Semler Scientific Inc (SMLR) 2021 Q3 法說會逐字稿

Good day, and welcome to the Semler Scientific Third Quarter 2021 Financial Results Conference Call. (Operator Instructions)

Please note, this event 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, intend, estimate, 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.

These risks include continued uncertainty due to the evolving COVID-19 pandemic, risks associated with Semler Scientific's recent investments in entities with potential complementary products and new distribution arrangements, along with other risks associated with Semler Scientific's business.

Please note that these forward-looking statements reflect Semler Scientific's opinions only as of the date, this presentation -- of this presentation and then 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.

I would now like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific. Please go ahead.

Good afternoon, everybody. Thank you for joining us for our third quarter results call. I would like to introduce you to Dennis Rosenberg, our Chief Marketing Officer, who will begin the call for us today. Dennis?

Thanks, Doug. We always like to begin our calls with a reminder about Semler's strategy. Semler is a company that provides technology solutions to improve clinical effectiveness and efficiency of health care 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.

We're pleased to report that Semler's fixed fee license quarterly revenue of approximately $7.8 million and our cash position of $35.9 million at the end of the third quarter of 2021, were the highest in our company's history. I'm sure you all saw that we uplisted to the NASDAQ market last month. We believe this move will enhance liquidity of our shares and could enable the expansion of our stockholder base. There is no plan to raise additional capital at this time. However, we do reserve the right to change our financing plans as opportunity or need arises.

Comparing results from the 9 months ended September 30, 2021, to the corresponding period of 2020, the highlights of today's report are as follows: revenues were higher by 56%, increasing to $41.5 million; pretax net income was higher by 77%, increasing to $17.7 million; net income was higher by 82%, increasing to $15.7 million; cash at the end of the quarter was $35.9 million, increasing by $19.1 million.

Now Andy Weinstein, our Senior Vice President of Finance and Accounting, will describe our financial performance in more detail. Andy?

Thanks, Dennis. Please refer to the financial results described in the press release that was distributed at market close today.

For the quarter ended September 30, 2021, compared to the corresponding period of 2020, revenues were $14 million, an increase of $3.3 million or 30% from $10.7 million. Operating expenses, which includes cost of revenue, was $8.7 million, an increase of $3.5 million or 69% from $5.2 million. The primary reasons for this change were due to increased expenses associated with our expanding business, such as increased personnel expenses as headcount increased to 119 from 76.

Pretax net income of $5.3 million, a decrease of $300,000 or 6% compared to $5.6 million. Net income was $4.2 million, a decrease of $700,000 or 15% from $4.9 million. Net income per share was $0.61 per basic share and $0.51 per diluted share, and that compares to $0.74 per basic share and $0.61 per diluted share.

For the quarter ended September 30, 2021, the weighted average basic share count was 6,754,526 and the diluted share count was 8,143,377. Analyzing the expense categories and earnings in the third quarter of 2021 as a percentage of quarterly revenue, our cost of revenue was 10% of quarterly revenue. Engineering and product development expense was 7% of quarterly revenue. Sales and marketing expense was 28%. General and administrative expense was 17%. And net income was 30% of quarterly revenue.

For the 9 months ended September 30, 2021, compared to the corresponding period of 2020, revenues were $41.5 million, which was an increase of $15 million or 56% from $26.5 million. Operating expenses, which includes cost of revenue, was $23.8 million, an increase of $7.2 million or 43% from $16.6 million.

Pretax net income of $17.7 million, was an increase of $7.7 million or 77% compared to $10 million. Net income was $15.7 million, an increase of $7.1 million or 82% from $8.6 million. Our net income per share was $2.34 per basic share and $1.93 per diluted share, which compares to $1.31 per basic share and $1.07 per diluted share.

For the 9 months ended September 30, 2021, the weighted average basic share count was 6,722,858 and the diluted share count was 8,135,337. Analyzing the expense categories and earnings for the 9 months ended September 30 as a percentage of the 9 months of revenues, our cost of revenue was 10% of the 9 months of revenues.

Engineering and product development expense was 7% of the 9 months of revenues. Sales and marketing expense was 25%. General and administrative expense was 16% and net income amount to 38% of 9 months of revenues. As of September 30, 2021, Semler had cash of $34.9 million, which amounts to an increase of $19.1 million compared to $16.8 million as of September 30, 2020.

Our stockholders' equity is $44 million as of September 30, 2021. We expect to file our quarterly report on Form 10-Q on or about November 5, 2021, which will include our cash flow statement and more discussion of our cash and liquidity.

In the third quarter of 2021, our 2 largest customers comprised 40% and 28%, respectively, of quarterly revenues. In the third quarter of 2021 compared to the corresponding period of 2020, fixed fee software license revenues were approximately $7.8 million, an increase of $1.5 million or 24% from $6.3 million.

