Semler Scientific, Inc.

Q4 2021 Earnings Conference Call

2/28/2022

spk04: Good afternoon, and welcome to the Semler Scientific Fourth Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Before we begin, Semer Scientific would like to remind you that this conference call may contain forward-looking statements. Such statements can be identified by words such as may, will, expect, anticipate, intend, estimate, or words with similar meanings. And such statements involve a number of risks and uncertainties that could cause Semer Scientific's actual results to differ materially from those discussed here. These risks include continued uncertainty due to the ongoing COVID-19 pandemic, risks associated with Semler Scientific's new distribution arrangement, along with other risks associated with Semler Scientific business. Please note that these forward-looking statements reflect Semler Scientific's opinions only as of the date of this presentation, and it undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Please refer to Semler Scientific's SEC filings for a more detailed description of the risk factors that may affect Semler Scientific's results and these forward-looking statements. During the call, Semler Scientific will also discuss certain non-GAAP financial measures, which illustrate the effects of inventory write-down in the fourth quarter on its cost of revenues, earnings per share, basic and diluted, and adjusted income as a percentage of revenues. These non-GAAP financial measures were not prepared in accordance with GAAP and should be considered in addition to and not in lieu of GAAP financial measures. Summer Scientific's press release, which is also available on the Investor Relations section of its website, includes, reconciles the adjustments. Now I'd like to introduce Doug Murphy, Tutorian, CEO of Summer Scientific.
spk01: Good afternoon, everyone. Thank you for joining us for the our fourth quarter and year-end results call. I'd like to introduce to you Janice Rosenberg, who is our chief marketing officer, who will begin for us today. Janice?
spk00: Thanks, Doug. We always like to begin our calls with a reminder about Semmler's strategy. Semmler is a company that provides technology solutions to improve the clinical effectiveness and efficiency of healthcare providers. Our mission is to develop, manufacture, and market innovative products that assist our customers in evaluating and treating chronic diseases. We believe that our technology and software solutions enable our customers to identify when preventive care options are appropriate, and to intervene before events like heart attacks and strokes occur. We're pleased to report that the company's financial performance during 2021, based on revenue and net income, was the best in our company's history. Comparing results for the year-ended December 31, 2021, to the corresponding period of 2020, the highlights of today's report are as follows. Revenues were higher by 37%, increasing to $53 million. Net income was higher by 23%, increasing to $17.2 million. Cash at the end of the year was $37.3 million, increasing by $15.2 million. Now, Andy Weinstein, our Senior Vice President of Finance and Accounting, will describe our financial performance in more detail. Andy?
spk02: Thanks, Dennis. Please refer to the financial results described in the press release that was distributed at market close today. For the quarter ended December 31st, 2021, compared to the corresponding period of 2020, revenue was $11.5 million, a decrease of $500,000 or 4% from $12.1 million. Operating expenses, which includes cost of revenue was $9.8 million, an increase of $3.7 million or 62% from $6.1 million. It should be noted that the fourth quarter of 2021 reflects a write-down of 1.2 million of inventory due to our termination of a distribution agreement. Excluding this write-down as a percentage of revenues, adjusted cost of revenues was unchanged at 8%. Net income was $1.5 million, a decrease of $3.5 million, or 72% from $5.4 million. Net income per share was 22 cents per basic share and 18 cents per diluted share, which compares to 81 cents per basic share and 66 cents per diluted share during the same period last year. Please note that excluding the inventory write-down of the $1.2 million, which accounted for 18 cents per basic share before taxes and 15 cents per diluted share before taxes, net income was 40 cents per basic share and 33 cents per diluted share. And as a percentage of revenues, adjusted net income was 23%. For the quarter ended December 31st, 2021, basic share count was 6,757,821 shares and the diluted share count was 8,148,048 shares. Analyzing the expense categories and earnings in the fourth quarter of 2021 as a percentage of quarterly revenue, cost of revenue was 19% of quarterly revenue. Excluding the write-down of the $1.2 