Semler Scientific, Inc.
Q4 2020 Earnings Call Transcript

Published: 1 Mar 2021

[Operator:]

Good afternoon, and welcome to the Semler Scientific’s Fourth Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. Before we begin, Semler Scientific would like to remind you 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 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. These risks include continued uncertainty due to the evolving COVID-19 pandemic, risks associated with our recent investments and entities of potential complementary products and other new distribution arrangement along with other risks associated with Semler Scientific’s business.

[Doug Murphy-Chutorian:]

Good afternoon, everybody. Thank you for joining us today for our fourth quarter and year-end results call. I’d like to introduce you to Dennis Rosenberg, our Chief Marketing Officer, who will begin for us today. Dennis?

[Dennis Rosenberg:]

Thanks, Doug. We always like to begin our calls with a reminder about Semler’s strategy. Semler 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 are pleased to report that the company’s financial performance during the fourth quarter of 2020 based on revenue and pretax net income was the best quarter in our company’s history. We also had the best year in terms of revenue and pretax net income in our company’s history. Comparing results from the fourth quarter of 2020 to the fourth quarter of 2019, the highlights of today’s report are as follows. Revenues were higher by 32% increasing to $12.1 million. Pretax net income was higher by 117% increasing to $6.5 million. Net income was higher by 93% increasing to $5.4 million and cash increased to $22.1 million at quarter end. During the quarter, we saw increased orders and usage for our QuantaFlo product from our current insurance company customers and from our home-risk assessment customers. We also received orders from new customers. Now, Andy Weinstein, our Senior Vice President of Finance and Accounting will describe our financial performance in more detail, including a comparison of our financial performance for the full year 2020. Andy?

[Andy Weinstein:]

Thanks, Dennis. Please refer to the financial results described in the press release that was distributed at market close today. For the year of 2020, compared to 2019, annual revenues were $38.6 million, an increase of $5.8 million or 18% compared to $32.8 million.

[Dennis Rosenberg:]

At year-end 2020, headcount was 86 employees, compared to 77 at the end of third quarter 2020. we continue to operate as close to normal as possible, notwithstanding the COVID-19 pandemic. We’ve been a virtual company for more than 10 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. There is also no plan to raise additional capital at this time. we reserve the right to change our financing plans as opportunity or need arises. During Q4, we continued our Investor Relations activities by participating in virtual investor conferences, hosted by B. Riley FBR, Colliers Securities, H.C. Wainwright, and Lake street securities. During 2021, we will continue to participate in virtual conferences and virtual non-deal road shows.

[Operator:]

Thank you. And the first question will come from Kyle Bauser with Colliers Securities. Please go ahead.

[Kyle Bauser:]

Great, thanks. Hi, everyone. Another incredible quarter, thanks for all the updates here. So maybe, on the fixed fee side of things, sales to your largest clients stepped up significantly, maybe in part, since they paused some of the new installations throughout the year and are fully back online. Was the strength in this bucket from pent-up demand? Or could we see other outsized quarters like this?

[Doug Murphy-Chutorian:]

This is both for existing investors and customers and also, new categories. We saw a record of growth in these areas. Andy, could you answer this more? Andy?

[Andy Weinstein:]

No. I agree with both of you. I think there was some pent-up demand and we did see increases from our current customers plus we did add a decent amount of additional new customers. So, I think that the increase had to do with actually both.

[Kyle Bauser:]

Got it. Thank you. And on the variable fee side of things, we saw a massive step up and back of the envelope math if we look at equipment sales of 500,000 in the quarter would imply another nearly 1,700 new placements made in the quarter to the HRA channel, so that the strength doesn’t seem to be slowing down – and am I thinking about this correctly? And have you seen any new seasonality in this part of the business?

[Doug Murphy-Chutorian:]

Yes. I think – yes, please go ahead.

[Andy Weinstein:]

Yes. I mean, I would agree with you and it is a little cyclical when the hardware sales come in based on how many new installations our customers have. So, when we do see a lot of installations in the fourth quarter, that’s good news to us, meaning that, there are going to be new installations with our customers. So, at back of the envelope, thinking that does make some sense.

[Doug Murphy-Chutorian:]

Yes. we don’t specify the numbers, but you have your own. but if you have things differently like…

[Kyle Bauser:]

Right. Yes. I’m just assuming kind of $300 for the QuantaFlo to the HRA clients. Got it. And then lastly, if I may, I know you said in the past that you expect other companies to come into the PAD diagnostic space given how massive this market is and under-developed it is, have you seen any new entrance into the PAD diagnostic space pop onto your radar?

[Doug Murphy-Chutorian:]

Dennis?

[Dennis Rosenberg:]

No, Kyle as you point out and as we’ve indicated in the past that predominantly PAD testing is traditionally done with blood pressure-cuffs, Doppler machines done in the vascular lab. And there are many companies that market this type of product; we are seeing a new entrance into the market with digital devices that seek to provide fast results that may be used outside of the specialized vascular lab. Today, we believe these companies have had minor effects on our market. And also, as you point out given the potential size of the PAD market, we do expect competitors to enter this space.

