SOPHiA GENETICS SA Q2 FY2022 Earnings Call

Good day, and welcome to the SOPHiA GENETICS Second Fiscal Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Jennifer Pottage, Head of Investor Relations. Please go ahead.

Welcome to SOPHiA GENETICS’ Second Fiscal 2022 Earnings Conference Call. My name is Jennifer Pottage, and I’m the Head of Investor Relations at SOPHiA GENETICS. Joining me today are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer; and Ross Muken, our Chief Financial Officer. Before we get started, I would like to remind you that management will make statements during this call that are forward-looking within the scope of U.S. federal securities laws. These statements are based on management’s current views and assumptions which are subject to material risks and uncertainties that could cause actual results or events to differ materially from those projected. Additional information regarding these risks and uncertainties are included in the section entitled cautionary statement regarding forward-looking statements and Exhibit 99.2 of the report on Form 6-K filed today with the SEC. Except as required by law, SOPHiA GENETICS disclaims any intention or obligation to update or revise any 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, August 9, 2022. Please note, the replay of this call as well as the earnings release and associated slides will be available on our website in the Investors section. And now I’ll turn the call over to Jurgi.

Thank you, Jen, and hello, everyone. I’m pleased to be here with you today to share the progress of yet another solid SOPHiA quarter with healthy demand across our core platform offerings and key geographies, as well as steady momentum in our major initiatives underlying our strategic pillars. Despite the challenging macroeconomic environment, our success as a company continues to be driven by the forward-thinking healthcare institutions and life science leaders that are consistently choosing SOPHiA as their trusted cloud-native analytics platform. But before diving in, I would like to take this moment to thank all the dedicated SOPHiAns whose efforts fuel our success each and every day. I’m proud to lead this talented team on our ambitious journey to democratize data-driven medicine and build a global network of collective intelligence for healthcare. On today’s call, the narrative for the second quarter will revolve around an overarching theme: sustainability. Our core focus today will be on sustainability and highlighting some of the investments and actions we have already made that will keep SOPHiA on its path of consistent and attractive long-term growth, as well as placing us on a clear path toward profitability and cash flow generation. We have been primarily focused on building our core capabilities and infrastructure to drive outside growth momentum and realize our sizable possible addressable market. Now that we believe we have created a solid foundation, our plan is to transition into a more sustainable investment model as we have always intended. I am happy to share that many of the crucial capital investments needed to scale our business and support our growth plan over the medium term are well underway. Given this dynamic, we would expect operating leverage to become increasingly apparent in the upcoming period and provide us with an extended cash runway through 2025 and beyond. I am proud of the many achievements we have made over the past few years. We built a broad network of customers globally through a strong product portfolio. We computed a tremendous amount of data which can be leveraged by both our clinical and biopharma customers to create meaningful insights. On top of that, we’re also preparing for the deployment of CarePath this year, a new model of our platform that will bring to life our aspirations of providing multimodal longitudinal data to our core customers to support their diagnostic and treatment decisions. The seeds of our long-term success have already been planted, and now is the time for us to begin harvesting the fruits of these efforts. Now let’s get into the Q2 highlights. Starting off with new customer adoption and the expansion of the SOPHiA network. We’re hyper-focused on building long-lasting relationships with new customers to increase and diversify the platform’s network. Customer growth on a global scale proved to be resilient this quarter despite