SOPHiA GENETICS SA Q4 FY2023 Earnings Call

Good morning. My name is Drew, and I will be your conference operator today. At this time, I would like to welcome everyone to the SOPHiA GENETICS' Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Kellen Sanger, SOPHiA GENETICS' Head of Strategy and Investor Relations. You may begin.

Thank you, and good morning, everyone. Welcome to the SOPHiA GENETICS' fourth quarter and full year 2023 earnings conference call. Joining me today to discuss our results are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer, and Ross Muken, our Chief Financial Officer and Chief Operating Officer. I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties, and factors that could cause results to differ appears in the press release SOPHiA GENETICS issued today and in the documents and reports filed by SOPHiA GENETICS from time to time with the Securities and Exchange Commission. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release, which is available on our website. With that, I will now turn the call over to Jurgi.

Thanks, Kellen, and good morning, everyone. During today's call, I will start with an overview of our progress in 2023, followed by a quick look at our performance in Q4. Next, I will highlight our key priorities for 2024. Then, Ross will provide a more detailed look at our financial results, business trends, and guidance for the upcoming year. Before I get started, I want to take a moment to reflect on some of the trends we saw in healthcare in 2023 and also more broadly across the industry. In many ways, 2023 was the year of AI. It was the first time that the general public gained access to powerful AI models and learned what they can do. As the Co-founder and leader of an AI-driven precision medicine company who has been working on building AI in healthcare since SOPHiA GENETICS' inception in 2011, this moment has been a fulfilling experience for me. I would like to highlight that since inception 13 years ago, we have invested over $400 million to build some of the most advanced AI capabilities in the healthcare sector. We have recruited a team of more than 200 of the top data scientists and engineers in the world who contribute to building and developing our platform, SOPHiA DDM. SOPHiA DDM today is widely recognized by healthcare professionals for its world-class analytical performance and by some of our partners as the leading AI platform in healthcare. However, at SOPHiA GENETICS, innovation is not the development of new technology, but rather the adoption of those technologies in the market. And in that spirit, let's turn to 2023 and the progress we made driving adoption of SOPHiA DDM. 2023 was a tremendous year for SOPHiA GENETICS. We grew revenue 31% year-over-year to $62.4 million by continuing to drive widespread adoption of our platform. In 2023, SOPHiA DDM was used by 450 core genomic customers across the globe to perform over 317,000 analyses. This record number of analyses represents a remarkable 27% year-over-year growth when excluding COVID-related volume. At the beginning of 2023, we laid out three primary drivers to achieve our ambitious growth objective. First, we highlighted the large market potential for SOPHiA DDM’s Solid Tumor application. Especially, we expressed excitement over HRD, which was exhibiting workplace analytical performance due to an innovative deep learning algorithm we developed called GIInger. Second, we highlighted high potential for growth in the U.S. market. And third, we explained that the genomic and multimodal data computed every day on our platform, in addition to our advanced AI algorithms being trained on these datasets, would create meaningful value for our biopharma partners. I'm proud to say that we delivered in each of these three areas. With respect to SOPHiA DDM Solid Tumor applications and in particular HRD, we saw impressive growth. Solid tumor revenue grew above company average in 2023 and HRD was a major driver with over 150% revenue growth during the period. We're pleased to see both existing and new customers adopt SOPHiA DDM for Solid Tumor applications. We signed an impressive 36 new logos for Solid Tumor applications in 2023, and by the end of Q4, we were proud to have a total of 129 core genomics customers using Solid Tumor applications. This group includes nearly 50 customers using SOPHiA DDM for HRD, all of whom were attracted by the application's world-class analytical performance. Moving on to our second growth driver for 2023, the U.S. market. In 2023, U.S. revenue grew 70% to $9.5 million, up from $5.6 million in 2022. We signed nine new core genomic customers in the U.S. in 2023, and we're proud to welcome some of the top U.S. cancer centers and labs to the SOPHiA DDM network. Apart from customer relationships, we also had a landmark year with our partners in the U.S. Namely, we continued to build our strategic partnership with Memorial Sloan Kettering. During 2023, we entered into a partnership with MSK to help them decentralize their liquid biopsy test, MSK-ACCESS, and their solid tumor test, MSK-IMPACT, making these tests available to healthcare institutions across the globe. We officially launched MSK-ACCESS powered with SOPHiA DDM in December and have been pleased to see strong demand for this application in the market. In the U.S., we announced a number of new signings for MSK-ACCESS powered with SOPHiA DDM and are looking forward to capitalizing on this momentum going into 2024. The third growth driver we focused on in 2023 was delivering value to our biopharma customers. The first way we accomplished this was through a number of deals with biopharma partners where they sponsored the deployment of SOPHiA DDM. Biopharma customers are motivated to do this because they are mutually interested in expanding access to cancer testing. Our partnership with AstraZeneca has been a major proof point in this area. Last month, we announced that AZ sponsored the deployment of SOPHiA DDM's HRD application across Spain in 2023 with resounding success. While the deployment of our genomics offering continues to be a key focus for us and our biopharma partners, we have always intended to complement our genomics computing capabilities with multimodal analytics. Multimodal data and multimodal algorithms analyzing that data provide significant value to biopharma companies. 