Semler Scientific Inc (SMLR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Semler Scientific's Q3 2017 financial results conference. (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's 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 it 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 results and these forward-looking statements.

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

Thank you, operator. Good morning and thank you all for joining the Semler third-quarter 2017 earnings call. Semler is an emerging growth Company that provides solutions to improve the 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 and to intervene before events like heart attacks and strokes occur.

Now I'm excited to report another increase in the number of orders for our vascular testing product, QuantaFlo. Revenue in the third quarter grew more than $1 million compared sequentially to the second quarter of 2017. And revenue grew 82% compared to the third quarter of 2016, one year ago.

It is noteworthy that a significant number of QuantaFlo orders were finalized at the end of the third quarter and therefore were not yet billed into the fourth quarter of 2017. We believe this timing of orders should result in continued sequential quarterly revenue growth in the fourth 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 September 30, 2017, compared to the corresponding period of 2016, revenue grew $1,625,000, or 82%. Operating expense, which includes cost of revenue, increased by $1,000,294 (sic - see Press Release $1,294,000) or 58%.

Other quarter-over-quarter details are as follows. Cost of revenue increased 82%; engineering and product development expense increased by 136%; sales and marketing expense increased by 42%; general and administrative expense increased by 45%. Net loss was $41,000 or $0.01 per share, compared to a net loss of $362,000 or $0.07 per share. Weighted average number of shares was 5.5 million compared to 5.1 million.

As of September 30, 2017, compared to June 30, 2017, Semler had cash of $578,000, an increase of $82,000. Cash flow items will be enumerated in the third-quarter 10-Q, which is to be filed soon. In the third quarter, we continued to invest in R&D projects to improve our products and service in response to customer requests. Areas of investments include new software -- platforms, sensors, cyber security and data analytics.

For the rest of 2017, we expect revenue to continue to grow due to increasing number of installations, higher average pricing, more usage fees and recurring revenue from our licensing business. We have directed our efforts towards achieving accelerating growth as the year progresses in a manner similar to our success in this regard during 2016.

As I mentioned, significant numbers of orders were installed right at the end of the third quarter. Billings for these orders will begin in the fourth quarter. This timing of installations should result in continued sequential quarterly revenue growth during the fourth quarter of 2017. We also expect operating expenses to increase as the business expands, but believe that the anticipated growth in revenue will exceed the increase in operating expenses.

As you can see from the third quarter results, we have put in place infrastructure and its associated costs to support a larger revenue base. Should revenue growth continue at this pace and expenses grow at a more modest pace, our goal of profitability will soon be reached.

For the first nine months of 2017, revenue was $8.2 million, which already exceeds the revenue of $7.4 million for the entire year of 2016. Or in other words, we have achieved our best year ever in terms of revenue with a quarter yet to go. 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 expenses. Our goal is near-term profitability.

In the third quarter of 2017 and the year to date, Semler continued to: number one, increase customer acceptance of our next generation vascular testing product called QuantaFlo; number two, add to our net QuantaFlo installations and to our book of orders; number three, increase inventory, manufacturing capacity and delivery capabilities; and number four, invest 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 is 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 the 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 patients.

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 have achieved our best year ever with one more quarter remaining in the year to better that mark.

I thank you for your interest in the Company and your continuing support. And now, operator, could you please open the lines for questions?

(Operator Instructions). Brian Marckx, Zacks Investment.

Great quarter. Congratulations on the results.

Thank you, Brian.

In terms of revenue, I think in Q2 you mentioned that there was some customization work, I think, that added to the revenue in the quarter. Did you see that in the current quarter as well?

In terms of customization of the product, our revenue really breaks out, Brian, if you think about it, into mostly licensing fees and/or usage fees or fee-per-tests. So in the third quarter, as a comparative ratio, the licensing fees were about five times the usage fees. While in the second quarter, to give you a comparative, it was 11 to 1.

So usage fees are becoming a larger contributor to total revenue. And we don't know if that's a seasonal trend, if the ratio will continue to increase, decrease, or remain the same in future periods. But in essence, that's exactly what's happening in terms of our business.

So it's not a matter of customization work, it's just a matter more of a continuing usage by both current clients and new clients, and a greater preponderance of dollars coming from the usage contracts.

Okay. And the usage contracts are primarily the home risk assessment channel, is that right?

