Semler Scientific Inc (SMLR) 2021 Q2 法說會逐字稿

Good day and welcome to the Semler Scientific Second 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 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.

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 of this presentation, and it undertakes no obligation to revise or publicly release the result of any revision to the 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 I would like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific. Please go ahead.

Good afternoon, everybody, and thank you for joining us for our second quarter results call. I'd like to introduce Dennis Rosenberg, our Chief Operating 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 the 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 are pleased to report that the company's financial performance during the second quarter of 2021, based on revenue and pretax net income, was the best quarter in our company's history. Comparing results from the second quarter of 2021 into the second quarter of 2020, the highlights of today's report are as follows: revenues were higher by 125%, increasing to $14.3 million; pretax net income was higher by 554%, increasing to $6.5 million; net income was higher by 522%, increasing to $6.7 million; cash increased to $28.5 million at quarter end.

During the quarter, we saw increased orders and usage for our QuantaFlo product from our current insurance company customers and from our health risk assessment customers. We also received orders from new customers.

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 June 30, 2021, compared to the corresponding period of 2020, revenues were $14.3 million, an increase of $7.9 million or 125% from $6.4 million. Operating expenses, which includes cost of revenue, was $7.8 million, an increase of $2.4 million or 45% from $5.4 million.

Our pretax net income was $6.5 million, which is an increase of $5.5 million or 554% compared to $1 million. Net income was $6.7 million, an increase of $5.6 million or 522% from $1.1 million. Net income per share was $1 per basic share and $0.83 per diluted share, which compares to $0.16 per basic share and $0.13 per diluted share during the same period last year.

For the quarter ended June 30, 2021, the basic share count was 6,702,258 and the diluted share count was 8,092,459. Analyzing the expense categories and earnings in the second quarter of 2021 as a percentage of quarterly revenue, cost of revenue was 7% of quarterly revenue. Engineering and product development expense was 7%. Sales and marketing expense was 25% of quarterly revenue. General and administrative expense was 16%, and net income was 47% of quarterly revenue. As of June 30, 2021, Semler had cash of $28.5 million, which represents an increase of $14.8 million compared to $13.7 million at June 30, 2020.

Our stockholders' equity is $39.8 million as of June 30. We expect to file our quarterly report on Form 10-Q on or before August 6, 2021, and this will include our cash flow statement and more discussion on our cash and liquidity.

Our 2 largest customers comprised 38% and 33%, respectively, of our quarterly revenues. In the second quarter of 2021 compared to the corresponding period of 2020, fixed fee software license revenues were approximately $7.6 million, which is an increase of $1.7 million or 28% from $6 million. Our variable fee software license revenues were approximately $6.5 million, an increase of $6.2 million from $300,000. Equipment and other sales revenues were approximately $200,000, representing an increase of $100,000 or 46% from $100,000.

Last year, in the second quarter of 2020, Semler Scientific experienced decreased test volumes due to COVID-19-related social distancing and other executive orders mandating shelter-in-place or similar restrictions, which limited patient visits. As such restrictions have been lifted around the country and nonemergency medical services resumed in late 2020, Semler Scientific's business has returned to or even exceeded pre-COVID-19 levels.

Although we do not provide formal guidance, we are intent on continuing annual revenue growth, continuing profitability and generating cash during 2021. It is the opinion of the management team that 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 then provide concluding remarks. Dennis?

At the end of second quarter 2021, headcount was 115 employees compared to 103 at the end of first quarter 2021. We continue to operate as close to normal as possible, notwithstanding the COVID-19 pandemic. We've been a virtual company for more than 10 years, and we're 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.

There is also no plan to raise additional capital at this time. We reserve the right to change our financing plans as opportunity or need arises. During Q2 2021, we continued our Investor Relations activities by participating in the Needham Healthcare Conference in April and the virtual Raymond James Human Health Innovations Conference in June. We also participated in non-deal investor road shows hosted by various brokerage firms that cover Semler stock.

During 2021, we will continue to participate in virtual conferences and virtual non-deal road shows. We do not yet have a firm point in time when we plan to uplist to the NASDAQ market. However, we are working with a consulting firm, which is advising us on the NASDAQ listing process and expect to communicate our plans to uplist once definitive.