2023 was a landmark year for us in building our multimodal capabilities. We launched SOPHiA CarePath, a model of SOPHiA DDM, which enables customers to perform longitudinal analyses of multimodal patient data. This includes multimodal models designed to predict treatment effects of different therapy decisions. As you can imagine, these capabilities provide differentiated value to our biopharma customers who are willing to pay for the access to the multimodal patient data and to multimodal algorithms, which analyze them. Towards the end of 2023, we completed a momentous project with one of our key biopharma partners, where SOPHiA CarePath identified a signature in subpopulations of lung cancer patients, which could indicate different treatment effects for a specific drug. We continue to remain excited about these use cases for our multimodal offering and the value these capabilities bring to our biopharma customers. In 2024, we plan to expand the footprint of SOPHiA CarePath beyond lung cancer to breast, prostate, and kidney cancer. We recently announced two data partnerships, one with MSK and the other with Exactis Innovation, a network of 13 hospitals across Canada dedicated to improving cancer survivorship. These partners will help us gain access to valuable multimodal datasets, which will be ingested into SOPHiA CarePath for our biopharma customers to use and access. Now that I have provided a brief overview of 2023, I would like to spend a minute discussing Q4 2023 performance in more detail. In Q4, we grew revenue 27% year-over-year to $17 million. We performed approximately 85,000 analyses, up 20% year-over-year, including COVID-related analyses, or 24% year-over-year growth excluding COVID-related analyses. As of December 31, we had 450 core genomics customers who are using our platform regularly to analyze patients for cancer and rare diseases, up from 434 in the prior year and up 19% sequentially from Q3. Q4 was a great quarter in terms of landing new logos. In the fourth quarter, we landed a resounding 35 new core genomics customers. These customers will add to our total number of core genomic customers over the course of 2024 as they are onboarded onto SOPHiA DDM. As mentioned previously, it typically takes customers six to nine months to enter routine usage. After landing a new logo, our expansion strategy continues to be effective as existing customers adopt more applications. As of the end of Q4, 56% of customers were using two or more applications, up from 49% a year ago; 31% of customers were using three or more applications, up from 28% a year ago; and 21% were using four or more applications, up from 17% a year ago. Moreover, our net dollar retention was 130% in Q4 2023, up 2,800 basis points from 102% at the end of 2022. The continued proof of our ability to expand within existing customers exemplifies the importance of landing new customers across the globe. On that note, I want to take a quick moment to highlight our progress in a key growth market for us, India, where the usage of our platform grew 70% from 2022 to 2023. I recently returned from a heartwarming trip across India, visiting our fantastic partners there such as Tata Memorial Hospital in Mumbai and the Institute Rotary Cancer Hospital in New Delhi. I also spent time with our newest partner, Karkinos Healthcare, an oncology platform boldly addressing the over 2 million estimated cancer cases in India each year. Together, we will work with Karkinos to provide genomic testing applications to the population of India in addition to a range of other strategic objectives. I am especially inspired by the shared vision between SOPHiA GENETICS and Karkinos, and I am excited for what this means for the broad deployment of SOPHiA DDM across India. Beyond India, I would like to announce today a few additional major signings and expansions. In the U.S., we recently signed Lifespan Health System, a network of award-winning hospitals in Rhode Island with dozens of locations across the state. Lifespan adopted multiple SOPHiA DDM hem-onc applications due to their top analytical performance and our platform's ability to seamlessly integrate into the workflow. In Spain, we recently expanded our relationship with the Vall d'Hebron Institute of Oncology, one of the top comprehensive cancer centers in Europe, adopting SOPHiA DDM Solid Tumor application for HRD. Vall d'Hebron joins other top European cancer centers using SOPHiA DDM for HRD testing, including the top two, namely Gustave Roussy and The Royal Marsden. I'm also excited to announce that in LATAM, we expanded our relationship with Dasa, the largest clinical diagnostics company in Latin America. Dasa is adopting MSK-ACCESS powered with SOPHiA DDM for liquid biopsy testing. This will be Dasa's sixth SOPHiA DDM application. We're excited to see these customers, in addition to the 35 new logos we landed in Q4 2023, beginning to ramp up usage of SOPHiA DDM during 2024. Speaking of 2024, let's move on to our priorities and outlook for the upcoming year. Similar to last year, I will highlight three primary growth drivers. I will then touch on how these growth drivers, along with continued fiscal discipline, will allow us to achieve profitability in the next two-plus years. First, we are excited to capitalize on the launch of our new liquid biopsy offering, including MSK-ACCESS powered with SOPHiA DDM. We are pleased with the strong demand we are seeing in the market for this application and are excited by our sales pipeline for it, which is approaching double-digit millions. As an additional catalyst for the growth of our liquid biopsy applications, we recently announced a collaboration with AstraZeneca, in which they will sponsor the deployment of MSK-ACCESS on SOPHiA DDM to customers across the globe during 2024. Our second growth driver for 2024 is the significant opportunity we continue to see in solid tumors. A major tailwind for us in the solid tumor space has been the increasing complexity of signatures. As signature detection becomes more complex, more sophisticated algorithms are needed. One example is our proprietary algorithm GIInger, which was recently published in Cell Reports Medicine for its unique ability to detect the HRD signature. Beyond HRD, we are also using other algorithms to help customers like Boundless Bio detect additional complex signatures such as extrachromosomal DNA, which are present in about 20% of cancer cases. Not only are we well equipped algorithmically to address this growing demand in solid tumors, but we also have a strong portfolio of comprehensive genomic profiling applications to meet our customers' needs. This includes the upcoming launch of MSK-IMPACT powered with SOPHiA DDM. Similar to our work with MSK-ACCESS, we will decentralize MSK's CGP test, MSK-IMPACT, and deploy it to customers worldwide. AstraZeneca joins us in the mission and will also contribute to the deployment of the application to customers across the globe. The third key priority for us in 2024 is continuing the trend of strong growth in the U.S. As mentioned earlier, we picked up significant momentum in the U.S. in 2023. In 2024, we're looking forward to capitalizing on this momentum and leveraging marquee names to attract other U.S. customers to our network. Apart from the three growth drivers mentioned today, we're also delivering a series of targeted high-impact platform and application launches in 2024. We plan to launch new capabilities in hem-onc with an application to measure minimal residual disease for acute myeloid leukemia. We also plan to launch new features in rare and inherited disorders to serve our customers' needs on whole genome sequencing and pharmacogenomics. From a platform perspective, we are launching a full modernization of SOPHiA DDM as we move to web technology and microservices. We will also continue making upgrades to SOPHiA CarePath and its multimodal capability in order to create even more value for our biopharma customers. Based on our current commercial pipeline, we're confident that these new launches will deliver long-term value to our business. In summary, 2024 is an exciting year for our liquid biopsy capabilities, our world-class solid tumor applications, and the momentum we are building in the U.S. We are well equipped for 2024, and as we continue on our path to profitability in the next two-plus years. So, with that, I will now turn it over to Ross, who will provide a more detailed look at our financial results, business trends, and guidance for the 2024 year.

