Semler Scientific Inc (SMLR) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Semler Scientific fourth-quarter 2017 financial results conference call. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

Before we begin, Semler Scientific would like to remind you that this conference call may include forward-looking statements. Such statements can be identified by words such as may, will, expect, anticipate, estimate, or words with similar meanings 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 results of any revision to these forward-looking statements in light of new information or future events. Please refer to the Semler Scientific SEC filings for a more detailed description of the risk factors that may affect Semler Scientific's results and these forward-looking statements.

Now I introduce Doug Murphy-Chutorian, Chief Executive Officer of Semler Scientific.

Thank you, operator. Good morning and thank you all for joining the Semler fourth-quarter and year-end 2017 earnings call. Please note that for today's call all mention of earnings per share refers to basic earnings per share. The difference between basic and diluted earnings per share as reported in our earnings release earlier this morning was approximately $0.01 per share. Let's begin.

Semler is an emerging growth company that provides technology solutions to improve the clinical effectiveness and efficiency of healthcare providers. Our mission is to develop, manufacture and market innovative products that assist our customers in evaluating and treating chronic disease. 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 or strokes occur.

I'm excited to report that the number of orders for our vascular testing product, which is named QuantaFlo, continues to increase. Revenue in the fourth quarter grew to $4.213 million, which is a sequential gain of more than $600,000 compared to the third quarter of 2017. And we are very pleased to report that revenue growth outpaced increased expenses such that we posted our first-ever quarterly profit.

The net profit for the fourth quarter was $0.05 per share, which included a write-off of approximately $0.05 per share of fixed asset impairment for old WellChec equipment.

In addition, in the fourth quarter of 2017, we achieved positive cash flow, which resulted from cash generated both from operations and the exercise of warrants. Our cash position had increased by $879,000 at the end of the fourth quarter compared to the end of the third quarter 2017.

Now please refer to the financial results that are described in the press release, which was distributed this morning. For the quarter ended December 31, 2017 compared to the corresponding period of 2016, revenue grew $1.897 million, or 82%.

Operating expense, which includes cost of revenue and includes the fixed asset impairment, increased by $1.418 million or 58%. Analyzing the expense categories in the fourth quarter of 2017 as a percentage of quarterly revenue, the cost of revenue was 16.6% of quarterly revenue. Engineering and product development expense was 11.5% of quarterly revenue. Sales and marketing expense was 37% of quarterly revenue and general and administrative expense was 26% of quarterly revenue.

Net profit was $254,000 or $0.05 a share, including the $251,000 or $0.05 per share negative impact of the fixed asset impairment. As of December 31, 2017 compared sequentially to September 30, 2017, Semler had cash of $1.457 million, an increase of $879,000 over three months, because proceeds from warrant and option exercises accounted for approximately $660,000 of this increase. The remainder of the increase in cash was due to operating activities, partially offset by investments in assets for lease and capital equipment. Cash flow items will be described in greater detail in the soon to be filed annual report on Form 10-K.

In the fourth quarter, we continued to invest in R&D projects to improve our products and service proactively as well as in response to customer requests. Areas of investment include new software platforms, sensors, cyber security and data analytics. In 2018, we expect revenue to continue to grow due to the increasing number of installations, higher average pricing, more usage fees and recurring revenue from the licensing business.

We continue to strive to achieve additions to our customer base and expanded orders from existing customers. We achieved quarterly growth throughout 2017. One footnote, previously on these calls, I've mentioned timing of orders that occur at the end of quarters for which billings have yet to take place. I will no longer routinely describe such intra-quarter timing of orders on earnings calls or releases after today.

Now that being said, there were once again a solid number of license orders for our vascular testing product at the end of the year for which billings should occur in the first and second quarters of 2018. We expect that this timing of installations will result in continued sequential quarterly growth in revenue from licenses during the first and second quarters of 2018.

Revenue from usage fees are also expected to grow in 2018 compared to 2017. The magnitude of these fees in 2017 were lowest in the first quarter and grew every quarter thereafter. We currently expect the same sequential quarterly revenue pattern in 2018, that is lowest in the first quarter and highest in the fourth quarter in regards to usage fees.

We also expect operating expenses to continue to grow as the business expands, but currently believe the anticipated growth in revenue will exceed the increase in operating expenses. Or in other words, we believe that cost of revenue and operating expenses as a percentage of revenue will decrease in 2018.

We reached our goal of profitability during the fourth quarter with a net profit of $254,000 or 6% of revenue despite writing off $251,000 in fixed asset impairment or another 6% of revenue, which was related to old WellChec equipment.

For the year 2017, revenue was $12.5 million, which exceeded the annual revenue of $7.4 million for 2016. In other words, we had our best year ever in terms of both revenue and earnings.