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 services and products, which provide enhanced value to our customers. In our 2020 Form 10-K filed with the SEC in March 2021, and our first quarter Form 10-Q filed with the SEC in May 2021, we provided some limited information about our recent arrangements with 3 private companies. We have nothing further to report at this time. Management may give more information about these private companies and products if, in the future, they become material to our business.

Overall, we believe annual revenue will continue to grow in 2021 because of increased number of installations of our product, more usage of our product and recurring revenue from the licensing businesses. Our goal continues to be to both make new additions to our customer base and to expand orders from existing customers.

Operating expenses are expected to increase from quarter-to-quarter during 2021. It is our intent to expand our infrastructure to accommodate anticipated future growth of the business. During the second quarter of 2021, we continued the purchase of inventory, some of which adds to our assets for lease.

Our goals for 2021 are to grow annual revenue, to continue to be profitable and to further establish our QuantaFlo product as a standard of care in the industry. 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 second quarter of 2021 was a record quarter for our company in terms of both financial performance and the number of patients being tested with our products. We also have our strongest cash position since the inception. 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 Brooks O'Neil with Lake Street Capital Markets.

Pretty extraordinary quarter. I have a few questions that I'd like to ask if that's okay. First, I noticed that revenues were up nicely quarter-over-quarter, but the cost of revenue declined significantly quarter-over-quarter. First, I don't even know how that happens. But could you describe what's going on there?

Andy, could you take the question?

Andy may be having a difficulty with the phone because he's in a hurry came in (inaudible). The cost of the revenue in the first quarter of 2021 was primarily (inaudible) increase because of a onetime inventory adjustment. And essentially, this inventory, maybe in case (inaudible). So it's -- no similar inventory adjustment was done in second quarter. So I will -- the cost of revenue improved.

Okay. I got that. That's very helpful. I noticed -- obviously, only had a few minutes to look over the numbers between -- when you released them in the call. But I noticed that other current assets were about $6 million quarter-over-quarter. You had mentioned some purchase of equipment. I think Andy mentioned that.

But would it be fair to assume that you purchased the $2 million of inventory from one of the private companies that you're obligated to do? Or again, what's going on with that big increase in other current assets?

(inaudible) we make a commitment or we receive inventory (inaudible). So in the first property, we made a commitment, and we were describing the crew, how many -- how much inventory we took from them. And the second company, we made a commitment of $2 million. And also, we haven't taken any inventory or there's going to be [restriction] in the Q that describe more about what we're talking about. Not the Q time yet. So is this a question we have to wait for the [crew chief] to come out.

Okay, Doug. Do you have any thoughts about how you're going to use this growing pile of cash you have on the balance sheet?

Well, we've been investing in new products. And we -- also, the main focus is to get enough people to satisfy the anticipated growth in the -- that we have seen and continue to think what we're going to see in the future. But it's not that money that we have. Certainly, more project. It couldn't matter if we get, but more of the same. I think it's more of the same, what we're going to do.

Okay. That makes sense. Let me just ask 1 or 2 more, and then I'll turn it over. You commented, I think, in this release and perhaps it was in the last quarter, about the put of the shares back to the private company and the receipt of your own shares back. Could you just describe why you did that?

Yes. It turns out that it is a technical point. But the Investment Act of 1940 says that you -- if you have companies that you've invested in, you can do it up to 40% of your asset. But they take out your tax from your assets. So that means, as you say, if the company is doing well, the company with (inaudible) we have to revaluate with, and we get into a situation where we're -- and according to the investment -- [municipal] fund. So we don't want to deal with that.

The way around it, if you mind (inaudible) investor is to reduce the number of shares you have. But if we -- for example, we bought more of the company to be -- have to include it in our finances, we can -- the investment (inaudible). If you want some more details or more information, happy to do it through off-line.

Okay. That's good. Let me just ask one more. I think in the past, you've described the total addressable market for peripheral artery disease testing is somewhere in the range of $1 billion or more and that your penetration was in the range of 5%. Do you have -- is that still kind of the way you think about it? Or would you say either your share of the addressable market has grown or the TAM has changed?

Dennis, can you answer the question?