macroeconomic and geopolitical challenges, which have primarily impacted us on a reported basis due to the unfavorable FX headwinds generated. While global growth is a priority altogether, we remain concentrated on North America, our largest potential market, where we continue to advance our strategy and see positive development. To that end, on top of continuing to penetrate leading academic centers, we are also making solid progress in penetrating the centralized lab space in North America. We look forward to sharing more details on our momentum very soon regarding these efforts. Consumption trends across the board were steady in Q2. SOPHiA’s sales strategy revolves around ensuring that new and existing customers recognize the full range of use cases of our platform to broaden and deepen customer relationships. You may have heard us talk about SOPHiA’s traditional land-and-expand model on previous earnings calls. Cross-application consumption continues to be key to deriving mutual benefit between us and our customers, expanding key customer wins into transformative long-term business relationships. Total recurring platform customers grew to 388 in the second quarter of this year, up from 367 customers in the second quarter of 2021. The total number of platform analyses increased to approximately 66,000 in the second quarter, up from approximately 63,000 analyses in the second quarter of 2021. Year-over-year, our core platform analysis volume, excluding COVID-related analyses grew approximately 17%, while total analysis volume grew approximately 5%. Overall, global usage has generally tracked according to expectations with the exception of Turkey, where we saw a notable decline in the period due to the impact of the lira’s continued depreciation and its implication for reimbursement rights. In another Q2 highlight, we recently finalized an additional agreement with GE Healthcare to further integrate data between GE’s Edison platform and the SOPHiA DDM platform. We are thrilled to be taking this step with them to deepen our partnership and enable our assured customer base to interpret complex data and generate novel insights. Additionally, this past June at ASCO, SOPHiA and GE Healthcare presented together in a joint symposium about the respective efforts to unlock the promise of data-driven medicine in cancer through the use of multimodal data. Our Chief Medical Officer, Dr. Philip Mooney, presented the preliminary findings for DEEP-Lung-IV, the observational clinical study that we launched to validate predictive signatures of response to immunotherapy for patients with advanced non-small cell lung cancer. At ASCO, we believe that we showed an initial 80% predictive value for such responses, which is incredibly exciting. ASCO itself was a big success for us, resulting in numerous meaningful conversations with customers, especially the biopharma community, who recognize the value not only in the rich volume of data we have computed on our platform but also for the value of our algorithms which can help improve the insights and quality of their own data. Additionally, with respect to DEEP-Lung-IV, the insights generated from the study are also expected to accelerate the development of and enhance the capabilities of CarePath, which is still on track to be deployed later this year. CarePath will offer advanced data visualization, cohorting, and ultimately predictive capabilities through a single comprehensive lens throughout the patient journey. We anticipate that this module will complement our biopharma business by helping life science customers select the right patients for clinical trials and offer them robust patient analytics as well as insight throughout the course of their trial. We are encouraged by recent discussions, and it is clear that our value proposition to biopharma companies continues to grow with the expanding scale of our multimodal data and platform capabilities, along with continuously improving predictive algorithms. Overall, Q2 was a successful quarter as we continue to execute on our core business while building the foundation for our future. We’re optimistic for the second half of the year, and our focus remains on our long-term growth and accelerating our trends to sustainably view the SOPHiA of tomorrow. And with that, I will now hand the call over to Ross to take you through our financial and operating results in more detail.

