Semler Scientific Inc (SMLR) 2021 Q1 法說會逐字稿

Good day, and welcome to the Semler Scientific First 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 and 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 opinion 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 in these forward-looking statements.

Now I would like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific.

Good afternoon, everybody, and thank you for joining us today for our first 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 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 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 first quarter of 2021 based on revenue and pretax net income was the best quarter in our company's history. Comparing results from the first quarter of 2021 to the first quarter of 2020, the highlights of today's report are as follows: Revenues were higher by 40%, increasing to $13.2 million. Pretax net income was higher by 74%, increasing to $6 million. Net income was higher by 82%, increasing to $4.9 million. Cash increased to $26.5 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 March 31, 2021, compared to the corresponding period of 2020, revenues were $13.2 million, an increase of $3.8 million or 40% from $9.4 million. Operating expenses, which includes cost of revenue, was $7.2 million, an increase of $1.2 million or 20% from $6 million. Our pretax net income was $6 million, which was an increase of $2.6 million or 74% compared to $3.5 million. Net income was $4.9 million, an increase of $2.2 million or 82% from $2.7 million. Net income per share was $0.73 per basic share and $0.60 per diluted share, which compares to $0.41 per basic share and $0.33 per diluted share during the same period last year. For the quarter ended March 31, 2021, basic share count was 6,707,990 and diluted share count was 8,169,375.

Analyzing the expense categories and earnings in the first quarter of 2021 as a percentage of quarterly revenues, our cost of revenue was 12% of quarterly revenue. Engineering and product development expense was 5% of quarterly revenue. Sales and marketing expense was 21%. General and administrative expense was 16% of quarterly revenue, and net income was 37% of quarterly revenue. As of March 31, 2021, Semler had cash of $26.5 million, an increase of $15.3 million, and that's compared to $11.2 million as of March 31, 2020. Our stockholders' equity is $35.3 million as of March 31, 2021.

We expect to file our annual report on Form 10-Q on or before May 7, 2021, which will include our cash flow statement and more discussion of our cash and liquidity.

Our 2 largest customers comprised 38% and 30%, respectively, of our quarterly revenues. In the first quarter of 2021 compared to the corresponding period of 2020, fixed fee software license revenues were approximately $7.2 million, an increase of $0.7 million or 11% from $6.5 million. Variable fee software license revenues were approximately $5.7 million, an increase of $3 million or 109% from $2.7 million. Equipment and other sales were unchanged at $0.3 million.

Although we do not provide formal guidance, we are intent on continuing annual revenue growth, continuing our profitability and generating cash during 2021. It is the opinion of the management team that customer interest in our product and services is increasing, and consequently, our 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 first quarter 2021, head count was 103 employees compared to 86 at the end of fourth quarter 2020. 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'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 Q1 2021, we continued our Investors Relations activities by participating in a virtual investor conference hosted by HC Wainwright. During 2021, we will continue to participate in virtual conferences and virtual nondeal roadshows. 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.

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 Form 10-K for the last fiscal year filed with the SEC in March 2021, we provided some limited information about our recent arrangements with 3 private companies. We have nothing further to report at this time except for the following: In April 2021, we entered into an exclusive marketing and distribution agreement for the United States, including Puerto Rico, except for selected accounts, with one of the companies in which we made a private investment in 2020. Under this distribution agreement, Semler agreed to purchase $2 million of product inventory.

We exercised our right to put the shares of common stock in another private company in exchange for shares of our common stock issued to the sellers. Following this transfer, we continue to hold the shares of preferred stock we acquired in this private company in December 2020. Management will provide 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 numbers of installations of our product, more usage of our product and recurring revenue from the licensing business. 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 first 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 first 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 since 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 will come from Kyle Bauser with Colliers Securities.

Great. So you mentioned purchasing $2 million product inventory. I think you previously purchased $1.2 million of inventory. Is this the same product? And are you able to talk about if this is a diagnostic or a therapeutic yet?

Kyle, it's a different product. This first one was in 2020, and the second one was another company that we are invested in, in 2020, but we have signed a distribution agreement in 2021.

Okay. Got it. And I know you don't want to get into the details of these products until they become material, what does material mean? I mean $2 million of product inventory, even if it was a 50% gross margin, $4 million in sales potentially, which is almost 10% of the last 12 months of sales. I'm just kind of curious when we might learn a little bit more about those products.

We don't have a date, but we think that is going to be sooner than later. So I don't have the time period to get to you. It depends on how the companies do in the marketplace.

Got it. I will look forward to those updates. And then I think back of the envelope math, sales to your largest customer came down about $700,000 sequentially. Admittedly, Q4 was an outsized quarter, so maybe that's the reason. But -- and then at the same time, we saw an increase in the variable use bucket of about $900,000. So is that a function of your largest payer client choosing to outsource QuantaFlo to an HRA? Or is the decline just a function of COVID disruption or pulling devices from practices that aren't utilizing QuantaFlo? Just trying to understand the cadence here.

