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spk08: Augmedics, Inc. 2023 Third Quarter 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, Mr. Chesler. You may begin.
spk09: Thank you, Operator. Joining me today are Manny Karkaris, Chief Executive Officer of Augmetics, and Paul Gianocchio, Chief Financial Officer. This afternoon, we released financial results for the quarter ended September 30, 2023. We posted a copy of the press release and an investor presentation on our website at Augmetics.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. They are based upon our current estimates and various assumptions and involve risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factors and management's discussion and analysis in our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission and similar disclosures in subsequent reports filed with the SEC. Also, during our call today, we will discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You'll find additional information regarding these financial measures and the reconciliation to gap measures in today's press release. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 6, 2023. We disclaim any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information future events, or otherwise. And with that, I'll turn the call over to Manny.
spk05: Thank you, Matt.
spk07: The third quarter marked another period of strong progress for Augmedics as we continue to be a leader in the large and rapidly growing market for ambient medical documentation. Increased adoption of live and notes drove 50% revenue growth, net revenue retention of 157%, and a 47% increase in average clinicians and service. We expanded growth margins by 380 basis points to 49.5% and demonstrated improving operating leverage while we continue to scale our business by building out the foundations of our emerging data and platform strategy. With strong revenue growth and improving profitability, We are on track to achieve our financial goals and are also increasing our full-year revenue guidance for 2023 to $44.5 million. Paul will speak to our financials and outlook shortly. It is clearer than ever that a tremendous opportunity lies in front of us. Healthcare systems are leaning into our solutions to help reduce the burden on their clinicians and enhance operating efficiency. Our current offerings anchored by our synchronous product, Augmetics Live, and our asynchronous product, Augmetics Notes, are experiencing increasing adoption by existing and new enterprise health systems who are deploying it across more than networks and in new specialties, such as behavioral health. Live and Notes are now being joined by Augmetics Go. a clinician-controlled mobile app that uses generative AI to instantaneously create a fully automated draft medical note. Go harnesses proprietary natural language processing models, large language models, and structured data sets with no human intervention by cosmetics. Go represents a highly scalable product that allows us to penetrate the largest segment of the documentation market that has historically been served by legacy dictation services. The last mile in the node creation process for Go is completed by the customer. In exchange, customers benefit from a significant reduction in price relative to our other offerings. Additionally, Go gives us an even wider range of products to address the varying and unique needs of our customers. providing clinicians and health systems the flexibility to optimize their spend and thereby maximize ROI. We are confident that providing choice and maximum flexibility to our customers, rather than a one-size-fits-all approach, is the winning strategy that will appeal to customers and sustain our growth for years to come. During the quarter, we reached a significant milestone with the early access release of Go in late September. Initial interest and feedback have been universally positive, validating our technology and roadmap. Our developers are incorporating some of this feedback to improve the product ahead of its GA release in the coming months. Even in the early access release, initial orders for Go have been brisk. Through our partnership with HCA Healthcare, We are also in advanced stages of developing a version of GO designed specifically for the emergency department and its nonlinear workflows in challenging ambient environments. HCA is currently testing GO in four hospitals with the intention for a broad rollout across their network once we achieve certain agreed upon metrics. We are very encouraged by our collaboration with HCA and the progress we are making and look forward to rolling it out across their network and entries in GO for the ER to other Augmedics customers. As we pursue the massive market for ambient medical documentation, we also see great opportunity for Augmedics to serve a healthcare ecosystem that extends beyond documenting the patient encounter. The same health systems that we serve with documentation products are increasingly looking to leverage our structured data for insights and our bi-directional communication channel to deliver vital information that can effectuate change at the point of care. We believe we are ideally suited to serve as the conduit for such data and information. As it pertains to HCA, we are working to enable them to mine the structured data that we amass to improve their overall business, both upstream and downstream from the patient encounter. Heeding our structured data into their data lake has the potential to drive unprecedented benefits for revenue management enhance population health analyses, and ultimately deliver better patient outcomes. Another way we are looking to create greater value is through our open network platform strategy that we recently announced, starting with a strategic partnership with three innovative digital health companies, Mindshift, Ellipsis Health, and the Sullivan Group. These forward-thinking partners and our health system customers realize that our bidirectional communication channel at the point of care has the potential to make their solutions even more valuable and more effective. Through a single platform that efficiently delivers content to the point of care, customers can enjoy the benefits of several key partners to maximize their use and impact. Take the Sullivan Group as an example, one of the industry leaders in patient safety and medical error reduction. Our teams are already working closely to integrate their industry-standard clinical decision support protocols for ER physicians into our platform. By making sure clinicians have the right information at the right time, using real-time prompts from our ambient tools, this capability has the potential to improve patient outcome