Semler Scientific Inc (NASDAQ:SMLR)
Q2 2016 Earnings Conference Call
July 29, 2016 11:00 AM ET
Douglas Murphy-Chutorian - Chief Executive Officer
Brian Marckx - Zacks Investment Research
Marc Robins - Catalyst Research
Good day, ladies and gentlemen, and welcome to the Semler Scientific Second Quarter 2016 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded.
Before we begin, Semler 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, estimate or words with similar meaning, and such statements involve a number of risks and uncertainties that could cause Semler Scientific’s actual results to differ materially from those discussed here.
Please note that these forward-looking statements reflect Semler Scientific’s opinions only as of date of this presentation and it undertakes no obligation to revise or publicly release the result of any revision to these forward-looking statements in light of the 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 in these forward-looking statements.
Now, may I introduce Doug Murphy-Chutorian, CEO of Semler Scientific. Please go ahead.
Thank you, operator. Good morning and thank you all for joining the Semler’s earnings call. Semler Scientific is an emerging growth company that seeks to improve the clinical effectiveness of both healthcare insurers and physician groups. Our mission is to develop, manufacture and market innovative products and services that assist our customers to evaluate and treat chronic diseases. We believe that our technology solutions give our customers preventative care options to intervene before events like heart attacks or strokes occur.
Now, from a financial perspective, our goal is to reach profitability and continue revenue expansion. The first step in that process was to control operating expense. In the first-half of 2016 compared to the corresponding period of 2015, operating expenses, including cost of revenue decreased by about 7%.
The second step for the company to achieve its profitability goal is to enhance revenue growth of its high margin vascular testing products. In the first-half of 2016 compared to the corresponding 2015 period, revenue grew about 25%. It’s expected that we will close the gap between revenue and expenses based on our growth in our cardiovascular business, which employs a recurring revenue model.
QuantaFlo, our latest vascular testing product sells at a higher price than its predecessor product. The gap between expenses and revenue is closed by transitioning current customers to QuantaFlo. We’re in the process of migrating these established customers to the QuantaFlo platform at higher prices, while at the same time adding in new customers and orders for QuantaFlo.
Our WellChec service, which includes cardiovascular and other disease testing is also intended to contribute to revenue growth. And as we previously discussed, we did not plan for any significant WellChec activity in the first-half of 2016. We are intending to provide such services in the fourth quarter of 2016. Based on current operations and assuming we can maintain our operating expenses at their current levels, we do not anticipate needing to raise additional funds prior to becoming cash flow positive from operations.
Now, please refer to the financial results that are described in our earnings press release, which is distributed this morning. Some highlights and additional details for the six months ended June 30, 2016, compared to the corresponding period of 2015 are as follows. Revenue was $3.1 million, an increase of $631,000, or 25%. The growth was due to increasing recurring revenue from our licensing model for vascular testing products.
Operating expenses, which includes cost of revenue were $4.9 million, a decrease of $235,000. Cost of revenue increased 89% due to the retirement of the remaining depreciation on units that were returned to replace with a higher priced QuantaFlo units, also depreciating a larger installed base, and we add more headcount in operations.
Engineering and product development expense decreased by 37%. Sales and marketing expense decreased by 20%, and G&A expense increased by 5%. Net loss was $1.97 million, or $0.38 per share, a decrease of 27% compared to a net loss of $2.7 million, or $0.56 per share in the previous year. Weighted average number of shares was $5.1 million compared to $4.9 million.
As of June 30, 2016, compared to the balance sheet of December 31, 2015, Semler had cash of $1,022,000, an increase of $617,000 compared to $405,000. In summary, QuantaFlo revenue is growing, expenses are better controlled, and we’re progressing towards our goal of profitability.
As of August 8, we expect that our shareholders equity will be below the level necessary to remain listed at NASDAQ market. So it’s our expectation that NASDAQ will move to delist our common stock, and we will be quoted on the OTC QB market. The Board has decided this move is in the best interest of Semler shareholders rather than doing a dilutive financing at current stock prices to raise shareholders equity to meet the minimum to be continued listed on NASDAQ buyback deadline.
Now, the business, we market our products and services predominantly to health insurance plans to improve healthcare in terms of cost and access. We believe that patients with chronic disease need earlier diagnosis and preventive care to improve their healthcare and to control costs. Our products and services provide objective, well-organized documentation and information to our clients.
With this information in hand, care management programs might be designed for patients to lower their risks and keep them out of hospital. In addition, payments can be received by our clients to compensate them for these risks and costs. Our entry point into the market is to create proprietary patented solutions that are intended to substantially improve information gathered. Our products are designed to be faster, more practical to use, more accurate, less expensive, and require less expensive personnel or a combination of these attributes.
Our primary sales focus is to expand our base of established clients, especially among health insurance plans. These contracts have long lead times, but we expect them to have a high return. We have concentrated our efforts on approaching health insurance companies rather than physicians, because we prefer the larger scale despite the longer sales cycle. We continue to expand our presence among the top 25 health insurance plans, and those 25 plans control 80% of the Medicare Advantage market, very concentrated.