Thank you, Jurgi, and good morning, everyone. I'm pleased to share that despite the challenging macro environment, SOPHiA GENETICS delivered strong performance in the fourth quarter, continuing our commitment to sustainable growth. Total revenue for the fourth quarter of 2023 was $17 million compared to $13.4 million for the fourth quarter of 2022, representing year-over-year growth of 27%. Constant currency revenue growth was 26%, and constant currency revenue growth excluding COVID-related revenue was also 27%. Of note, clinical revenue fell in line with our internal plan as consumption trends played out as expected in the second half. However, we did have a small amount of biopharma-related revenue shift from the fourth quarter to the first half of 2024. As I've stated previously, our biopharma revenue is still in its nascent stages, and thus you should continue to expect small timing-related recognition impacts over the near to medium term. Platform analyses volume was approximately 85,000 for the fourth quarter of 2023 compared to 71,000 for the fourth quarter of 2022. The 20% year-over-year growth was attributable to the strength of our core platform analyses volume, offset by continued expected decline of COVID-related analyses volume. Excluding COVID-related volume, platform analyses grew a healthy 24% year-over-year in the period. Strength in North America and Asia Pacific highlighted geographic outperformance in the quarter, offsetting a slight moderation in Latin America, which had an overall strong 2023. From an application standpoint, rare and inherited disease applications outperformed oncology applications in the period, given broad demand for exomes despite strong contributions from solid tumor, liquid biopsy, and hem-onc applications. Gross profit for the fourth quarter of 2023 was $11.9 million compared to gross profit of $9.6 million in the fourth quarter of 2022, representing year-over-year growth of 24%. Gross margin was 70% for the fourth quarter of 2023 compared with 72% for the fourth quarter of 2022. Adjusted gross profit was $12.5 million, an increase of 25% compared to adjusted gross profit of $10 million in the fourth quarter of 2022. Adjusted gross margin was 73% for the fourth quarter of 2023 compared to 75% for the fourth quarter of 2022. We continued to benefit in the period from economies of scale related to cloud-based compute and storage costs as well as favorable price capture, partially offset by a challenging prior-year comparable related to sizable Microsoft Azure cloud credits, offsetting our computational and storage-related costs. Excluding this one-time benefit, gross margins would have increased 600 basis points year-on-year. Total operating expenses for the fourth quarter of 2023 were $30.8 million compared to $24.7 million for the fourth quarter of 2022. Across the functions, we continued to benefit from lower headcount both on a year-over-year as well as quarter-on-quarter basis. FX was a notable headwind in the period, particularly impacting R&D expenditures. On a reported basis, share-based compensation was also a notable headwind broadly. Lastly, I am also proud of our hard work on the G&A side where we continue to benefit from lower professional service fees and optimization of our public company costs. Operating loss for the fourth quarter of 2023 was $18.9 million compared to $15.1 million in the fourth quarter of 2022. Adjusted operating loss for the fourth quarter of 2023 was $13.3 million compared to $12.1 million for the fourth quarter of 2022. We continue to be pleased with our trajectory toward profitability and believe the additional headcount actions we took in the second half of 2023 were necessary to sustain the trend into the first half of 2024. Of note, below the line this quarter, we did have a significant charge related to foreign exchange losses. This is due to the material appreciation of the Swiss franc and euro in the period. As this is primarily related to intercompany receivables, you will see an immaterial impact on our cash utilization overall. Lastly, total cash burn for the fourth quarter of 2023 was $9.5 million compared to $10.6 million in the prior-year quarter. This represents an 11% year-over-year improvement even when factoring in a credit to computational and storage-related expenses related to our strategic agreement with Microsoft in Q4 2022. We remain happy overall with our cash and utilization trends and are on track with respect to our medium-term liquidity trajectory. Now, turning to full year 2023 financials. Total revenue for the full year 2023 was $62.4 million compared to $47.6 million in 2022, representing year-over-year growth of 31%. Constant currency revenue growth was 30%, and constant currency revenue growth excluding COVID-related revenue was 32%. This outcome was generally in line with our initial forecast and speaks to the level of revenue visibility we continue to have in the business despite ongoing macro and industry-specific headwinds. Platform analyses volume was 317,000 for the full year 2023 compared to 264,000 in 2022, representing 20% year-over-year growth. Excluding COVID-related volume, platform analyses grew at a strong 27% year-over-year in the period. For the full year, oncology application growth outperformed rare and inherited disease applications, led by strength in solid tumors and liquid biopsy. Regional growth was generally balanced, with APAC representing the exception, delivering greater than 50% growth. Core genomic customers were 450 as of December 31, 2023, up from 434 in the prior-year period and up sequentially by 19 customers relative to Q3 2023. Annualized revenue churn rate was 4% in 2023, in line with our expectations. Net dollar retention for the year improved to 130%, up 2,800 basis points from 102% in 2022. Constant currency net dollar retention, excluding COVID-related revenue, was 130% compared to 123% in 