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spk06: Greetings and welcome to AugMedics 2021 Third Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caroline Paul, Investor Relations. Thank you. You may begin.
spk02: Thank you, and thank you all for participating in today's call. Joining me are Manny Kurkaras, Chief Executive Officer, and Paul Ginocchio, Chief Financial Officer. Earlier today, Augmedics released financial results for the quarter ended September 30th, 2021. A copy of the press release is available on the company's 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. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. These forward-looking statements are based upon our current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. 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 discussion and analysis of financial condition and results of operations 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. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 9, 2021. Augmetics disclaims any intention or obligation, except as required by law, 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.
spk04: Thanks, Caroline. Good afternoon, everyone, and thank you for joining us. We are pleased to report another strong quarter as we executed well across our growth initiatives and built upon our bookings momentum in the first half of 2021. We continue to see strong demand from our existing customers, and we remain focused on the significant opportunity ahead to further penetrate the clinical documentation market where healthcare organizations already under contract with Augmetics represent an aggregate annual revenue opportunity of about $1 billion. As a reminder, our service model is centered around Augmetics ambient automation platform, which leverages our proprietary note builder system and medical data specialists to generate accurate and timely delivered medical documentation. By combining structured data models with natural language processing and machine learning models, Augmedics' note builder system is able to deliver comprehensive notes for more than 35 specialties in a variety of healthcare settings. The metadata generated from the sequence of clinicians' questions and patient answers from nearly 40,000 visits per week helps train our AI-driven note builder and drive increasing efficiency. This metadata will also facilitate automated add-on services such as coding, providing our cosmetics with a powerful advantage over other approaches that do not possess such data. Physicians have a choice of our real-time service, which we call live, or our non-real-time service, which we call notes. Both of our solutions focus on reducing the burden of medical note documentation, which results in higher clinician productivity and helps generate additional revenue for healthcare enterprises. Our service has also been proven to increase clinician and patient satisfaction. Our unique approach to clinical documentation enables not only natural physician-patient conversations, but also creates scheduled capacity for clinicians to spend more time or see more patients which is exactly what health systems need right now as they are experiencing higher levels of retirement and economic pressure post COVID-19. Turning to our recent financial performance, revenue for the third quarter of 2021 was $5.6 million, representing a 33% year-over-year increase. Quarter-over-quarter revenue growth accelerated to 9% versus 8% last quarter. Given the health of our pipeline, and increase in customer adoption, we expect our bookings momentum to continue and for growth in clinicians and service to accelerate into the fourth quarter of 2021. We believe we have a multi-year revenue growth opportunity of 30 to 45% annually through the increased adoption of our live and notes offerings among our existing and future customers. Looking ahead to the remainder of 2021 and beyond, we are excited to share some updates on our revenue and gross margin growth initiatives. First, we continue to build relationships with our major accounts in order to offer our notes and live offerings to a broader base of physicians within these enterprises. Recall that when we land within one of these enterprises, we implement our solution among an initial cohort of physicians who we believe would be prime beneficiaries of our service based on their individual productivity metrics. And we gradually expand our footprint once we demonstrate the targeted ROI. The unlocking of our notes offering at a few of our large enterprises has increased our opportunities to further penetrate these organizations. Second, we are thrilled today to announce a partnership agreement with the National Cooperative of Health Networks Association, MTHN, a national professional membership organization to help rural health networks gain access to Augmedics' ambient automation platform, which we refer to as AAP. As rural health networks struggled with recruitment and clinician burnout, we are focused on helping NCHN's clinicians free up time, ease the administrative burden of the EHR, and practice at the top of their medical license. We look forward to helping NCHN's rural health networks achieve their goals through this partnership. In September, we were pleased to announce our partnership with Google Cloud to integrate and optimize their automatic speech recognition technology into our Note Builder technology platform. Our proprietary technology provides the natural language processing to the text to produce a final clinical note. We believe this integration can improve the accuracy of our NLP models, improve our unit economics, and accelerate our ability to scale to new clinicians. Our partnership with Google Cloud is also beginning to benefit our go-to-market efforts and generate Google-sponsored enterprise sales leads. We remain focused on identifying other potential partnerships that are complementary to our core documentation solutions to help us further accelerate our growth. Fourth, we continue to invest in technology to enable increasing levels of automation and greater operational efficiencies in the node creation process, and other related services as we broaden our solution portfolio. As a result, we expect higher gross margins in the future. Finally, our flexible operational infrastructure and technology platform have enabled us to seamlessly enter new end markets such as wound care, dental, veterinary, outpatient, and post-acute care settings, which we consider to be underserved markets. Our solutions are utilized today by over 35 specialties across 28 EHR systems, and we remain focused