million in inventory as a percentage of revenues, adjusted cost of revenues was unchanged at 8%. Engineering and product development expense was 10% of quarterly revenue. Sales and marketing expense was 35%. General and administrative expenses was 22%. And net income was 13% of quarterly revenue. For the year of 2021 compared to 2020, annual revenue was $53 million, which was an increase of $14.4 million, or 37%, compared to $38.6 million. Operating expenses, which includes cost of revenue, were $33.6 million, an increase of $11 million, or 48%, compared to $22.6 million. The primary reasons for this change were due to increased expenses associated with our expanding business, such as increased personnel costs as headcount increased to 124 from 86, and inventory charges such as the $1.2 million right down in the fourth quarter of 2021 due to our termination of the distribution agreement. Pre-tax net income was $19.5 million, an increase of $3 million or 18% compared to $16.5 million. Net income of $17.2 million was an increase of $3.2 million or 23% compared to $14 million. Net income was $2.56 per basic share and $2.12 per diluted share compared to $2.13 per basic share and $1.74 per diluted share. Excluding the inventory write-down of the $1.2 million, which accounted for $0.18 per basic share before taxes and $0.15 per diluted share before taxes, adjusted net income was $2.74 per basic share and $2.27 per diluted share. As a percentage of revenues, adjusted net income was 35%. In 2021, earnings per share was calculated using a basic share count of 6,731,693 shares, and a diluted share count was 8,138,608 shares. Analyzing the expense categories and earnings in 2021 as a percentage of annual revenue, cost of revenue is 12% of annual revenue. Excluding the rate down of the 1.2 million in inventory due to our termination of the previously discussed distribution agreement, as a percentage of revenues, adjusted cost of revenues was unchanged at 9%. Engineering and product development expense was 7% of annual revenue. Sales and marketing expense was 27%. General and administrative expense was 17% of annual revenue. and net income was 32% of annual revenue. As of December 31st, 2021, Semler had cash of $37.3 million, which represents an increase of $15.2 million compared to $22.1 million as of December 31st, 2020. Our stockholders' equity is $45.6 million as of December 31st, 2021. We expect to file our annual report on Form 10-K on or around March 4th of 2022, which will include our cash flow statement and more discussion of our cash and liquidity. In 2021, our largest customers comprised 40.8 and 28.6% respectively of annual revenues and 48.6 and 21.7% of fourth quarter revenues. In 2021 compared to 2020, revenues from fixed-price software license fee arrangements were approximately $30.5 million, an increase of $4.8 million, or 19%. Variable fee software license revenues were approximately $21.5 million, an increase of $9.9 million, or 85%. And equipment and other sales were $1 million, a decrease of $300,000, or 24%. In the fourth quarter of 2021, compared to the corresponding period of 2020, fixed-fees software license revenues were approximately $7.9 million, an increase of $.9 million, or 13%. Variable-fees software license revenues were approximately $3.5 million, a decrease of $1 million, or 23%. And equipment and other sales were $100,000, which is a decrease of $400,000, or 74%. In 2020, due to the effects of the COVID-19 pandemic, variable fee license revenues had decreased sharply in the first half of 2020 and rebounded strongly in the second half of 2020. The inverse happened in 2021 as the first half saw increased testing volume by our variable fee license customers compared to the second half of 2021. This fact makes quarterly comparisons in 2021 to the corresponding period of 2020 less meaningful in our opinion. We believe that a new pattern in the home testing market, as evidenced by the higher volume of testing seen earlier in the year with fee per test revenue, is due to a COVID-19 related timing change in the behavior of insurance plans when ordering Quantiflow testing from our health risk assessment customers. Notably, in January of 2022, compared to December of 2021, fixed fee monthly license revenues increased by approximately 1%, while variable fee license software revenue increased by approximately 87%. Comparing January 2022 to 2021, fixed fee monthly license revenues increased by approximately 13%. while variable fee software license revenues increased by approximately 6%. All numbers for January 2022 are preliminary and unaudited. Although we do not provide formal guidance, we are intent on continuing annual revenue growth, continued profitability, and generating cash during 2022. Now I will ask Dennis to continue the discussion and provide concluding remarks. Dennis?