2022. Strong NDR and a healthy level of backlog continued to provide us with a high level of revenue visibility going forward. Gross profit for the full year 2023 was $42.9 million compared to gross profit of $31.3 million in 2022, representing year-over-year growth of 37%. Gross margin was 69% for the full year 2023 compared with 66% for 2022. Adjusted gross profit was $45 million, an increase of 39% compared to adjusted gross profit of $32.4 million in the full year 2022. Adjusted gross margin was 72% for the full year 2023 compared to 68% for 2022. I am incredibly proud of this outcome as we have now outperformed our medium-term guidance for an entire year. I'll remain encouraged with respect to continued expansion opportunities moving forward. Total operating expenses for the full year 2023 were $117.7 million compared to $119.1 million in 2022. R&D expenses for the full year were $37 million compared to $35.4 million in 2022. Sales and marketing expenses for the full year 2023 were $28.4 million compared to $28.3 million in 2022. General and administrative expenses for the full year 2023 were $53.3 million compared to $55.8 million in 2022. Operating loss for the full year 2023 was $74.8 million compared to $87.8 million in 2022. Adjusted operating loss for the full year 2023 was $55.9 million compared to $72 million in 2022. Lastly, total cash burn for the full year 2023 was $55.4 million compared to $86.7 million in the prior year, down 36%. We are quite proud of this achievement and remain committed to sustainable growth moving forward. Cash and cash equivalents were approximately $123.3 million as of December 31, 2023. Now, turning to our 2024 outlook. SOPHiA GENETICS expects full year reported revenue to be between $78 million and $81 million, representing 25% to 30% growth on a reported basis. Let me provide a few key underlying assumptions relative to our reported revenue forecast for 2024. One, we currently contemplate that exchange rates will remain highly volatile, and as such, we are anticipating a moderate negative impact to reported results in 2024. Two, we also expect a very modest headwind to 2024 reported revenues related to a ceasing of COVID-related contribution. The combined impact of these assumptions would place our implied organic growth rate toward the low end of our medium-term guidance of 30% to 35%. This is despite excellent new customer momentum exhibited in 2023. We attribute two key factors to a more conservative stance as we approach 2024 revenue guidance. First, we have assumed elongated implementation times for liquid biopsy applications given the complexity of the workflow compared to tissue. Further adding complication is a need to help our customers gain access to tumor-normal reference samples for proficiency testing. We currently believe this may add up to three months to implementation timelines, meaning we will likely see a larger impact from recent key wins in 2025. Second, we are seeing increased adoption of new sequencers in the market. This includes companies like Complete Genomics, PacBio, Ultima, Oxford Nanopore, and Element. At SOPHiA GENETICS, we welcome this diversity. One of the founding principles of our platform is to be technology agnostic. While the prevalence of these new sequencers is driving opportunities across our offering, the changing adoption pattern also warrants some conservatism about customer readiness to implement our solutions as they first need to manage their sequencer transitions. Thus, a majority of the growth forecasted in 2024 is from the expansion of existing customers. This is consistent with our historical NDR of 125% to 130%. We will update you over the course of the year as to how new implementations are trending. With respect to seasonality, we would expect 2024 to follow our typical cadence, whereby Q1 and Q3 tend to be seasonally softer from a revenue standpoint, while Q2 and Q4 tend to be seasonally stronger, with Q4 being the largest in terms of percent of revenue contribution to the full year, as many of our recently signed logos will likely begin ramping up at that point. We continue to expect a larger portion of our 2024 revenue to be recognized overall in the second half of the year. Following on our strong cost performance in 2023, SOPHiA GENETICS expects further gross margin expansion from 2023 levels in 2024. We currently forecast adjusted gross margins for 2024 in the range of 72.5% to 72.7%, representing an improvement of up to 50 basis points. This is despite a challenging comp in the first quarter due to the remaining prior year Microsoft credit. Turning to operating loss, we currently expect adjusted operating loss to fall between $45 million and $50 million. This is yet again another notable improvement from 2023 levels despite a less material benefit year-over-year with respect to headcount, which drove a majority of our loss improvement in 2023. We are confident in our medium-term path to profitability. We have taken the required actions to expedite that goal and remain obsessed with capital efficiency. In the second half of 2023, we took some tactical headcount actions to further optimize our operations while also continuing to focus our R&D efforts on increasingly high ROI projects. These were difficult decisions, but we prioritized sustaining medium-term revenue momentum at our previously communicated targeted levels while ensuring a reasonable timeframe to cash flow generation. In 2024, we will continue to revisit our discretionary expenditures and execute and identify savings in systems, professional services, and certain public company costs. The combined nature of these items and the natural operating leverage in the business from strong revenue growth will further our path to profitability in the next two-plus years. With that, I would like to turn the call back over to Jurgi for the closing remarks before we take your questions.

