Augmedix, Inc. (NASDAQ:AUGX) Q3 2023 Earnings Call Transcript

Augmedix, Inc. (NASDAQ:AUGX) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Greetings and welcome to Augmedix, Inc. 2023 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Chesler, Investor Relations. Thank you. Mr. Chesler, you may begin.

Matt Chesler: Thank you, operator. Joining me today are Manny Krakaris, Chief Executive Officer of Augmedix; and Paul Ginocchio, Chief Financial Officer. This afternoon, we released financial results for the quarter ended September 30, 2023. We posted a copy of the press release and an investor presentation on our website at augmedix.com. We'll begin our call with prepared remarks to be followed by a Q&A session. This call is also being simulcast and will be archived on our website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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Any statements that relate to expectations or predictions of future events, results or performance are forward-looking. They are based upon our current estimates and various assumptions and involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors and management's discussion and analysis in our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission and similar disclosures in subsequent reports filed with the SEC. Also, during our call today, we will discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items.

You'll find additional information regarding these financial measures and a reconciliation to GAAP measures in today's press release. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 6, 2023. We disclaim any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Manny.

Manny Krakaris: Thank you, Matt. The third quarter marked another period of strong progress for Augmedix as we continue to be a leader in the large and rapidly growing market for ambient medical documentation. Increased adoption of Live and Notes drove 50% revenue growth, net revenue retention of 157% and a 47% increase in average clinicians and service. We expanded gross margins by 380 basis points to 49.5% and demonstrated improving operating leverage while we continue to scale our business by building out the foundation of our emerging data and platform strategy, with strong revenue growth and improving profitability, we are on track to achieve our financial goals and are also increasing our full year revenue guidance for 2023 to $44.5 million.

Paul will speak to our financials and outlook shortly. It is clearer than ever that a tremendous opportunity lies in front of us. Health care systems are leaning into our solutions to help reduce the burden on their clinicians and enhance operating efficiency. Our current offering anchored by our synchronous product, Augmedix Live; and our asynchronous product, a Augmedix Notes, are experiencing increasing adoption by existing and new enterprise health systems, core deployment across more of the networks and in new specialties such as behavioral health. Live and Notes are now being joined by Augmedix Go, a clinician-controlled mobile app that uses generative AI to instantaneously create a fully automated draft medical note. Go harnesses proprietary natural language processing models, large language models and structured data sets with no human intervention by Augmedix.

Go represents a highly scalable product that allows us to penetrate the largest segments of the documentation market that has historically been served by legacy dictation services. The last mile in the Notes creation process for Go is completed by the customer. In exchange, customers benefit from a significant reduction in price relative to our other offerings. Additionally, Go gives us an even wider range of products to address the varying and unique needs of our customers, providing clinicians and health systems the flexibility to optimize their spend and thereby maximize ROI. We are confident that providing choice and maximum flexibility to our customers, rather than a one-size-fits-all approach, is the winning strategy that will appeal to customers and sustain our growth for years to come.

During the quarter, we reached a significant milestone with the early access release that go in late September. Initial interest and feedback have been universally positive, validating our technology and road map. Our developers are incorporating some of this feedback to improve the product ahead of its GA release in the coming months. Even in the early access release, initial orders for Go have been brisk. Through our partnership with HCA Healthcare, we are also in advanced stages of developing a version of Go to bind specifically for the emergency department and its nonlinear workflows in challenging ambient environment. HCA is currently testing Go in 4 hospitals, with the intention for a broad rollout across their network once we achieve certain agreed-upon metrics.

We are very encouraged by our collaboration with HCA and the progress we are making and look forward to rolling it out across their network and interest in Go toward the ER to other Augmedix customers. As we pursue the massive market for ambient medical documentation, we also see great opportunity for Augmedix to serve a health care ecosystem that extends beyond documenting the patient encounter. The same health systems that we serve with documentation products are increasingly looking to leverage our structured data for insights and our bidirectional communication channel to deliver vital information that can effectuate change at the point of care. We believe we are ideally food serve as the conduit for such data and information. As it pertains to HCA, we are working to enable them to mine the structured data that we map to improve their overall business both upstream and downstream from the patient encounter.

Eating our structured data into their data lake has the potential to drive unprecedented benefits for revenue sector management, enhanced population health analyses and ultimately deliver better patient outcomes. Another way we are looking to create greater value is through our open network platform strategy that we recently announced. Starting with the strategic partnerships with 3 innovative digital health companies: Myndshift, Ellipsis Health and The Sullivan Group. These forward-thinking partners and our health system customers realize that our bidirectional communication channel at the point of care has the potential to make their solutions even more valuable and more effective. We are a single platform that efficiently delivers content to the point of care.

Customers can enjoy the benefits of several key partners to maximize their use and impact. Take The Sullivan Group, as an example, one of the industry leaders in patient safety and medical error reduction. Our teams are already working closely to integrate their industry-standard clinical decision support protocols for ER physicians into our platform. By making sure clinicians have the right information at the right time using real-time prompts from our ambient tools, this capability has the potential to improve patient outcome and reduce costly errors. We believe the value of our structured data and our ability to timely deliver critical information to the point of care will benefit other large health care organizations beyond HCA. Finally, I'd like to underscore the importance of generative AI to our offering and our commitment to utilizing the technology in a thoughtful and responsible manner.

