 core Genomics customers that utilize our platform regularly through our dry lab bundle and integrated access modes. Our strong Q1 performance is demonstrated by very robust usage numbers across the board. For the Q1 of 2023, analysis volume across our core Genomics customers across proxy for patients Was 77,819, an all time high, up 9% sequentially and up 18% year over year. When excluding COVID-nineteen related volumes, Platform Analysis volumes were 75,868 for the Q1 of 2023, up 12% sequentially and up 25% year over year. We ended the quarter at nearly 30,000 analysis a month, indicating that we are well on our way I will now highlight some areas of particular strength in the quarter.

Speaker 1

In EMEA, France, a country with one of our largest and longest standing presence, continues to demonstrate strong growth. Customers such as Institut Gustave Roussier in Paris, among the top cancer centers in Europe and arguably among the top Institut Gustave Roussy began working with Sofia Genetics in 2017 with a vision to offer patients personalized treatment. They will now be using the SofiaDDM capabilities for the analysis of over a dozen cancer related applications, including solid tumors, hematological and hereditary cancers, establishing our platform as a record genomic analytics platform. We also recently established for Gustave Roussy a new bidirectional communication link from Sofia DDM directly to their database. This will enable them to facilitate more efficient interpretation of their research data And help to further grow the internal knowledge database of FCT Gustaf Rousse.

Speaker 1

In the APAC region, I would highlight India, which has usage growth well ahead of our company average in the quarter and well ahead of our expectations. During the quarter, Krishna Diagnostics, a central lab, went live on Sofia BDM Technology. Krishna Diagnostics is India's largest diagnostic service provider in radiology and pathology. They will be expanding their current next generation DNA sequencing by adopting Sofia DTM for their hereditary cancer needs. In addition, we announced that UniPASS, A leading diagnostic brand in India has launched HRD testing capabilities with Sofia DDM.

Speaker 1

The Sofia DDM HRD solution will enable Unipath To retain full ownership of their data, saving time and expense, while offering comprehensive genomic insights powered by deep learning algorithm. In LatAm, Brazil is a country that delivered usage growth in the quarter, well above the company average. In this region, I would highlight for you DASA as an example of an expanding customer within our land and expand strategy. Daza is the largest diagnostic company in Latin America and the largest integrated healthcare network in Brazil, Serving approximately 10% of the Brazilian population, DASA has been longstanding customer and partner of Sofia Genetti. A year ago, DASA launched HRD testing capabilities on Sofia DDM.

Speaker 1

And we are pleased to tell you that just 1 year after implementation, DASA has now analyzed over 2,000 samples using HRD on Sofia DBM, a true testament Of the democratization of data driven medicine. Next, turning to Norang customer momentum, I would like to highlight a recent win at the University of Maryland Medical Center, UMMC, We selected SofiaDDM to enhance their capabilities around rare disease detection through the combination of oral exam plus mitochondrial DNA sequencing. Thanks to Sofia Didiam, UMMC can maintain their sample in house and using our artificial intelligence and machine learning capabilities, Find a more efficient way to analyze and interpret data, further developing their expertise in rare diseases. Looking at the Q1 from the standpoint of application areas on the SofiaDDM platform, in rare disease, We saw one example sequencing data volumes grow above company average year over year, which supports the broader view that As sequencing costs continue to grow, customers will shift to larger panels at higher volumes. We are encouraged that this trend supports Increased value for those that enable large scale data production within an increasingly complex workflow.

Speaker 1

In cancer applications, hereditary cancer and solid tumors grew volumes above company average and some newer ARS like HRD and liquid biopsy grew analysis volumes in triple digits. On the biopharma front, We continue to be very active in our engagement with top biopharma companies. The more we discuss our capabilities with the top 20 players, The more we realize our need to have real world and real time data. At the recent American Association For Cancer Research, AACR meeting, we noted high interest in new applications And particular focus on MSK access liquid biopsy, not the last of which included discussions around Dx global commercial partnerships to support upcoming drug launches with several top 20 pharma. At the AACR meeting, we gave a talk on the decentralization and collective intelligence in precision medicine, Highlighting the benefits of having a harmonized platform approach to promote the greatest reach in the 70 plus countries we serve, while simultaneously collecting key data in real time and real world that can benefit decision making.