spk00: At the end of year 2021, headcount was 124 employees compared to 119 at the end of third quarter 2021. We continue to operate as close to normal as possible, notwithstanding the ongoing COVID-19 pandemic and ever-changing rules and regulations. We have been a virtual company for more than 11 years, and we're comfortable with communicating and working out of our homes. Also, we have web-based training in place for our customers and are experienced in using it. As Andy mentioned, in previous years, our variable fee per test revenue was always greater in the second half of the year. We believe the new pattern for variable fee license revenues in 2021 was due to effects of a COVID-19 related timing change in the behavior of insurance plans when ordering Quantiflow testing from our health risk assessment customers. However, we do not know if this newly observed pattern will continue in 2022 or in future years. Our R&D goals are to continue to upgrade the existing product and data services, to commercialize other internally developed services and products, and to in-license or distribute new services and products which we believe can provide enhanced value to our customers. In the fourth quarter, as Andy mentioned, we terminated one of our distribution agreements with a private company. But as previously announced, we began adding customers to a new product that we are distributing, Insulin Insights. Insulin Insights is a software program that a healthcare provider can use to optimize outpatient insulin dosing. We previously made an investment in Melodys Health in October 2020 And in April 2021, we entered into a distribution agreement pursuant to which we prepaid for $2 million of Insulin Insights product licenses. By the end of the fourth quarter, we signed up several customers for this software product, and the service to these customers may begin in the first quarter of 2022. We also made investments in fall 2020 in another private company, now known as Synapse DX, whose product, Discern, is a test for early Alzheimer's disease. Our new initiatives are early and not yet material to our business. However, we believe our current products and services, and any future products or services that we may offer, position us to provide valuable information to our current and growing customer base which in turn permits them to better guide patient care. We also believe that PAD testing has potential to become standard of care. In February 2022, an independently conducted peer-reviewed clinical study was reported that used Quantiflow for the prospective screening for undetected and asymptomatic PAD in a Medicare Advantage population with three-year follow-up. In this study, 13,971 patients were tested, and 31.6% were found to have PAD. In positive PAD patients versus negative patients, there was an increased risk of 60 to 70% for all-cause mortality or morbidity at one year, and a 40 to 50% increased risk of all-cause mortality or morbidity at three years. The authors concluded, that a positive screening result of previously undetected lower extremity PAD was independently associated with short-term and long-term increased risks for mortality and major adverse cardiovascular events, MACE, in individuals age 65 years and older living in a large metropolitan area. Furthermore, they added, a positive PAD screen with Quantiflow has the potential for PAD risk management at the population level. Semler Scientific believes that this study supports the use of Quantiflow and highlights the benefits that the product brings to our customers and the patients they care for. Thus, it may drive further adoption of Quantiflow by existing and new customers. Overall, we believe annual revenue will continue to grow in 2022 because of increased numbers of installations of our product more usage of our product, and recurring revenue from the licensing businesses. Our goals continue to be to make new additions to our customer base, to expand orders from existing customers, introduce additional products to our customers, and to further establish our Quantiflow product as a standard of care in the industry. In 2022, Semler Scientific expects continued profitability and generation of cash from operating activities. Operating expenses are expected to increase from current levels due to wage inflation pressure in the job market and our continuing desire to build infrastructure to support new business opportunities. We believe that the market for vascular disease testing is larger than our current market penetration, so there is room for continued growth. continue to invest in R&D with the goals of providing new products that enhance value to our customers now and in the future. 2021 was a record year for our company in terms of revenues, net income, and cash generation. We are optimistic for the future. Thank you for your interest in the company and your continuing support. Now, operator, please open the lines. Doug, Andy, and I will be happy to address your questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is coming from Brooks O'Neil with Lake Street Capital Markets. You may now go ahead.
spk08: Good afternoon, guys. I have a couple questions. I guess I'll start off by just asking if you can provide any color on why you terminated the distribution arrangement that you highlighted.
spk00: Hey, Brooks, how are you? We felt that our attention was better served to the products that we've highlighted today, and so that's where we're directing our attention.
spk08: Okay, makes sense. And then maybe you highlighted some of the dynamics in January in terms of the business. I'm just curious if you see anything about the fixed fee business that causes you to think that the order pattern may have changed in that business as a result of COVID or other factors.
spk00: We have not seen anything to indicate that as far as the fixed fee license end of the business.
spk08: Okay, great. And then obviously going to be a lot of interest in some of these new products and services. So I'll just take a stab at one. As it relates to the diabetes product, software product, would you – Can you tell us anything about sort of the underlying financial dynamics of that product? Would you expect it to have similar financial characteristics to Quantiflow, or will it be somewhat different?
spk00: I'd say there are some similarities and differences. The similarities being it's also a software product, so ultimately the margins should be in line with software products. The financial benefit to the customer may be slightly different, but we believe there's going to be benefit in terms of cost savings as well as improvements potentially in HEDIS measurements or quality measures, which impact revenue as well.
