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spk03: Ladies and gentlemen, greetings and welcome to the Augmedics, Inc. second 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 and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Cheslow, Investor Relations for Augmetics. Thank you, and over to you, sir.
spk04: Thank you, Operator. Joining me today are Manny Korkaris, Chief Executive Officer of Augmetics, and Paul Ginocchio, Chief Financial Officer. This afternoon, we released financial results for the quarter ended June 30, 2023. We posted a copy of the press release and an investor presentation to our website at Augmetics.com. We will 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 the management will make statements during this call that include forward-looking statements within the meaning of the 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 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. 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 risks factors and management 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 will find additional information regarding these financial measures and the reconciliation to get measures in today's press release. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 7, 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.
spk06: And with that, I'll turn the call over to Manny. Thanks, Matt.
spk05: Our medics delivered another strong quarter in Q2. We set records for revenue growing 47% year over year and dollar-based net revenue retention at 148%, demonstrating that health systems and clinicians increasingly value and are adopting our products. We also expanded gross margins by 330 basis points to 47% as we are realizing the inherent operating leverage of our recurring revenue model with our increasing scale of operations. With this strong performance in bookings that matched our best-ever quarter, we are confident in our outlook and are raising our revenue guidance for the year. We have promised to help the healthcare industry address the dilemma of clinician burnout and patient dissatisfaction through world-class ambient medical documentation solutions. And that is what we are delivering. Augmedics offers the broadest portfolio of products that set the standard for the level of accuracy possible. We've accomplished this by combining years of experience understanding clinician workflows and a technology stack that uniquely combines the power of automatic speech recognition, proprietary natural language processing models, including large language models, and a vast library of structured data sets developed from more than 6 million patient encounters. Our health system customers are increasingly adopting our products for use by a growing number of their practitioners within both the ambulatory and acute care settings. Now, in partnership with these same customers, which includes some of the largest health systems in the U.S., such as HCA Healthcare, The structured data we generate as a byproduct of our medical note generation process is being harnessed to develop innovative solutions that deliver even greater value to the healthcare ecosystem that transcends the patient encounter. We are right on track for an important year for our company and the clinicians and health systems we serve.
spk06: Let's now talk about some of the exciting current developments across our companies.
spk05: Recall that we formalized a strategic partnership with HCA Healthcare in April. Working collaboratively with partners such as HCA, we are actively trialing Augmedics Go in both the ambulatory and acute care settings. We are very pleased with the progress we are making with the automation of the product to optimize the quality of the draft note that is delivered to the clinician and to enhance the user interface to make it easy as possible to use. Augmedics goes on schedule for commercial launch later this year. We will have much more to say about the rollout of this new offering when we speak to you in the fall. Our current strong performance is underpinned by our live and nose products, which are resonating with clinicians due to their ability to generate accurate medical notes while delivering compelling ROIs to health systems. This is evidenced by our dollar-based net revenue retention rate of 148%, which improved from an already strong 136% in the first quarter of this year. HCA's vote of confidence in our technology and our approach further validates what is already a strong value proposition. Many of our largest clients are rolling out our products on a much broader basis, which is a major factor behind our accelerating revenue growth. Our focus is to bring unrivaled efficiency to clinicians, relieving the administrative burden by providing highly accurate medical notes while allowing doctors to focus more on their patients. AugMedicsGo is the next evolution of this initiative, which we believe will appeal to an even broader segment of the healthcare market. Importantly, we are positioning ourselves to extend our value proposition well beyond the doctor-patient encounter. The U.S. healthcare system has some structural idiosyncrasies that result in a less than ideal relationship between the services that are rendered by healthcare providers and the price they are paid for those services. The function of revenue cycle management is burdened by the imperfect information gleaned primarily from the medical note that is used as a basis for billing. This often results in multiple billing iterations between provider and payer for a given encounter, which adds considerable cost to the healthcare system. We are working closely with our largest customers to tailor our products to help address this area of inefficiency. We can do more than create an accurate medical note. We can use AI and machine learning to tie this medical record to the detailed description of the clinician's activities that we already generate as a byproduct of our note creation process to enable more accurate billing records. This should result in health organizations being paid faster and more fairly and provide the entire ecosystem with more transparency. This expansion of our offering will provide yet another compelling ROI to our customers. Importantly, it will extend our participation in the value chain beyond the patient encounter, which would serve as a durable competitive advantage for Augmetics. As we see here at the midpoint of 2023, we remain very confident in our overall market positioning, which is predicated on scale and trust. We're building that trust as evidenced by our very high net revenue retention rate. And we're achieving scale as evidenced by our substantial revenue growth. Our business is performing very well, driven in part by some of our largest customers widely adopting our products. We are on track to gain the scale that we need in order to break even while continuing to invest for the future. We are excited about the next evolution of our business, which is Augmetics Go. and especially looking forward to helping health systems beyond the point of care in downstream areas where we see a major opportunity to deliver even more value. With that, I'll now turn the call over to Paul Ginocchio, our Chief Financial Officer, then we'll return with closing comments. Paul?