and reduce costly errors. We believe the value of our structured data and our ability to time and deliver critical information to the point of care will benefit other large healthcare organizations beyond HCA. Finally, I'd like to underscore the importance of generative AI to our offering and our commitment to utilizing the technology in a thoughtful and responsible manner. Generative AI supports our lives, notes, and especially our Go products. During the quarter, we hosted our inaugural AI Advisory Council meeting. This group includes distinguished academics, governance experts, and customers, and is already providing invaluable insights and guidance as we advance the development and use of generative AI in Augmetics solutions. Our AI Council recognizes the unique and delicate balance Augmetics has forged between technology and humans within our particular field. generative AI in its current state does a good job of summarizing a transcript of a patient encounter. However, comprehensive and accurate medical documentation requires historical patient data, physician preferences, structured data sets, and independently derived models that serve as guardrails to supplement it. And for more complex encounters, it may be necessary to provide the higher levels of service inherent in our live and note offerings. We believe this portfolio of solutions, all of which utilize the best generative AI can offer, will be a winning formula in the burgeoning medical documentation market. At the same time, regulatory requirements and our customers demand compliance with rigorous data security standards. Augmedics recently achieved certified status by the HITRUST Alliance for Information Security. HITRUST has championed programs that safeguard sensitive information and manage information risk for global organizations across all industries and throughout the third-party supply chain. This prestigious certification validates Augmedics' commitment to safeguard sensitive patient information data. With that, I'll now turn the call over to Paul Ginocchio, our Chief Financial Officer, then we'll return with closing comments. Paul?
spk09: Thank you, Manny. Let's review the quarter's financial highlights. Revenue for the three months ended September 30, 2023, was $11.8 million, a 50% increase from the $7.9 million in the same period a year ago. Growth was driven by growing adoption of live and notes by existing customers. Dollar-based net revenue retention rate for the third quarter was 157% for our health enterprise customers, compared to 130% in the third quarter of 2022, 148% in the second quarter of 2023. Net revenue retention measures 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, and excludes revenue from any new logos that were added during the previous 12 months. Acceleration of NLR was driven primarily by expansions at a handful of our largest health system customers. Our NLR results put us at best-in-class levels for SAS companies. Average clinicians in service for the third quarter rose 47% as compared to the third quarter of 2022 and compared to a 48% year-on-year growth rate in the second quarter of 2023. We define a clinician in service as an individual doctor, nurse practitioner, or other healthcare professional using either our live or note service. Going forward, it will also include users of Go. 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 third quarter of 2023 was 49.8% as compared to 45.9% in the corresponding prior year period and compares to 47.2% in the second quarter of 2023. This nearly 400 basis point improvement year-on-year in gross margin percentage was mainly driven by our growing scale and efficiency and our strategic initiative to shift U.S. service clinicians to outside the U.S., which continues. Gross profit growth was 62% year-on-year. Total operating expenses for the third quarter of 2023 were $10.2 million, up only 2% sequentially from the second quarter of 2023. Non-GAAP operating expenses, which exclude stock-based compensation and one-time items, grew 12% year-on-year. Our gross profit growth, outpacing PopEx growth, resulted in more than a half-million-dollar reduction in our operating losses quarter-on-quarter and over a $1 million reduction year-on-year. Adjusted EBITDA, which we calculated by adding back depreciation, amortization, taxes, interest, one-time items, and stock-based compensation to net loss, was a loss of $3.1 million in the third quarter of 2023, compared to a loss of $4.5 million in the third quarter of 2022. Along with this improvement in adjusted EBITDA loss was a year-on-year improvement in our adjusted EBITDA margin, from negative 57% in the year-ago quarter to negative 26% in this most recent quarter. Cash flow from operating activities was an outflow of $2.3 million in the third quarter compared to an outflow of $3.5 million last year. At September 30, 2023, we had $22.3 million of cash, cash equivalents and restricted cash, as compared to $22.0 million as of December 31, 2022. During the quarter, we qualified for a six-month extension of our interest-only period on a $20 million term loan facility with SEB as we exceeded certain financial hurdles within the agreement. The interest-only period now extends through July 2024. In terms of share count, we have nearly 41 million common shares outstanding currently. In our weighted average share count for EPS, we show 45.5 million common shares outstanding, as we include the 4.375 million pre-funded warrants that are fully vested and in the money. Assuming all the warrants outstanding are net exercised and all our employee options and SARs that are vested in the money are net exercised, we have approximately 50 million shares outstanding. Overall, the third quarter marked another strong period of revenue growth and improving profitability. Now moving on to guidance. The positive momentum that we have demonstrated during the year is continuing. We now expect revenue to be approximately $44.5 million for the full year of 2023. With one quarter to go in the year, this implies approximately $12.3 million of revenue for the fourth quarter of 2023. We expect gap gross margins to be similar to third quarter 2023 gap gross margins. We expect operating expenses to be up 7% to 8% quarter-on-quarter due to the hires we have made and will make to accommodate our accelerating growth. A number of investors have asked us about GO's contribution to our revenue growth. We anticipate GO revenue to be modest during the first half of 2024. We're only one month into the early access release of GO, so our visibility is going to sharpen as we reach general availability and commercially launch GO for the ER. At this point, I would like to turn the call back to Manny for closing comments.