Generative AI supports our Live, Notes and especially our Go products. During the quarter, we hosted our inaugural AI Advisory Council meeting. This group includes distinguished academics, governance experts and customers and is already providing invaluable insight and guidance as we advance the development and use of generative AI in Augmedix' solutions. Our AI Council recognizes the unique and delicate balance Augmedix has forged between technology and human within our particular field. Generative AI, in its current state, does a good job of summarizing the transcript of the patient encounter. However, comprehensive and accurate medical documentation requires historical patient data, physician preferences, structured data sets and independently derived models that service guardrails to supplement it.

And for more complex encounters, it may be necessary to provide the higher leverage of service inherent in our Live and Notes offerings. We believe this portfolio of solutions, all of which utilize the best generative AI can offer will be a winning formula in the burgeoning medical documentation market. At the same time, regulatory requirements and our customers demand compliant with rigorous data security standards. Augmedix recently achieved certified status by the HITRUST Alliance for information security. HITRUST's Champion programs safeguard sensitive information and managed information risk for global organizations across all industries and throughout the third-party supply chain. This prestigious certification validates Augmedix' commitment to safeguard sensitive patient information data.

With that, I'll now turn the call over to Paul Ginocchio, our Chief Financial Officer, then we'll return with closing comments. Paul?

Paul Ginocchio: Thank you, Manny. Let's review the quarter's financial highlights. Revenue for the 3 months ended September 30, 2023, was $11.8 million, a 50% increase from the $7.9 million in the same period a year ago. Growth was driven by growing adoption of Live and Notes by existing customers. Dollar-based net revenue retention rate for the third quarter was 157% for our Health Enterprise customers compared to 130% in the third quarter of 2022, 148% in the second quarter of 2023. Net revenue retention measures were $1 of revenue at our existing clients a year ago, grew into in this most recent quarter. It includes upsells, expansion and churn that excludes revenue from any new logos that were added during the previous 12 months.

Deceleration of NRR was driven primarily by expansions at a handful of our largest health system customers. Our NRR results put us at best-in-class levels for SaaS companies. Average clinicians in service for the third quarter rose 47% as compared to the third quarter of 2022 and compares to a 48% year-on-year growth rate in the second quarter of 2023. We define a clinician in service as an individual doctor, nurse practitioner or other health care professionals using either our Live or Note service. Going forward, we will also include users of Go. We believe growth in the number of clinicians in service is in of the performance of our business as it demonstrates our ability to penetrate the market and grow our business. Adjusted gross margin for the third quarter of 2023 was 49.8% as compared to 45.9% in the corresponding prior year period and compared to 47.2% in the second quarter of 2023.

This nearly 400 basis point improvement year-on-year in gross margin percentage was mainly driven by our growing scale and efficiency and our strategic initiative to shift U.S. service clinicians through outside the U.S. which continues. Gross profit growth was 62% year-on-year. Total operating expenses for the third quarter of 2023 were $10.2 million, up only 2% sequentially from the second quarter of 2023. Non-GAAP operating expenses which excludes stock-based compensation and onetime items, grew 12% year-on-year. Our gross profit growth outpacing OpEx growth resulted in more than a $0.5 million reduction in our operating losses quarter-on-quarter and over a $1 million reduction year-on-year. Adjusted EBITDA which we calculate by adding back depreciation, amortization, taxes, interest, onetime items and stock-based compensation to net loss was a loss of $3.1 million in the third quarter of 2023 compared to a loss of $4.5 million in the third quarter of 2022.

Along with this improvement in invested EBITDA loss, what was a year-on-year improvement in our adjusted EBITDA margin, from negative 57% in the year ago quarter to negative 26% in this most recent year. Cash flow from operating activities was an outflow of $2.3 million in the third quarter compared to an outflow of $3.5 million last year. At September 30, 2023, we had $22.3 million of cash, cash equivalents and restricted cash as compared to $22.0 million as of December 31, 2022. During the quarter, we qualified for a 6-month extension of our interest-only period on a $20 million term loan facility with SEB, as we exceeded certain financial hurdles within the agreement. The interest-only period now extends through July 2024. In terms of share count, we have nearly 41 million common shares outstanding currently.

In our weighted average share count for EPS, we show 45.5 million common shares outstanding as we include the $4.375 million prefunded warrants that are fully vested and in the money, assuming all the warrants outstanding are net exercise and all our employee options and SARs that are invested in the money or net exercise, we have approximately 50 million shares outstanding. Overall, the third quarter marked another strong period of revenue growth and improving profitability. Now moving on to guidance. The positive momentum that we have demonstrated during the year is continuing. We now expect revenue to be approximately $44.5 million for the full year of 2023. With 1 quarter to go in the year, this implies approximately $12.3 million of revenue for the fourth quarter of 2023.

we expect GAAP gross margins to be similar to third quarter 2023 GAAP gross margins. We expect operating expenses to be up 7% to 8% quarter-on-quarter due to the hires we have made and will make to accommodate our accelerating growth. A number of investors have asked us about Go's contribution to our revenue growth. We anticipate Go revenue to be modest during the first half of 2024. We're only 1 month into the early access release of Go, so our visibility is going to sharpen as we reach general availability and commercially launch Go for the ER. At this point, I would like to turn the call back to Manny for closing comments.

Manny Krakaris: Thank you, Paul. We remain committed to playing an essential role in unburdening clinicians and improving the operating efficiency of health care organizations. We are building out our product portfolio and working hard to establish Augmedix an effective information and data delivery platform into the point of care. This unique positioning will help ensure we continue our rapid growth well into the future. I have never been more excited about the opportunities in front of Augmedix and want to thank our team and our customers for helping us deliver another quarter of strong financial results. Thank you very much. With that, we will now open it up to questions. Operator?

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