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Edited Transcript of SMLR earnings conference call or presentation 4-May-20 8:30pm GMT

Q1 2020 Semler Scientific Inc Earnings Call

PORTLAND May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Semler Scientific Inc earnings conference call or presentation Monday, May 4, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew B. Weinstein

Semler Scientific, Inc. - SVP of Finance & Accounting

* Dennis Rosenberg

Semler Scientific, Inc. - CMO

* Douglas Murphy-Chutorian

Semler Scientific, Inc. - CEO & Director

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Conference Call Participants

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* Aman Raj Gulani

B. Riley FBR, Inc., Research Division - Associate Analyst

* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Greg Bogdanski;Dougherty & Company;Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Semler Scientific First Quarter 2020 Financial Results Conference Call. (Operator Instructions) Please note this event is being recorded.

Semler Scientific would like to remind you that this conference 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 results include uncertainty due to the evolving COVID-19 pandemic, 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 result in these forward-looking statements.

Now I'd like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific. Please go ahead.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [2]

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Good afternoon, everybody. And thank you for joining the Semler Scientific First Quarter 2020 Financial Results Call. I would like to introduce you to Dennis Rosenberg, our Chief Marketing Officer, who will begin our presentation today. Dennis?

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [3]

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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're pleased to report that the company's financial performance during the first quarter of 2020, based on revenue and pretax net income, was the best quarter in our company's history. Comparing results from the first quarter of 2020 to the first quarter of 2019, the highlights of today's report are as follows: number one, revenue grew 39% to $9.4 million; number two, pretax net income grew 86% to $3.5 million; number three, net income grew 44%; number four, earnings were $0.41 per basic share and $0.33 per diluted share, which compares to $0.29 per basic share and $0.23 per diluted share; and number five, cash was $11.2 million at quarter end compared to $4.5 million 1 year ago.

During the quarter compared to the same period last year, we saw increased orders and usage for our QuantaFlo product from our current insurance company customers and from our home-risk assessment customers. We also received orders from new customers.

Now I'd like to turn the call over to Andy Weinstein, our Senior Vice President of Finance and Accounting, to describe in more detail the ongoing improvement in financial performance. Andy?

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Andrew B. Weinstein, Semler Scientific, Inc. - SVP of Finance & Accounting [4]

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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, 2020, compared to the corresponding period of 2019, revenue was $9.4 million, which was an increase of $2.7 million or 39% from $6.8 million. Operating expense, which includes cost of revenue, was $6 million, an increase of $1.1 million or 22% from $4.9 million.

Pretax income was $3.5 million, which was an increase of $1.5 million or 86% from $1.9 million. Our net income was $2.7 million, which was an increase of $800,000 or 44% from $1.9 million. Our net income per share was $0.41 per basic share and $0.33 per diluted share, and that compares to $0.29 per basic share and $0.23 per diluted share for the same period last year.

For the quarter ended March 31, 2020, weighted average basic share count was 6,533,369 and our diluted share count was 8,065,813.

Analyzing the expense categories and earnings in the first quarter 2020 as a percentage of our quarterly revenue, our cost of revenue was 9% of quarterly revenue, engineering and product development expense was 9%, sales and marketing expense 29%, general and administrative expense was 17%, and net income was 28% of our quarterly revenue.

As of March 31, 2020, Semler had cash of $11.2 million, which is an increase of $6.7 million compared to $4.5 million at this time at March 31, 2019. This change was primarily due to cash provided by operations from net income as adjusted for such items as accounts receivable, which provided $1.9 million; reconciliation of net income to net cash provided by operations, which provided $1 million, including a tax-deferred expense of $700,000. This was partially offset by cash used for accrued expenses amounting to $1.5 million, prepaid expenses amounting to $500,000 and the purchase of inventory and other capital expenditures amounting to $272,000. As a result of these items, our stockholders' equity is now $15.8 million at March 31, 2020. Our quarterly report on Form 10-Q, which includes our cash flow statement and more discussion on our cash and liquidity, the Form 10-Q will be filed with the SEC shortly.

Our 2 largest customers comprised 46% and 21% of our quarterly revenues. Fixed fee license revenues were approximately $6.5 million for the quarter. Variable fee license revenues were approximately $2.7 million. And equipment and other sales were $270,000.