spk07: Thank you, Paul. We remain committed to playing an essential role in unburdening clinicians and improving the operation efficiency of healthcare organizations. We are building out our product portfolio and working hard to establish Augmedics as an effective information and data delivery platform into the point of care. This unique positioning will help ensure we continue our rapid growth well into the future. I have never been more excited about the opportunities in front of Augmedics and want to thank our team and our customers for helping us deliver another quarter of strong financial results. Thank you very much.
spk05: With that, we will now open it up to questions. Operator?
spk08: Thank you. We will now be conducting a question and answer session. If you would 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 would like to remove your questions 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. The first question comes from the line of Jared Haas. But William, please go ahead.
spk02: Yeah. Hey, guys. Jared Haas here for Ryan Daniels. Thanks for taking our questions. And congrats again on another solid quarter. Manny, you talked a little bit about the HCA partnership to develop a Go product for the EV. And I'm curious, I think you mentioned there are a couple of kind of KPIs that you're tracking that you need to hit before that. you know, gets, becomes more available in that system, are you able to provide a little bit more color just, you know, what those metrics are and how close you are to achieving them? I mean, should we think about that potential expansion as a 2024 event or longer term? And then just as a related question here, I think you've spoken to this in the past, but can you just remind us, you know, when you do have an ED version of Go, are there any sort of exclusivity related to HTA that would prevent you from being able to sell that into other systems?
spk07: Thanks. Great question. So with respect to the first one, we really aren't at liberty to discuss that at the request of HCA, what those metrics are. But you can assume that they're going to be ones that are objective, measurable, and impactful. And we feel very confident, as does HCA, by the way, that we will be able to attain those metrics. And we have some... historical empirical data by which to gauge our confidence. And that is a pilot program I ran at a dignity hospital a couple of years ago in Southern California, where we were able to achieve the kinds of results that HCA is looking for.
spk05: Okay. And the second question. Oh, yeah, go ahead.
spk09: I was just going to say on the second one, there are The agreement with HCA, they're going to get it first, but there are no certain exclusivities that we have to deal with. We are allowed to sell to other ER systems or ER hospitals.
spk05: Okay. Yeah, it's not an exclusive deal. Correct.
spk02: Understood. Thank you for that. And then just one follow-up from us. It's nice to see the updated foliar guidance here. If I look at the implied revenue number for Q4, it does suggest a slower Q&Q sequential growth rate relative to what you've experienced in prior year or fourth quarters. Paul, I'm curious if you could just touch on any nuances we should think about from a seasonality perspective or maybe a timing perspective that we might be missing there, because obviously it's With the net revenue retention, it seems like the momentum and bookings and those sort of forward-looking metrics seem to be very strong. So just curious if there's any kind of nuances we should read into that Q&Q growth rate for the fourth quarter. Thanks.
spk09: Sure, Jared. Good question. So historically, the fourth quarter has seasonally been a little bit slower in terms of bookings, go-lives, and some of our adopters take longer extended breaks, and we give them credits for those. extended break. So you didn't really see it last year. We had some exceptionally big orders, you know, in the fourth quarter coming into the fourth quarter. So you just, you know, you're going to see a more normal seasonal quarter this quarter than we have. What's typical?
spk05: Okay, perfect. That makes sense. Thanks for the color and I'll hop back in the queue. Thank you.
spk08: Next question comes from the line of Neil Chatterjee with B Riley Securities. Please go ahead.
spk05: Hey, guys.
spk04: Good afternoon. Thanks for taking our questions. I mean, maybe just sticking with Archimedics Go, I mean, I realize that the HCA rollout is initially with the emergency rooms, so maybe just how should we think about kind of the rollout beyond the emergency rooms in terms of, you know, what type of utilization we would see?
spk05: Hey, Neil. I'm Manny.
