Augmedix, Inc.

Q1 2023 Earnings Conference Call

5/12/2023

spk04: Greetings and welcome to the Augmetics, Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Matt Chesler, Investor Relations. Thank you. Please go ahead.
spk08: Thank you, Operator. Joining me today from Augmedics are Manny Porqueras, Chief Executive Officer, and Paul Ginocchio, Chief Financial Officer. This morning, Augmedics released financial results for the quarter ended March 31st, 2023. We have posted the press release and an investor presentation on our website at Augmedics.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. Any statements that relate to expectations or predictions of future events, results, or performance are forward-looking statements. They are based on current estimates, and various assumptions involve material 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 in 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 may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will 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, May 12, 2023. Augmetics disclaims 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.
spk02: And with that, I'll turn the call over to Manny. Thanks, Matt.
spk09: Good morning, everyone, and welcome to our earnings call. The start to 2023 is highlighted by strong top-line growth, continued development, and commercialization of our broad product offerings, strengthening of our financial position, and solid momentum exiting the quarter. Last month, we concluded a landmark strategic partnership and financing with HCA Healthcare. This partnership with one of the nation's largest and most forward-thinking healthcare providers serves as a powerful vote of confidence in our technology and our approach to bringing technology at scale to the point of care. HCA is collaborating with us on the development of the technology underlying our Augmetics Go product that aims to transform the way patient care is documented in the acute care setting. Alongside our largest investor, Red Mile Group, HCA also made a substantial investment in Augmetics, serving as a clear indication that we are on the right strategic path. Even prior to our HCA partnership announcement, we were experiencing increased commercial demand from clinicians, and I'm confident that our collaboration with HCA will only accelerate our commercial momentum. The need for our technology at the point of care is real, urgent, and growing. The administrative burden on practitioners is significant, leading to higher costs and physician burnout. No healthcare professional went to medical school to manage documentation. They want to see and help their patients and practice at the top of their license. We are developing products that enable them to do just that, allowing clinicians and patients to truly connect with the point of care, improving patient access as clinicians spend less time documenting visits, and improving healthcare operating efficiency. HCA fully understands this. With the industry's increasing adoption of powerful AI tools such as large language models, we are mindful that all of our products must engender trust among our customers if they are to be adopted at scale. That is why we take great pains to ensure our automation technology is built thoughtfully and respectfully. While others throw intrusive technology or black box AI to automate their processes, we are developing a platform modeled on practitioner workflow that provides clinicians with transparency and control. Our clinician customers will be able to see how their medical notes are built and can set their own preferences for the notes look and feel. We believe this will instill confidence among clinicians in the finished product. Our medical notes are presented in well-understood formats and focus just on relevant medical issues as opposed to being long and meandering transcript summarizations. Beyond the medical note, data we deliver to customers is structured and formatted to be easily ingested by third-party platforms. Finally, we don't believe a one-size-fits-all is the right product strategy, so we have developed a portfolio of products as part of our platform that provide healthcare systems and clinicians the flexibility to choose the product that best works for them and provides the highest ROI. We believe thoughtful and responsible use of AI tools, transparency and clinician control in node creation, structured output, and product fungibility across a wide spectrum of care settings are key differentiators that set us apart from other players in our space. We generated record first quarter bookings and 38% revenue growth, demonstrating the acceleration in commercial adoption we are seeing. even before Augmetics Go is released later this year. We continue to build our base of recurring revenue, adding both new customers and expanding within existing customers. Existing customer expansion is best highlighted by our dollar-based net revenue retention of 136% in the quarter, up from an already strong 133% in the first quarter of 2022. This NRR demonstrates that our land and expand strategy within our large healthcare customers is working. We are adding incremental recurring revenue with minimal increases in fixed costs at an attractive customer acquisition cost. Importantly, we were able to deliver this 38% revenue growth while holding operating expenses flat sequentially compared to the fourth quarter and with only a 9% increase year over year. The effects of high operating leverage become more evident as we scale our offering, providing clear evidence that we are moving toward cash flow sustainability. As we noted in the announcement of the HCA and Red Mile transaction, we expect to reach operating cash flow breakeven as we exit 2024. Our results demonstrate that we are making solid progress towards this critical goal. With that, I'll now turn the call over to Paul Ginocchio, our CFO, Then we'll return with closing comments. Paul?