I'll let Dennis answer the second part of the question. The first part is the largest customer is indeed using an outside persons at the same time. And Dennis?

Yes, we don't see systems being pulled from offices and clinics. That's not going on. But there is a mix of how the customers are reaching the patients they want to test. And as you know and we talked about, we offer our customers a good deal of flexibility in this ability to test them either in the home or with the fixed fee systems. So we think that's a benefit to them and, as I say, it gives them flexibility on how they get to the people that they need to test.

Okay. Got it. I appreciate it. And then just lastly, given the mix shift from fixed fee to per use, I think, typically, you were seeing an increase in gross margin when that happens, but gross margin came down a little bit. Has pricing changed for the device on a per-use basis?

As I said early, it's -- we are -- we treat our customers a little better, but we always have maintained that we don't talk about the prices.

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

I want to humbly apologize for once again doing a terrible job of forecasting your results. You guys crushed my estimate again. And I'm trying my best, but I can't keep up.

Thanks for that data work. (inaudible)

Right. Keep it up, Doug. Keep it up. That's all I got to say. All right. So first question I have is following on with Kyle, thinking about the mix shift and whatnot, but maybe on a broader level, do you think Q1 performance benefited from kind of pent-up demand or some kind of a backlog that might have developed because of COVID? Or do you think this is a continuing natural growth of your business?

Dennis, can you take that one?

Yes. I think that it's hard to know for sure. But the way, as we've discussed, the system is financed, there's not a big issue of backlog from year-to-year. So I think it's natural growth. And I think that the ability of the large insurance company customers to be proactive in going after the people they need to test through the home testing gives them a lot of positive momentum in having these 2 different ways that they can make sure everybody gets covered. So I'm not sure backlog is really a big issue or was an issue in the first quarter.

Yes. This is Andy. I agree with Dennis. I don't think backlog was a big issue in the first quarter.

Great. Great. That's perfect. So second question, and I'm going to ask you a theoretical question, I know it's maybe not supercomfortable to answer, but it's not specifically related to the projects you're working on in the new product area. But can you envision new products or services from Semler to have business dynamics that are similar to the business dynamics of your core business today? I mean what I'm speaking about obviously is, we talked a little bit about going through the same kind of distribution channel. But more importantly, I think from investors' perspective, the extraordinary profitability of your base business, the scalability of it, et cetera, can you see other products having those kinds of characteristics as you think about the future of Semler?

We hope so. Dennis, can you answer?

I think there's no question that, that is what we have our eyes set on. Whether that comes to fruition, we'll have to see. But as you stated, the distribution leverage and really bringing the level of benefit that we think QuantaFlo brings to the customers and kind of transplanting that type of high-level benefit to other products is feasible, although we certainly can't guarantee that that's how it's going to turn out. That's certainly what we're marching towards.

Great, Dennis. That's -- I expected that, but I'm glad to hear you say that. So last question for me. Obviously, the cash is beginning to pile up on the balance sheet. You've taken a number of steps in the direction of adding some other products, but can you give us a high-level view of kind of how you view the best uses of cash from the perspective of growing and improving the performance of the company going forward?

We intend to invest in new products, R&D and salespeople to get this thing off the ground. These products -- these new products are very exciting to us. But everything in case is cash, I'd say -- that being said, we don't think about doing any share buybacks or any dividends per se, but that may change in the future. So I can't predict yet. But right now, we're trying to concentrate in R&D, building the core businesses and to achieve the maximum results.

Our next question will come from Marc Wiesenberger with B. Riley Securities.

Since you have the capability to see activity for both your variable fee as well as your fixed fee customers, I'm wondering if you could talk about the utilization across the fixed fee customer base. And is there anything that you're seeing there that might foreshadow additional rollouts in the near term?

Well, we intended to get to a position where we are called the standard of care. Some people do consider us as standard of care already. But Dennis, can you illuminate this question?

Yes. I mean there's certainly variability in usage patterns. What we tend to see over time is growing usage, the longer systems are in place typically. And as we mentioned in the call, we're seeing continued growth in current customers' fixed fee, in new customers' fixed fee and in fee per test. So we're seeing growth in all of those areas. And as I kind of said earlier, the flexibility that this offers our customers, the ability to be testing either in the office or at home is a powerful piece of our business. So we're very positive on both of those segments of our business.

Sure. Understood. From your point of view, can you talk about the progress the HRA providers have made through their patient list thus far and how that relates to prior years?