Speaker 1

Interest in our multicentric deep lung 4 study was high, particularly with respect to multi modality and predictive analytics, With discussions at the conference looking to apply a similar approach, but beyond lung and into additional indications such as prostate and breast cancer. As you know, Sofia Genetics started 12 years ago on the clinical side and clinical has been our primary customer focus to date. Biopharma is a new class of customer for us. And while other informatics payers have approached the market launching initially with biopharma, We feel confident about our approach and its uniqueness and value. As we introduce BioPharma to Sopia Genetics and provide them this unique pathway to anonymize real time and real world data not previously available.

Speaker 1

We believe in our differentiation and its likely success over time. On a related note, We are very much looking forward to attending ASCO, the conference of the American Society of Clinical Oncology next month In Chicago, where Sofia Genetics Technology will be featured in several poster sessions. Of note, our collaborators The Saint Leon Berard in Lyon, France will provide an important update on the clinical validation of HRD using samples from the PAULA-one study, which was the study supporting the approval of AstraZeneca's PARP inhibitor olaparib in the first line treatment for ovarian cancer. Additionally, Sofia will be showcasing exciting new results in the multimodal analytics space as applied to kidney cancer and highlighting how our proprietary multimodal capabilities enable next generation sequencing stratification of patients according to risk of progression. We expect this work may open many promising avenues for further collaborations with biopharma companies.

Speaker 1

Taking a step back, I would like to touch on our continued scientific innovations. On this topic, I would like to review for you today A recent publication we made, which was accepted in Transnational Medicine. It involves the topic of molecular barcoding, a genomics technique that allows labs to detect mutation signals with low tumor content, which is becoming quite popular in applications such as somatic genomics profiling or MRD tracking. However, Its benefit in different application contexts is not well studied. At Sofia Genetics, We use DNA sequencing data generated by molecular barcoding from various types and quantities of input materials such We have demonstrated that benefits of applying molecular barcoding systems are not uniform across different genomic applications.

Speaker 1

We are excited that our work has been accepted in the Journal of Translational Medicine, a peer reviewed journal, and will help clinical labs to understand better their Molecular barcoding system called Qmin that encodes the barcode in a novel way and is combined with Probability based variant calling algorithms. This technology has already been incorporated into our offering, notably liquid biopsy and will facilitate the detection of mutation signals with low tumor traction. Now moving from scientific of our business to technology, I think it is worth highlighting that last month we attended the HIMSS conference, which is perhaps the most influential health information technology event of the year, a gathering of approximately 40,000 attendees. This year, we were thrilled to attend alongside Microsoft, where we shared a booth And course this learning lunch. Atrium's development in generative AI and LLM were highlighting In the provider space, large language model is a type of artificial intelligence algorithm that uses deep learning techniques And massively large data set.

Speaker 1

Our new collaboration with Microsoft will leverage these same technologies as well as Conversational AI Technologies from Microsoft 2022 acquisition of Nuance to create a scalable approach to integrate various and unstructured multimodal data to train and test the AI in our ClearPath model. Ultimately, The goal is to enable the collection and sharing of large data sets historically found not just within the EMR, but also in doctor notes as well as other unstructured formats. With all this momentum, you can sense what makes us super excited about In March, Sofia Genetics was named to Fast Company's prestigious annual list in the World's Most Innovative Companies for the 2023. And in April, Sofia Genetics joined the ranks of Actelion and Lonza in accepting the Swiss Biotech Success Stories Award for our outstanding Contribution as a leader in data driven medicine. So to conclude my section, I feel as excited today as Ever that Sofia Genentix has the element in place that will enable us to accomplish what we set out to do 12 years ago, To harness data from the global community, to generate actionable insights that contribute meaningfully to patient care and patient outcomes, Insights that contribute meaningfully to work our customer success and that deliver outstanding performance of Sopia Genetics in 2023 and beyond.

Speaker 1

And now I will turn the call over to Ross to discuss our financial performance in more detail.

Speaker 3

Thank you, Yerdi, and good morning, everyone. I'm pleased to share that we started 2023 on a strong note, continuing our commitment to sustainable growth. Turning to the financials. Total revenue for the Q1 of 2023 was $14,000,000 compared to $10,900,000 for the Q1 of 2022, representing year over year growth of 29%. Constant currency revenue growth was 34% And constant currency revenue growth excluding COVID-nineteen related revenue was 37%.