spk06: Thank you, Manny. As stated, revenue for the three months ended March 31st, 2023 was $9.6 million, a 38% increase from the $7.0 million in the same period a year ago. Growth was primarily driven by existing client expansion, new clients, and growth in our notes offering. Dollar-based net revenue retention in the first quarter of 2023 was 136% for our health enterprise customers. compared to 133% in the first quarter of 22, and 126% in the fourth quarter of 2022. As many of you know, net revenue retention measures what a dollar of revenue at our existing clients a year ago grew into in this most recent quarter. It includes upsells, expansion, and churn, but excludes revenue from any new logos that were added during the last 12 months. The acceleration of NRR was driven primarily by significant expansions at two of our larger health system customers. Our NRR results put us at best-in-class levels for SAS companies. Average clinicians in service for the first quarter of 2023 rose 43% as compared to the first quarter of 2022 and compares to 41% year-on-year growth in the fourth quarter of 2022. We define a clinician in service as an individual doctor, nurse practitioner, or other healthcare professional using either our live or note service. We believe the 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. Adjusted gross margin for the first quarter of 2023 was 45.8% as compared to 45.3% in the corresponding prior year period and compares to 46.5% in the fourth quarter of 2022. The exposure to clinicians serviced out of the U.S. reduced our quarter-on-quarter gross margins, partially offset by efficiency gains. We expect gross margins to benefit later this year from the shifting of a significant number of U.S. service clinicians to outside the U.S., along with continued scale benefits and improving automation. Total operating expenses for the first quarter of 2023 were $9.5 million, flat sequentially from the fourth quarter of 2022. Non-GAAP operating expenses, which exclude stock-based compensation and one-time items, grew 9% compared to the first quarter of 2022, a deceleration from the double-digit growth rates we reported in the past several quarters. You are beginning to see the inherent operating leverage in our model come through as we scale. We are continuing to incrementally invest in sales and marketing and engineering to drive innovation and growth. But other cost categories are largely flat outside certain costs, such as audit fees and legal fees. Growth and gross profit outpacing OPEX growth resulted in a reduction in our quarterly operating losses for the third consecutive quarter. Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, one-time items, and stock-based compensation to net loss was a loss of $4.1 million in the first quarter of 2023 compared to a loss of $4.8 million in the first quarter of 2022. Along with this improvement in adjusted EBITDA loss was a year-on-year improvement in our adjusted EBITDA margin from negative 69% in the year-ago quarter to negative 43% in the most recent quarter. Cash flow from operating activities was an outflow of $6.2 million in the first quarter of 2023 compared to $4.2 million last year. The first quarter is typically our largest cash burn quarter of the year due to some annual payments and bonuses. We continue to expect a reduction in cash burn in 2023 versus 2022, and cash burn will improve from these 1Q results. At March 31st, 2023, we had $20.6 million of cash, cash equivalents, and restricted cash. At quarter end, we had an additional $5 million of incremental liquidity via our AR line of credit. The $12 million in new equity from the financing with HCA Healthcare and Red Mile Group in April at $1.60 per share gives us pro forma cash, cash equivalents, and restricted cash of nearly $33 million as of March 31st. In addition to the new equity raised, We have also agreed with Red Mile to finalize a $5 million equity line of credit, and we are in the final stages of putting it in place. The new equity line of credit will provide further capital certainty and give us backstop capital access, even if the markets are closed. But as we have said before, our expectation is that we will reach cash flow sustainability without accessing this facility. In terms of our common share count, we had 37.5 million weighted average common shares for 1Q 2023. For modeling purposes, remember we sold another 3.125 million common shares to HCA and Red Mile combined, and a combined 4.375 million pre-funded warrants. Positioning the company to reach profitability is a top priority for our company. With a tremendous opportunity in front of us, and our technology platform. We believe we can deliver both strong revenue growth and operating leverage to reach operating cash flow breakeven before net interest expense as we exit 2024. Now moving on to guidance. The positive momentum we saw coming into this year is continuing. We now expect revenue to be at least $42 million for the full year of 2023. Turning to our outlook for the second quarter of 2023, given the strength of our recent bookings and the health of our current backlog, We expect revenue in the second quarter to be approximately $10.4 million to $10.5 million. We expect GAAP gross margins to be similar to the first quarter 2023 GAAP gross margins. As you saw this quarter, we expect the overall increase in operating expenses in the coming quarters will be lower than the overall increase in revenue and gross profit. We do expect some incremental OPEX investments in 2023 and sequential OPEX growth in each of the coming quarters. We expect 8% to 10% sequential growth in OPEX into 2Q23 from 1Q23. At this point, I'd like to turn the call back to Manny for closing comments.