QuantaFlo, our next-generation vascular system was launched in the third quarter of 2015. We’ve had outstanding feedback on its performance. It has enhanced data tracking capabilities, better clinical performance, more comprehensive results, and its expanded marketing labeling.
These features have attracted some of our original product users to migrate to this higher priced platform, and we continue to ship customers over to QuantaFlo from our predecessor product. And as a reminder, our typical business model is recurring revenue license or fees per test, and we’re building on that base of business and increasing revenue.
In 2016, revenue from QuantaFlo is expected to continue to grow on a quarterly basis due to increasing number of installations, higher average pricing, and the business model of recurring revenue.
In 2015, we made significant investments to create and conduct WellChec business. We believe the value proposition of WellChec is attractive and we know how to deliver the service with substantial client and patient satisfaction. We planned to limit WellChec business until later in the year, at which time, we expect to see increased revenue and contributions to profit, as long as we can keep our expenses in line, although at a lower margin in our QuantaFlo business.
Because we do not give financial guidance, the magnitude of these changes in progress, towards such an operating plan will be reported during the quarterly earnings releases. The list of goals we’ve accomplished during the first-half, number one, we continued to increase customer acceptance of our next-generation vascular testing product called QuantaFlo.
Number two, we added to our growing list of large insurance plan customers; and number three, we completed debt financing in the first-half of 2016. We believe Semler is well-positioned in the healthcare market, because we deliver cost-effective wellness solutions for the care of patients with chronic diseases, and we provide economics that work for the providers, the facilities, the insurance plans, as well as the government and the patient.
So to conclude, we are on track to achieve profitability and substantial revenue growth. And I thank you for your interest in the company and your continuing support. And, operator, you may now open the line for questions.
Thank you. [Operator Instructions] And our first question comes from Brian Marckx of Zacks Investment. Your line is now open.
Hi, good morning, Doug.
I think Q1 there was an offset right, with WellChec revenues, so the vascular testing revenue was about $1.66 million, roughly. So that would imply essentially flat growth sequentially from Q1 to Q2. Is that kind of indicative of stagnate growth in that business, or is there reasons to be optimistic that the growth will pickup here in the near-term?
So we – I recall them with curiosity. In the first quarter, predominately a lot of the growth happened earlier in the quarter. While in the second quarter, a lot of our growth in units went out in late June, just because of contracts that we’re signing with these large insurance plans and they have a little bit of lumpiness to them.
So in other words, there’s a lot of growth in the second quarter that appears in the third quarter, because it was on the partial time periods and not much revenue gets accounted. So, indeed, we did experience very, very nice unit growth. I did not report that growth in the earnings release in terms of numbers of units. But there were substantial unit growth in the second quarter, and if anything is obviously appeals like it’s picking up speed.
Okay. So more of a time in setting than anything?
Yes, very much kind of unusual that so much got shipped out in late June, but it happens sometime.
Okay. And so in terms of the revenue growth in the vascular business, is it mostly attributable to the migration from FlowChec to QuantaFlo, and additional customers coming on, or is there also a utilization component that the customers are using machine more often as well?
I think that the predominant growth that we’re seeing are new units that are coming in and we’re adding on new insurance plan. So very happy about that. Of course, when new insurance, these large plans come on, they usually take small amounts relative to their size in the beginning. So that’s one very exciting thing that we are adding on insurance plans.
The second thing is that are – we’ll say our largest, most established customers have pretty much deciding, yes, they want to make the migration over. I can’t put a number on that, we’re going to migration a 100% of their units or more. But even our largest customers, in addition to migrating or adding in new machines.
So we actually see growth in all aspects of the question you asked, both new coming in, establish – migrating over. On a percentage basis, I don’t have that in my fingertips, but I think, because the migration is an increase from an existing contract to us – higher price contract, while the new contract obviously is all new revenue. I think the waiting is a little bit higher on new units coming in than it is on the migration at this point.
Okay. Do you have a sense of how much of the legacy FlowChec installed-base has migrated so far?
I would think that probably less than 15% is migrated.
So, typically speaking our product sales as we disclosed before approximately €6,000 or more €6,600, so that’s the pricing with the QuantaFlo product, while FlowChecs were at various times, at different prices as we increased it, but substantially lower. So a migration adds 50%, 60% to an existing contract in terms of pricing, while a new contract obviously start substantially more. So, new contract was about 3, 3.5 times in terms of revenue as a migration. So, as such, that’s the reason that multiplies why new units are increasing our revenue more than migration, but they both contribute.
Okay. In terms of WellChec, I think on the Q1 call, you would expect that WellChec to come back online in Q3 and it sounds like it’s pushed out to Q4. Can you just kind of talk about what’s behind the slight over there?