Variable fee software license revenues were approximately $5.8 million, an increase of $1.7 million or 43% from $4.1 million. Equipment and other sales revenues were approximately $300,000, which was flat for the corresponding period of 2020. For the 9 months ended September 30, 2021, our largest customers comprised 39% and 31%, respectively. For the 9 months ended September 30, 2021, compared to the corresponding period of 2020, our fixed fee software license revenues were approximately $22.7 million, an increase of $4 million or 21% from $18.7 million.

Variable fee software license revenues were approximately $18 million, which is an increase of $10.9 million or 154% from $7.1 million. Equipment and other sales revenues were approximately $800,000, increase of about $100,000 or 13% from $700,000. Variable fee license revenues, that is fee-per-test, which had rebounded strongly in the first half of 2021 from the effects of the COVID-19 pandemic in 2020 did decrease sequentially in the third quarter of 2021 compared to the second quarter of 2021.

We believe the change may be either due to the effects of COVID-19 or due to a new seasonality in the in-home testing market, which we haven't seen in prior periods were due to both. Although we do not provide formal guidance, we are intent on continuing annual revenue growth, continuing profitability and generating cash during 2021 and 2022.

It is the opinion of the management team, the customer interest in our products and services is increasing. And consequently, staffing and inventory are increasing as well.

Now I will ask Dennis to continue the discussion and provide concluding remarks. Dennis?

At the end of third quarter 2021, headcount was 119 employees compared to 115 at the end of second quarter 2021. We continue to operate as close to normal as possible, notwithstanding the COVID-19 pandemic. We have been a virtual company for more than 10 years, and we are comfortable with communicating and working out of our homes. Also, we have web-based training in place for our customers and are experienced in using it.

As Andy mentioned, we believe variable fee license revenues experienced some effects of COVID-19 during the third quarter of 2021, but not nearly as much as in the second quarter of 2020. During Q3 2021, we continued our Investor Relations activities by participating in the 2021 Colliers Investor Conference and the Lake Street 2021 Big5 conference, both in September. We also participated in non-deal investor roadshows that were hosted by various brokerage firms who cover Semler stock.

During Q4 2021, we will continue to participate in virtual non-deal road shows. We will also host in-person investor meetings in San Francisco during the week of January 10, 2022 overlapping the JPMorgan Healthcare Conference. Please let Susan Noonan now if you plan to be in San Francisco that week and would like to meet. Susan's contact information is on our press releases.

Our R&D goals are to continue to upgrade the existing product and data services to commercialize other internally developed services and products and to in-license new service and products. which provide enhanced value to our customers.

In our 2020 Form 10-K filed with the SEC in March 2021, our first quarter Form 10-Q filed with the SEC in May 2021, and our second quarter Form 10-Q filed with the SEC in August 2021, we provided some limited information about our recent arrangements with 3 private companies. We can now report that at the end of the third quarter, we signed up our first customer for the new software product that we are distributing for one of these private companies. The service to this customer may begin in the near future. Management may give more information about the product if it becomes material to our business.

Overall, we believe annual revenue will continue to grow in 2021 and in 2022 because of increased numbers of installations of our product, more usage of our product and recurring revenue from the licensing businesses.

Our goals continue to be to make new additions to our customer base, to expand orders from existing customers and to further establish our QuantaFlo product as a standard of care in the industry. For the remainder of 2021 and in 2022, Semler Scientific expects continued profitability and generation of cash from operating activities.

Operating expenses are expected to increase to support anticipated growth in its business. It is Semler Scientific's intent to grow annual revenues at a faster rate than annual expenses and to remain profitable. We believe that the market for vascular disease testing is larger than our current market penetration. So there is room for continued growth. We continue to invest in R&D with the goals of providing new products that enhance value to our customers now and in the future. The third quarter of 2021 was a record quarter for our company in terms of cash generation and fixed fee licensed revenue. We are optimistic for the future.

Thank you for your interest in the company and your continuing support. Now operator, please open the lines. Doug, Andy and I will be happy to address your questions.

(Operator Instructions) Our first question comes from Kyle Bauser with Colliers Securities.

Congratulations on the NASDAQ listing. Maybe I'll start with outside investment opportunities. I know you want to wait until sales from new products become material before disclosing them. But perhaps, we could talk about the opportunity set -- you've mentioned going after metabolic disorders at a minimum. So wondering, if you could just confirm that you're contemplating targeting other HCC codes?

I know QuantaFlo currently targets HCC107 and 108, and there is a metabolic syndrome code that I think is HCC23. Just simply knowledge of you targeting another HCC code, I think, would mean that your addressable market is much higher than it is now. So would just love to get your thoughts here.

Dennis, can you see? I will say that, we are targeting HCC codes.

