Semler Scientific Inc (SMLR) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Semler Scientific second-quarter 2017 financial results conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

Before we begin, Semler Scientific would like to remind you that this conference call may contain forward-looking statements. Such statements can be identified by words such as may, will, expect, anticipate, estimate, or words with similar meaning, and such statements involve a number of risks and uncertainties that could cause Semler Scientific actual results to differ materially from those discussed here.

Please note that these forward-looking statements reflect Semler Scientific's opinions only as of the date of this presentation and undertakes no obligation to revise or publicly release the result of any revision to these forward-looking statements in light of new information or future events. Please refer to Semler Scientific's SEC filings for a more detailed description of the risk factors that may affect Semler Scientific's result of these forward-looking statements.

Now may I introduce Doug Murphy-Chutorian, CEO of Semler Scientific. You may begin.

Good morning and thank you all for joining the Semler second-quarter 2017 earnings call. Semler is an emerging growth company that provides solutions to improve effectiveness of healthcare providers. Our mission is to develop, manufacture and market innovative products that assist our customers in evaluating and treating chronic diseases.

We believe that our technology and software solutions enable our customers to identify when preventive care options are appropriate, which allows them to intervene before events like heart attacks and strokes occur.

I'm excited to report another increase in the number of orders for our product. This growth has led to revenue in the second quarter that was 25% higher as compared sequentially to the first quarter of 2017. And revenue grew 58% higher as compared to the second quarter of 2016, one year ago.

These customer orders were for QuantaFlo, our vascular testing product. It's noteworthy that a significant number of orders were finalized at the end of the second quarter and therefore were not yet billed until the beginning of July 2017. We believe that this timing of orders should result in continued sequential quarterly revenue growth in the third quarter of 2017.

Now, please refer to the financial results that are described in the press release, which was distributed this morning. For the quarter ended June 30, 2017 compared to the corresponding period of 2016, revenue grew $946,000 or 58%. Operating expense, which includes cost of revenue, increased by $638,000 or 25%.

Other quarter-over-quarter details are as follows. Cost of revenue increased 11%, engineering and product development expense increased by 160%, sales and marketing expense increased by 13%, general and administrative expense increased by 18%, net loss was $850,000 or $0.16 per share compared to a net loss of $906,000 or $0.19 per share. Weighted average number of shares was 5.3 million compared to 5.1 million.

As of June 30, 2017 compared to March 31, 2017, Semler had cash of $496,000, an increase of $337,000, primarily because accounts receivable decreased $319,000, accounts payable increased $236,000, other assets and liabilities such as accruals increased $189,000. Options were exercised for $78,000 and loans net of loan payments added $28,000. All of which were partially offset by various items such as decreased deferred revenue and purchases of assets for lease that will be enumerated in the second quarter's 10-Q to be filed soon.

In the second quarter, we continued to invest in improving our products and service in response to customer requests, as well as beginning new R&D projects. For the rest of 2017, we expect revenue to continue to grow due to increasing number of installations, higher average pricing, more per-test fees and recurring revenue from the licensing business. We have directed our efforts towards achieving accelerating growth as the year progresses in a manner similar to the success in this regard in the year 2016.

As I mentioned, significant numbers of orders were installed right at the end of the second quarter and billed at the beginning of July. The timing of installations should result in continued sequential quarterly revenue growth during the third quarter of 2017. We also expect operating expenses to grow as the business expands, but believe the growth in revenue will exceed the growth in operating expenses.

Because we wanted to be ready for larger sized orders of our vascular testing product, we have and will run inventory at a higher level and have expanded capacity to do more manufacturing, deliveries and installations.

Also, we are customizing systems at little or no extra charge to incorporate enhanced cyber security features. These activities will cause the cost of revenue and inventory purchases to be higher than usual for the next several months. We believe these decisions represent sound investments in growing long-term customer satisfaction with our products and services.

Now, when employing our license and/or our fee-per-test business models, rapid fulfillment of orders is beneficial because revenue starts to flow when our product is shipped into the customer's facility. So the sooner we deliver, the sooner revenue is generated.

Sales commissions also grow with increasing revenue, which accordingly impacted operating expense in the second quarter, and hopefully will impact future quarters as well. We like paying commissions as long as revenues are growing substantially faster.

Some of the increase in cost of revenue is due to more sales of equipment and supplies in the second quarter. When we sell, that item is fully expensed during the period, unlike the accounting treatment of licenses for our product, where the equipment is depreciated over 36 months.

So to reiterate, although we do not give formal guidance, we are intent on continuing strong sequential quarterly revenue growth with revenue growing faster than operating expense. Our goal is near-term profitability.