Comparing the annual results for 2017 to 2016, annual revenue increased 68%, operating expense increased 39%, operating loss decreased 61% and net loss per share decreased 41%. Moreover, as of the fourth quarter of 2017, we have achieved both positive cash flow from operations and profitability. Given our recurring revenue business model, if we are able to maintain operating expenses, we currently anticipate that 2018 will be the first profitable year in the Company's history.

To reiterate, although we do not give formal guidance, we are intent on continuing strong annual revenue growth and maintaining profitability during 2018. We currently anticipate meeting our debt repayment obligations and other liabilities from existing cash and anticipated cash from operations. There is no plan to raise additional capital at this time. We reserve the right to change our financing plans as opportunity or needs arise, however.

We met our goals for 2017 as we continued to accelerate growth in revenue from the QuantaFlo product and to further establish it as a 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 continued growth.

We believe Semler is well-positioned in the 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 would benefit from preventive health measures. And we provide economics that work for the providers, the facilities, the insurance plans, the government and the patient.

To conclude my prepared remarks, in terms of both financial performance and testing a growing number of patients, we have achieved our best year ever. I thank you for your interest in the Company and your continuing support. Now, operator, could you please open the lines for questions?

(Operator Instructions). Brian Marckx, Zacks Investment Research.

Good morning, Doug and congrats on another great quarter and another great year, in fact. Doug, I think you said that the asset impairment charge -- I'm just trying to clean things up in my model -- that the asset impairment charge, $251,000, was in cost of revenue. Is that right? In Q4?

No, it's in G&A.

In G&A. Okay, okay. Okay, good. Great. That answers the next question I have, okay. All right. And then you mentioned that usage fees, that part of the business, it sounds like there is some seasonality to that business. Anything more that you can talk about in terms of what drives that seasonality? Is it more -- is it kind of reimbursement-driven or copay driven or just a little bit more insight on that would be helpful.

Sure. Well, most of the growth in usage fees during the fourth quarter, it came from established customers. Now we really do not have enough history to know whether usage fees are more seasonal in nature and don't know if the usage fees will increase, decrease or remain at the current levels during future periods. And we do anticipate new customers coming in under usage contracts in 2018.

That being said, the business that the usage fees is going to is the kind of customer that does work for insurance plans, like a home risk assessment company for example. And generally, their business is to get a list of customers, or I should say members or patients, from an insurance plan and they get that list somewhat later in the year.

So we see, as we saw last year, that they get their list and by the time they organize and start doing it, they've done a little bit in the first quarter, more in the second and then in the third and fourth, they really ramp up. We did -- I believe we reported previously about $550,000 in usage fees in the third quarter of 2017 and it has grown to be about 19% of revenue in the fourth quarter or maybe closer to $800,000. We will get the exact numbers in the 10-K.

So I would say the same thing should happen. We should see increasing license revenue in the first quarter and then hopefully every quarter thereafter in 2018 and we will start with a lower usage fee amount and then probably lower in the fourth quarter, but, for the year, we would assume that the usage fees will be higher for the year than they were in 2017. They will be higher in 2018.

Okay. And so it sounds like, as a percentage of total revenue as well over the longer term on an annualized basis or however you want to think about it, that usage fees potentially would become a greater portion of total revenue as well. Is that --?

That's hard to say. That's what we don't know because the license fees also have good growth to them. So which grows faster, we are kind of a little agnostic to in the sense that we make very good margins both ways. One is not particularly preferred over the other. So I actually don't even think in terms of it that way anymore. I kind of think in terms of just where the revenue is going from the year. But there is a little difference in the way those customers pay us, i.e., usage fees come in, as I said, probably in greater numbers in third and fourth quarter. I'd like a little more history to say that for sure and license fees seem to grow organically with this recurring revenue model quarter-over-quarter.

Okay. And you think that licensing fees should grow sequentially for the foreseeable future. Is that accurate?

We are attempting to make that happen and I did mention though that we did have a number of units that shipped that we haven't billed for that will be billed in the first and second quarters, so it gives us good confidence to believe that we will certainly have increases in licenses in the first two quarters by having it already essentially baked into what we have done.

Okay. And then in terms of the balance sheet, is there any -- just to cover all bases, is there any concerns or issues about collectability on the AR side?

No, we have done very well in AR collections, actually even got better as we expanded the accounting team last year. Most of our customers are just -- they pay on a timely basis. It also doesn't hurt that our technology turns off the device if we want to every month. So we have an ability to, if someone hasn't paid, turn their device off until they pay. So the net-net of it all is we have good payers. We really don't have to turn off devices and I'm very happy with collections.

Okay. And then, generally, relative to the payer side of reimbursement, is there anything on the reimbursement side that is meaningful to talk about I guess? In particular, Obamacare and then particularly on that, the individual mandate going away in 2019. Do you think that that may have a substantive effect on your business in any way that you can -- obviously you don't have a crystal ball, but just from what you see and your insight and kind of just your outlook for things when that comes into effect?