That's correct.

Okay. All right. So in terms of your installed base, FloChec versus QuantaFlo, do you have a sense of what percentage is still using the legacy instrument?

I actually don't have that at my fingertips, but it's a relatively small number now. And there is then a crossover that started last year to the new product and continued the beginning of this year. But we're really not seeing many more that need to do that. So I would say that we are predominantly there.

To give you a better idea, perhaps this will help, in terms of the growth in revenue, take a look at just the same-store new installations. All the new installations of course would be QuantaFlo. The growth is about [500 to 65,000] in the third quarter compared to the second quarter of 2017. And some of those were with new customers, some are just expansion of orders with previous customers. And we don't really specify that difference.

But -- and most of the growth of the usage fees during the third quarter came from installations made in previous quarters. Because there's a time period lag where they get the machines from us, they have to train up the people using it, they have to secure contracts to do usage for people and then they start working with it.

And new installations for usage fees that were set up in the third quarter we would assume might begin contributing significantly to usage in the fourth quarter. So it's kind of a nice trend that we have there that we've sent some of these -- excuse me, we installed a base and the base is now just beginning to expand in its usage of the device.

Doug, you referenced 2016, Q3, Q4 in your prepared remarks related to -- and maybe I'm making the connection and you didn't mean to, but I'll ask the question. It sounded like related to potentially what the growth might be in going from Q3 to Q4 this year. In 2016 that growth was 17%. Is that what you were implying, that it could be similar?

I don't think I was making the -- any implication about percentages, because we've actually far exceeded that kind of growth rate quarter to quarter this year. So not being specific though, the last year though was an increasing -- quarter to quarter kept increasing, which is what I was really referring to, that the trend is an upward trend.

And there was some good amount of growth in that trend. So when I take a look at it this year in terms of where we're going, I really just made the same statement that I made at the end of the second quarter, and I think I may have made it at the end of the first, in regards to bookings that come in late in the quarter.

For those of you not familiar with that, for example, if we have a license model, the license fees, if the installation is done in April or let's say in the third quarter -- in July of the quarter, we would have almost three months of license fees. However, if the installation was done late in September, we may not have any fees yet associated with it because we haven't billed yet.

So, that's what I mean by a number of bookings coming in at the end of the quarter that were not reflected in the third-quarter revenue, but should be reflected in the fourth quarter and hopefully in a recurrent basis thereafter.

Okay. In terms of expenses, and specific to your sales force, can you give us how big the sales force is currently? And then do you expect to add headcount to the sales force, say, in the next couple of quarters?

Sure. The sales force is approximately 20 people, but the predominant portions of those are not direct selling people but what I'll call customer service and support people in the field. So as the base of business, the number of installations grow, he will add on some people like that. Which in general are not as expensive as you might think in terms of a direct salesperson with a heavy commission schedule.

So the support function is growing. But we really are leveraging a very small direct selling team. And we're doing that because a number of the groups that we work with, i.e. our customers, are large insurance companies or insurance plans or larger medical groups. And therefore it doesn't take us -- we're not going to be adding on a lot of headcount in that regard.

So, the plan right now is pretty much keep the headcount exactly where it is in sales, unless it's support functions that are necessary to service the growing established base of business.

Okay. And then on the product side, you talked about some features known the product side, some enhancements in the recent past. Are those ongoing projects that -- cyber security was one that you mentioned. So just trying to get a feel for maybe on the R&D spend, what should we expect going forward?

Yes. Well, if the question is what to expect, I would think that we will continue to have these expenses. Even though the projects are finishing up and we could decrease the dollar of spend, I think basically our infrastructure and our R&D are the foundations to support a bigger revenue business.

We'll probably continue to spend, and expenses will probably drift upwards if anything in the future years, but it's a substantially lower rate than the revenue growth. And we'll control that to make sure that happens as best we can.

Okay. So on CapEx, can you give us a feel for what your expectations are on CapEx as it relates to the instruments for lease? It looks like you spent about -- I think it was about $500,000, maybe a little bit more, through the first half, so Q1 and Q2 of 2017. If you can just give us a little color on your expectations in terms of that going forward.

Yes. For us, guys, the CapEx is really not that large, and part of that is because the business -- let's just step back from the question and I'll come right to the CapEx question. What are our operating margins or our gross margins?