spk10: Thank you, Manny. I'm very proud of the financial and business accomplishments that the Augmetics team delivered during the second quarter. Building on the success of the first quarter, Augmedics is generating continued strong growth and an improvement in profitability. Our results further demonstrate our position as a leading health tech company. We also took important steps to strengthen our financial position to ensure that we have the resources required to continue to scale our business and the capital to reach cash flow sustainability. Let's review the quarter's financial highlights. Revenue for the three months ended June 30, 2023. was 10.8 million, a 47% increase from the 7.3 million in the same period a year ago. Growth was primarily driven by existing client expansion, while new clients and the growth in our notes offering also contributed. Dollar-based net revenue retention rate in the second quarter was 148% for our health enterprise customers, compared to 131% in the second quarter of 2022, 136% in the first quarter of 2023. 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 primarily driven by expansion and a handful of our largest health system customers. Our NRR results put us at best-in-class levels for SAS companies. Average clinicians in service for the second quarter rose 48% as compared to the second quarter of 2022, compared to a 43% year-on-year growth rate in the first quarter of 2023. 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 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 second quarter of 2023 was 47.2% as compared to 44.0% in the corresponding prior year period and compares to 45.8% in the first quarter of 2023. This over 300 basis point improvement year-on-year in gross margin percentage was mainly driven by our growing scale and our strategic initiative to shift U.S. service clinicians to outside the U.S. Gross profit growth was 58% year-on-year. Total operating expenses for the second quarter of 2023 were $10 million, up 5% sequentially from the first quarter of 2023. Non-GAAP operating expenses, which exclude stock-based compensation and one-time items, grew 9% year-on-year. As expected, G&A for the quarter was $4.8 million, up 14% compared to $4.2 million in the second quarter last year. Transaction expenses, including professional fees, accounted for $400,000 of G&A in the second quarter. Of gross profit growth, outpacing OpEx growth resulted in a reduction in our quarterly operating losses for the fourth 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 $3.6 million in the second quarter of 2023 compared to a loss of $5.1 million in the second quarter of 2022. Along with this improvement in adjusted EBITDA loss was a year-on-year improvement in our adjusted EBITDA margin from negative 70% in the year-ago quarter to negative 33% in this most recent quarter. Cash flow from operating activities was an outflow of 6.0 million in the second quarter, compared to an outflow of 4.7 million last year. We had lighter collections at the end of June, which led to a nearly 2 million higher cash burn than expected in the quarter. This is a timing issue, and most of that collection shortfall was corrected in the first week of the third quarter. With revenues stronger than planned and costs below planned, we were on track to reduce burn in 2023 versus 2022. At June 30, 2023, we had $25.3 million of cash, cash equivalents, and restricted cash as compared to $22.0 million as of December 31, 2022. The strengthened balance sheet initiatives include the $12 million in new equity from HCA Healthcare and Red Mountain Group. the extension of the term loan facility by up to 18 months, and the finalization of the $5 million equity line of credit. The equity line of credit provides further capital certainty and gives us backstop capital access even if the markets are closed. But as we've said before, our expectation is that we can reach cash flow sustainability without accessing this facility. In terms of share count, we have 40.8 million common shares outstanding currently. For our weighted average share count for EPS, we show 43.6 million common shares outstanding, as we include the 4.375 million pre-funded warrants since their issuance on April 19th. Positioning the company to reach profitability continues to be a top priority. As we have said, with the 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 break-even before net interest expense as we exit 2024. Now moving on to guidance. The positive momentum we have demonstrated during this year is continuing. We now expect revenue to be at least 43.5 million for the full year of 2023. Turning to our outlook for the third quarter of 2023, given the strength of our recent bookings and the health of our current backlog, we expect revenue in the third quarter to be approximately 11.4 million to 11.5 million. We expect GAAP gross margins to be similar to second quarter 2023 GAAP gross margins. We expect operating expenses to be up five to six percent quarter on quarter due to the hires we have made to accommodate our accelerating growth. At this point, I'd like to turn the call back to Manny for closing comments.
spk06: Thank you, Paul.