spk07: You broke up a little bit, but I think your question is, do we anticipate or envision a deployment of Go beyond the emergency room?
spk05: Was that the question?
spk04: Yeah, or what that would look like, at least with the HC rollout.
spk07: Well, we're actually going to be releasing or GA-ing the ambulatory version of GO before the emergency department version of GO. And that's in response to demand we've received for that particular version of GO from other enterprises. We also anticipate that when it comes to HCA, that HCA will want to deploy the product beyond the emergency department. We've already been told that, that there's interest in expanding the HCA
spk05: the areas where within HCA that they believe Go could benefit the organization. Great.
spk04: And then maybe just on the kind of the open network strategy in terms of those relationships with the digital health companies leveraging APIs. I mean, on that, how should we think about, you know, potential impact from that, you know, on the top line at 24 and beyond?
spk07: Yeah. Personally, I don't think we're going to provide much guidance on the revenue impact of those partnerships. Right now, I think about those as strategic relationships that we're really going to strengthen our positioning in the marketplace. Enterprises are going to look to us for more than just a medical note. They are going to look to us as a means of making changes upstream and downstream to their operations that is beneficial to them. We are ideally suited to do that just based on our bi-direction communication channel to the point of care. And these three partnerships are leveraging that capability. We're really excited about that. We have built into our agreement with one of these companies already a a revenue adder, if you will, for including their particular products in our platform. But I don't anticipate that to be material.
spk05: We have not factored into our projections for 24. Great. Thanks for that. I'll hop back in the queue.
spk08: Thank you. Next question comes from the line of Aaron Clay, But Maxim, please go ahead.
spk03: Hi, good afternoon. Could you, for Augmetics Go, help us understand how the go-to-market sales process works? Like, for example, with HCA, are you making the sale or is HCA involved in that? And with, you know, other parties that you're trying to sell to?
spk07: Hey, Alan. Manny here. Good question. So with HCA, the way it's going to work is they're going to bring us the hospitals that they want us to deploy in. That's how the first four worked. We didn't go out to seek them. They brought them to us. They put in all of the processes necessary to deploy within those particular hospitals from the ground floor all the way up to the senior management levels within those particular hospitals. So the same process will apply to the other hospitals that we deploy in. With respect to other organizations, it really depends on how they're structured. Some are highly centralized, like HCA, in which case a similar process would likely be followed. For the more decentralized organizations, I would suspect that it would be more like a license to hunt that we would enter into, and we would have to use our team our CSM team in particular, to go in and secure interest within those particular business units of those decentralized organizations. And if you recall, part of what Paul mentioned was our net revenue retention rate. It's 157% this last quarter. So we generate most of our revenue from those enterprises. and I would anticipate that that would remain the case going forward.
spk03: That's great.
spk05: Thank you very much. Thank you.
spk08: Next question comes from the line of Aaron Vukmir with Lake Street Capital Markets. Please go ahead.
spk01: Hey, good afternoon, guys. This is Aaron on the line for Brooks. Again, congrats on the great quarter. I guess to start, I'd love to hear your assessment on the competitive environment. You know, have you been seeing anything new, especially from Microsoft and Nuance? And do you sort of expect any significant new competition to enter your markets in the near future? I guess, especially in relation to the ER with Go, since that's been the topic of discussion here. Thanks.
spk07: Hey, good question. Yes. Obviously, the market is very, very large. and it's starting to grow quite rapidly, and so those conditions would conspire to stimulate competition and new entrants coming into the market, and we're seeing that today. With respect to Nuance, I think it's Microsoft, and it's a huge company, and they're very aggressive, but one thing to note about every company that we've encountered in the market, they are focused on the medical note itself, the flat file that is the outcome of the note creation process, their note creation processes. We do much more than that. Not only do we deliver a medical note, this flat file, but we deliver traditional databases of structured data that is mineable so that our customers can perform the kinds of analytics they need to to better their operations. That is not something that our competitors do today. They may try to do that down the road. I don't know. But we also have the advantage of having this bidirectional communication channel that we spoke of, which is central to our long-term strategic vision, as well as the broadest portfolio of products. We have a synchronous product and we have asynchronous products in both the ambulatory and acute care areas. and our products are fungible for our customers. So there's a lot of things that we do differently from competition that I think sets us up really well going forward.
spk09: Aaron, I'd just add to that, that, you know, that we're also high trust compliant and have seven of the top 20 health systems. So we really like our, our position. We feel like we're, you know, we're already a strong leader in the, in the space. So everything that all those competitive advantage that man just talked about just, make us feel very comfortable, not resting on our laurels, but very comfortable with where we are currently.