Thank you, Ross. We're proud of our performance, which we believe reflects our continued ability to execute on our vision and the opportunity ahead. SOPHiA's success stands on our ability to delight customers and continue driving more and more usage of our platform. After a successful 2023, our focus shifts to SOPHiA's future. I will share just a few final thoughts as we look towards the near future with three key priorities for 2024. First, we look forward to seeing significant growth from new liquid biopsy applications, including MSK-ACCESS powered with SOPHiA DDM, as we deploy the applications to customers worldwide with the help of our biopharma partners. Second, although we set the bar high in 2023, we're excited to continue growing SOPHiA DDM Solid Tumor applications and capitalize on the demand for increasingly complex signatures. And third, we plan to continue our strong trajectory of growth in the U.S. as we leverage momentum from 2023. In closing, thank you to our SOPHiA colleagues, partners, customers, and investors for joining us on our journey. Without you, none of this would be possible. Please note that we are attending the Cowen Health Care Conference tomorrow in Boston and Barclays next week in Miami. I look forward to continuing to update you on SOPHiA's future success in democratizing data-driven medicine. Operator, you may now open the line for questions.

Thanks. Please note, Jurgi won't be joining us today for the Q&A portion of the call as he had a minor medical procedure over the weekend. He sends his regards and apologizes for not being able to make it today. We look forward to having him back soon. Now back to you, Drew.

The line is now open for questions. We will now begin the question-and-answer session.

Thank you for the questions, Ross. I hope Jurgi is doing well. Firstly, regarding the guidance, you mentioned the extended implementation for liquid biopsy and the new platforms. Can you provide some context around that, including the current size of the liquid biopsy business and what's happening in that area? Additionally, on the sequencing side, could you elaborate on how widespread the adoption of this new platform is? Will this be a topic we discuss in the second quarter, and is it likely to be an ongoing issue for you throughout the year? I also have a few follow-up questions. Thank you.