spk09: Thank you, Paul. Our product and technology strategies are resonating with customers as evidenced by our strong top-line growth and adoption by five of the top 10 U.S. healthcare systems. The proliferation of LLMs within the healthcare industry will inevitably level the technological playing field. However, LLMs alone are not a complete solution to the dilemma facing the industry. Using this technology in a thoughtful and responsible manner and incorporating it into a compelling product portfolio that accommodates the widest range of clinician workflows in both the ambulatory and acute care settings are what set Augmedics apart from others in this space. I am proud of our team's mission focus and grateful to our customers for entrusting us with this vital work. As we look at the rest of the year and beyond, I remain very excited by the opportunity that lies in front of us. Thank you. Operator, let's open it up to questions.
spk04: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. If you would like to remove your question, please press star two. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that is star one to register a question at this time. Today's first question is coming from Ryan Daniels of William Blair. Please go ahead.
spk07: Hey, good morning. This is Jared Hassen for Ryan, and thanks for taking our question. You know, wanted to start just hoping to give maybe an update on the opportunity to unlock notes within your existing client base. You know, it sounded like that product was a source of strength in the quarter. And I know you had a filing recently indicating you achieved this unlock with an existing customer, Dignity Health. So could you just speak to how you're thinking about the growth opportunity from adding this? And maybe what aiming we're in, in terms of getting this unlocked across the client base or how penetrated you are today? And then with clients that have turned on notes, have you seen any signs of, I guess, cannibalization from live users just given the difference in pricing?
spk02: Let me take that. Great question.
spk09: So our progress in unlocking notes across our enterprise customer base is pretty far along. I think most of them at this point are unlocked. There might be, I think, two or maybe three that are still in progress. We are very confident that they'll be unlocked as well. And in terms of the second question, in terms of cannibalization, we haven't seen any cannibalization to date between notes and our live offering.
spk03: Okay.
spk07: Okay, fair enough. I appreciate that color. And then, you know, one other follow-up, and Manny, you spoke a little bit to transparency and control of the product as key differentiators during the prepared remarks. I was wondering if you could provide a bit more color just to help illustrate that a bit more. You know, are there any sort of examples of what that means in terms of either the output or the actual clinician experience relative to maybe a more cookie-cutter or black-box approach?
spk09: Sure, so, and I'll speak specifically to our Go product, which is currently being tested at HCA and one other healthcare organization. The user interface shows the various steps that our backend goes through to create the note. It'll expose the ASR. converting the audio into text. It'll expose our NLP, which identifies the key elements within that transcript that we believe, our technology believes, is relevant to the medical note. It'll show the structured data breakdown of those key elements into significant and relevant blocks that need to be incorporated into the medical note. And it'll also expose sections of the medical note, the output, where the LLMs generated output for content. So all of that is exposed to the customer, to the user, and they will have the ability to adjust the preferences within the structured data elements to affect the look and feel of the output. And then, of course, they can also add their own content manually to the extent they wish to do so.
spk03: Okay.
spk02: Yeah, I think that's really helpful.
spk03: Thanks for the call, and I'll back up. Thank you.
spk01: Thank you. The next question is coming from Brooks O'Neill of Lake Street Capital.
spk04: Please go ahead.
spk11: Well, good morning, guys. Congratulations on the great start to the year. I have a couple questions. I'd like to start by just asking you a little bit about what you anticipate the workflow and sort of plan is with HCA as you can see it today.