In the first quarter of 2020, new installations produced an overall net gain in fixed fee license contracts. Request for changes in billing arrangements due to COVID-19 pandemic amounted to less than 1% of the total fixed fee license revenue for the quarter. Because we started to experience the effects of COVID-19 late in the first quarter, results in the first quarter are not indicative of any future quarter or the full fiscal year.

Test volumes have decreased due to social distancing and other executive orders, mandating shelter-in-place or similar restrictions. This affects revenue from our variable monthly fee arrangements, which are based on usage, largely occurring during home visits.

In April 2020, compared to March 2020, our fixed fee monthly license revenues decreased by approximately 4% and our variable fee software license revenues decreased approximately 97%.

Although we do not provide formal guidance, Semler Scientific intends to manage its expenses and other costs in line with these changes in revenues to conservatively preserve cash during these uncertain times. We believe customer interest in our QuantaFlo product and related services will return or exceed the pre-COVID-19 activity at such time as the shelter-in-place or similar restrictions are lifted and nonemergency medical services resume.

Operating expenses are expected to decrease during the second quarter of 2020 as a result of cost-cutting measures that have included vendor fee reductions and decreased spending on consultants. To date, staffing, salaries and inventory have been maintained at our usual levels. Travel expense has been decreased.

Cash at April 30, 2020 increased compared to the cash at March 31, 2020 primarily due to the spending adjustments. Until the effects of the COVID-19 pandemic on our business are more quantifiable, we do not plan to make any material changes to our business plans or operations.

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

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [5]

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In the first quarter of 2020, Semler, again, expanded its infrastructure and headcount to 78 employees or an increase of 11 employees. We plan to hold at that number for now. As we have been a virtual company for 10 years, we are comfortable communicating and working out of our homes. Also, we have web-based training in place 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 as need arises. For the time being, we don't plan to uplist to the Nasdaq exchange.

Our goals are to continue to upgrade the existing product and data services and to invest in new services and products. We continue to invest in R&D and also look at potential products to license in order to provide enhanced services that our customers will value both now and in the future.

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

In conclusion, the first quarter of 2020 was an achievement record for the company in terms of both financial performance and the number of patients being tested with our products. As we discussed, we have seen a decline in our business in April, but I want to reiterate that we believe customer interest in our QuantaFlo product and related services will return to or exceed pre-COVID-19 activity at such time as shelter-in-place or similar restrictions are lifted and nonemergency medical services resume.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Brooks O'Neil from Lake Street Capital Markets.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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Congratulations on another terrific quarter.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [3]

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Thank you very much, Brooks.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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So I guess I have a number of questions, but I'll start with, Dennis, I think you mentioned being very familiar with virtual operations. Can you see any opportunity to turn QuantaFlo into more of a virtual-type product or service? My sense is, right now, it's still pretty dependent on a face-to-face interaction between some kind of a medical provider and patient.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [5]

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Yes. We certainly are looking at that. I would agree with you that at this point, it is dependent on a face-to-face provider encounter.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Okay. Secondly, I'm curious if you could give us any color, I'm not meaning customer-specific color, but any kind of color about the type of communication or interaction you might have had with customers on the fixed fee side of your business or customers on the variable fee side of your business as it relates to how they view the market conditions now and how they see themselves adjusting over time.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [7]

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Andy can answer the question about the fixed fee customers. Andy?

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Andrew B. Weinstein, Semler Scientific, Inc. - SVP of Finance & Accounting [8]

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Sure. Basically, it's coming in the same direction with every customer. They're asking if we could just do a delay in the billing until -- and sometimes we'll say, 30 days, sometimes we'll say, 60. Or they'll say they'll contact us when it's time to ramp back up. So if doctors' offices are closed, they don't want to pay. Why? They're not seeing patients. You can't fully blame them. So what we're doing is we're seeing almost 99% of the cases when they're asking us to delay billing, they're saying that they are going to come back when this pandemic's over. Of course, the magic question is when is it going to be over? But that's the type of communication we're getting from our customer. It's basically just a delaying in the billing until they could see patients again. So...

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [9]

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Okay. And the -- to see potential customers, they are done because they haven't got the opportunity to go into the field. But almost a demand, they are ordering more stuff from us in anticipation of starting over. So that's why we say we say -- we think -- I don't know. But we think we're going to exceed the rate we had before COVID hit.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [10]

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Great. That's very helpful, Doug and Andy. Just following on that for a second. Do you see any indication there is a -- there's going to be a catch-up period where patients that might have been seen during April or May will ultimately get seen on top of patients that were likely to be seen in June or July? Or how are you thinking about that at this moment?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [11]

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Dennis, can you answer this question?