Thanks, Dan. In terms of the factors we considered for our guidance, I want to highlight that we had a fantastic quarter in acquiring new core logos, adding 35 during the period. Additionally, we experienced exceptionally strong bookings towards the end of the year. Overall, the new demand environment is quite positive, particularly in liquid biopsy. This solution is somewhat more complex compared to tissue because it involves a tumor-normal approach, making sample acquisition more challenging, along with the workflow for customers. Therefore, we decided to be a bit more cautious and incorporated an assumption that customers would take about three months longer to ramp up their adoption process than our typical six-month timeframe. Consequently, this implies that we will receive only about one quarter of contribution from these new customers this year, while we usually expect two. Regarding the sequencer side, the market has mostly been dominated by two players for many years, with one being significantly ahead. Although the leadership position remains unchanged, we are noticing new vendors succeeding in various applications, which is a positive development for us. We appreciate the introduction of diverse applications, sequencer types, and vendors. However, this situation brings a bit of uncertainty since it is new to us. We haven't observed any significant delays in our setup time, but we want to include some extra cushion just in case. Overall, while both areas present positive long-term prospects, we're adopting a more conservative approach as we start the year due to the unique challenges this new business environment presents.

Okay. Got it. Thanks. And then maybe just as a follow-up, it'll be a two-parter, and then I'll just go back in the queue. Just biopharma, I think in the 20-F, you noted was up $3 million year-on-year. Could you give us some color on what the base was and just any color on the biopharma contribution and how we're thinking about the impact in '23? And then, you discussed in the prepared remarks the medium-term path to profitability and the actions that you guys are taking in order to ensure that. I know you haven't given us a distinct date or timetable, but any more color around what that medium-term path looks like, whether how long, what the revenue base is, what needs to happen? Thank you.

Thank you for the question, Dan. Regarding biopharma, we have not yet broken out those figures, and it's worth noting that some revenue has shifted to the first half of next year. This business is still in its early stages, but we are very enthusiastic about the opportunities. There's significant synergy between our clinical and pharmaceutical sectors, especially in liquid biopsy. This year, you can expect updates on new partnerships and successes in that area. Long-term, we are excited about multimodal approaches, which are increasingly relevant in the pharmaceutical landscape. We have other projects in the works that we will keep you informed about. Overall, I'm pleased with pharma's performance this year, which exceeded our internal expectations. However, it remains a small part of our business, so we're not ready to break it out separately. The disclosures shared indicate positive momentum, but we want you to consider the overall platform. In response to your second question about our path to profitability, I'm proud of our team's efforts this year, particularly in terms of gross margins, which rose over 600 basis points this quarter when excluding the Microsoft credit. We've also made significant progress with our headcount, our main expense, and you’ll see that reflected as we continue improving. Since we are a European entity with a varied headcount mix, headcount actions take time to impact our P&L. We anticipate benefits to operating expenses in the early part of next year. We are also maintaining strict control over our discretionary spending. Looking ahead, the primary driver of our path to profitability will be the increase in incremental revenue. We have strong organic growth, evidenced by a net dollar retention rate of 130% for the year, which sets a solid foundation for future growth. With continued gross margin expansion, we feel increasingly confident about our ability to increase margins. A large portion of the incremental gross profit from this net revenue growth is expected to contribute significantly to our EBIT line, which will aid our profitability journey. At JPMorgan, we previously mentioned a timeline of two-plus years and our solid capital base. You have a clearer range for this year's losses, and with ongoing improvements in 2025 and 2026, we believe we have a visible trajectory towards achieving cash flow breakeven.

Great. Thanks, Ross.

Hey, Ross, good morning. I want to express my best wishes to Jurgi. I have a couple of quick follow-ups regarding your comments on the guidance and the path to breakeven. You've consistently been above 70% for quite some time, and you've made significant strides in gross margins in the fourth quarter, even accounting for the Microsoft situation. What is preventing you from potentially raising that target to 75% or higher on the margin front? Additionally, regarding your mention of the timeline to operating profit breakeven in two-plus years, is that mainly to maintain some flexibility? Are there possibilities for you to invest more than you currently plan in the coming years, or is there another reason for that phrasing?

Good morning, Tejas, and thanks for the question. So, I would say, I'll take your second one first. So, on the plus, yeah, I think the way you characterized it, ultimately, it does give us a bit of degree of freedom. But frankly, I think as a public company, we're obviously incredibly focused on this initiative given sort of the end market environment. But the practical reality is, as a business that's primarily a headcount, we have a high degree of control of where we land. But we also want to balance to make sure that we hit our growth objectives, right? As I mentioned before, so much of the dropdown that comes is relative to that top-line momentum. And so, I think from that standpoint, it's really crucial that we don't lose sight that we still need to invest for the future, right, and we need to be able to drive really good operating leverage, but we also need to contain or sustain our revenue momentum within our targeted range. So again, I think it's always the balance. We're trying to delicately balance that and maximize shareholder value creation. And so, I think again, we've done a relatively good job of that so far, and we're maniacally focused on continuing to execute and deliver on that in the future.

Got it.

And yeah, go ahead. Sorry.

No, go ahead.