Yes, we had anticipated that we could start it early as the third quarter. And I think what we see here is a final negotiations and setting up. There’s been a lot number. We could be limiting, this really essentially to one customer this year, one large customer. And there’s been a lot of information back and forth and logistics worked so far on it, however, until we’re actually doing tests for which we are going to gather revenue.
We think that might slip like October 1, okay, of course when I say that there’s a – no guarantee that we believe – if we believe that the logistics associated WellChec were not going to produce profits for it then obviously wouldn’t even start on WellChec. So we’re kind of excited by it. We’re ready to get going and to be conservative rather than predicting, it happens in September. I’m just saying fourth quarter just to give us another month or so, 30 days or so, in case there’s a little bit of slippage.
Okay, in terms of the contracts, you said one customer, one large customer that you expect to work with. Is – so for the contracts whether that customer that may come online here. Is that something that you’re working through now or some of that I guess more finalized? And then you’re just working through the details in terms of getting the program setup?
One customer – we had a profitable contract with last year. We anticipate same pricing and everything else that we’re doing. But the scope of which is going to be larger. Therefore for example, if we worked in two states before we might be working five, or six, or seven states now. So we were defining that scope as you remember the way this worked is. The customer sent to us a list of the patient that they would like to have tested. We then identify those people schedule them into either home visit and/or event visits.
We then take our testing service by hiring outside and those practices to medical aid, and they go in with our suitcase of test, if you will and perform an extensive WellChec examination, second executive physical [ph]. All that information gets set into our computer systems that we have setup that really organizes the information well and ensures A, that there is proper coding i.e., that the insurance company did pay. And number two, ensures that the primary care physician get the full report on what has transpired, so that they can take the next step to care management.
So in essence having that scope define, who do you want and where it is, kind of define for us just when we start and how we did organize. So we put a lot of work into this so far. And I’m just building a little bit of slippage if listed delayed or hiring is slower or something like that.
We will probably achieve 30% of the list that were given. So if were given 20,000, 30,000, 40,000 names you can assume what we get. And each typically pricing last year was about $1,200 or $1,300 per patient that we saw, so most of that we expect everything to be about the same that we saw in the fourth quarter from this client.
Our total fourth quarter WellChec was about $1.4 million I believe. So we would think that if that contract occurs, if everything goes according to plan here, we should have a substantial WellChec revenue in the fourth quarter, bigger than what we had in the fourth quarter of last year, and that’s basically the detail.
But the reason for us concentrating, just taking on one client and doing it right, because that client so large that that’s how we did and WellChec would be very successful. But number two is really to prove to ourselves that we have the logistics down that we can document it and also to have a referenced account.
We have many of other clients who can ensure about WellChec, this year we’re just holding back a little and doing it. Second piece, as you see that we have a – we’ve been able to keep steady in our capital, in our cash position. But we would love to show that we’re profitable that our revenues are increasing and that we’re in a position to with those profits we deploy and maintain the business to do more WellChec and/or some more cardiovascular.
So this is just the timing play. We’re – I don’t say binding our time. We’re working very hard to get to the profitability. So we get the stock price up and so we can then move to the next level of revenue growth we hope is a faster revenue growth I mean even have to take.
So where will you have to start the program to be able to – want to finish it to book the – you mentioned the customer in Q4 of last year did 1.4. So to say it was 1.5 for just arguments to say. How soon would you have to start in Q4 to be able to recognize all of that revenue in Q4? So would you need to start October 1 for you to be able to do that?
Yes, yes, you can anticipate that in October 1 start with that kind of program, maybe a little earlier, maybe a little later. But we are well organized in terms of we know who is going to do the work for us. We believe we have – as I said the equipment and the technology ready to go. We’ve been doing a lot of work to set this up. The goal is just to do it in a very organized way.
Last year, we rushed to get WellChec done, because the orders came in and we wanted to satisfy them. This year we want to take the time to set it up before them. To ensure that is the profitable operation. And the goal last year was to show that we can do it and get great revenue driven growth and our return on investments for the customers. This year we really want to make sure that not only do they have that that they’re patients is satisfied. But we’re making a reasonable profit on the business, okay.
So that’s the – [indiscernible] not guarantee what we’re going to do, because things do happen in the timeframe. But we’re feeling pretty confident that we positioned ourselves well, we understand what we’re doing and it’s going to be substantially bigger than what we did last year.
Great, sounds good. Thanks, Doug.
Thank you. And our next question comes from Marc Robins of Catalyst Research. Your line is now open.
Thank you. My questions have been answered.
Thank you. And I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Murphy Chutorian for any further remarks.
All right, thank you, operator. Thank you all for joining us today. I look forward to updating you soon on our continued progress. We think this is a – obviously a major point in the history of the company as we make this next move. We’re very confident that we can make a move to cash flow positive and the profitability. We have not given guidance, but we do really appreciate your support during this time period. We hope we can deliver success for all of you. Thanks again for the call. We look forward to speaking with you next quarter. Take care.
Ladies and gentlemen, thank you for participating in today’s conference. This does concludes the program and you may all disconnect. Have a great day everyone.
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