spk05: I would like to thank our entire team for continuing to deliver on our promise to our while turning in another strong quarter for our shareholders. We believe we are strongly positioned, have set forth a sound strategy, and are executing well against that strategy in a fast-moving and growing market. Technology, particularly generative AI, is evolving rapidly and will have an increasing impact on our industry. Through our years of experience in understanding clinician workflows and their challenges, Augmetics is ideally poised take maximum advantage of these advances. I believe our industry is at a significant inflection point, and I am truly excited about what lies ahead. Thank you, everyone. With that, we will now open it up to questions.
spk06: Operator? Thank you.
spk03: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles.
spk06: Our first question comes from the line of Ryan Daniels with William Blair.
spk03: Please go ahead.
spk01: Good afternoon. This is Jared Haas for Ryan. Thanks for taking our questions and congrats on all the momentum that you continue to see in the market. Manny was hoping to unpack the comments that you made around data solutions a little bit further and appreciate the color around some of the inefficiencies with RCM specifically as maybe an area where you can continue to add value for partners. I guess I was just curious, is the idea here that this is something you could theoretically kind of monetize through distinct products, or maybe you could pull data as you get more scale across your partner base and share those insights with others in the future? Or are you thinking of this as more sort of the idea of leveraging data just as another source of enhanced value proposition to drive stickiness and expansion with your current customer base?
spk06: Hey, Jared.
spk05: Right now, as you may know, we're working with Google and HCA to build a data lake. We're actually pretty far along in building a data lake for HCA to actually mine their own data. What I was referring to in my prepared remarks was an extension of that concept where we would productize that capability and allow third parties to get access to that structured data that we're now directly integrating into the data lake for HCA. So the idea here is to develop an ecosystem that relies on our structured data as the input to help them do their jobs a little bit better. And as you probably know, in the area of building and collections in healthcare, it is a fairly archaic and complex situation where there's a great deal of iterations that go on with many of the submissions for reimbursement between payer and provider that result in added cost to the system. And we feel that if we could provide good input to those parties that are responsible for that function, then we're removing some of those inefficiencies that are inherent today in the system. We haven't built a business model around it yet, still early days, but the idea is to establish an entire API ecosystem and architecture to enable these third parties to get access to that information.
spk01: Got it. It absolutely makes a lot of sense. Excuse me. And then just one quick follow-up from us, actually. So on the average clinicians and service metric, nice to see that kind of accelerate relative to the prior quarter. Just in terms of the net sort of doctors added, if I take the difference relative to the first quarter, it looks like this was pretty comfortably a high watermark just in terms of the number of docs added to the service. So I'm curious how we should sort of feel or think about, are there any kind of risks operationally in terms of having the staffing and the resources in place to support that level of growth?
spk05: No, we don't envision any kind of constraints supporting that growth or actually growth well beyond that level. In fact, we've been proactive in taking the necessary steps to expand our capacity significantly beyond what you're seeing now. So we keep brushing up against old thresholds that we had established for ourselves, and they keep falling. So I think the steps we've been taking have been working.
spk01: All right. That's great to hear, and congrats again on the momentum.
spk06: I'll hop back in the queue. Thanks, Jared. Thank you.
spk03: Our next question comes from the line of Neil Chatterjee with B Riley Securities. Please go ahead.
spk07: Yeah, good afternoon. Thanks for taking our questions, and congrats on a strong quarter. Maybe just on automatic notes, I mean, you kind of talked about kind of the growing adoption there with the larger customers. Just curious, you know, what you've seen, you know, maybe different this last quarter versus prior, and what's kind of driving that adoption there?
spk06: Sure. Hey, Neil.
spk05: So what was new with respect to notes is that Prior to this quarter, and actually it started happening sometime during the first quarter, we had been precluded from selling to some of our major, our biggest customers because we had to go through new data security and compliance requirements given the nature of that particular product. And that took some time because we had to negotiate those new contracts with those entities. And there's, you know, the standard bureaucracy that goes along with all of that. But we managed to get through most of them. And that's unlocked our ability to sell that particular product into those organizations. And that's what you see now. We're seeing the fruits of that effort as some of those enterprise customers are seeing that, you know, one-size-fits-all is not the right necessarily solution for them, and having the ability to pick and choose what best suits their particular physicians is the right way to go.
spk06: Got it. Got it.
spk07: Thanks for that, Tyler. Maybe one follow-up here, just kind of flipping to Augmedics Go, just kind of curious on the you know, the feedback that you're getting on the ambulatory care setting side and I guess how you see that evolving upon launch?
spk05: Sure. So we're getting feedback all the time every day from the physicians who are testing it right now. And we're incorporating the feedback into the design and development of that particular product. It's still on track to be released commercially this year. So we feel very confident about that. All we're doing right now is really making it better and better based on the feedback we're getting. So, like I said, we feel very good about our ability to release this commercially this year.