on identifying additional opportunities that will further expand our already large total addressable market. Although these are exciting developments that should continue to drive growth and margin expansion in our business for many years to come, I want to make sure that people remember an ambition of ours since the company was founded back in 2013. And that is the creation of a natural language processing slash artificial intelligence platform that can generate complex medical notes in a fully automated process from an ambient natural physician-patient conversation. This is an enormously complicated piece of technology that requires millions of data sets to create. Because we have built our solution to be end-to-end, meaning we have access to the conversation between the patient and the doctor, as well as the final EHR entry, it means that we are in a unique position in the market to be able to develop this platform. The platform is being launched in phases over time, allowing us to automate key steps in the medical note creation process along the way, until in the end, almost all of the note is likely to be generated by a machine. We expect the majority of the medical note content we create to be automated within the next two to three years. Over time, therefore, we should be able to become much more productive, expand our gross margins, as well as offer increasingly complex and other value-added services to our healthcare system clients. In summary, we delivered another strong quarter, and we are very enthusiastic about our achievements to date. We executed well in our strategic priorities, and we remain committed to investing in our platform to further penetrate the clinical documentation market. With that, I'll now turn the call over to Paul Ginocchio, our Chief Financial Officer, then we'll return with closing comments. Paul?
spk01: Thank you, Manny. As stated, revenue for the three months ended September 30, 2021, was $5.6 million, a 33% increase from the $4.2 million in the same period a year ago. Growth was driven by existing client expansion, new clients, and strong growth in our notes offering. Dollar-based net revenue retention was 122% for our health enterprise customers compared to 129% in the second quarter of 2021 and 113% in the third quarter of 2020. As many of you know, net revenue retention measures what a dollar of revenue at our existing clients a year ago grew into in the most recent quarter. It includes upsells, expansion, and churn, but excludes revenue from any new logos added during the last 12 months. Clinicians in service as of September 30, 2021, were 834, up 51% as compared to 551 in the previous year. Our average clinicians in service in the third quarter were up 42% year over year. We define a clinician in service as an individual doctor, nurse practitioner, or other healthcare professional using either our live or no service. We believe growth in the number of clinicians in service is an indicator of the performance of our business as it demonstrates our ability to penetrate the market and grow our business. Gross margin for the third quarter of 2021 was 45.0% as compared to 44.2% in the corresponding prior period and compares to 45.0% in the second quarter of 2021. the latter of which excludes the one-time benefit from the write-off of a provision related to our previous office lease. Total operating expenses for the third quarter of 2021 were $7.2 million versus $5.2 million in the third quarter of 2020. Operating expenses in the third quarter of 2020 were $400,000 lower due to temporary salary reductions and furloughs attributable to COVID. The biggest driver of our operating expense growth in the third quarter was sales and marketing. which grew as a result of higher commissions due to stronger bookings, expansion of our commercial team, and increased marketing investment. R&D investment also expanded due to a higher headcount in engineering to further accelerate our AI and ML efforts. Finally, G&A expense was flat year over year, attributable in large part to transaction related expenses a year ago. We expect that revenue growth should start to outpace operating expense growth as we get into 2022. Adjusted EBITDA, which we calculated by adding back depreciation, amortization, taxes, interest, transaction expenses, one-time items, and stock-based compensation to net loss, was a loss of $3.9 million in the third quarter of 2021 compared to a loss of $2.6 million in the third quarter of 2020. We ended the third quarter of 2021 with $11.1 million of cash and restricted cash. In October, we were pleased to complete a capital raise and concurrent uplisting to NASDAQ, which generated gross proceeds of $40 million. Now turning to our outlook for the fourth quarter. Given the health of our backlog and increase in customer adoption, we expect growth in clinicians in service to accelerate into the fourth quarter of 2021. We expect year over year revenue growth to be similar to our third quarter revenue growth rate of 33%. We expect gross margins to decline quarter over quarter by approximately 150 basis points due to our Bangladesh MDSs returning to the office. We provide transportation and meals to our data specialists when they travel into the office. So our cost of service will grow a little bit as the trend to working from home ebbs. Additionally, we would like to note that in the fourth quarter of 2021, we will start a defined savings plan for our Bangladesh employees as required by local law for any company that has been operating there for five years. We will contribute a percent of each employee's salary to a fund, and for those employees who stay with Augmentix for five years or more, they will receive a payout from the fund upon retirement or departure. For those employees who depart before five years, those allocated funds will be used to offset future contributions. About 5% of our current employees have been with Augmetics for five years, and approximately 2% of all Bangladesh Augmetics employees since inception have been with us five years. The one-time catch-up payment in the fourth quarter to implement this program will be about a half a million dollars, and it will have an ongoing 30 basis point impact on our overall gross margin. Year to date, we have received about $400,000 of grants from the Bangladesh government, which has basically funded this required savings program. Recall, at scale, we've indicated that we expect live gross margins to range from 50% to 55%, and notes gross margins to range from 55% to 60%. At this point, I'd like to turn the call back to Manny for closing comments.