Sure. Sure. Well, as you know, Brooks, there's a couple of ways to look at the market and the size of the market, whether it be the number of patients who should get PAD testing or as we look at the number of different primary care physicians and nurses that there are, and the addressable market is units in those placements. So that number is -- that you quoted is probably a good number to work with.

We believe that our market share is increasing, but we're still in early innings, probably still in single digits in terms of penetration with a lot more of the market yet to go. So I don't think there's been any drastic changes in our thinking as far as either of those pieces of data.

Next question comes from Kyle Bauser with Colliers.

Thank you for all the updates and congrats on the phenomenal quarterly results here. So sales growth in the quarter, it sounds like it came from new and existing clients. But as it relates to new business opportunities, I guess, within the larger private payers that aren't clients or -- maybe they are clients, but they don't contribute to a large amount, are they becoming more constructive to the idea of bringing QuantaFlo in-house similar to your largest client?

Or are they kind of electing to consider farming it out to the HRAs? I'm just kind of wondering if some of these bigger private payers are becoming more willing to kind of bring it in-house themselves?

Dennis?

I think we're seeing both of those things. So it's -- although, as we've talked about, it's a concentrated market in terms of the large players than the percent of the market that they control. it really breaks down to a lot of different suborganizations and other types of organizations.

So we're seeing growth in both areas. We're seeing these as synergistic to each other, whether they start with fixed fee license systems or whether they start with an in-home program. Both of them are growing, and I wouldn't say there's a strong trend either way in terms of new customer uptake.

Got it. That's helpful. And I know you want to become a material multiproduct company before uplisting. And I know you don't have a firm time line in place based on your prepared remarks.

But maybe asked another way, based on the inventory that you purchased or have of other products and the traction you're seeing in the marketplace, any sense as to when you think you'll have material sales from non-QuantaFlo products? Maybe could it be this year still?

Well, (inaudible) asked that question, but in my remarks (inaudible) not depends on the materiality of the other product necessarily.

Dennis, can you answer the second part of your question?

Sure. Absolutely, yes. Just in terms of the first part, additional products to add to QuantaFlo are one consideration when it comes to uplisting, but not strictly a gating item on that.

And then in terms of when we're going to see something material, it's hard to say. It really could happen in shorter term or it could take longer. We're in the process of developing the marketing plan and also in conversations with a number of our accounts, new accounts, existing accounts. And so we really, as it is with QuantaFlo, very much up to their decision-making process and what the timing is and how this fits, if at all, with their plans. So we can't really give you anything definitive on that.

Sure. And Dennis, to your point, maybe you could describe some of the gating items that are still on place before an uplist. I know you have the shareholders' equity on the balance sheet. Presumably, you have enough shareholders, you've got a diverse and complete board. What are some other considerations that you kind of want to cover before uplisting?

I think we have covered all of them. So we're (inaudible) later in the year to [knock] this thing. But then we have no particular need to do anything else other than test the (inaudible).

Got it. Appreciate that. And then lastly, so I think headcount, you mentioned 115 versus 103 in Q1. Any sense to how you anticipate this trending perhaps over the balance of the year?

I think that we don't give guidance on this point. I think that management believes that we're getting more and more of the market. The market is getting bigger. Our main customers are getting bigger as well. So we anticipate good things that are happening. And we will hire more people to satisfy our expected needs.

But these are things we are considering and -- but the timing of which -- I say to you that we've added about 20 people in the first quarter and 20 people in the second quarter. It may be -- turn out to be sold down or speed up, I can't tell you now.

(Operator Instructions) Our next question comes from Marc Wiesenberger with B. Riley Securities.

Our thesis has been that as payers continue to see the ROI that their peers are generating from the QuantaFlo, that would stimulate further adoption. I'm wondering if you signed any new customers in the second quarter that could have a material impact in the future.

We've signed more customers. So I think that the biggest customers make the biggest impact. The 4 -- 3 or 4 customers control about 80% of this market. So that being said, we have hopes that we are getting new customers that will be material, but it doesn't look like there's going to be 30% or more customers (inaudible) we have. So I don't know (inaudible). Dennis, can you add to it?

Well, I think the thesis is correct that we are seeing additional -- not only specific adoption, but moving towards that standard of care. Generally, it may be a slower movement than we all would like, but it is movement forward, and we are signing new customers quarterly.