No. Overall, as we take a step back, the business shows strong momentum in terms of gross margin. We've made significant progress in compute in store, which constitutes a large portion of our cost of goods sold. Our labor absorption has been very effective. The only uncertainty we face is related to our business mix over time. We have begun to actively enhance our professional services efforts. Given our size and the number of laboratories we engage with, there are great opportunities to deepen our relationships with customers and assist them in various areas. For instance, with the LDT legislation, we believe we can provide valuable support. Additionally, there may be service aspects within the pharmaceutical sector that could develop over time. Therefore, as we assess these factors, we have held off on finalizing how they will fit into our overall mix. Generally, we feel confident in our ability to expand gross margins, which is reflected in our guidance for this year. In the long run, maximizing gross profit dollars is essential for our path to profitability, targeting a two-figure outcome rather than just two-plus. We are very focused on this and have a high level of visibility and accuracy in predicting our performance. We do not want to commit to anything until we are completely certain we can deliver it and that it aligns with the current mix of our business, considering the various demand influences we are experiencing, which I believe are all positive developments.

Got it. Super helpful, Ross. My next question here is really related to the expand part of your land and expand sort of algo, right? And would you be willing to share a little bit more color in terms of what you're doing to incentivize cross-selling into your existing customer base once you land them? You called it out as one of the more conservative assumptions in the guide. So, I'm assuming it's an important focus area for you. And of the growth that you saw in '23, do you think you could parse it out for us in terms of how much came from just new accounts versus existing accounts ramping volumes on your legacy solutions, so to speak, and the third leg being existing accounts adding new SOPHiA solutions that they haven't used before?

Sure. And it's a great question because I really think it speaks to sort of the differentiation of our business. And again, as a software company, net dollar retention remains a crucial metric for us because that truly shows the health of the expand. And so, Jurgi, in the prepared remarks, did share that our average number of applications per customer expanded this year from 2.3 to 2.5, with many more having multiple applications than we've seen in the past. This is incredibly crucial to us and it gives us again very high degree of visibility, but it's also a very high return on CAC in terms of the customer acquisition cost because you're obviously selling with an already landed customer. And so, in that, I would say even more so over the last six months, we put a real focus on the expand. And I think we're seeing really nice dividends. You can see the growth we have this year in HRD or solid tumor overall. I think '24, '25 liquid biopsy will remain a really good story for us. But frankly, there are quite a number of applications for folks to adopt. There was a client Jurgi called out on the call that actually is going to start with us with 11 applications. I would say this is not the norm, but it just gives you the sense of how much expand potential there is at many accounts. And so, I would say we're doing a much better job now of incentivizing that behavior, albeit I would caveat and say it's still challenging at times because if you're using an existing solution and even if you're not happy with it, the friction to change is high. So, this is why our churn is so low, in general. So it also benefits us. But it does make, I would say, the pace of expansion a bit more elongated than you would see in most markets. But still, again, longer term, this is quite a positive. The one other thing I would say to your question is obviously, a good proportion, a very high proportion of our growth came from the expand from existing customers this year. The land typically for us is anywhere between 0% to 5% of our growth. This year was sort of in the middle. I would say, the ideal situation for us is that sort of sustains solely because it essentially positions us for a much more, I would say, visible, elongated period of elevated growth. Because all of those customers, the 80-plus that came on this year, they will contribute materially in '24 and '25. And the ones we land this year thereafter. In the guide, we obviously are assuming a much more conservative amount this year. It's towards the lower end of that. So, we have very little contribution. And so again, maybe that will prove conservative. But we just wanted to call it out this year relative to some of those dynamics that we're seeing. So, ultimately, we feel good about that. Kellen, do you want to maybe add a key point there?

Thank you, Ross. As we've highlighted, we have shown a strong ability to grow within our existing customer base, which makes our announcement of adding 35 new core genomics customers even more exciting. We secured these new core genomics customers in Q4, and they will be implementing SOPHiA DDM over the next six to nine months in 2024. Following this, we expect to see further opportunities for growth within these accounts in areas such as liquid biopsy, solid tumors, and other drivers of growth.

Got it. Very helpful, guys. Last one for me here. Ross, any thoughts on this on the LDT regulation from the FDA? It now appears increasingly imminent. What are you hearing from your customers? And should that final rule not include grandfathering or any further pushouts to implementation? What can SOPHiA do to help your customers adapt?

That's a great question. And so, I would say, overall, we view the regulation as positive. This has been quite a good result for us in Europe as well, if you think about IVDR. And so, we're essentially using the same playbook we saw with IVDR for the U.S. with LDT, albeit to my other point of gross margins, there might be a higher professional service component as the potential pace of transition is probably a bit more, I would say, expedited than what we've seen with IVDR, although that's been pushed out several times. And so, I think the need for a validated platform and the ability to track QMS events, this is all stuff we already do to some degree. And so now, it's more formalizing. So, I think the pressure on our customers essentially to move to a validated platform will just be higher. Because the ability to maintain your own pipelines or multiple distinct pipelines and approaches, I think will be quite a challenge. And so, it's our view that the ultimate net of this will be, I would say, a positive. But obviously, we'll monitor the situation. We have to see the final rule. We're eagerly awaiting, as I'm sure you are. But in the end, regulation tends to be favorable to larger-scaled players, which I would say fits our profile.