Speaker 3

Platform analysis volume, Including volumes from our integrated access customers was 77,819 for the Q1 of 2023 Compared to 65,694 for the Q1 of 2022, the 18% year over year growth was attributable Excluding COVID related volume, platform analyses grew a healthy 25% year over year in the period. 4 Genomic customers grew to 4 37 as of March 31, 2023, up from 426 in the prior year period. This included 14 new routine customers in the quarter. Of note, our definition of core genomic customer now includes all three access modes, including integrated access versus only bundled in dry lab previously and is a better representation of DDM land adoption. Annualized revenue churn rate was 4% during the Q1 of 2023, in line with our expectations.

Speaker 3

Net dollar retention for the quarter improved sequentially on a reported basis 107%. Constant currency net dollar retention, excluding COVID related revenue, was 118%. Strong NDR and a healthy level of backlog continue to provide us with a high level of revenue visibility going forward. Gross profit for the Q1 of 2023 was $9,700,000 compared to gross profit of 6 point An increase of 47% compared to adjusted gross profit of $6,900,000 in the Q1 of 2022. Adjusted gross margin was 73% for the Q1 of 2023 compared to 64% for the Q1 of 2022.

Speaker 3

Of note, in the period, we did again benefit from an expected one time credit of approximately $300,000 related to our previously disclosed cloud optimization efforts. Overall, I remain encouraged by our progress on gross margin expansion And I'm increasingly confident in our medium term goal of sustaining adjusted gross margins in excess of 70%. Total operating expenses for the Q1 of 2023 were $29,000,000 compared to $31,700,000 for the Q1 of 20 22. Adjusted operating expenses were $26,300,000 compared to $27,900,000 in the first Quarter of 2022. Headcount, our most significant expense, was down versus the prior year, but remained relatively flat sequentially.

Speaker 3

We continue to make progress on containing our discretionary expenditures and remain hyper focused on maximizing capital efficiency while sustaining targeted growth levels. Turning to operating loss for the Q1 of 2023, it was $19,300,000 compared to with $16,200,000 compared to $21,000,000 for the Q1 of 2022. Cash and cash equivalents were $162,000,000 as of March 31, 2023. Now turning to our 2023 outlook. Based on our strong start to fiscal year 2023, we are reiterating all elements of our annual guidance.

Speaker 3

We continue to expect reported revenue growth to be at or above 30% in 2023. Constant currency revenue growth excluding COVID-nineteen related revenue for 2023 is expected to be between 30% 35%,

Speaker 4

in line

Speaker 3

with our previously highlighted long term expectations. Of note, we continue to expect a headwind to 2023 reported revenues of approximately $1,000,000 related to a ceasing of COVID-nineteen related contribution, which was minimal in the Q1. This will equate to a headwind of approximately 19,000 analysis to reported volumes. Furthermore, we would note that Change rates remain highly volatile, but at the moment, we anticipate a modest impact to reported results, albeit I would note They have improved slightly from our Q4 call. Lastly, following on strong cost performance continuing in the Q1 of 2023, I turn the call back over to Yergi for the closing remarks before we take your questions.

Speaker 1

Thank you, Ross. We're extremely proud of our performance, which we believe reflects our continued ability to execute on our vision and the opportunity ahead. Sofia's success stands on our ability to delight customers and continue driving more and more usage of our platform. I am encouraged and as confident as ever about the long term path that we are on. We have a fantastic opportunity to In closing, thank you to our Sofia colleagues, partners, customers and investors for joining us in our journey.

Speaker 1

Without you, none of this would be possible. Please note, next month, we are attending the William Blair Growth Conference in Chicago. I look forward to continuing to update you on Sofia's

Operator

We will now begin the question and answer session. And our first question will come from Tejas Shiban of Morgan Stanley. Please go ahead.

Speaker 5

Hey guys, good morning and thanks for the time here. Maybe I'll start with one Ross or perhaps Yuri you can chime in as well. I think you did a 30,000 sort of monthly run rate here in March. I think that was that compares to about 4,000 at the end of the last quarter, so really nice tick up there. But you've kept the guide sort of unchanged here.