Yes. Kyle, absolutely. Other HCC codes are on our dashboard. Also know that there are other financing and business models that make sense beyond just targeting the HCC codes. So while HCC codes are important and obviously played a key role in what we're doing with QuantaFlo and may impact what we do in future products. It's not the only way to go in terms of bringing things that make sense, both clinically and financially to our customers.

Got it. That's helpful and understood. There's probably close to 90 HCC codes and not all of them are relevant because a lot of them don't have a lot of undiagnosed patients walking around. But certainly, seems like there's some low-hanging fruit out there. So glad to hear that.

And on the subscription side of things, I think you said one client is about 40% of sales. How many other subscription clients do you have? Or perhaps asked another way, beyond the large client and your fixed fee business, are the remaining subscription clients mostly physician practices? Or are they other private payers? Just kind of wondering how that mix is?

Yes.

Dennis?

Yes. Sure. So we continue to grow in terms of the number of customers that we have in both the fixed fee and the variable fee categories. Not -- we don't have a strong focus on individual physician practices at this point. We're looking for and are recruiting as customers larger organizations. And so that is where we are growing.

Also knowing that, while there are opportunities for other customers, as we've discussed before, there's a tremendous concentration of business in this market in a few hands as well. So expanding within current customers as well as adding on new customers are both emphases of our sales team.

Got it. And 2 more quick ones. Do you anticipate the per-use sales to ramp again as HRAs kind of race to finish their wellness exams before year-end. I know you mentioned, seasonality could be part of it. Just trying to get a sense of if we could see that bucket pick up again in Q4 here.

So it's interesting because, we've gone now 7 quarters since COVID had no effect on business. That is to say all of 2020 and 3 quarters of 2021. And COVID has had various effects throughout this period in terms of slowing down the business and -- but also in potentially moving some of this business earlier in the year, vis-a-vis the seasonality that we've just talked about, where contracts are being issued sooner and testing is being done earlier in the year. So I think we'll have to just wait to see how the seasonality plays out, ultimately over a period of time. So we're not predicting at all which way that's going to go. We do know that a lot of these home tests were pulled into the first half of the year.

Got it. Yes. No, that's helpful. And then lastly, longer-term question, maybe over the next 12 to 24 months or even over the steady state, just curious, do you anticipate per-use sales to surpass fixed fee sales? Or asked in other way, do HRAs conduct more annual wellness exams for Medicare Advantage enrollees than the large insurers that administer Medicare Advantage themselves do? Just kind of curious there.

Historically, the fixed fee licenses should be more than a fee-per-test.

Our next question comes from Brooks O'Neil with Lake Street Capital Markets.

I just like to probe in a little bit more on the 2 factors that you highlighted that may have had some impact on the business this quarter. First, could you point to geographic differences by state or region where you think or you see evidence that the impact of Delta may have had a deleterious effect on your business? Or to help us establish that connection.

Yes. Sure. I think that our feeling is the main impact of COVID over the 7-quarter period has been primarily to pull the testing done and the contracts issued for home testing earlier into the year. In other words, the health plans didn't want to be caught in the same position that they were caught in, in 2020, where they were cruising along, doing home testing, when suddenly everything shut down. And there was a big push at the end of the year to try to get the backlog done, as you know. So I think the biggest impact has been the issue contracts target member lists earlier and to get those done earlier.

Now that being said, certainly, as we all know from the news, there were flares of COVID in Florida and Texas and elsewhere, which may have had an impact on some of the actual home testing activities as well.

Okay. And is there any -- I mean, obviously, the business has been growing over a period of time. And as you've said, and we all know, the penetration of the use of the QuantaFlo so far is de minimis compared to the overall market opportunity. Is there anything that leads you to believe that the pull forward of activity this year is going to lead, let's call it, something of a void in the second half of the year? Or do you think growth with both existing and new customers could allow some filling of the void that you've highlighted in the back half of the year?

Well, we're continuing to see good activity in terms of bringing on new customers and expanding with our current customers on both sides of the business. As far as the timing of that, some customers prefer to start programs in the beginning of the year rather than towards the end of the year. You have factors like shorter, just the calendar days are less in the fourth quarter in terms of home testing due to the holidays. So there's a number of different factors that are going in different directions. And as you know, we've always tended to look on this as a year-over-year business, while, of course, the quarterly results are important, no doubt. But we expect to see continued year-over-year growth and how that shakes out on a quarter-by-quarter basis, as I mentioned, from seeing this new seasonality perhaps, emerging in the market, we'll have to see that in retrospect rather than ahead.

Sure. That makes total sense. To the extent that there was some negative impact in Q1 through 3 or Q2 and 3 from Delta, as what appears to be a reduction in case counts, been noticeable in terms of a pickup in activity? Or would you say, you really see this pull forward that's occurred leaving something of a void here that won't necessarily be affected by decline in Delta incidents?