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [12]

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Sure. Brooks, I think that, that is the operative thought in the minds of the customers at this point. It's dependent on really when things get back in action again. But at this point, they are very much looking to make up whatever has been postponed at this point.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [13]

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Sure. Well, that makes sense. Could you just talk a little bit about customer geographic concentration? I'm not asking about specific customers again, but I'm curious if you feel that you have a customer concentration in any of the areas that might have been described as a COVID hotspot over the last month or 2?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [14]

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I can't answer that exactly, but we're all over the country. And it's -- basically, the places that we are at are the warmer places as opposed to the colder places as such. But we're all over. So I think, for example, New York is a good concentration for us, but it doesn't -- predominantly. So it's better to -- well, better than most situations.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [15]

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Sure. Well, that makes sense. Let me just ask 1 or 2 more. Can you say -- again, I'm not asking specifics about new products, but I'm curious if your progress with regard to new products has been curtailed or delayed or whether you continue to feel you're making progress there? And then sort of on a related note, I'm curious if as you look at the current environment, you see any new product or sort of ancillary product opportunities that might have emerged that weren't obvious before?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [16]

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Okay. The question is, we are experiencing some delay, but I think that we're basically on track with the new product area. But we're aggressively looking at new things because maybe some customers -- companies may be getting into problems that we could solve. So anyway, it's -- I'm optimistic about this. But we're not telling much information, and you'll have to wait and see what transpires.

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Operator [17]

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The next question comes from Kyle Bauser from Dougherty & Company.

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Greg Bogdanski;Dougherty & Company;Analyst, [18]

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This is actually Greg Bogdanski on for Kyle. So first one, I imagine there having been as many home wellness exams as usual. But it seems like HRAs typically wait until the end of the year to conduct the majority of these, anyway. Can you provide a bit more color on what you're seeing here and if patients will simply be pushed out later this year for their home exams?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [19]

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Yes. It's a same basic question. Dennis, you can answer that as well?

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [20]

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Sure. Sure. We see home visits occurring throughout the year and with the -- often a concentration towards the end of the year. As far as our HRA customers who have reduced their home visits, they are looking to make up those home visits to whatever extent they can in addition to the ones they wouldn't normally be doing in the latter part of the year, but that's dependent on when things pick back up.

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Greg Bogdanski;Dougherty & Company;Analyst, [21]

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Okay. Got you. And then are you finding that the remaining large payers are electing to go with HRAs to administer the QuantaFlo rather than implementing it themselves? Or do you think we'll see some large new payers choose the licensing option in the coming quarters?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [22]

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I think we can't predict. But basically, we're signing up new customers directly from the insurance plans. And we're also getting increased uses of the fee-per-service guys, the HRAs, so -- but everybody is delayed, and we haven't been doing as many cases as we did before in the month of April. But I think it's -- if the restrictions let up, we're going to do and try to do as many as we can, and then these guys are generating interest. But as you said, maybe to even the scales, the insurance companies are going to not only do their cases, but they're going to ask the HRA to do more. So that's what we hope, but that we don't know yet.

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Greg Bogdanski;Dougherty & Company;Analyst, [23]

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Okay. Got you. That makes sense. Since your largest client is a subscriber, and they still have incentive to diagnose Medicare Advantage, PAD patients despite the COVID pandemic, how has utilization been in this channel? And then how about new QuantaFlo installments into this client?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [24]

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Well, as you see, the new client -- the older client, the largest one, orders -- has been ordering consistently throughout the years. I think that if you look back a year ago, and you see that basically, the percentage of our revenue they had was unchanged, okay? So it's maybe down a little or up a little, it depends. So we have a good relationship with these guys. And I think we're going to continue our growth.

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Greg Bogdanski;Dougherty & Company;Analyst, [25]

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Okay. And then lastly, if I may. Are there any additional updates regarding plans for deploying your cash?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [26]

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I'm sorry, will you repeat the question, please?

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Greg Bogdanski;Dougherty & Company;Analyst, [27]

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For sure. Are there any additional updates regarding plans for deploying your cash?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [28]

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Andrew, can you answer this question?