Speaker 5

Just wanted to get some color around the degree of like conservatism in light of the recent momentum here. And Ross, I think in your prepared remarks, I caught You mentioning something about a change in volume definition. Does that sort of like play into this sort of monthly run rate dynamic at all? Any color would be helpful. Thank you.

Speaker 1

Yes. Good morning, Tejas, and thanks for the questions. Indeed, you are touching something we're very excited about. So first, no, there was no change on the definition for the volume of analysis. The change in the definition was for the Number of recurring platform customers.

Speaker 1

So on the volume of analysis, indeed, We end up with high demand in Q1, almost 30,000 analysis, to your point, in March. And all in all, 77,900 and 18 analysis, including COVID related analysis in Q1, Which is basically 18% up versus Q1 2022. And even more important, I would say, it is just 9% up Versus Q4 2022. I think the demand suggest really comes from hospitals and labs that are adopting bigger Sequencers, right. And I've been traveling recently as well in Canada, in Montreal and in New York, and it was Really fascinating to see how hospitals are moving, if we refer to Illumina sequencers beyond NextSeq to NovaSeq.

Speaker 1

And I think This is primarily now driving higher volume of consumption as well as the consumption of larger gene panels. When it comes to the guidance, maybe I will leave Ross answer to you.

Speaker 4

Thanks, Tejas. So in terms of Just the start to the year and the full year guide, I would say, obviously, we're encouraged by demand in general. And we had very strong bookings All throughout last year and obviously as we've talked about that gives us a good degree of visibility. And so I would say relative to our own expectations, we did come in a bit above in Q1 on the volume side, so it was strong overall and we did close the quarter quite well. It is a consumption based model, I will remind you.

Speaker 4

And so, it's not as if you get up to that run rate and then you're all of a sudden, catering at I think we'll expect some variability, particularly in the Q3, where you typically see in the summer months a bit of a dip. But Overall, we're very encouraged by the start. In terms of the definitional change, there was a slight benefit, but it was de minimis. Integrated is a very, very small percent of our business, less than 1%. So not much change there.

Speaker 4

This is truly, I would say, underlying Volume strength and again, if you look globally at where we're winning some business in some of the new countries, I'm sure Yurhi will talk about it as well. Some of these are our initial starts are quite high volume. And so, we're very encouraged overall around sort of the environment and, obviously look Forward to be able to continue to deliver on our results for the year and given its Q1, we We decided not to make any formal change. And we obviously aim to be able to continue to deliver on what we We will obviously update you, but at this point, I think it's prudent to leave it as is. Got it.

Speaker 4

That's helpful. And actually,

Speaker 5

it's a nice segue into my next question. Yogi, you highlighted a couple of sort of marquee wins in India over here, one with UniPASS and the other with Krishna Diagnostics. How big is that opportunity for you over the medium term? And to what degree are you seeing cross selling sort of kick in among your existing customers there? You highlighted UniPASS being more HRD.

Speaker 5

Are they starting to adopt like some of the other tests as well? And same question for Krishna and your other existing customers?

Speaker 1

Yes. Thanks for that question, Tejas. First, we're very proud, right? Our tagline is democratizing data driven medicine, and so we're very proud to Help as well indeed market names, but in countries which are other than the U. S.

Speaker 1

And Europe. So as a reminder, we started in India signing Tata Memorial Hospital, so another marquee name with whom we are working on multiple applications, but we with them on solid tumor testing and a bit similarly indeed with Unipass and Krishna Diagnostics. So these are customers that we have onboarded on the first application, so for one of them it has been on HRD testing, which is, I think, an application where Now we can tell we have unique capabilities given the adoption we've been adding since the year time. But to your point, yes, we have as well upselling opportunities into these centers as we have in any. And so just to remind to everyone who is listening to us, our model is really land and expand.

Speaker 1

So we penetrate an account most of the time with one application such as HRD. And then once they start adopting our platform, This gives us the opportunity to expand beyond other applications. And so along those lines, beyond India, where we are actually very enthusiastic, We are as well very happy with the performance of some of the historical centers that we have recently expanded. That's that we've been talking a lot about and we're now we've been announcing and celebrating the fact that over the last 12 months, We've been helping them on doing 2,000 analysis on HRD, but as well another market name in Europe, maybe the most sophisticated Cancer Center in Europe, Institut Gustave Roussy, with whom now basically we work so that we help them Across all the cancer applications they cover and for which they produce genomics data. So very interested and I would say very Excited about the penetration in India.