In the second quarter of 2017 and the year to date, Semler, number one, increased customer acceptance of our next generation vascular testing product called QuantaFlo; number two, added to our net QuantaFlo installations into our book of orders; number three, increased inventory, manufacturing capacity and delivery capabilities; number four, invested in research and development.

The goals in 2017 are to continue to accelerate growth in revenue from the QuantaFlo product and to further establish it as the standard of care in the industry. We believe that the market for vascular disease testing is large relative to our current market penetration, so there's plenty of room for growth.

We believe Semler is well-positioned in this healthcare market because we deliver cost-effective wellness solutions for the care of patients with chronic diseases. We may improve health outcomes for patients by identifying those who benefit from preventive health measures. And we provide economics that work for the providers, the facilities, the insurance plans, the government and the patient.

So to conclude my prepared remarks, in terms of both financial performance and in helping to provide better medical care for a growing number of patients, I believe that we are on our way to our best year ever. I thank you for your interest in the Company and your continuing support. And now, operator, please open the lines for questions.

(Operator Instructions). Brian Marckx, Zack Investors.

Congratulations on the results. Pretty impressive.

That you, Brian.

Can we talk about a little bit of -- on the growth side for revenue? I think you had mentioned on at least the Q1 call and maybe a quarter prior to that as well that much of the growth is coming from the HRA channel, I believe. Is that still the case? And can you give us a sense of how much is coming from that channel versus this -- the traditional licensing business?

I think we have not even touched upon the revenue growth from the home risk assessment business. We have seeded that customer base with a number of systems and there is growth there. It will be described better in the 10-Q, but predominantly everything you're seeing is from the licensing model with that extra growth to come.

So in other words, we may have many installations in that market, which have started to produce revenue, but really are just ramping up, which we hope we'll see in the current quarter and the fourth quarter and in quarters thereafter.

Okay. In terms of the installations, and is there any of those that are essentially idle? Or are all the installations that you have active in terms of generating revenue?

Sure. Well, every installation on a -- which we send in for a license, is obviously generating revenue for us. The activity, they tend to get started and almost get started from the get-go. So I would say the activity is going to be seen in most of those units if not all in terms of clinical care.

In terms of systems that go into the home risk assessment groups, they have a -- they start obviously paying on a per-test revenue for us and also they pay some for equipment. So, in essence, we get some immediate revenue but the bulk of the revenue comes hopefully as they use those machines.

We have found that Windows machines are in place for, oh, let's say several months, they start to generate revenue and that revenue seems to be increasing. I can't give you really good parameters yet on that because a lot of those installations have come out. So I can tell you that we've had the experience with over a year with them. They all seem to get up and running after a while and I'm happy to say that there are many more out there now due to the activities in the second quarter of this year than there ever were. So we're extremely excited about that.

We're not breaking down individually how many of the many installations we made in the second quarter were in each particular category, i.e. licenses or per-test, but there were substantial numbers in both.

Okay. And then in terms of what I'll call same-store sales or installations that have been there for 12 months or more, do you have a sense of how much of the revenue, current revenue -- we can call it the first half or the second quarter -- how much of the revenue relates to the same-store sales versus new installations within the last 12 months?

For example, the second quarter, which is approximately a little more than -- about $0.5 million or more than the first quarter -- is all new installation growth, predominantly. There is some equipment sales associated with that. That will be indicated in the 10-Q. So that would be selling sensors and some supplies.

When we do that, of course, that affects our cost of revenue because those are expensed immediately, so the cost of revenue goes [up], but most of the other is new. So when you take a look at the cost of revenue here, you see approximately in the second quarter $0.5 million -- excuse me, $0.5 million increase in revenue but only a $50,000 increase in cost of revenue.

So that gives you an idea, particularly since some of that came from equipment sales, that we have work in our high-margin business and very exciting opportunities for us in that regard. I'm not sure I answered your question exactly but I thought that information might be interesting.

Okay. Yes, that was helpful. Doug, you mentioned expanded infrastructure. I don't know if you mentioned it in the prepared remarks, but it's in the earnings release. Can you clarify for me what expanded infrastructure, what you mean by that specifically? And does it relate anything to additional headcount?

A couple things. Number one, we bought a lot of inventory in the first quarter and deployed a lot of that in the second quarter. We also bought a substantial amount of inventory in the second quarter because of the continued book of business and orders that are coming in, so we're kind of happy about that too.

The ability to have the extra inventory means we increase manufacturing capacity, which we do to a large extent through contract manufacturing, but there is some internal stuff in terms of quality control and managing our contract manufacturers that gets done. So we have improved the -- just recently, the goal would be to make sure that we have the appropriate managers in place to see what we see as an accelerating business and being prepared for that growth.