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Andrew B. Weinstein, Semler Scientific, Inc. - SVP of Finance & Accounting [29]

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Yes. We're always looking at R&D. We're looking at different opportunities. And if we find something that's synergistic and something that we would be interested in, it's something we are looking at and we continue to look at. Right now, our cash is strong, and we're looking to conserve cash because of these uncertain times, but we're still out there actively doing what we were doing prior to COVID-19.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [30]

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And in the month of April, we actually increased our cash as opposed to the cash which was available on March 31. So we -- I think we're doing a good job, and we may be continuing to do this in a conservative manner. And two, we were able to quantify everything. But we want to keep our cash in place because we realized that if they start up again, we need these people to serve with this cash. So I think if we save money, as we are doing, we're going to be able to expand in the future.

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Operator [31]

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The next question comes from Aman Gulani from B. Riley FBR.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [32]

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And congratulations on another solid quarter. I wanted to ask where do you think you are from a penetration standpoint with your top 2 customers?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [33]

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Dennis, can you answer this?

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [34]

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Yes. We believe we are early in the game, first inning, as we refer to it, in terms of penetration to the customers. So there's a lot of opportunity to expand within them, and that's a good deal of our activity is focused on that.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [35]

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Got it. And then it's nice to see gross margins continue to walk up. I wanted to ask what do you think a sustainable long-term gross margin is for the business?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [36]

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Well, it's very high now. I think it's 91%. Can you imagine going further, I don't know. It's -- but we think that they're going to be the highfalutin expenses should be improving in normal times. As such, we think we're going to have the operating expenses as a percent of revenue go down, so it is a good situation. But I -- we don't have a -- we don't give guidance. So I can't answer your question exactly.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [37]

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Okay. Yes. But that's helpful. And then I wanted to ask about your second product, whatever you can comment on. But I wanted to know how much of your R&D dollars are dedicated towards upgrading QuantaFlo versus developing new products?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [38]

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Dennis will kind of -- you take the first part of that, and I'll take the second.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [39]

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Sure. Well, we are focused very much actively on new products, and that really falls under 2 categories as we described. One is expanding QuantaFlo product and services and then looking at outside products as well. So I don't recall exactly how you framed your question, but I just want to reiterate, we're active in both of those areas.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [40]

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And as a percentage of expenditures, we're expanding more and more as a percentage on these new products than the old products. But our total R&D budget is increasing. So the increases are being spent on the new products. So I think we're going to continue in this fashion.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [41]

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Got it. Very helpful. And then just last question for me. I imagine that PAD -- patients that are diagnosed with PAD are at higher risk if they contract the coronavirus. So do you think there might be a bigger push to do PAD testing after we're sort of out of the woods in regards to COVID-19?

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [42]

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Dennis, answer this question. Explain also what PAD means.

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [43]

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Sure. Well, what our QuantaFlo product does is test for peripheral arterial disease, which is growth of atherosclerosis in -- specifically in the leg arteries, and it's often a precursor for heart attack, strokes. And since it's a systemic condition, it grows throughout the body. So PAD testing is often an early warning sign for some of these other types of cardiovascular and heart disease.

As far as whether there will be more push because of COVID, I'm not sure. But I know that there is an eagerness when you consider the fact that although COVID deaths are significant, the deaths from cardiovascular disease march on month in and month out. And I know that our customers and our clinicians are eager to get back to testing for PAD and other forms of cardiovascular disease.

As far as specific to COVID, that's yet to be seen. But there's certainly an eagerness to get back to the PAD testing that was going on before.

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Douglas Murphy-Chutorian, Semler Scientific, Inc. - CEO & Director [44]

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And so the preventive therapy is important to do for these chronic diseases. But because COVID affects vessels, they may also have the intention, the physicians want to get the risk factors dealt with because, for example, ACE inhibitors may be protective. So if you have hypertension and then you're on an ACE inhibitor, that may be protective against the problems that happen with COVID-19. So I don't know the answer. But preventive is always better than -- to do than not. So anyway, we have got to see what the people do in the future. But I think for some -- for instance, it's the key to everything.

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Operator [45]

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

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Dennis Rosenberg, Semler Scientific, Inc. - CMO [46]

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Thank you for joining us today, and we look forward to updating you soon on our continued progress. Goodbye, everyone.

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Operator [47]

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