Obviously we report this cost of revenue number so we have to take the cost of revenue, divided by the revenue, and that decreased this quarter down to 20%. Or in other words, in a non-GAAP way of saying that, our gross margin rose from 77% to 80%, so that's good.

Part of that is reflected in the fact that many of our customers provide their own hardware and we're predominantly a software business. So from a -- that relates to the CapEx. So we're seeing that the CapEx expenditure has been, if anything, stable or even a little lower, and mostly because our individual installation is costing us less.

I expect that trend [mobby] will probably continue, so therefore our CapEx is not going to grow too much, if that helps you with your numbers. That's what it looks like right now. Of course if items change I'll have to revise that statement.

Okay. And in terms of cash, Doug, as you referenced, the cash balance went up a little bit quarter to quarter. Does that mean that you were cash flow positive? Or does that mean that there was some -- exterior funds that came in?

No. I think -- well, it's nice to be able to say that there was income from operations rather than saying there was a loss, as you can see on the numbers. So although be it small, hopefully it will continue to grow. And therefore the cash position, there was a relatively larger increase in the accounts receivable, which would be a user of cash, and we were able to obviously defer that with some accrued expenses and some other accounts payable.

But going forward, what I think is the key question, and those who may be following Brian, is that we believe that there is positive cash flow from operations. And we have some warrants that exercise soon. With the continuing improvement of some of our expenses, I think we're going to be able to pay off all or most of our outstanding notes when due, and also reduce some of our expenses based on our cash flow and the trends that we're seeing.

That is of course if the trends continue. If they increase, we could pay off faster. And if not, we will have to perhaps accrue some more. But in essence, the Company is interested in having minimal dilution and share issuance until we believe the stock is appropriately valued.

So when we think it's undervalued we're really not interested in any kind of equity. So I think the key thing is from a cash perspective we believe we're going into cash generation mode. We like to think we're going to be a cash cow and we'll use that cash appropriately to improve our balance sheet and hopefully provide increasing shareholder value.

Great. Thanks, Doug. I appreciate it.

Greg Graves.

Congratulations on a very pleasing quarter. A couple of simple questions. You talked a little bit about headcount as far as sales. Can you tell me how many people are employed by your Company today? And do you look at having to increase that number, whether it's sales or operations or what have you, in the next quarter?

Hi, Greg. Thank you for the question. The total Company headcount as of September 30 was 36. That compares to about 31 on June 30 of this year. The headcount should grow in the future, probably at a modest pace. And the area of future headcount growth is probably in these customer service field representatives and maybe a little bit of technical support. So we are really not a big cash using or big headcount kind of Company. We're using -- employing a lot of leverage in the way we work.

All right. And one other question. The issue came up of some warrants that might be exercising. Could you give us a rough indication of how many warrants might be out there today that could dilute the stock in the future?

I believe -- don't have the numbers in front of me. I believe that there is approximately $600,000 of warrants that are exercised let's say by early 2017 to, like, March or May of -- excuse me, early 2018 to March or May of 2018. That would represent -- those options were approximately a few hundred thousand shares; I'll say approximately 300,000 shares.

In total I believe that all options and warrants considered, which have an average price -- and I can't be quoted, you have to look at the numbers -- but something between $3 and $4 a share in general. They probably would take us up to a total of -- let's see, if we were 5.5 million in equity shares, that would be about 8.2 million would be the total if you are thinking in those terms.

Of course if we exercise all those warrants, we'd have a substantial amount of dollars coming in, too, with those warrants and options. But those are what the numbers are. Did I say that clearly enough?

At first you said $600,000. That -- so you're talking about $600,000 of cash flow coming in for the warrants that might exercise in the next two quarters?

Yes, exactly right, exactly (multiple speakers). About $600,000 that will come in from that, and then in total, including those and all equity and all options in the Company, there is probably a fully diluted number, if you want to use that term, of 8.2 million shares.

Very good. I appreciate that. Thank you very much.

And sir, I'm showing no further questions in the queue. At this time I'd like to turn the call back to you for closing remarks.

Thank you. Thank you all for joining us today. I look forward to updating you soon on continued progress. We thought it was an outstanding quarter and we're very happy with the performance of the employees and the rest of the management team. We thank you again for joining us and your continued support. Have a nice day. Bye.

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