Schrödinger Inc.’s latest earnings call (March 2026) offers a timely reminder of a well-known dynamic in software revenue accounting. The Nasdaq listed biotech-software company is currently going through a transition many software companies have faced: the shift from on-premise to hosted contract models. And this is not only an operational and economic shift, but also a fundamental accounting transition…
On-prem means the software is delivered and installed at the client, who operates it on their own infrastructure. Hosted, by contrast, means the software (and compute) is provided as a service via the cloud and continuously delivered by the vendor (SaaS-like).
🖥️ Under the traditional on-prem model, a large share of revenue (66–88% in the case of Schrödinger) could be recognized upfront, as the performance obligation (the core trigger of ASC 606 and IFRS 15) was largely fulfilled upon delivery.
☁️ Under hosted models, however, revenue is recognized gradually over time, as services are continuously provided. A typical multi-year hosted contract is therefore evenly spread across periods rather than front-loaded.
The accounting effect is straightforward: even with solid contract growth, reported revenue often temporarily dips at the beginning of the transition (the so-called “software hole”), as new hosted contracts contribute less upfront than legacy on-prem deals. While later periods see a catch-up of this effect, it is important from the viewpoint of fundamental analysis to get this switch right at the beginning of the transition.
👉 For investors, key takeaways are:
◆ While the IFRS 15 / ASC 606 framework is conceptually sound, transition effects must be adjusted for in fundamental analysis, as reported revenue can temporarily diverge from underlying business performance. The “software hole” is an accounting artefact, not an economic effect: so look through it.
◆ Under a hosted model, greater analytical emphasis should be placed on contract liabilities (deferred revenue) and contract backlog (where available), as an increasing share of economically secured revenues is deferred and only recognized over time in the P&L rather than upfront. Particularly during the transition phase, this requires a stronger focus on the balance sheet and management commentary.