spk01: Great. Yeah, that's super helpful. Thanks for that. And I guess a quick follow-up. You know, you might have mentioned this a little bit in your prepared remarks, but I'm just curious on how the interest from either the existing clients or prospect has sort of changed since you announced the HGA project.
spk07: Good question. So, since we announced the partnership with HCA, we've received several inbound inquiries. This started right away from some high-level executives from some major healthcare enterprises. I think, if I'm going to speculate here, that the partnership announcement served as validation that Augmetics can deliver on these complex problems. And We've been fielding those inquiries since the announcement. It has definitely helped, for sure.
spk01: Awesome. Thank you so much.
spk05: Again, congrats on the great quarter. Thanks, Aaron.
spk08: Thank you. Next question comes from the line of Bill Sutherland with the Benchmark Company. Please go ahead.
spk10: Thank you. Hey, guys. Hey, Paul. One or two for you. The The move up in gross margin quarter on quarter was pretty impressive. Was the main factor there just more resources moving offshore or was it a mix with notes?
spk09: Good question, Bill. Thanks. Yeah, we've been really pleased with the gross margin development over the last few quarters. A lot of the hard work the operations team has been doing to, you know, continue to gain efficiencies is starting to pay off. Obviously, we are being helped by this shift in revenue from servicing some clinicians onshore to offshore. That gives us a nice lift. There's still more to come. Not that much more, but there is more to come, so we're excited about that. And I think, you know, just we're getting notes is becoming more efficient with all the AI and automation we're adding to that product and with the product growing larger. And we continue to gain scale and efficiencies, our overall delivery of Augmetics Live. So it's a number of factors. A good factor is the U.S. to O.U.S., but there's more to it than that.
spk10: Okay. That's helpful. I noted that revenue per average clinician was up year over year. And I thought the mix of notes was going to be a little bit of a weight on that number. Can you give us just color on that move this quarter?
spk09: Sure. We've had a handful of clients who've historically been really pleased and happy with Automatic Slide, which is obviously great when some of your biggest clients love your premium product. They've made some significant investments over the last year in that product. We've worked with them to use notes to penetrate deeply. They're still going deeper with live. And so we just had a little bit of a positive mix shift from notes to live in this quarter.
spk07: I think also our proof for notes went up.
spk05: And I think that was also a contributing factor. Good. That's good to hear. Okay.
spk10: And you guys are kind of happy with the direction of operating cash flow as well in the quarter?
spk09: Yeah, we're making good progress there. We had a little collections in the second quarter that came through in the third. I think we're making good progress on keeping cost control tight and collections. We're doing some additional work on collections. We're trying to reduce our DSOs. So all of that, I think, is you're starting to see good progress on collections. change in cash.
spk05: Good. Okay, guys. Nice quarter. Thanks so much. Thanks, Bill. Thanks, Bill.
spk08: Thank you. Next question comes from the line of Pat Walravens with GMP. Please go ahead.
spk06: Oh, great. Thank you.
spk09: uh paul starting with you i mean obviously you guys haven't guided for 2024 but are there any points that you would want investors to keep in mind as we think about next year hey pat uh thanks for joining hey um yeah you know we continue to you know i think if you look at our longer term plan and our long-term guidance we talk about revenue growth in the 30 to 45 range and you know continued improvement in gross margins and we would expect you know, 2024 to fall within that sort of those large parameters. We've talked about, you know, continuing to reduce, reduce cash burn also.
spk06: All right, great. And Manny, you got a lot going on. What are sort of the one or two most important things for you to make sure that, uh, get done over the next 12 months?
spk07: Well, first, uh, first of all, our business is to GA go, um, for both the ambulatory and ER departments. And that is coming up soon. And then to continue to iterate and improve the product to make sure that we satisfy as many customers as possible with that product. And then after that, once you get go, you're talking about, we're looking at adding features to our product suite and then leveraging the open platform that we've been talking about making sure that those partnerships materialize and that they start generating some impact with our customers. So we're really excited about that. That's going to be really central to our long-term strategic positioning in the market.
spk05: Great. Thank you both. Thanks, Pat. Thank you.
spk08: This concludes today's question and answer session. I would now like to turn the floor over to Manny Krakaris for closing comments.
spk05: Thank you, Operator.
spk07: So thank you, everybody, for listening in. We look forward to getting back together to discuss fourth quarter results with you. We're really excited, as I mentioned in my closing comments, about what lies ahead for Augmetics, and hopefully you'll stay tuned.
spk05: Talk to you soon. Thank you. Thank you.
spk08: This concludes today's study conference. You may disconnect your lines at this time. Thank you for your participation.
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