spk04: Thank you, Paul. In summary, I'm encouraged by our strong third quarter results, which reflect the continued momentum in our overall business. Our differentiated platform continues to resonate well in the market, and we remain enthusiastic about the vision ahead for Augmetics. We are very grateful to all our new investors and our existing investors who supported us in our most recent capital raise. We appreciate your trust and belief in our strategy to transform the clinical documentation process. Our team remains focused on executing on our strategic growth initiatives and will continue to make the necessary investments to capitalize on the large market opportunity in front of us. Our public listing on NASDAQ marks the culmination of years of hard work and is a major step on our journey forward. Our success is truly a testament to the dedication of each of our employees. We are proud of all that we have achieved, and we look forward to the opportunities that lie ahead. With that, we will now open it up to questions. Operator?
spk06: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Ryan Daniels with William Blair. Please proceed with your question.
spk07: Yeah, guys, congrats on the strong performance in the new partnership. Let me start with just a quick, somewhat housekeeping-related one for Paul. Can you go into the sales guidance and overall guidance in a little bit more detail, in particular maybe discussing some of the nuances of provider versus revenue growth? That's obviously going to start to deviate more in the future as you sell notes at a Just curious if you can offer a little bit more color on guidance. Thanks.
spk01: Sure. Thanks, Ryan. First, on the mix between live and notes, we do expect increasing percentage of our new clinician bookings to come from notes, and that will decrease ARPU over time. Second, on our revenue guidance, We said similar. I think as you look at our bookings momentum and backlog, I think the revenue growth will come in at or maybe slightly above. So I'd say maybe it's 33% to 35% year-on-year growth in the fourth quarter compared to 33% in the third.
spk07: Very helpful. And then can you go into a little more detail on the National Cooperative Health Networks Association partnership? You know, it sounds like they have 38 hospitals that could benefit from your solution. So is this more of a hunting license for your sales team to go in under a corporate-level agreement or MSA, Master Services Agreement, or an implicit endorsement where they're going to push it out to their customers? Just any more color on how that could augment provider ads going forward?
spk04: Sure. Good question, Ryan. It's a little bit of both. So the NCNH will – promote our service, if you will, to their membership who are in dire need of assistance with documentation burden of their positions. And as part of that process, we will, of course, go into the individual systems, and we already have contracted with one of them to demonstrate to them the value proposition we can deliver and, you know, offer the service to those specific individual members.
spk07: Okay, great. That's helpful, Culler. And then maybe just a big picture one for you. As we go through earnings season, I think one of the largest comments from providers that we cover is that they're seeing a ton of workforce burnout and turnover and difficulty recruiting clinicians. And one of the things we've heard about Augmetics and our channel checks is not only that it reduces the provide our burnout by keeping them out of the EHRs so much, which they hate. But also, it appears that some of your clients are using it as a pure recruiting tool, saying that we're going to offer this to our recruits as a differentiator. So I'm curious how you're capitalizing on what's a megatrend in healthcare that seems something you can address and maybe something that can really benefit the growth of the company over time.