Thank you, Jurgi, and good morning, everyone. We delivered healthy results for the second quarter of 2022 and are reiterating our full-year outlook for constant currency revenue growth of 30% to 35%. Second quarter revenue grew approximately 15% year-over-year to $11.7 million from $10.2 million in 2021 despite significant headwinds on FX, which negatively impacted our growth by approximately 1,500 basis points due to a material depreciation of the euro, Swiss franc, and Turkish lira against the U.S. dollar in the period. Excluding the impact from COVID-related revenues, constant-currency revenue was approximately 36% for the period. Our net dollar retention rate remains above 120% as of Q2 2022. The slight decline in NDR is particularly attributable to the aforementioned FX headwinds, a slightly higher annualized revenue churn of 7%, which is considered standard in the software space, and the decline in COVID-related revenues as our customers are reducing the scale of their COVID-related operations. Platform analysis volumes increased to approximately 66,000 analyses in the second quarter of 2022 compared to approximately 63,000 analyses in the second quarter of 2021. Analysis volume grew approximately 5%, reflecting lower contribution from COVID-related products, as well as challenges in our Turkish market that Jurgi referenced earlier. Core platform analysis volume, excluding COVID-related analyses grew a healthy 17% year-over-year. Average revenue per platform customer increased to approximately $92,000 compared to approximately $84,000 for the prior-year period. Gross profit in the second quarter of 2022 was $7.6 million, an increase of approximately 22% compared to gross profit of $6.2 million in the second quarter of 2021. Gross margin was 65% in the second quarter of 2022, compared to 61% for the second quarter of 2021. Adjusted gross margin was notably strong at 67% for the second quarter of 2022 compared to 62% in the prior-year period. Total operating expenses for the second quarter of 2022 were $31.7 million compared to $22.2 million in the second quarter of 2021 on an IFRS basis. R&D expenses for the second quarter of 2022 were $9 million, an increase from $6.4 million in the second quarter of 2021, which underscores our continued investment in technology and product development, particularly as we prepare for the initial deployment of CarePath later this year and an increase in share-based compensation. Sales and marketing expenses for the second quarter were $8.2 million compared to $7.6 million in the second quarter of 2021. General and administrative expenses for the second quarter were $14.7 million compared to $8.2 million in the second quarter of 2021. Of note, a majority of the increase in expenditure is related to our scale-up as a public company, public-company-related expenses, an increase in share-based compensation, and the investments we made to achieve CE-IVD certification this quarter. As a reminder, the vast majority of our expenses are headcount-related as is typical with any cloud software business. Operating loss in the second quarter of 2022 was $24.1 million compared to $15.9 million in the second quarter of 2021. Adjusted operating loss in the second quarter of 2022 was $19.6 million, compared to $14.3 million in the second quarter of 2021. Net loss in the second quarter was $24.7 million, or $0.39 per share, compared to $18.4 million or $0.38 per share in the second quarter of 2021. Adjusted net loss in the second quarter of 2022 was $20.2 million or $0.31 a share, compared to $15 million or $0.31 a share in the second quarter of 2021. Cash and cash equivalents were approximately $216.6 million as of June 30, 2022. Turning to guidance, we are reiterating our previously presented constant currency revenue growth range of 30% to 35% for the full year 2022. Demand trends overall remain healthy, and given our high level of visibility, we do not expect a material shift in our underlying fundamentals in the second half. Despite our continued confidence in our core business, FX headwinds have worsened materially since our original guidance, and in turn, our reported range for full-year 2022 revenue now translates to be between $47 million and $49.5 million. Of note, this range is based on June 30 FX rates. Furthermore, following Jurgi’s theme of sustainability, I also want to reiterate that we are committed to our shareholders to be diligent with respect to organic and inorganic growth objectives and investments. We have put in place numerous initiatives to enhance productivity and efficiency to maximize our capital runway with an eye towards long-term profitability. With that being said, we recently conducted a comprehensive review of our cost structure and are implementing optimization strategies, in particular with regards to our research and development efforts as well as our corporate spend, with the aim of extending our cash runway and bridging toward profitability and cash flow breakeven. I am pleased to share that based on our conclusions from our updated planning exercise, we currently envision sufficient capital on hand over the next several years, placing us on the pathway to profitability and cash flow generation and in turn self-sustainability. Our efforts will remain focused on balancing the cadence of investments required to achieve our growth ambitions while keeping a focused eye on driving superior returns. Fortunately, as Jurgi mentioned earlier, many of the upfront investments we have made in 2022 should aid in our ability to meet this dual mandate. Thank you for your time this morning. I am looking forward to seeing many of you in New York at SOPHiA’s Investor Day next month. And now I will turn the call back over to Jurgi.