spk08: Sure. And would you, I know you don't want to talk much about your existing customers, but would it be fair to guess that some of your existing customers have shown interest in the new diabetes software product?
spk00: Yes, they have.
spk08: Okay, cool. And then let me just ask one more. Obviously, the a long-term study on quanta flow testing and the patient population and article you highlighted have you had any chance to get any feedback or reaction from customers do you think that's going to be a driver of more testing more more new customers that type of thing or is it too early to say
spk00: I think it's too early to say, but ultimately this type of support can only be helpful in terms of supporting adoption.
spk08: Great. Okay, that's all I've got. Thanks a lot for taking my questions.
spk05: Thank you.
spk03: Our next question comes from Kyle Bowser with Coilers Securities.
spk04: You may now go ahead.
spk07: Great, thanks Doug, Dennis, and Andy for the updates. Maybe I'll follow up on Brooke's question on some of these new products. So for Insulin Insights, sounds like, you know, the most reasonable launching point would be to your fixed fee business in the office or outpatient setting. Can you talk a little bit about the economics and how they work for the payers? I mean, is there a way to go after another HTC code here? I guess I'm just kind of curious, what do the economics look like from the payer perspective on that?
spk01: Well, the economics are... As Dennis said, the heat is a measurement, as you know. The things that we think that they're interested in the insurance plan business. And the thing is also the cost of savings of treating patients. diabetes and grossing the insulin profitably is most important. So there's also cost savings as well as that. So whoever has a diabetes program for managing their patients should be very interested in what we do because we make it easier for the primary care guy to take care of these people. Fully 90% of the diabetics on insulin are managed by primary care, not insulin. So it's a very important product.
spk07: Okay. Got it. Um, and so I guess just following up on that, um, Is there going to be an opportunity? Do you have an idea of like the cohort of patients you're going to go after in terms of like age group? Is this type one, type two? Are you going to go after Medicare Advantage patients first or is it kind of all the above?
spk01: All of the above, because there may be 7.5 million diabetics that are on insulin in the United States, and they're type 2. So there are quite a lot of people. And probably, likely, the first contracts are charting for it. PM, PM, per member per month. So it's a very exciting opportunity. The margins are like software margins, so keeping with our business model. So we're very pleased with the early showing.
spk07: Okay, got it. And then I just looked briefly at the discern product. Looks like you're kind of going after the other channel with that, the home testing market. Is that a diagnostic that the in-home evaluators can bring with them, or is this more an opportunity for you to send the test directly to the patients that have already done in-home wellness exams? Just kind of curious how you plan to roll that out.
spk01: I think that we are not distributing that product yet, so we have no plans to roll it out soon. But the thing is, it's also a product that will appeal to the primary care practitioners because it's 90% of the patients patients with Alzheimer's go to see primary care and get managed by primary care as opposed to a low-risk. So it's a very important part of it. It's very accurate. And we'll put a landing page to get to their site on our site so you can see for yourself what the they're doing. So I think we will not talk more about it than that.
spk07: Okay, got it. And then just lastly, and I'll jump back in queue, appreciate the color on January volumes and kind of what you're seeing now that you've kind of relisted to NASDAQ. I'm just kind of curious if you've thought about eventually putting out formal kind of full year guidance. Any thoughts there? We appreciate it. Thank you.
spk01: We've thought about it. I think we decided on this approach because it gave you an idea of what January was compared to last month. Of course, we wanted to say that seasonality is real this year. And it looks like we had a huge increase from December to January in our visits for fee protection. So it's probably following the same pattern, but we can't be sure.
spk05: Okay, understood. Thanks so much, Jim Bagge and Q. Thank you, Kyle.
spk03: Our next question comes from Mark Weisenberger with B-Riley Securities.
spk04: You may now go ahead.
spk06: Thank you. Good afternoon. Just going back to the seasonal dynamics you talked about, is that across all of your variable fee customers, or is that primarily just with your largest variable fee customer? Dennis?
spk00: It is primarily with our largest variable fee. But, you know, it's, of course, early data, just one month. So it's a broad indicator, but I don't think we can make too many assumptions about other customers or what the rest of the year, let alone first quarter, is going to bring.
spk06: Got it. Okay. And then for some context, I know you're comparing January to December, but is it appropriate to think that maybe that's a difficult or kind of an apples to oranges comparison because December has the holidays and things? So I'm just wondering, how much does December actually represent in terms of kind of variable fee revenue in the quarter? Andy?