spk04: Well, Ryan, you're absolutely right. The industry is under tremendous pressure today to recruit and retain medical staff. That includes physicians, nurse practitioners, clinicians, you name it. And so anything that we can do that relieves that tension created by the burden of documentation on those medical practitioners would be and is being received with open arms. It is both a recruiting tool and a retention tool. And when we go into enterprises, we emphasize the ROI, which is very demonstrable based on the data that we've collected from our existing customers. But also, we emphasize the retention benefits of relieving that burden from these enterprises. And they use that, as you mentioned, as a recruiting tool. And it is very, very difficult today for most enterprises to recruit qualified staff, and it's becoming increasingly so. So they're looking for and they're desperate for solutions to help them resolve that issue.
spk07: Very helpful. And then final one, and I'll hop off. Any more color on some of the data sharing agreements that you've been discussing with your partners? It seems like you know, that's a big opportunity to identify more providers that could benefit by the solution. So just any discussion on progress there and maybe what that actually is for those less familiar in regards to identify the potential high ROI users. Thanks and congrats again.
spk04: Sure. Okay. Thanks, Ryan. So the data approach that we use to identify demonstrate the value proposition to enterprises is predicated on two key metrics. One is WRVUs, which is work relative value units. It's a standard unit of measure of performance of individual doctors. And it's a metric that most major healthcare enterprises do track for each of their individual practitioners. And the other metric that we look at is the average amount of time that each clinician spends in the EHR per visit. And what we do is we map every physician's metrics on a grid according to those two axes. And we know from empirical data that we've collected from our existing customers what the productivity improvement curve looks like once they've adopted our service after a given period of time. And we know from that curve, when we plot all the physicians in a particular enterprise, where they reside on that curve. And we know the steepest part of that curve. And we identify those physicians that do reside on the steepest part of that curve that demonstrates the highest improvement in RVUs, WRVUs. Those are the initial targets that we go after. And so what we do when we go into an enterprise is we name the individual doctors that we believe would benefit the most. And what that does for the enterprise is it provides them with a tool to motivate productivity within the enterprise. And what I mean by that is they will go to an individual doctor that we've identified and let them know that they can receive the service without changing anything in their workflows, and the enterprise will cover, say, 50% or 75% of the cost of the automatic service. But if they improve their productivity by adding one additional patient to their daily schedule, the enterprise would cover 100% of the cost of the service. And they know from the data we presented them that that particular doctor can easily generate or add another patient to their daily volume. So now we have management promoting the service based on hard data within the enterprise, and that has helped unlock the opportunities within each of our large enterprises.
spk01: And I'll just add, Ryan, we rolled this out about a year ago. We've got a number of clients on there, and we continue to add additional clients or increase our relationships to include this data sharing. But we're a year in, and we've got more clients to unlock.
spk07: Okay, perfect. Thanks so much, guys. I appreciate it.
spk04: Thank you, Ryan.
spk06: Our next question is from Bill Sutherland with the Benchmark Company. Please proceed with your question.
spk05: Thank you. Hey, Manny. Hey, Paul. Just a couple from me. So in a couple of client calls, one thing I noted was that as happy as that clinician was, the penetration, at least in their group, had not really gotten that deep. I forget what the number was. So are you all, give us a sense of a reasonable penetration level. I know it's all over the map probably. And then what are some of the strategies to go after that $1 billion opportunity, you know, because it's such low hanging fruit seems to me.
spk04: Right. Great question, Bill. Now, As I just mentioned, we have this data-centric approach, and as Paul elaborated on, we launched it about a year ago. When we identify specific practitioners or physicians within an enterprise as the initial cohort that we track, it takes about a year to realize the benefits and to see it in the data. So there's an inherent lag in when you can reap the benefits of this data-driven approach, but it is powerful when the data supports your contention in terms of the ROI for the customer. So we'll continue to pursue that strategy. It seems to be working. And if we look across enterprises and we look at the data that we've already collected from them, Typically anywhere from 25 to 40% of all the physicians within an enterprise will fall within what we consider to be the sweet spot of that productivity improvement curve, which is the steepest part of the slope of that improvement curve. So there's a tremendous pathway for us to expand within those enterprises just looking at those particular doctors.