[Kyle Bauser:]

Okay, understood. Thanks for all the updates and congratulations on a great year.

[Dennis Rosenberg:]

Thanks, Kyle.

[Doug Murphy-Chutorian:]

Thanks, Kyle.

[Operator:]

And the next question will be from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

[Brooks O'Neil:]

Yes. Good afternoon, guys. I just want to follow up on Kyle’s – one of the Kyle’s questions, obviously, the variable fee business growth rate was elevated this quarter. I’m curious if you can help us to think about how much of a COVID impact there was a pent-up demand from Q2, Q3 that got unlocked in Q4, or whether you think a $4.5 million revenue run rate from Q4 in that business is the new kind of baseline revenue run rate for that business. What can you tell us?

[Doug Murphy-Chutorian:]

Okay. Dennis, can you comment what do we dig it on that?

[Dennis Rosenberg:]

Sure. So, as we know – and hi Brooks, how are you?

[Brooks O'Neil:]

Fine. Thanks, Dennis.

[Dennis Rosenberg:]

as we know, 2020 was an extraordinary year, as far as COVID and in relation to our business, the flexibility that the HRA approach gives our large insurance companies was very beneficial for 2020, in that their ability to move quickly in testing either patients that – where their tests had been postponed, where offices were closed down for a period of time, et cetera. So, we are seeing good growth in this market. We expect to see continued growth in the market, as far as what the rate is. We’re just going to have to see how much of an effect COVID really was in 2020 compared to 2021.

[Brooks O'Neil:]

Absolutely, I get that. So, you continue to deliver extraordinary results on the cost of revenue line. And I’m curious when we should expect that line to go to zero?

[Doug Murphy-Chutorian:]

never, but that’s kind of nice to see these numbers.

[Brooks O'Neil:]

Absolutely, it’s fantastic, it’s incredible. I’m curious, I know you don’t want to talk a lot about the new business, but should we assume since you converted the note from your – the convertible note from one of your new relationships and sold the equity security that you’re no longer interested in that company product opportunity, or is that just a financing situation and sort of a cash use?

[Doug Murphy-Chutorian:]

Yes. I think, the comment is, we turned it further to the notes and to first shares. And so the proposal there is and the – but we retained about a certain amount of the investment that we make otherwise. So, we have still as of an interest. So that was a matter of cleaning with the way to the Investment Act of 1940, to be able to do some more things. Then, they say it gets into technical discos, but we sold to interested third-party, who’s – has a big shareholder in December. So, we have – we made a little bit of money, but we still basically, in a shareholder, who’s aligned with our interests.

[Brooks O'Neil:]

Okay. That makes sense. I totally understand that. When you think about the $1.2 million of the inventory you have for the other new products, can you give us any sense for how quickly you might be able to turn that into revenue? And I mean, any details on any of the three new products or the diabetes related or anything you can tell us would be great.

[Doug Murphy-Chutorian:]

Dennis, can you comment please?

[Dennis Rosenberg:]

Sure, sure. Yes. we are moving ahead with our planning in relation to these products and very specifically, in terms of the one product that we have purchased the inventory and have the distribution agreement with. And as we’ve indicated before, we’re looking carefully at which market segments we want to enter with this. we’re looking at all of the related strategies in terms of pricing, in terms of reimbursement, et cetera, et cetera. So that we don’t feel a pressure to move super quickly on that, we want to make sure the ducks are in a row and that we do it the right way. So that continues to be our thinking in relation to that product.

[Brooks O'Neil:]

Yes. Okay. Let me just ask one or two more. I’m curious if you feel the $7 million from the fixed price software business. It’s kind of a good base up to think of for growth for 2021.

[Doug Murphy-Chutorian:]

Exactly. We think that we’re – this business is continuing, and we have older clients and new clients, who are coming to the – to use our products. So, we’re quite interested. Andy, can you say anything about it?

[Andy Weinstein:]

No, I agree with you there totally. I mean, we do have these – our existing clients are growing and we’re adding on new clients every month. So, I agree with him, not much to add to that.

[Brooks O'Neil:]

Okay, great. And then just lastly obviously, the cash continues to build, and I know you’re investing in new products and growing your employment dates, et cetera, but are you thinking we’re going to turn similar into a bank or what are you going to do with the money?

[Doug Murphy-Chutorian:]

Well, the point is we’re spending the money on products and projects that are and seeing our future growth. So, we tend to do the same thing in the future, maybe, squeeze the expenses, for example, R&D, you will tend to assume that we’re going to be increased. but if we think about it, is there – we would like to treat about 8% to 10% R&D budget, but we’ve been going so fast. We can’t able to do it. So, we would like to get this up in future, because we want to do more things, but we don’t want to lose focus on the main product. So, the main product that got a lot of lags to it. So we – of course, then we do what we have to do to support the minor product and to make improvements in the main product.

[Brooks O'Neil:]

Makes sense, Doug. thank you very much for those comments and congratulations on terrific results.

[Doug Murphy-Chutorian:]

Thank you.