spk02: Hi, Brooks. Manny again. So we're currently testing our Go product.
spk09: with several doctors at HCA. We've also deployed our live solution in the emergency department of a couple of hospitals at HCA. We will add in the process of adding a couple more hospitals to that deployment in the emergency department. And we're learning through the data that we collect from those encounters and incorporating that into our GO technology for the acute care setting. So the rollout is, you know, kind of set for four hospitals at this point. And we expect that once we get a little closer in terms of finalizing the design On the Go product, we will be rolling that out much more aggressively across other hospitals. And as you know, HCA has 188, a little over 188, I think 188 hospitals in the U.S.
spk06: Pretty good number, huh? Brooks, the only thing I would add is that we're also – hiring to accelerate the roadmap of GO, and that's what's also included in our second quarter op-eds guidance.
spk11: Great. Can you guys say, I mean, I don't follow HCA directly, obviously, but would you say there's any opportunity in working with HCA outside the acute care setting? I mean, do they employ doctors in outpatient or freestanding centers across that 187 hospital network?
spk09: Great question. So they have a substantial ambulatory practice or clinical practice. You know, they have, I think, 2,200 care centers around the U.S. outside of those 188 hospitals. And, yes, we are planning to deploy outside the acute care settings. That is a separate commercial thread that we are pursuing actively with HCA today.
spk11: Great. And I would assume you might follow the same kind of footprint. Start with a couple facilities, a limited number of doctors, get your feet on the ground and do the lands and expand like you've done with many of your customers over time.
spk09: Exactly. We've already identified the initial candidate hospitals or, sorry, care facilities for ambulatory. And we're just setting things up right now.
spk11: Great. All that sounds good. I want to ask you just one more, but it's a little bit of a multi-part, so I apologize for it. But just thinking about product development initiatives and opportunities, Obviously, AI is a huge buzzword. You mentioned it in your prepared remarks. I'm curious how you're thinking about opportunities with AI. Obviously, you've had historic partnership with Google. I'm curious how you're working with them and whether, in fact, they're helping you with the HCA would be interesting to know. And then the last piece I'm just curious about is how you're seeing developments with the EMR technology. The key EMR vendors that are out there are obviously Epic and Oracle Cerner today. Is there anything going on there that's worth talking about?
spk02: Thank you.
spk09: Okay. Let me start with the first one in terms of LLMs, our use of large language models in our quest to further automate the note creation process. And, of course, you know, all of this, use of technology, the whole point of it is to improve operating efficiency, improve the speed with which you can create a medical note and reduce the cost of creating that medical note and pass those cost savings on to your customers. So we're very keen on incorporating that technology as much as we can. But as I mentioned before, we want to do it responsibly. and we think we're on the right track in terms of earning the trust of our customers that the technology is not being used blindly by us. So we've been putting in the appropriate guardrails to ensure that the product that we deliver is trustworthy. So we will continue to do that. And as you mentioned, rightly so, Google is, um, we do use Google's large language models today. Um, we've been using them for a while and, um, we are testing, uh, new ones, new releases as we speak. Um, we've got a whole team of, um, machine learning engineers working on that, uh, on, on their latest, um, LLM, uh, that is specifically, uh, tailored to the, uh, healthcare environment. And, um, We're really excited to be able to deploy that commercially over the coming months. In terms of EMR activity, we continue to have conversations with Epic and Cerner slash Oracle. I would say that the conversations are healthy. They're progressing. There's not much more to say other than that. And for us, the first order of business with them is to develop as, as close an integration with the EMRs as possible to facilitate the, uh, deployment of our go product.
spk11: Yeah. All that. I appreciate all that color and it's, it's all fascinating and exciting. Let me ask one last one. And I'm just curious if you know, uh, I'm guessing HCA maybe has multiple EMR vendors, but do you happen to know if there's a predominant system they use within the HCA organization, or is it literally hospital by hospital in their world?
spk09: Actually, it's not. It's pretty uniform, and it's Meditech that they use. Meditech Magic is the particular version of Meditech that they have deployed.