To me, there is no effect of that in our business. That is not kind of the part of the business that we work in or that is the economic part for most of our customers. At the same time, if there are substantial changes in the way healthcare is delivered, of course, we have to deal with those. We'd like to think that we built our product in such a way and priced it so that there is tremendous economic incentive for our customers so that we could tolerate even cuts if you will from the government and what they pay in the usual way and do very well.

At the same time, as I said, there is always some risk associated with what they are going to do and I do not have a crystal ball for that.

Doug, as I am sure you are aware, CMS started paying for exercise therapy for PAD. I believe it was somewhere around last year, I think mid last year. Have you seen a positive impact from that in terms of the demand side on the diagnosis side with that potentially driving more business?

We did very well in growth. There may be multiple factors in play. Perhaps that played a small part. Certainly it's a positive factor for us. At the same time, I really cannot determine which factors were that are making this thing grow.

I think people are getting much more comfortable with their device, with that use, the diagnosis, the outcomes for their patients are good. So I think those are really the driving forces. But certainly having the outcomes for patients will improve if they are paying for exercise therapy, which is one of the frequent things that you want to do when you make an early diagnosis.

So I am very happy about it. I think it is good for healthcare that it's there and it certainly would seem to be beneficial for us, but I can't give you a number.

Okay, great. I appreciate it. Thanks, Doug.

Dave Lavigne, Trickle Research.

Hi, Doug, great quarter.

Thank you, David.

I'm just wondering -- I know that you don't give specifics about customers and that sort of thing, but I wonder if you can give us any sort of color on just kind of the revenue mix. I mean was half of it from five customers or even from the perspective of was a preponderance of it from existing customers who are expanding it throughout their systems or can you give us any color on that at all?

And I guess the second question would be I'm curious what -- you kind of mentioned new software platforms. I'm kind of curious what that means I guess.

Sure, okay. We don't break it down, but clearly one of the main customer groups that we are going after, we are working with are insurance plans and the way we see this working, it takes a long time to get involved with one of these to get them interested to start a pilot phase, maybe a couple years to get started. And after they have gotten some experience with it, we do see substantially bigger orders coming from these large groups.

So a lot of our stuff, and we don't -- as I said, I'm not breaking it down to numbers -- but a good preponderance of it does come from them and because it takes so long, we are certainly going to have a number of these groups that are very important to us in terms of percentage of our business.

At the same time, the groups that we are talking about are not kind of central command and control where there's one person who flips the switch. They generally have multiple divisions, let's say, that all make independent decisions and whom we have to go to individually. So there's a lot more discreteness to it than you would if you just looked at kind of the umbrella organization, they may own it.

So that being said, I do think that going forward that the established groups, they are so large and we have so little of their overall business yet, will be really key to us. Whether -- we'd love to get more new customers in and we try to do that, but we have a lot of terrific established customers who could drive this business substantially more than it is now. So that's kind of the answer to that question.

The software side is that we are -- from a platform standpoint, we have a system that works on Windows, works on Android. We are coming out with -- it works on iOS platform for those who use that. Generally speaking, many of our customers prefer to use their own tablets and laptops rather than one we supply because all their practitioners have them already. So we are very happy to do that. That decreases our cost of revenue because we don't have to supply that equipment and it just makes us have to make sure that our software is compatible with whatever they are running on their system.

So we do a lot of software integration, etc. and at the same time continually trying to make sure that our software works even better in terms of providing data, doing other things that these customers need to run their business. We see that if they are using our technology, running -- and helping them run their business better that's really our goal. That is why we do all these other things.

So you feel like sort of improved analytics is becoming a greater sort of value proposition to the offering in general?

Yes, I do. I think cyber security, I think data analysis, these are all some of the things that we want to do and then there are also just simple things like the actual logistics of how easy it is to do and how a nurse's aide can do something that previously a vascular specialist would have to do or a vascular technologist. So we are really trying to make it as easy to use, as fast to use and as accurate and those are kind of the predominant things that we do in our software development.

Okay, and just back to the first question. So I understand sort of the autonomy of some of these bigger groups, but is it fair to say that at least -- that maybe the second sale into one of those groups or the third sale or the fourth sale is maybe a little bit easier and maybe a little shorter than the first than the prior sales maybe?

Yes, I think it's more that if a group within one of these large organizations is using us, what happens is they at some point decide everybody needs it and then we get relatively large orders. So there is some lumpiness to it and then maybe that division is satisfied but another division hears about what they are doing and says well we want to get involved too. They start slow and then hopefully there will be a big surge.

So very exciting. There's a lot more to do for them. So as I say frequently, we are in this market, maybe penetrated 1% to 2% and we have a lot more to go, we hope.