spk01: Bill, maybe I'll just add to that. Obviously, Manny talked about the most important way for us to expand our existing enterprises, which is through data. The second thing we've done is we launched notes just over a year ago. That's going to unlock certain physicians who may not be the best fit for live, so that just expands our opportunity set within enterprise. Obviously, we've been expanding our customer account management team that also is hands-on and helps us faster expand existing
spk05: Got it. Thank you. And then just have to ask the COVID question. I know most of your MDSs are, I'm sorry, your medical documentation specialists are in Bangladesh and other offshore. But is there any comment there in terms of how it might have impacted your quarter? Thanks.
spk04: Well, I don't think it's really impacted our quarter. We had a good quarter, both from a revenue perspective, but also from an operations perspective, our utilization rates are high. They continue to increase. So we've adapted well to the challenging environment. I think as the pandemic subsides in varying parts of the world, we will be returning to a more normal operational capability and And so we'll have, as Paul alluded to, we'll have some impact on our gross profit margin, but that'll be ameliorated by other initiatives that we're undertaking to boost our gross margins.
spk05: Right. Okay. I think that's it for me. Nice job with the quarter. Appreciate it. Thank you.
spk04: Thanks, Paul.
spk06: Our next question comes from Mark Rosenberger with B. Riley. Please proceed with your question.
spk03: Hi, this is Kat Knope on for Mark Wiesenberger. Um, so in mid September, you guys extended your MSA with Sutter Health and within that they included an option to roll out Augmetics notes. I'm wondering if you could talk about how that is scaled thus far and what are your expectations for the ultimate, ultimate mix, um, within Sutter between live and notes?
spk04: Paul, you want to tackle that one?
spk01: Sure. As you said, we signed that new relationship with Sutter to unlock notes within that enterprise. It's still early days. We're going to listen to them about how they want to present that to doctors with our assistance. We haven't given a long-term mix. We still think a majority of our clinicians long-term will be on the live service. and a minority will be on the notes service. Where individual enterprises fall within that overall mix will depend a lot on the workflows and the specialties and the ships that each of the individual doctors within the enterprise fall. But I think each enterprise will have a different mix. But overall, we think a majority is live and a minority is notes.
spk03: Great. Okay. And then another question for me. I know the company has talked about introducing additional incremental offerings such as pre-charting. So I'm just wondering if you could talk a little bit more about the product roadmap and how we should think about pricing and economics for the upcoming offerings. Sure.
spk04: So products like pre-charting, we view them as a a kind of entry-level service that has broad appeal across most major healthcare enterprises that need that service to relieve some of the burden from not the physician necessarily, but other medical staff, given the shortages of medical staff in the industry. And because of its very low price point, we feel that we can establish a broad beachhead within these enterprises from which to upsell our other higher value-added services, such as the medical note itself.
spk01: And that pre-charging, because it'll be more automated, will be an enhancement to our gross margin profile.
spk03: Awesome. Great. Okay. Sorry, one more question for me. So I know we've talked about two-thirds of growth will be from existing accounts and one-third from new accounts. But can you guys talk a little bit more about how you're prioritizing your sales and marketing efforts? I know you talked a little bit about it in the call, but if you could add any more color, that would be super helpful.
spk04: Sure. So we actually have a bifurcated sales organization that is split roughly according to the split in our revenue between existing and new. So we have about what we have five enterprise sales managers focused on generating new sales from new customers. And then we have about 15 what we call customer success managers who are focused on retaining and expanding business within our existing enterprise accounts.
spk01: And, Kat, our plan would be to potentially add a few heads to the ESM team in 2022 and, you know, grow our CAM team more in line with or maybe just below our clinician service growth.
spk04: Yeah, and just to elaborate on that point, sorry, you know, we continue to see great returns on the investment we make in sales and marketing. as evidenced by our LTV to CAC ratio, which is very high relative to SAS industry benchmark. And so as long as we continue to see that great return on that investment, we will continue to invest in sales and marketing.
spk03: Awesome. Thank you, guys.
spk05: Thanks, Kat.
spk06: There are no further questions. At this time, I'd like to turn the call back over to Manny Krikaris for closing comments.
spk04: Great. Well, that concludes this earnings call session. Thank you, everybody, for joining, and have a good night. Thank you very much.
spk06: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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