spk11: And could you see yourself on some level having discussions and integrating on some level with them?
spk09: We're actually in the process of doing that just now.
spk11: Yes.
spk09: Okay.
spk11: That's well underway. Great. I'll follow up offline with that. I'd like to learn more about it. Absolutely.
spk04: Thank you. The next question is coming from Alan Klee of Maxim Group. Please go ahead.
spk05: Hi, good morning. Two small modeling-related questions. The gross margin declined a little sequentially. Could you address what was behind that? And then second, how much dollar amount do you think you have to increase operating expenses to build up sales and marketing for the Go launch? Thank you.
spk06: Hey, Alan. It's Paul. I'll take those. So for the Q1Q change in our gross margin, the U.S. serviced business, which is less than 10% of our total business, drove that Q1Q decline. And that's due to the sort of normal beginning of the year payroll tax bucket refills, less holidays in the first quarter versus the fourth quarter, and then just higher health care costs here in the first quarter. Those were the the main drivers of that sequential change in gross margin. And on, when it comes to sales and marketing for go, we're doing some things, but we think it's going to be a pretty efficient launch. You know, you're, you're seeing some OPEX increases as we accelerate the product development roadmap for go in the Q care setting. But we, you know, obviously we feel very comfortable with both our commentary around getting the cashflow break even and,
spk03: and our ability to successfully launch Go. Thank you.
spk04: Thank you. Once again, that's star one for any questions. The next question is coming from Neil Chatterjee of B. Riley Securities. Please go ahead.
spk10: Good morning, guys. Thanks for taking the questions, and congrats on the quarter. Maybe just on HCA, I know you've mentioned it wasn't you know, it's not an exclusive agreement. So just curious, you know, given, given kind of the aggressive expansion plans, you know, maybe across those 180 plus hospitals is curious, you know, how much bandwidth does that leave for, you know, similar pilots or rollouts with other, other large systems, you know, in 2023 or is that more of a focus for 24?
spk02: Hey, Neil, it's Manny. So, um,
spk09: I think we've guided that we don't expect a significant impact to revenue from Go sales in 2023. That doesn't mean we're not going to be piloting or testing Go with other healthcare organizations this year. It just means that we've muted our expectations in terms of what commercial benefit we will expect for this current year. So we have the bandwidth to deploy outside of HCA, and that is the plan.
spk02: Got it.
spk09: And just to keep in mind, we've been, just to add to that, sorry, several of our major enterprises have been asking for this product. and want to be included in pilots. So we do expect to be able to accommodate them later this year.
spk10: Great. Great. And then just on the guidance, you know, kind of given the strength you saw in the first quarter, you know, record bookings, second quarter guy was pretty strong. Just curious, you know, what gives you confidence in that and, you know, what was driving some of that strength?
spk06: And, you know, Mitch Paul, on the bookings we saw and the record bookings in the first quarter, we saw a number of, you know, health systems make incremental investments into our products that drove that, you know, strong bookings quarter. Obviously, we're guiding to a healthy increase Q1Q in terms of revenue growth. And, you know, we feel good about our guidance for the full year. And obviously, I slightly tweaked it. You know, we'll continue to revisit as we progress through the year. We've only given that $42 million guidance, you know, less than two months ago initially. But, you know, everything's at this point in time, we're feeling really good about the year.
spk02: Great. And just in terms of quarterly cadence, how to think about the back-up of the year and seasonality there?
spk06: I think we always show nice Q-on-Q revenue growth. How one quarter grows versus the previous quarter kind of depends on the bookings over the last quarter, potentially the last two quarters. And so that is yet to be determined, but we continue to feel really good about at least $42 million of revenue.
spk03: Great. That's all for me. Thanks.
spk01: Thank you. I'd like to turn the floor back over to Mr. Kakaris for closing comments.
spk09: Well, if there's no more questions, look, I want to thank everybody for participating in this earnings call. I'm sure we'll have more news to share with you as the year progresses. But as I said with my closing comments, we're really excited about the year. and look forward to keeping you guys updated as we progress into the year.
spk02: Thank you very much.
spk04: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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