Great, thanks.

John Henderson, Kershner Trading.

Good morning, guys. Congratulations on your progress. I'm kind of new to the story, so if I sound ignorant, please forgive me.

That's okay. Thanks for calling in, John. How can we help?

So you guys have a nice little company and a friend mentioned the stock to me, so thus my interest. You guys are very profitable for a $4 million quarterly run rate company and it seems like there is an interesting valuation here.

So my first question is what would the total share count be assuming everything was converted that's out there, outside the current share count of common stock?

Well the weighted average number of shares for the quarter was just about 5.6 million. The diluted number, the calculated number is 6.6 million. In terms of the number of common shares outstanding, I don't have that in front of me at the end of the quarter, but it's probably presumably a little higher than the average weighted, so close to 5.6 million, 5.7 million and the total number of options and warrants just taken together was about maybe a little over 2 million shares. So that would take everything up to under 8 million shares if you added the common shares outstanding, along with the vested and unvested options and warrants.

And if all the warrants were exercised, are all those going to bring cash to the balance sheet?

Yes, the average price of the warrants is probably over $4. Of the options, it's probably $3. In the 10-K, you will see more details about this than I can really provide on the call here. So if it's okay to wait for that, I'm just trying to get you a general idea to get you in the ballpark.

Okay, and just final question. In terms of any plans for uplisting, obviously, it's a profitable medtech company with a big market is a nice opportunity in terms of getting in front of new investors. Are there plans to uplist to the NASDAQ this year?

That would be the plan. The goals -- well, the requirement for us to get back on NASDAQ, we have done just everything you need to do. It's simply the shareholders equity. We need to have $5 million in shareholders equity last time I looked at that, after which it's fairly easy to reapply and get on.

So as you can see, the two choices for us are let the operating profits come in and correct our current shareholders equity, which was minus $2.5 million at the end of the year, so we'd have $7.5 million to go and/or at some point depending on share price, which we kind of think is too low now to do it, so we have been avoiding dilution, but would be to take some of that money in as an equity financing and then also be in position to do that.

So there is definite interest amongst shareholders I know and also the Board to relist on NASDAQ when the appropriate time comes. But not to do it in a way that would cause a substantial dilution to the stock unless the stock were at what we would think is a reasonable price.

I appreciate that. Okay, well, that sounds like a very logical and smart plan and my final question -- so in terms of the market opportunity, in terms of the competitive landscape, I mean who are you guys competing against? Is it just any specific competitor or are you guys kind of creating this market so to speak?

Well, if you think of the market as PAD or peripheral artery disease testing, there is a long history of people in this industry using predominantly the blood pressure cuff products with the Doppler ultrasound systems and we basically always will [see] them in the marketplace.

What the product we have, QuantaFlo, does is it does it faster, more accurately and solves a lot of issues, but specifically it allows it to be done instead of by a vascular technologist or specialist to be done by a nurse's aide. And that allows the test to get done in a primary care setting where prior to this, they didn't have the time to do it or the expertise to do the testing.

So the testing is very important, both the American Heart Association and the American College of Cardiology, American Diabetes Association all say that you need to test these patients particularly because most of them are asymptomatic. So they have the disease, it's going to be a problem and early prevention would actually make it hopefully easier or better. But there is no way to test them because there is only 20,000 specialists and no one gets referred in when they are asymptomatic.

Now you can have, in the primary care office, a patient comes in, nurse's aide asks them a couple of questions. For example, are you over 65, are you over 50 and do you have a cardiac risk factor. This is all on a simple questionnaire. They check the box. If they check a box that says they need the test, she takes their temperature probably, checks their pulse and does their QuantaFlo. So that when the doctor walks into the office, into the examining room, he has the report right in front of him. He says well you know you do have something started here. You do have some risk factors. So I think, and then depending upon the severity of disease, might say I think we need to concentrate on your exercise, we need to get you off smoking, we need to get your blood pressure or medicines in place or if it is more severe, we need you to see a specialist.

All this is kind of the thing that we are doing and it starts with the fact that, yes, there are a lot of people out there who have these other types of devices, but we think we have disrupted the system and brought something very important to another, if you will, the gatekeeper of the medical process rather than the specialist.

Great. Well, congrats and good luck. Exciting little growth story and hopefully can be a much bigger story in the coming years. So good luck with everything. Thank you.

Thank you for your questions, John.

(Operator Instructions). Ladies and gentlemen, this concludes our question-and-answer session for today. So now it is my pleasure to hand the conference back over to Mr. Doug Murphy-Chutorian, Chief Executive Officer, for some closing comments or remarks. Sir?

Thank you, operator and to everybody on the call today thank you for joining us. I look forward to updating you soon on our continued progress. We are very happy with the quarter and we hope to have more in the future and thank you again for your support. Have a good day and a good week.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.