Well, I think I would probably just point out what we've been saying is that, in general, we're seeing the trend, at least with our HRA customers and our largest HRA customer, a pull towards the front half of the year. I can't say whether that's going to be across the board in the entire HRA industry, but that's what we've seen and perhaps, by way of an overperformance in the first half of the year.

Yes. And then, I have just one more. I'm curious, obviously, a big increase in operating expenses, if I was listening correctly, not necessarily a big quarter-over-quarter increase in headcount. I'm curious, if all of those operating expenses are targeted sort of towards the core business, is any of it related to anticipation of opportunity in the new businesses? How would you characterize the spending this quarter?

It's due to both. Maybe the current business is more, but we're trying to get the other businesses a range to space x 01. So which -- both but, more than the primary product.

Yes. Doug -- I agree with Doug completely on that.

Our next question comes from Marc Wiesenberger with B. Riley Securities.

Did the composition of your 2 largest customers remain the same. And if so, it appears that there might be some deceleration for both on a year-over-year and a quarter-over-quarter basis. So if you could share the dynamics around those 2 relationships so it would be helpful.

Andy?

Yes. I do not see a decrease in year-over-year of the customers at all. I don't see deceleration...

Deceleration. Deceleration...

I don't see a deceleration with the larger customers. I think there's actually somewhat of an increase that we're talking about year-to-year. But quarter-to-quarter might be a different story like this third quarter. But no, I do not see a deceleration.

I think the largest client grew. And as you said, the other one, the second largest had a little bit of little kicks in the third quarter as its opposed to the second quarter of 2021.

Okay. With your variable fee customers, I think you called out, maybe it was the surge in the Delta variant or new seasonality. But do you have visibility into their the number of visits that they're doing? And maybe, was there a shift to virtual visits that they were doing. And so maybe the total number of HRA assessments might be the same, but there was because of the Delta variant, a shift back to their virtual, which obviously makes it harder to use the QuantaFlo. Is that any dynamic part of it? And also, do you have visibility into how far the HRA providers are through their patient list relative to prior years?

Dennis, can you answer?

Sure. There was a move to virtual visits in 2020. And the indications that we have is, they moved rapidly back to actual in-home visits in 2021. I don't think the factor that you're talking about there, played a significant role in that.

In terms of our visibility to what their total target member list is, who they've reached, who they still have to reach, we don't have detailed granularity on that. But we do know that, as I've said a couple of times that they pulled a lot of this forward. They've got their target member lists earlier than they had in typical years and got on those more rapidly. And again, I think this is the kind of psychological impact of COVID from last year, more so than actual impact of being prevented from physically doing home visits.

Understood. Within the QuantaFlo data that you can see going through your system, is there an elevated percentage of patients that are testing positive for PAD relative to prior periods? And maybe based on some dynamics around the pandemic, are patients not taking out care, could be a factor? And do you think that could impact your customer strategy overall with QuantaFlo going forward?

QuantaFlo has been performing well in the past years, into the present. So I think with -- you think about it as a percentage of positives, maybe all the same for many years.

Okay. But in terms of people, maybe they're sicker or their conditions have deteriorated because of the pandemic or how they've been taking care of themselves. You're not seeing any evidence of that within your data.

I know what you're asking, but I don't see it.

Okay. Maybe can you talk about where the company stands in terms of rolling out QuantaFlos in broader settings beyond just in-home evaluations and primary care settings, maybe kind of a mini clinic or other retail clinic type environments? Is that on the radar? And where do we stand with that?

Dennis?

That is something that we have been pursuing and continue to do so. We don't have any announcements to make in that area at this time. But certainly, as we have talked about expanding 2 things like delegated medical groups and even beyond to other settings is something that we anticipate happening in the future or timing of that, can't say. But this is part of the move towards standard of care and the acceptance of early PAD testing more generally, which is the trend that we're seeing throughout the market. So it would not be unexpected to see some of that at some point.

Got it. Okay. Last one for me. Is there an ideal time of the year to launch new products in either the home or conventional medical practice environment and kind of what factors play into that?

For us, I don't think it's much of a difference about when we try to introduce some. Dennis, can you comment?

Yes. I think it varies, but I would say that it really doesn't matter. Second half of December, obviously, it's not a time to generally launch things. But when you look at product launches, they're usually multiphase. And so it's not just one moment that comes along, and you're not launched the day before and you are launched the next day. So it's a process that occurs over weeks, months to launch a product. So it's not really something that is seasonal in that regard, other than obviously avoiding times like Thanksgiving week or Christmas.

This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Rosenberg for any closing remarks.

Thank you. And thanks, everybody, for joining us today. We look forward to updating you soon on our continued progress.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.