spk07: I mean, maybe just, you know, any nuance there as far as, you know, versus the acute care setting and kind of the progress with HCA, just, you know, on the ambulatory care side?
spk05: Well, okay. We do anticipate... commercially releasing ambulatory version of GO before the acute version, acute care setting version of GO. It's not going to be a big gap, but, you know, maybe a few weeks, maybe a month or so. But there will be a staggered release between the two versions of GO.
spk06: Got it. Thanks. I'll hop back into you. Sure.
spk03: Thank you. Our next question comes from the line of Brooks O'Neill with Lake Street Capital Markets. Please go ahead.
spk02: Good afternoon, everyone. This is Aaron Walkmer on the line for Brooks. Congrats on the print. So just curious, sort of the reaction that you guys have been getting from other customers and potential products as a result of your relationship with HCI?
spk06: Hey, Aaron. Sorry. Can you repeat that? You broke up a little bit.
spk02: Sure. Apologies. I'm just curious about the reaction that you've been seeing from other customers and potential prospects as a result of the relationship with HCA.
spk05: Well, as you would suspect, it's been pretty positive. The HCA partnership just adds another level of credibility to the company and our approach to how we go about incorporating generative AI into our technology stack. So, as far as the people who are making the purchasing decisions at these big enterprises, they are aware of it and they applaud it. And, you know, we're just at this point, they're waiting to see how the release goes for Go. And then we're poised to sell to those organizations.
spk09: I think the only, Aaron, the only thing I would add is that the launch of Go was a fully tech solution has really probably elevated the conversations we have with most of our existing customers and probably brought us into the higher level with potentially new customers. So it's been having that on the roadmap that's coming out in the back half of the year has been really good for our overall conversations with clients.
spk02: Sure, yeah, okay, very helpful. And then just a quick follow-up. How do you feel about the resources you have to advance your technology and products? And do you feel that you'll need more resources to compete effectively with maybe Google, Amazon, or really any other player in your market?
spk05: Well, we're not really competing with Google. They're our partner. Amazon's recent announcement about their partnership with 3M and Modal is an interesting one. We haven't really seen anything in the market yet from them, but we don't take that lightly, that announcement. So we feel like we're on solid ground here based on our positioning, our product portfolio, the strategy we have in place to compete pretty much against anybody. And the testament to that, of course, is the traction we're getting with some of the biggest enterprises in the U.S., So we feel, like I said, we feel pretty good about where we are in the marketplace today. Aaron, it's Paul Ginocchio.
spk09: I'll just add that we do, you know, we did guide to growth, cost growth up Q1Q, and we continue to make growth investments and investing for the, you know, we keep growing nicely, and so we're investing to continue to be able to grow at that rate, if not better, and to obviously continue to build out the product set. So You're going to continue to see us add costs, but certainly not at the level that gross profit grows at.
spk02: Sure. Sure. Okay.
spk06: Very helpful. Thanks for taking the questions, guys. Sure. Thank you, Aaron.
spk03: Thank you. Our next question comes from the line of Alan Klee with Maxim Group LLC. Please go ahead.
spk08: Good afternoon. Could you talk a little about – the AI Advisory Council that you set up of kind of what you're thinking about some directions that could go into?
spk05: Hey, Alan. Great question. So when we started using generative AI, large language models, last year, well over a year ago, we realized that, you know, they weren't a panacea. There's all sorts of issues that cropped up from their use in our particular use case. And we felt that we're going to eventually need to get some guidance on how we apply that technology in a responsible and flexible manner for our customers. So we started putting together this AI council a couple of months ago. It's pretty much set. We'll make an announcement about the composition of that council shortly. But the idea is to collect perspectives from different areas of healthcare and from academia, the technology side, to learn about the latest developments, number one. And number two, figure out what some of the challenges are before they hit us to make sure that we reflect those in how we develop, design our products. So it's just us being proactive in terms of how to properly use this technology, and we feel really good about the people that we've been able to attract to join this council.
spk06: That's great. Thank you. You bet. Thank you.
spk03: As there are no further questions, I would now hand the conference over to Manny Craxis, Chief Executive Officer, for closing comments.
spk05: Thank you, Operator. Well, I just want to thank everybody for jumping on this call. We're very pleased with the second quarter's results, building up, building on the momentum we shared with you over the last several quarters. Our goal remains to become cash flow positive by the end of next year. And in so doing, we will also maintain our leadership position in the industry, catering to the very needs of big healthcare enterprises, because we recognize that one size fits all is not the right approach.
spk06: So thank you very much, and we'll keep you updated on our progress. Thank you. Thank you. The conference of Augmedics, Inc.
spk03: has now concluded. Thank you for your participation. You may now disconnect your lines.
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