That being said, in the second quarter, there was very little change in headcount. We have, for example, one senior person in the accounting/finance side that we brought in to bolster that whole group and we got the full amount of that salary. But these are small numbers in terms of the overall numbers. So there's a little bit of growth, expect a little bit more headcount growth, and we may see a little more headcount growth in the clinical installations team if we continue to have this much need to have some of these installations. So that's the good news story, but those are not substantial numbers.

The interesting thing about the expenses would be the following. We are showing a, what is it, $850,000 loss for the second quarter, which is better than the first quarter but not dramatically so, you would think. However, you have to look at that number and say, hey, $750,000 of that $850,000 are non-cash accounting entries.

Things like depreciation, stock compensation. The amortization of debt to discount -- you remember we had announced previously that we took $1.75 million of debt and we did an extension of that debt, bringing it in to a payment that moved it into 2019.

So you'll see a big accounting hit all in the second quarter because of that, almost on a -- we don't do a non-GAAP basis, but if you take that $750,000 out, you can see that we're very happy with what we've been doing on the net loss. And also very happy the fact that the cash position improved from the first quarter to the second quarter by approximately $350,000.

So you might call this an inflection point and that's kind of what we see it as. So if there is continued sequential revenue growth on the order of better than what we had seen from the first to second. And these expenses, many of which were one time, we're saying probably will continue to grow, but just not as fast as that revenue.

And we hope that we're -- with this R&D investment, that we are taking ourselves to a higher plane, if you will, of accelerated revenue growth. That's kind of the goal of it all. So from my standpoint, outstanding quarter.

I agree. So I'm just trying to get a little bit more detail on the various different items. And you did mention that cost of revenue may go up a little bit, or you mentioned it may go up. Can you help me just a little bit with what I should expect in terms of how much cost of revenue will change, and then will that come back, do you think, towards the say mid-70%s level?

Yes. I think it's higher than that now if you take a look at the numbers, higher than mid-70%s and getting back to the 80%s. And obviously with the new revenue, and if you take out approximately $50,000 that went for equipment, which was expensed immediately, you have basically flat cost of revenue despite some first quarter to second quarter of 2017 -- despite revenue going up $0.5 million. So that means that cost of revenue doesn't seem to be drifting up that quickly unless we make some equipment sales.

There are other items in there that we can go, but your sales and your marketing, you would expect that to increase as a function of your sales, which is good news as far as I'm concerned. It goes up substantially less than maybe -- I think it was at 8% or 10%. I don't have the number in front of me right now.

And similarly, we're not seeing much change in accounting or G&A, but those things tend to drift up from various items can get in. And R&D seems to be pretty tight right now as to where it is, plus or minus $25,000, in terms of expenditures. So it feels like everything is very well controlled. And obviously you wouldn't have that one-time expense from the loan extension, the extension of debt.

So to help you with the side of looking at that, everything looks pretty tight. However, from time to time, one-time items come in. Particularly as we're growing, we have an expanding customer base. They ask for stuff and we're trying to deliver on the long-term commitment from them, so we will have expenses from time to time.

So rather than predicting that our expenses are going to decrease, I decided I think it's conservative for us to assume that revenue will increase substantially and that the expenses will increase, but not as much in terms of a percentage basis.

Okay. So if we can just talk about the cost of revenue. So if we call it gross margin, I know that's not necessarily appropriate term, but just for argument sake, we call it gross margin. It was 77% in Q2. Can you help me with where we would think that would go with the additional cost of goods that will come on due to the equipment sales?

Okay. I think from the second quarter that would include the equipment sales. So just assume that the licenses are higher than that number and the equipment sales are lower than that number; brings it down a little bit. We don't think equipment sales are going to be a big component of what we do, although I can't guarantee that. But I'm just saying in general we will take the additional sales. I'm not going to say they are bad sales. But you expect to see more of that high margin fee-per-test and that high-margin license. So if anything, over the time period, we should continue to see, if you will, margins -- just the term you're using -- improve.

Margins continue to improve? I guess I'm confused.

Well, if it's 77% now, if you're using that number, you should expect in outlying quarters -- we don't give guidance, but you expect that number should continue upward. And hopefully our goal would have it to end up in the mid-80%s. That's kind of the direction we'd like to see. I can't predict how fast it will get there.

I understand, and I understand it's difficult to predict. Maybe I just understood incorrectly. I guess I interpreted the comments to mean that over the short term you would expect that that 77% would essentially come down from 77%.

I meant increase, improve.

Okay, all right. I apologize. That's (multiple speakers)

I may have misspoke and I'm sorry about that.