Speaker 1

And I think this will give us ideas as well eventually to go in the future to other similar markets.

Speaker 4

And I would just add, one of the interesting dynamics is obviously we've seen adoption there both of central labs as well as academic medical centers. So I think that's quite encouraging for the market. We also recently did an event with our partner GE there, which I Say was quite good in terms of broad branding across quite a number of hospitals. So obviously, you know, it's a very large country in terms of population. They've come a little bit later, I would say, in Asia Pac to the sequencing game, but obviously they're bringing huge population.

Speaker 4

So even at lower price points, It's a really nice long term opportunity for us, but again, one of many across the globe where we're seeing really nice adoption.

Speaker 5

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

Speaker 1

Yes. Luke, thanks, Tejas. Indeed, we announced these partnerships, which are important partnerships in For our Q4 results, right, in March? April. Sorry, in April.

Speaker 1

And since then, we've been very nicely working with both companies. We are revising the partnership yesterday in our executive team meeting. So we are being able to create a number of opportunities with existing and new customers in the U. S, in Germany in particular, by combining our platform with their consumables. So we're very excited about those partnerships, and we believe that To your point, this is early.

Speaker 1

But if we are successful in the first opportunities we work on together, that this should benefit as well to Sofia In being able to land new customers and continue to grow significantly the number of analysis quarter on quarter.

Speaker 4

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

Speaker 5

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

Speaker 1

Yes. Thanks for calling this one, Tejas. This is a result of a lot of discipline. So maybe taking a Step back, right? We've been able to grow year on year on constant currency and excluding COVID with 30 At 37%, while in the meantime, we're being basically able to improve our gross profit Year on year by 47%, right?

Speaker 1

So I think definitively, this highlights the discipline we added In being laser focused on the cost side and basically being pretty selective targeted in the investments we're making. Very proud with this gross margin, big improvement indeed. Just as a reminder, 23% on a gross margin adjusted basis compared to 64% in Q1 2022. So kudos to our teams at Sophia because they have been working very hard to be, I would say, even more efficient than we have ever been. And when it comes to the guidance, I will leave it to Russ.

Speaker 4

Yes. So, obviously, really impressed by the team's execution here. It's been a big focus as you know, right, as we're trying to push toward profitability. There's a number of levers, right? You obviously have revenue growth, you have your incremental Gross margin and then you have OpEx controls.

Speaker 4

And so we've been trying to balance all three. I think here we're really proud of the gross margin Execution on the technology side, our partnership with Microsoft and our efforts around architecture, I think are really playing off there. Cost of hosting and cost of storage, but the other dynamic that's happening is there is a shift and we'll talk about it I'm sure later to larger panels, The whole genome sequencing and so we're also on that path to kind of preparing for a bigger explosion of data. And so in that, we are Ensuring we are future proofed in terms of where all of these different technologies are going. But frankly, some of this is just Good old fashioned rolling up your sleeves and saving money and execution and labor absorption and all of the The long term guide that I do think are obviously our confidence in sustaining, let's say, 70% plus gross margin continues to go up.

Speaker 4

And obviously, At a later date, as we take a look at it, we'll have a formal update for you on sort of the targets. But certainly, you would think relative to where a software business Should operate, we're getting closer to what you would normally expect from a consumption based business. And frankly, If you compare us to some of the players on the technology side, PureTech players, we're actually now above those levels. So I feel really good about our discipline and execution.

Speaker 5

Got it. Thanks guys. Appreciate the time.

Speaker 1

Thank you, TJ.

Operator

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

Speaker 6

Hello. Thank you for taking the questions. This is Marta on for Julia. So I have two quick questions. Maybe you could discuss macro headwinds you experienced in the quarter.

Speaker 6

I know towards the end of the call, you mentioned that FX has traded better, but What are you seeing perhaps in terms of customer funding constraints? And are there any differences that you're seeing geographically? Thank you.

Speaker 1

Yes. Thank you, Marcin. So first, I would start highlighting that there is demand everywhere, Right. So when it comes to the macro level, but in genomics, right? So from the recent visits I had personally In the U.