Super helpful. Thanks so much. Appreciate it.

Hey, Ross. Thanks for taking the questions. This is Vivian on for Mark. So, in terms of the strong HRD growth that you've been seeing for some time now, I think, just how sustainable do you think that growth is and just where you think you are in the adoption curve?

Sure. So, I think relative to the initial opportunity in ovarian, we're making very good progress. And I think our share in many key markets has been quite high. And so, as we've spoken about before, the next phases of growth for HRD will come as the class of PARPs kind of moves out of ovarian into other indications. And so, we're obviously monitoring that incredibly closely. We think as a signature overall, this will continue to be quite important. I'm not quite sure, right, we can sustain the growth we saw this year as we're sort of in the early phases of kind of the product cycle. But ultimately, for us, HRD and solid tumor overall remain a really key element of the platform. It remains quite, I would say, a popular application for us as we look at our pipeline, and we're eager to continue to work in this category, particularly with our pharma partners over time.

Okay, perfect. And then, as far as the BioReference customer add last quarter, what has the early feedback on MSK-ACCESS been there? And just how winning that account has helped move along conversations with other large U.S. customers?

Yeah. So, I don't want to specifically comment on a customer, but I would say, overall, we're quite happy with both the pipeline we've built for MSK-ACCESS as well as, I would say, the early experience of what we're seeing both in our own R&D lab as we decentralized the solution and are starting to bring it to some of our early access customers. So, stay tuned. We hope to have more updates here. But overall, I would say things are progressing quite well and I'm incredibly proud of the hard work of the team. I do think again, for us, this remains a really unique partnership with MSK and an asset that over time for us could really, I would say, transform elements, not just of our business, but of care in the decentralized world. The types of conversations we're having with institutions and I would say the places in the world we think we can take this are really quite expanded from what I would have thought even six months ago. And so, I'm incredibly encouraged around the early interest, and now it's on us to turn that activity and interest into revenue. And so, I would say, again, this will be something that plays out primarily for us in the second half of this year, but will move into '25 as well. Kellen, you want to maybe comment as well on the biopharma opportunity?

Yeah, sure. So, specifically for liquid biopsies and MSK-ACCESS, we're getting a lot of interest, as Ross mentioned, in the clinical market. It's one of those solutions where you bring the Memorial Sloan Kettering name, and the customer almost immediately perks up both our existing customers who might want to add that application as well as new customers that we're speaking to. You mentioned BioReference. We also announced Tennessee Oncology at JPMorgan. But outside of the clinical market, we're also getting a lot of attraction from biopharma. So, we announced a collaboration earlier last year with AstraZeneca, who is sponsoring the deployment of our HRD application in Spain. We gave an update today on that and mentioned that it was an incredibly successful partnership. We're now, I think, testing approximately 90% of all HRD patients in Spain, which has been a great success. And we announced later last year that we're going to be expanding that partnership with AstraZeneca and they'll now be sponsoring the deployment of both MSK-ACCESS and MSK-IMPACT globally. So, this is really exciting for us in the liquid biopsy space as they help offer their footprint to reach more clinical customers globally. And then, that'll help also with MSK-IMPACT, which is slated to launch later this year.

Hey, Ross. Thanks for taking the question. I wanted to follow up on the new sequencing technology and its impact on your customers that you discussed. Are you expecting to lose customers as they switch vendors, or is it more about the slowing down of overall volume as they implement, validate, or evaluate a new vendor?

Yes, it's really the second, Conor. I think, in general, and again, I want to be very clear, this is not something we're actually seeing in practice. It's more of an assumption as we're seeing in our pipeline as well as in our bookings, a different sequencer mix than we did in the past. And so, our assumption is that the delivery of those sequencers, the installation of those sequencers, and thus the onboarding of our platform may just take longer. And again, it's not clear to us if that will be the case. We'll obviously track it and report over the balance of the year. But given our lack of historical context with many of these businesses, right, again, you well know the market had been dominated by one or two players for the better part of the last decade. And so, again, I'm not suggesting a significant shift, but I think at the margin, we are seeing, in the clinical market, more players pop up and we're seeing more requests for new players in many different geographical markets. And so, we just want to be prepared in the case that there's some change in the typical cadence of onboarding for us. And so, again, no loss. If anything longer term, this expands the market overall. And we think for us, the diversity plays into our strengths as a business.

Great. Thanks for clearing that up. That's all I have, and thanks for the question.

Thank you, Conor. Thank you everyone for joining us. We are pleased to have an incredibly strong end to the year. I'm proud of all of the SOPHiAns that contributed to it. And we look forward to having Jurgi back with us here on the call very shortly. So, thank you everyone, and I send our best wishes to Jurgi, and we'll talk to you all soon at conferences next week.

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