So Doug, again, I think it was a great quarter. I guess probably the major thing that I have is in the R&D expense. And you did a great job of explaining what was in there. I'm just trying to get a little bit better sense of how much the recent increase is short term in nature and then how much may be more recurring in nature.

Well, there are certain projects associated with it, so that the current projects that are associated with that R&D increase that we made in the second quarter actually tapered down by the third or in the beginning of the fourth quarter.

However, given the response to our products and services and what we see as a substantial market opportunity, I don't think you should be expecting us not to find other R&D expense, if you will, and projects that we think are going to be very exciting. That's this whole concept of getting to a higher plane, if you will, of revenue and accelerating growth. I'm happy to see 25% growth from one quarter to the next in terms of that's a good number, but I'm not satisfied with it.

Doug, you mentioned -- I gathered, anyway, or interpreted right or wrong -- that some of the expense that's in there is non-reimbursed customization work for --.

Correct.

Yes, okay. Can you give us an idea of how much that made up of the current quarter's expenses?

Yes, actually, I don't think we delve into it at that level. But just to give you some flavor, though, clearly the products that we have produce important results. And as we get into larger and larger customers, it's very important for, if you will, central control and command to have an understanding of what's going on to make sure that they are appropriately training their physicians, that the appropriate criteria in the place of the physicians, that the economics are working for them.

And so we're providing them with the information systems, which you would think that they would have in these large organizations, but it turns out that there's obviously a need for that, particularly when they're introducing a new technology and service. So we see there's an opportunity, if you will, to get behind their firewall to help their software work better. You think of us as a software company. So that's a very exciting opportunity and we want to do that. And when you do that, you have to do it with extreme, if you will, firewall protection, cyber security, et cetera.

That type of investment is worth making, both on a companywide basis and also on an individual customer basis, because the same customers are going to have the same issues. We may have to solve them slightly differently because of their individual needs, but we find that's an important part of the service we're trying to deliver. And that sets the stage for additional products we could add onto that service once that's in place. So that's kind of one aspect of what we're doing.

The second aspect is that the systems that we have in place were originally on a Windows-based platform, an Android-based platform, so additional platforms that we may bring into play. And also just improving the look, the expediency, the effectiveness of it. So all that's coming together very, very well and it's making the product, if you will, state of the art, which is what we're trying to do to make sure that it's in place, both in its look and its functionality.

So that's a big task, but as I said, if there are 60 million people in the United States who are at risk, not to mention the rest of the world, for peripheral artery disease and need to be tested every year according to the American Heart Association or the American College of Cardiology, that's a big task.

We are just at the beginning of that task, luckily getting some abilities to -- or some increasing abilities to get that done. So that's the task and we want to be prepared to do as many of those as possible. And that's a huge opportunity from a market standpoint. So if you want to go after something that appears like it's a -- well, we won't even put numbers on, but hundreds of million dollars of market, these are the small investments that we're making now to try to achieve that in the future.

Okay. So the customization work, it sounds like, is for new accounts only. Is that right?

What we're finding is people expand -- remember, some of our, if you will, existing accounts are ordering more product from us. So as they expand, making sure that their systems are connected is an important thing. And that's kind of what we're doing as well. So I can't break it down. I understand the question, but I think for the basis of this call and his audience it may be not really germane to get into that level of detail.

Okay, okay. But -- and this is my last one, it relates to the same topic. When you do the customization work, is it kind of one-time? You set them up, you get them going, you do the software, whatever needs to be done, so it can operate they want it to operate, and then it's essentially ready to go and there is no real significant expense related to that?

That's a fair assessment (multiple speakers). That's a fair assessment. Think of it this way. There are different electronic medical record systems that exist. Assume that there are five major ones. Each one of them has their own little aspects that need to be dealt with. It's not ridiculously difficult work, but it requires a little attention to detail. Particularly if anybody has put any particular -- or if we call it homebrew on their particular software.

So doing all that and doing it in a way that preserves cyber security and all the other good things is, as I said, is what we try to do. And just as you said, once it's set up, it should continue to work that way. And hopefully what worked for one person who's using let's say the Epic system will work for the other person who uses the Epic system. 99%. Okay?

Okay. Perfect. Thanks, Doug. I appreciate it. Yes, thank you.

(Operator Instructions). Mr. Chutorian, I'm showing no further questions at this time. Please proceed with any further remarks.

Well, thank you, operator. And thank you, everybody, for joining us today. I look forward to updating you on future calls soon on our continued progress. As you can tell, we're kind of happy with what this quarter's activity did, not only for this quarter, but for succeeding quarters, in particular the one that we are in currently. And we appreciate once again your interest. Thank you again and this will end the call. Good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.