Speaker 1

S. And in Canada or in Europe, it's obvious that the demand is growing. And I would say from 1 out of 2 meetings we're doing, it's clear that there is an opportunity for Sofia to either expand The usage of the platform for a new application or otherwise land the platform with the new customers. So In that sense, I would say at the macro level, when it comes to clinical genomics, huge excitement. A lot of excitement as well on the biopharma side, Where I would say, there is a growing demand on getting access to tech capabilities that on being able to work with a taxpayer that can get access to real time and real world data through a network of 750 Plus hospitals and labs in 70 countries.

Speaker 1

Beyond that, maybe on the macro level when it comes So the currencies and so on, I will leave Ross' comments.

Speaker 4

Yes. So obviously, for us, just given the ex U. S. Exposure, Currency movements, which I would say have been quite volatile, continue to pump around. I wouldn't say it's had an effect on demand.

Speaker 4

It's more on a reported basis. And so again, just sort of something outside of our control, but certainly, as we think about sort of the remainder of the year, there's no reason for us to think You're going to see anything different than sort of what we saw in the recent period, which is strong underlying demand, but then quite a bit of noise on the reporting side. I will say, at the customer level, we certainly see economic pressures, right, in certain parts of the world, particularly in the U. S. For a number of the customers on the labor side, labor markets for a lot of our folks are still quite tight or some of the larger central lab players are obviously Moving to cut costs, I would say in some of that, frankly, for us, it's a positive, right?

Speaker 4

Whether that means they need us To help them with menu expansion or with cost savings or on the COGS side, we've had a lot more of those conversations with a number of different players. But frankly, The underlying dynamic for the industry overall, at least as we can see, is still quite good. We're certainly though always prepared for changing the environment, right. And so we're in the field all the time. We obviously have a very large presence Globally, and so we're small, but our ears are to the street, but we don't know much more in terms of how Whatever happens over the remainder of this year economically will sort of play out.

Speaker 4

But I would say for us, we're prepared for any We're also thankfully in a business where the visibility remains quite good. And so overall, while not everything plays out exactly as you want, we tend to be able to also attempt We tend to be able to also attempt to pull different levers to make sure we're hitting our results. And so we're going to obviously continue to Attempt to do that for the remainder of this year.

Speaker 6

Great. Thank you. And I guess the second question more on the modeling front.

Speaker 1

Yes. Thank you, Martha. So indeed, as well answer to Tejas, we're very proud about the gross margin performance For Q1, which was 73% on an adjusted basis versus 64% in Q1 2022, This has been the result of definitively growing the business, 30% 37%, sorry, Year on year on constant currency, excluding COVID versus Q1 2022, but this has been as well the result A lot of focus on targeted investments as well as continuous improvement on better controlling costs and in particular, Our indirect costs. So again, kudos to our teams. I think this is a strong quarter, and we need to recognize all the hard work of our Sofia, colleagues.

Speaker 1

And beyond that, Ross, I don't know if you want to give some color on how you See that evolving in the future.

Speaker 4

Right. So obviously our business being consumption based, it tends to follow a bit of what you would think of as the utilization cycle, Which tends to be sort of building over the course of the year, a seasonal dip in 3Q and then I would say a bit stronger Results in the Q4 and this is similar to what we've seen in the past. I would say this year, The one caveat I would give is just given some of the timing of some large contracts coming on, I would expect the 3rd Q4 to be even a bit Stronger than is typical for us just in terms of overall payments. But overall, I would say we'd follow On an analysis basis, more of the normal sequencing of our year. Now on the gross margin We did call out about a $300,000 benefit from the cloud side in Q2 that will cease Sorry, in Q1 that will cease in Q2.

Speaker 4

So you will see now sort of, I would say, the new run rate of gross margins in the Q2 for us that we Hope to obviously build off of it, but certainly some degree of variability in either regional demand or in product demand can always influence that number. So I'm not going to give you an exact amount for 2Q or the remainder of the year, but I would say you certainly to pull out that $300,000 benefit as you think about Q2 and then again think about that being sort of the new rebasing For where we are as we now come out of this period where we spent quite a bit of energy on gross margin expansion.

Speaker 6

That's very helpful. Thank you.

Speaker 1

Thank you, Martijn.