Thank you, Ross. As we look to the second half of our fiscal year, we are on solid footing. Despite some of the current macro challenges, we believe that the growth and unique capabilities of our platform, which we continue to augment with new product launches, will drive global customer adoption and increased usage from our customer base. We remain optimistic about SOPHiA’s journey and our continued leadership in using the power of data analytics and predictive AI to transform the world of healthcare. While we have accomplished a tremendous amount already, we’re just getting started. Before I open the call to questions, I want to remind everyone that SOPHiA’s Investor Day is taking place on September 20 in New York City. We hope to see you there. Thank you again for joining our call today. And operator, we’ll now take questions.

[Operator Instructions] And our first question will come from Tejas Savant with Morgan Stanley.

This is Neil on for Tejas. So last quarter you talked about the strong visibility into the pipeline for net new business wins through the second half of the year. And based on the direction you’re seeing with HRD along with other major partners such as AstraZeneca and Ambry, can you break out some of the puts and takes here on the guidance range and how should we think about revenue phasing through the second half, factoring in the increased FX impact?

Yes, thank you for the question. I will take your question regarding the bookings, and then I will let Ross comment on any impact you could or not expect on the revenue side. So on the booking side, we’ve seen the bookings healthy and stable, I would say, over the last quarter. And we definitely see more demand for applications like HRD, which becomes more and more important in terms of signature in the overall oncology effort. In particular, we are starting to see demand in the U.S. by the central lab. So we have good hope that indeed this should enable us to grow revenue in the mid to long term. Ross, I don’t know if you want to further develop on the revenue side.

Thank you. So obviously, with respect to the guidance, the material change that we had this quarter was really around FX, right? That continues to be the biggest swing factor related to reported revenues. If you think about it from an organic or core perspective, I would say we’ve modeled utilization relatively conservatively for the back half of the year. So no real expected change in the underlying demand curve that we had predicted in the first part of the year, albeit I would remind you seasonally Q4 is typically our strongest quarter. To your point on the phasing, just given the time it takes to set up HRD clients, which is typical for any new start, that was going to push some of the revenue to the back part of the year. We continue to expect that to be the case. I would say from a recognition perspective, we probably have a bit more variability around our biopharma business than we do HRD. It is possible we see a quicker uptake of HRD related revenue relative to the model, but I would say ultimately, Pharma is probably where we have the bigger swing point just because of the size of those contracts, right? We have a number of things projected for the back end of the year that we’re quite confident on recognizing, and we have a few other elements that could lead us to some degree of upside. One last one, and I’m sure we’ll get to another piece—we’ve also, I would say, modeled Turkey relatively conservatively for the rest of the year, and we’ve tried to take that into consideration as that piece of our business is, as maybe Jurgi will talk to later, was a bit challenged in the quarter.

Got it. Thank you. Considering the macro volatility and some of the erosion you’re seeing in FX, are you starting to see any signs of shifting customer demand or signals of tightening budgets, particularly in regions such as Europe? Given the value proposition presented by your platform to enable lower-cost bioinformatics, can you give us some color on how those customer conversations are progressing?

Thank you for the question, Tejas. So overall, if we look at our user trials, which are a proxy of our revenue, given we’re a consumption-based cloud player, EMEA has been stable this quarter, while Turkey has been down materially because of the impact that Ross was mentioning, FX, which impacted basically reimbursement in Turkey, leading to less consumption. So on that, as Ross said, we’ve been prudent in our forward-looking forecast, but we expect EMEA to be stable. In NORAM, APAC, and LATAM, we continue to experience stronger growth. We don’t see any sign of this being decelerated. To your point, I think, given now that the market expects some private leaders to be more cautious on cost, it may be that this gives us a favor in the adoption of our platform, because we believe that with our platform solution we can accelerate the adoption of precision medicine applications into hospitals to central labs in a very cost-effective way.

I would add one point to that. Obviously, the other advantage of the consumption model is no CapEx or significant upfront investments. We allow players to adopt our technology in a pretty capital-efficient way, and then as they scale up and obviously receive revenue for what they are doing, they can increasingly consume. We’ll watch the market closely, but as of now, things are quite healthy and steady in our core markets, and we’ve seen no signs relative to what you highlighted on the macro, with the exception of Turkey.

Great. And one last for me. There are a few peers this quarter in the diagnostic space pointing to some impacts presented by hospital staffing and labor shortages. While your business is quite geographically dispersed, have you seen any of those impacts in Q2, temporary or ongoing in the business?

So nothing so far, Tejas. To recap, our clients are primarily core academic centers, which are treating patients suffering from severe diseases such as cancer. As we have observed in the past with COVID, those hospitals have been very good at equipping themselves so they could sustain their efforts and serve their patients. In a certain sense, this specific positioning in these core academic centers is not impacted as widely as you described; other facilities may be more affected while serving community hospitals.

Our next question will come from Julia Qin with JP Morgan.