spk02: Yeah, I mean, that is a good question. That's also why we compare to January to January. But look, you know, there's people to travel in December. There's less business days. So, you know, each year, although we haven't seen it drastically dip, but the fact of the matter is there are less days that people would probably be getting tested in December.
spk06: Right. So how much does that represent in terms of the quarterly variable fee revenue?
spk02: It's hard to say. Like I said, it's not like December usually falls off that large, but you can make the assumption that there are less days in December doing testing. So it's hard to say exactly what percentage it is.
spk01: In previous years, we didn't see a fall off in the fourth quarter compared to the first quarter. So this is the first year we saw it. So it's new to us, so we don't have any trends to report because it didn't happen before. Got it.
spk06: Your largest variable fee customer publicly announced a contract extension with what's believed to be your largest fixed fee customer. Can you shed some light on that dynamic and does that potentially push or could that push the variable fee growth rate in excess of what was seen in 2020, which was about 30% year over year?
spk01: I think that We have to reserve comments about our customers, but I think we are encouraged by that, but we don't speak for them. So you have to listen to their earnings calls and make your judgment accordingly.
spk06: Got it, okay. Moving on, can you provide insight into the percentage of patients that had Quantiflow tests in 2021 relative to the prior year? And how does that compare to kind of previous years? Meaning if someone was tested in 2020, did 80% of those people get retested in 2021? And kind of how did that compare to prior years?
spk01: We don't give out numbers for testing numbers. But we try to hit them, and it's growing every year. I could say that last year was a fantastic year in terms of quantity of tests done, but we don't quantify it more than that.
spk06: Has the entrance of new or the development of newer Medicare Advantage payors directly resulted in new customer wins and And what's your expectation for kind of the Medicare Advantage member churn impacting your business in 2022? Dennis, can you comment?
spk00: Well, we continue to see growth within the current customers as well as with new customers. So as you know, Medicare Advantage overall is generally picking up steam. And there's movement from one company to another. Different companies are focusing in different ways. But we're feeling that between our ability to test in office through fixed fee, test at home through the HRA partners, we're going to be able to get to a continuingly larger number of Medicare Advantage patients no matter which program they're under. So to us, the growth of Medicare Advantage in general is a good thing. And we're able to get to an increasing number of them annually.
spk06: Okay. Could you talk about net revenue retention at all and maybe stratify that kind of across your, let's say, top five customers and then maybe how that looks beyond that?
spk01: Okay. Dennis, can you comment about the churn we're seeing or not seeing? And maybe Andy can make a comment as well.
spk00: You know, as we talked about in the past, we do not see churn in any significant numbers. And if we see programs where a small percentage of the machines are not being used, it usually has to do with consolidation on the customer's part or you know, individual practices shutting, but we are not seeing where people are starting PAD testing programs and then saying, no, this is not making sense for us. We're going to end that. I think highlighting, as we have in this call, this new publication that's coming out, that's out, large study of 13,000 plus patients is only going to continue to reinforce the the importance of doing PAD testing early as we are with Quantiflow.
spk06: Okay, helpful. And then just the final one from me. In the release, you noted that operating expenses are going to increase. In terms of the growth rate, X cost of product sales, OpEx averaged a new kind of growth rate of 34% from 2017 through 2019 versus 42% in 2021. Where should we think about the growth rate for OpEx X cost of product sales landing in 2022?
spk01: I think it's a matter of what the revenue goes. For example, you heard Dennis talk about this earlier. new article that is maybe going to be important to the adoption of new customers. So I will send it accordingly. We spent a lot of money increasing in preparation for this paper. So I think we have a good figure that's going to increase. We hope it's going to increase because we're only going to increase it if we need the people to get the work done. Andy, that's it.
spk06: Okay. If you could, if Andy would expand upon that, that would be great. That's it for me. Thank you. Yeah, Andy.
spk02: Yeah, I mean, what we mentioned in the call is there is a little bit of pressure with salaries going up. And I agree with Doug that if we hire more people, that's a good thing because that means we're having the revenue and new customers to support it.
spk04: That concludes our question and answer session. I'd like to turn the comments back over to Dennis Rosenberg for any closing remarks.
spk00: Thank you for joining us today. We look forward to updating you soon on our continued progress. And that ends the call.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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.

-

-