Operator

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

Speaker 7

Hey, good morning. This is Kyle on for Dan. Thanks for taking the questions here. Maybe starting on just the composition of the guidance, Can you just remind us what is implied in your guide for volume and pricing this year? And Can

Speaker 3

you provide any color on

Speaker 7

what the average revenue per platform customer was in 1Q? Thank you.

Speaker 4

So in terms of the guidance, right, and we're focused really on that 30% to 35% ex COVID growth. I would say there, we're still expecting volumes to be in the high teens, and then the remainder obviously come from ASP and I would say mix in pharma, right? So that sort of contribution Today, there is really no change to that even though obviously we had better than anticipated volume growth in the Q1. Certainly, as we think about our business, again, it is consumption based. And so there could be timing elements, which is for us why Again, given we're in Q1, we want to remain conservative on the outlook.

Speaker 4

But again, we're constructive with how things have kind of developed In terms of the full year picture. In terms of the other portion, I don't know, Yirby, if you have anything else you want Add there, but for me, we generally feel quite confident with what we've communicated.

Speaker 7

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

Speaker 1

Yes. So as you remember, Kyle, we started our journey by first building our platform, Serving customers which are in the clinical space, right? And this is because we wanted to own a network of connected hospitals and labs that would be Computing real time, real world data that are then being computed through the platform and our algorithms and On which basis we're being paid as we compute the data. And as a second, we knew that when we would have been able to build such a network, This would be extremely valuable to help patients working with the biopharma companies pre and post approval of drugs. So this has been a more recent market to us, but the market where as we're being, I would say, announcing a number of deals, we have been seeing great traction Since a year now.

Speaker 1

And maybe I will call 2 of the announcements we made last year and beginning of this year with Boundless Bayon, AstraZeneca. So these partnerships are being well executed. But as you know, unlike our business on the clinical side, which is consumption based and purely, if you like, Based on the volume of data we compute, this type of partnerships are sometimes based as well on specific type of milestones where we need to deliver objectives, and we're basically getting access to the data might be a step, where computing data might be another step. So what basically I'm telling you is that while indeed these opportunities and partnership we signed are being well executed, You should indeed consider that they will come rather towards the end of the year in terms of revenue recognition.

Speaker 4

And as a quick reminder, particularly relative to the pharma customer base, right, as you remember, As we've reported previously, ARPU had been around, let's say, 100 ks roughly, and that's more indicative, I would say what a clinical customer would look like. On the pharma side, it's multiples of that, right? And many times Significant 7 figure or 8 figure even contracts potentially over time. And so with that, obviously start date And sort of when they ramp is really important from a cadence perspective. And so you can imagine with the visibility we have on the clinical business, Obviously, there we feel quite good even though it's consumption based on how that will fall.

Speaker 4

On the farm side, we're still early enough where Even a month or 2 months or 3 months change in start date will have a pretty material impact quarter to quarter on Recognition, again, overall, the contracts are quite visible. But in that, that's why I would Say for this year with some of the ramping, you do see a little bit more recognition of revenue likely in the second half of this year. But that will continue in terms of Some of those moving parts dependent on the pharma starts. And again, there as we have more pharma contracts, it will start to average out And will be less noticeable to you on the reported side. But remember, we don't also give analysis volume relative to pharma.

Speaker 4

And so you Typically, we'll see that as many of that is around data development on the ASP side. And so just from a modeling standpoint, keep that point in mind.

Speaker 1

And I would add, Kyle, beyond the modeling side for the revenue recognition, which is definitively important and where I think you understand that We have already these opportunities in the bag, and we're executing them. Even more maybe important to highlight that the Demand on the pharma side continues to grow. I think the strategic offering of Sofia along the 3 d, Which is from discovery to development to deployment all around data is more and more understood. And at ASCO, we already have a lot of

Speaker 7

Got it. Thank you, guys.

Speaker 1

Thank you, Kyle.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Doctor. Jurgen Campbellong

Speaker 1

Sofia, and I really would like to thank all the Sofians who have been working very hard and being very disciplined, very passionate so that our Performance could be such. Stay tuned. We're going to be at the ASCO Conference in beginning of June In Chicago, following that, we will be as well at the William Blair Conference. And so we will be very eager to meet Partners and investors, while we are in these conferences. Thank you so much again, and have a good day.

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Earnings Conference Call
SOPHiA GENETICS Q1 2023
00:00 / 00:00