Starting with the cash runway, you said you expect the cash runway to extend until at least 2025. I’m wondering between gross margin, sales marketing, R&D, etc., where do you see the greatest leverage? And for R&D, just wondering what areas are you prioritizing versus deprioritizing? And how do you see that potentially impacting any new product launches or any expansion going forward?

Thank you, Julia. I will start and let Ross afterwards develop on the gross margin side. On the core investments, as we have mentioned, we have already made important investments over a year—in fact, over 10 years—in our core platform capabilities. These capabilities enable us to deploy quite quickly new applications such as HRD. On the application side, I think we’ve made significant efforts over the last 2 years to generate momentum in the years to come. Therefore, we don’t necessarily have any need to make deep investments in R&D capabilities to further strengthen our current technology and algorithmic capabilities. So indeed, in that sense, you should expect our investments to be quite flat. I will let Ross offer some insight into the G&A and other sales and marketing aspects.

Thanks, Jurgi. We made good progress this quarter on the gross margin side and continue to remain very focused there, albeit again dependent on mix and a number of other items that could fluctuate quarter-to-quarter. Overall, the trend has been favorable. Long-term, we aim for software-like margins in this business, so that will help. Relative to operating expenses, Jurgi has talked about some of the key projects we’ve already put significant investments toward. We’ll get operating leverage as those projects start to generate revenue like CarePath and our biopharma efforts. Additionally, we’re very focused on the G&A line. Public company costs are not insignificant, and we’ve made efforts to bring down this spending level, which I expect to continue over the next several quarters. The headcount investments we’ve made, both in sales and marketing and R&D, should sustain us for a bit. As you think about leveraging, across all three lines, that should yield continued sequential improvement.

To add on G&A, as you may remember, we invested significantly in the quality regulatory aspect over the last year, which was a strategic decision. We needed to recruit an experienced team to set the standards in our industry with the platform being our IVD with plans to go to IVDR and potentially have the approval path. We also want to develop our conversations with the biopharma industry. Having said that, we have the headcount we need now in our plan, so you shouldn’t expect further expansion of this team in the future.

Great. Super helpful. In terms of CarePath, I was wondering if you could give us a little more color on what feedback has been from the biopharma community regarding your DEEP-Lung initial readout at ASCO and how your current biopharma pipeline is trending. Regarding CarePath, what do you think will be the monetization model? Is this still a paper analysis basis, or are there other clinical trial enrollment or CDx deal components to it? How should we think about the revenue ramp?

Sure. Thank you. We are very excited, but it’s too early to provide insight into the monetization aspect, Julia; we will share that with you later during the year or at the beginning of next year. However, we share a lot of excitement around CarePath and around ASCO. I would say the level of discussions we have with pharma has exceeded my expectations. Not only have we been able to demonstrate the value of the data we collect as we serve a decentralized clinical market, including with CarePath for DEEP-Lung-IV and the value of this data for pharma. We confirm that our technologies and algorithms are perceived as unique in computing the data that pharma themselves produce, where they may want our algorithms to revisit their data to identify anything they haven’t seen so far. Very exciting and positive developments await. We will announce soon regarding the DEEP-Lung study, where we’re extending the number of sites joining the effort, and we have computed data from about 500 patients with an accuracy of 80% on predicting whether a patient will respond to immunotherapy. This could be an important step forward for SOPHiA, and for the entire industry when it comes to leveraging multimodal data and better patient outcomes.

That’s great. Last one from me. Congrats on the recent CE-IVD approval. Can you maybe talk about the significance and how much incremental revenue opportunity that unlocks? In terms of volume mix, do you expect any changes compared to your existing customers with CE-IVD approval and any implications in terms of ASP?

Thank you, Julia. Regarding revenue, I cannot share specific figures, but I will explain the rationale and importance of the IVD effort. Thank you for highlighting that. There have been significant regulatory changes in Europe where players are expected to transition to a new framework called IVDR. Given the high standards of IVDR, the first phase was toward achieving IVDD compliance, and there was a strong deadline for all players. SOPHiA has fulfilled that deadline this summer on the platform, but also on four core applications, primarily oncology applications. We are now helping some of our customers move from RUO to IVDD, or a more regulated environment. We expect this trend to happen across the board. We’re well-positioned to help our customers in this more regulated environment.