[Operator:]

The next question will be from Aman Gulani with B. Riley. Please go ahead.

[Aman Gulani:]

Hey, guys. thanks for taking my question, and congratulations on another great quarter here. So, I mean, it appears that a lot of the large Medicare advantage, providers are really pushing for in-home care with either new investments or expanding their existing HRA business. But given the material push on that front, do you think that could mute some of the seasonality that you typically, do see in the first quarter of the year?

[Doug Murphy-Chutorian:]

It is possible. We are too much into – with the first of the year, so we can’t comment, I’d tell you the things that we don’t want to disclose yet. So, we’ll find out in April or what you take aback when we do the next call.

[Aman Gulani:]

Okay, thanks. And what is your growth expectation for the fixed fee business given the ramp in HRA side of the business?

[Doug Murphy-Chutorian:]

I think that Dennis, can you take that? We had – in the last quarter, we reported about 40% of the business was licenses that are variable for price. but now, it’s a comment value of what you think as you can be in the future. Please, Dennis.

[Dennis Rosenberg:]

So, I think that again, we refer back to 2020 as an extraordinary year in terms of the flexibility that the insurance companies needed in getting the patients tested. So, it’s hard to look at the numbers in 2020 and read too much into that in terms of whether what the future holds for the mix between these two types of licenses. For us, we’re happy with either type of business. They’re both very high margin businesses for us and we just want to get as many people, who fall into the criteria to be tested as possible, whether that’s home or whether that’s fixed fee. The combination, I think, gives us a lot of leverage in the market to be getting everyone tested, who needs to get tested. We just have to see what COVID brings for this year and kind of what the trends are looking back at 2020 to see what the real indicators work.

[Aman Gulani:]

Got it. Okay. And then outside of your recent investments, can you comment on any internal – internally developed initiatives that you’re working on that could compliment QuantaFlo, any comments on the time to market for some of those internally developed products?

[Doug Murphy-Chutorian:]

We’ve been very quiet about that, because we don’t feel in a rush to do it, but we’ve been making moves and you see some of the things that we reported, not by us, but they reported that private that has been made. So, I think – I have to say to you that we liked what we’re doing, but it’s not completed yet. And when it’s done material will be the first to know, and I think we have a good feeling about it, but I don’t want to say more than that. Dennis, can you comment on that?

[Dennis Rosenberg:]

It’s the same approach that we’re taking with the outside products in that we want to make sure everything is done, right. We are in a fortunate position of having a stellar main product with a lot of growth left to go. So, we don’t feel pressure on these products. We don’t want to drag our feet obviously, but we want to make sure that all the ducks are in a row and that we do it right.

[Aman Gulani:]

Got it. Okay. And last question for me. Can you talk about your recent hiring activity? Like what are some of the new hires focused on? Well maybe, mostly, on your new products or largely focused on expanding QuantaFlo.

[Doug Murphy-Chutorian:]

All the above. We’ve made several hires supporting the new products, but most of the hires support QuantaFlo, we made some R&D hires as the world, as the operation to hires, as well as expanded to sales team. So, we continue to do this and reasons we do it is that management is entirely confident about the next year to be a bigger one. So, we want to get the infrastructure in place to have to be prepared for the growth that we’re going to see in 2021.

[Aman Gulani:]

Great. Thank you. Congratulations on the quarter, guys. I’ll pass it on.

[Doug Murphy-Chutorian:]

Thank you.

[Operator:]

The next question will come from Madison Woodward with Avalon Advisors. Please go ahead.

[Madison Woodward:]

Hi, thanks for taking my call. I was just wondering if you could elaborate a little bit on the sale of the preferred securities and to the related party and just clarify that a little bit and what’s going on there.

[Doug Murphy-Chutorian:]

Okay. It’s going to be disclosed in the 10-K that is soon to be released. So, I don’t think it’s appropriate to get into the details, but the thinking is that we sold it to someone, who’s also a shareholder of the main company. So, he’s got a certain line of interest to do it, and we didn’t sell it to him at what we bought it for. We sell it to for a little bit more. So, it was – the thinking is if you refer to an investment of Act of 1940, we have a limit to what we can invest in any company it’s a minority investment. So, we want to make many other little bets and we want to take on more distribution to the products that we have invested in. So that is – we should make the investment. But we don’t want to get into anything that hurts our earnings. But that being said, if these companies are successful, we are – maybe, take them to buy them eventually. It isn’t that a big thing is that we have. But first of all, we want to take smaller steps and to get some more distribution rights and get a better product mix that we had before. Dennis, can you say anything about this?

[Dennis Rosenberg:]

Yes. I think that the key point of what Doug is saying there is the idea of placing small bets on things that look good to us that we can expand in the future as their performance or potential increases in our eyes. And that’s really what this is all about is expanding on our relationships with our customers, our leveraged distribution model, in which future products are going to fit into that the best.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Dennis Rosenberg for any closing remarks.

[Dennis Rosenberg:]

Thank you for joining us today, and we look forward to updating you soon on our continued progress. And that ends our call today. Thank you.

[Operator:]

And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.