Well, this patient list, they get at the beginning of the year and -- the calendar year. And they feel pressure to get it done or get more patients added to the list as they go out to last the year. So usually, the first quarter is a worst quarter. But now, look at the quarter, it was fantastic. So we're really encouraged by the growth in this area.

Sure. QuantaFlo is primarily used in the general practitioner setting as well as the home setting. Are there any other major kind of locations or venues that you could see being appropriate for QuantaFlo in the future?

Dennis, can you answer this?

Yes. Well, those are the key settings now. We also have systems in some specialists' locations as well, hospitals and elsewhere. But I think it is feasible in the future to see wider spread placements of PAD testing in other locations as well. We'll have to see how that comes to fruition as part of the growing standard of care and recognition of early PAD diagnosis and PAD testing. As that becomes more and more widespread, I think there is opportunity for doing testing in other locations as well.

We also see things like health fairs, health buses and these types of scenarios also. They don't play a major role at this point, but there are other opportunities out there.

Great. And then one final one for me. Can you talk about the cadence of the $2 million inventory purchase that we should expect and then maybe the margin profile a little bit more of the product?

We generally don't talk about prices, as you know. So I think we have a feeling that there's going to be excellent margin for us, but we wait to see. A part of the reason we don't talk about it was that we haven't fully decided yet how to price it or how to sell it at the start of a new contract. But we'll get to that decision soon and test the market. In general, we're going to have a larger market, and we test the segment of it to make sure it is going to work for us. Dennis, can you give your comment as well?

Yes. I think the key point there is the fact that we're looking carefully at segments of the markets to understand all of these issues, pricing, margins, et cetera, and which of the segments make the most sense to approach in different timing. So all of these factors, as we decide them, are going to impact margins and pricing.

Sure. And -- but just to the cadence point, should we expect that $2 million purchase one lump sum? Would that be spread out through the year or maybe more back half versus first half? Anything on that, that would be helpful.

So I think that we're going to try it. Maybe we don't want to give guidance on at this point. We were talking to some big customers. One of them comes in, changes the whole game. But in general, building a market is a step-by-step process. So you are going to anticipate we're going to do -- try to do all the right things and try to correct all the mistakes that we make in the -- quickly and to maintain the cadence of the bucket.

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

I think this is a little bit of a tag-on to a question Kyle was asking earlier, but I just want to try to be sure I understand. It looks like customer #2 that you have maybe grew dramatically in Q1, but customer -- your largest customer didn't grow quite as quickly in Q1. And I'm curious if, a, you have changed growth expectations for this top customer going forward? Or was this a little bit of an anomaly? Or any comments would be extremely helpful.

I'll take the first question. (inaudible) is doing a lot of work. And also, they're acquiring different companies. Andy, can you give some color to this question?

Yes. I don't think there's a change much in the cadence, and the first customer is not decreasing or canceling. The first customer is also on a growth pattern as well.

Great. And then Andy, do you think there's plenty of room to grow for the biggest customer, right?

I'm sorry, this wasn't covered. You sounded [lightly] to me. So can you ask the question again?

Sorry, Doug. Do you still believe that customer #1 has significant long-term growth potential, if I am thinking about it properly. But I just wanted your comment on sort of the overall outlook if you could give it to us.

Absolutely. The large customer has got, as far as we're concerned, a lot of legs under it and going to be fantastic in the future. But we're going to have -- all the customers are 0that we have are established, customers are ordering more. And also, they may be doing, like I said, other tests to cover their vacs because they have to get the patients tested every year. Post-COVID, they're worrying about how many tests they're doing. So they're getting them done and, well, going to the HRAs sooner than ever, I think. So I think it's going to be a favorable situation. But I don't -- as Andy said, I don't see any large customers doing less work.

Yes. Look, you asked about adjusting our expectations down, and we're not adjusting our expectations down. We don't feel -- we feel our original projections are accurate.

Yes. Well, that makes sense. So let me just ask you one more. And I'm not trying to set you guys up, but it's my understanding that there are something like 500 conditions that CMS has identified for which they might consider paying Medicare Advantage health plans incremental premiums if covered members were demonstrated to have those conditions. Is that -- am I reasonably close to the ballpark in that? And if I am, do you -- I mean would you concur with me that there's a virtually unlimited opportunity for Semler going forward?

I conclude that you are right, there are maybe 500 different indication or diagnoses that are going to the HCC codes. And of course, we think that all the customers of -- particularly the large ones, have ability to use more than 1 of our products. Dennis, can you explain?

Doug, I think that you're definitely on the right track in terms of that, something that we're -- we are certainly focused on that as well in looking at those opportunities. As far as unlimited opportunity, it would seem with those kinds of numbers that it might be a lifetime's work of opportunity. Not all of them are going to pan out in the same way, but there are quite a few possibilities.

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

Thank you.

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