Additionally, relative to your ASP question, regulated products typically have a higher ASP. As seen in our results this quarter, we’ve continued to see nice ASP progress this year. Unfortunately, it’s been overshadowed by currency impacts, right? Keep that in mind. You would expect this trend to continue favorably for us once currency ceases to be such a significant headwind as it is currently.

[Operator Instructions] Our next question will come from Mark Massaro with BTIG.

This is Vivian on for Mark. I think you’ve previously spoken about pursuing additional data modalities such as digital pathology and proteomics. Any sense of timing or prioritization on these? How are you sensing customer demand on these fronts from existing customers?

Thank you for the question, Vivian. Right now, we are focused on our core capabilities, which are basically genomics, radiomics, and combining genomics and radiomics data modalities longitudinally in CarePath. As I mentioned while responding to Julia, we had a lot of discussions at ASCO around CarePath capabilities. In that sense, our focus is very disciplined. We see a positive evolution in some new players in the sequencing sector, which may lead to higher volumes and value in informatics. Despite previously discussing potential expansions into digital pathology and proteomics, we currently find more need around our core genomics capabilities, which continue to increase along with multimodal capabilities mixing radiogenomics data.

Perfect. And regarding the gross margin improvement, could you remind us of any targets you have there longer term?

Ross, can you take this one?

Sure. As I said earlier, we’re striving for software-like margins in the business. Looking at data companies across the traditional tech space, you will see numbers at our level or slightly higher. In the medium term, we’ve talked about a target of around the 70% threshold. This quarter, at 67%, we’re making progress toward that, albeit, I would say we don’t expect it to be a perfect linear trend. The mix of our business will also determine that somewhat, as biopharma and other elements have high margins for us since they are traditionally data businesses. Overall, we’re very happy with our progress, and we’re continually focused on ways to drive leverage in this business.

[Operator Instructions] Our next question will come from Dan Brennan with Cowen.

This is Kyle on for Dan. I want to discuss your traction in the U.S. You’ve been positive about the large opportunity in increasing traction here. Could you discuss your traction with large U.S. reference labs and help us think through the future impact on revenue and margins?

Thank you, Kyle. As mentioned, the traction has been solid in APAC, LATAM, and NORAM, and stable in EMEA. NORAM is a market where there were questions regarding our model, which is more decentralized. But every day we execute upon our model, and it’s a region where we are growing nicely. The HRD capabilities we built enable us to grow beyond the traditional academic centers, including penetrating some reference labs.

We can’t provide specific guidance on revenue margin impact, but you can assume relative to our existing ARPU, these are significant new wins as they happen. We’re excited about the progress around these customers, and we believe the momentum continues to build. So stay tuned for more on that front.

Great. And one on clarifying the growth guidance in constant currency terms. The 30% to 35% constant currency growth—does that include or exclude the impact of COVID? How should we think about the COVID impact for the rest of the year?

First, as a reminder, Kyle, in the core business, putting the FX impact aside and COVID, we grew 36% year-on-year, which was solid performance. Without COVID or as COVID declines, we’re around 30% and 17% with FX. The business has been solid and was highly impacted in terms of reporting currency but not the constant currency due to the euro and Turkish lira. Regarding guidance, Ross, would you want to provide more color on the 30% to 35% growth?

Yes, the 30% to 35% captures the impact of COVID. It ties back to the original guidance we provided. COVID has continued to trend down, and we had assumed it would trend down to almost no contribution by the end of the year. We’ve trended so far year-to-date at the upper end of that range or slightly above. We’re happy with the underlying performance and have talked about a number of factors that should help us in the back half of the year, particularly in Q4. The updated range was purely FX-related, which has been quite challenging across the board with core currencies. So again, that 30% to 35% reflects the negative COVID mix and is consistent with what we’ve said prior.

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

Thank you again for joining the call today. As we get closer to our Investor Day in New York in September, we look forward to seeing some of you there. Have a good day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.