Got it. That's great. Any change in the churn or cancelations from fixed fee customers as a result of restrictions or change in utilization patterns that you would like to highlight?

No, it's [quite nice] that we're going.

Okay. Maybe relative to the first half of the year, can you help frame the trends that you see for fixed fee and the variable fee segments? And maybe what are some of the puts and takes that go into your expectations for the back half of the year?

Dennis?

So we've described before that we're agnostic towards which side of the business grows faster, et cetera. As long as the people who should be tested are getting tested, we are leaving that in the hands of the large insurance companies that are our customers who are making these decisions as far as how they best reach their members.

We've seen ever since -- now a year ago when the home testing market essentially disappeared for a period of time due to COVID. We're -- now a year later, that's bounced back as we've described significantly by the end of last year. We're continuing to see very robust home testing market. And at the same time, we're seeing additional fixed fee license systems going in.

So it's really up to them. It's hard for us to predict. We're just fulfilling their needs as they come up.

Got it. Got it. A few more for me. There was a build in -- or a higher level of equipment sales in the fourth quarter and the first quarter -- fourth quarter of 2020 and the first quarter of this year. Have all those devices been deployed into the market and started generating revenue? Or is there still some potential additional benefit or monetization from those devices yet -- that hasn't been happened yet?

Well, there's kind of -- these devices maybe take 3 months to generate some revenue or maybe 6 months. So the things -- so from the first quarter, maybe they didn't get the device or it's not being used yet. But it's important to understand what the equipment is used for.

First of all, you have to get equipment. Second of all, you have to get trained. And third of all, your salesmen, I'm talking about the HRA salesman, has to go out and get the contract. So -- and they -- so the thinking is maybe they could take 4 months or more to get the contract. Dennis, can you comment on...

Yes. I think that, that's the basic way in which this works is that there is delays of varying amounts of time between when we ship some of these units to HRAs and when they actually start being productive for us. So there's variability there.

It's hard to say, in our case, when the variable fee license business picks up for a given customer. It's really dependent on when they get those contracts. So those systems are out there. Some are being utilized more than others, but it varies depending on their contracts.

Very helpful. Got it. And then just the last one for me. Have you formulated a marketing plan at all for your new products? And are there any special credentials that might be needed for the actual care provider in order to administer the diagnostic or therapeutic?

I think that (inaudible)

The marketing plan is being worked on at the same time as we're introducing this to our customers and really guiding how we ultimately are going to bring this to the wider market. In terms of special credentials, no.

Our next question is a follow-up from Brooks O'Neil with Lake Street Capital Markets.

I'm sorry, I thought of a couple of other things that I was hoping to ask about. Was there anything in Q2 that led you to think there's some catch-up demand being satisfied in either side of your business? And if not, would you anticipate seeing any catch-up activity in Q3 or Q4?

I don't. The catch-up was in last year. After Q1, they had to catch up a little bit. And we may have seen the (inaudible) plans do more contracts for the HRAs in the beginning of this year. But I tend to be more certain than that. It's looking like there's a good demand from all sides, but we can't give you credible information than that. We -- absolutely. Dennis, can you answer this as well?

Sure. Well, I think it partially is how you kind of define catch-up. With 10,000 people a day in the U.S. turning age 65, with Medicare Advantage programs growing as quickly as they're growing, I think these -- a lot of these companies are in perpetual catch-up mode to satisfy the growing demand. So I think that's a factor.

And then as we move towards standard of care as a greater acceptance of what we're doing among our customers, current and new, there's kind of a sense of catch-up there. So there's growth all around. In terms of trying to catch up to maybe tests that were missed during the second quarter of last year, I think that's pretty well worked its way through the system.

Okay, good. Let me just ask one more. And I kind of asked a little bit about this but maybe from the other side. Obviously, 93% gross margin in the quarter is just fantastic. And I know you don't want to provide guidance, but would you call out anything that you think was unusual or nonrecurring in this quarter? Or do you think all else being equal, which, of course, it never is, but is 93% sustainable?

For the meantime, it is sustainable. You get over 90%, and you have to say -- look at yourself and say, it's going to be about 93% or 94% is not a possibility that you can [relatively] expect it to be sustainable. That being said, it is what it is.

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 for joining us today, and we look forward to updating you soon on our continued progress, and that ends today's call.

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