Feb 6, 2015
Executives
Doug Murphy-Chutorian - CEO
Analysts
Brian Marckx - Zacks Small Cap Research Yi Chen - Aegis Capital Research Unidentified Analyst -
Operator
Good day ladies and gentlemen and welcome to the Semler Scientific Fourth Quarter 2014 Financial Results Conference 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, this 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 may be identified by the words such as may, will, expect, anticipate, estimate or words with similar meanings. 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 opinion only as of the 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 new information or future events. Please refer to Semler Scientific’s SEC filings for a more detailed description of these risk factors that may affect its results.
Now may I introduce Doug Murphy-Chutorian, CEO of Semler Scientific.
Doug Murphy-Chutorian
Thank you, operator and thank you all for joining Semler’s year-end earnings call. The fourth quarter of 2014 was the first million dollar plus revenue quarter for Semler.
Sequential quarterly revenue growth was 18% which represents the first double-digit quarter of the year. These results are particularly satisfying, they provide evidence that the marketing emphasis that we embarked upon at the beginning of the year appears to be gaining traction.
That plan was to approach large insurance payers with Medicare Advantage patients as the key market opportunity. The highlights of the year-end financials are described in our press release this morning and I’ll just mention a few.
For the year-end December 31, 2014 compared to the corresponding period of 2013, revenue was 3,635,000 an increase of 1,361,000 or 60% year-over-year growth. We believe that revenue growth is predominantly due to our sales and marketing efforts which added new customers through an established customer base and added more units to orders from existing clients that we won in both directions.
As many of you know, we have a recurring revenue model and have consistently been achieving month to month growth in revenue. Now the cost of revenue was 692,000 an increase of 220,000 or 48%.
While we see that revenue is increasing at a faster rate than cost of revenue which means that we continue to improve and expand our margins on a yearly basis. Total operating expenses which includes cost of revenue was 7,976,000, an increase of 3,578,000 or 81%.
Engineering and product development expense and general and administration expense increased for the first three quarters of the year but both decreased by 20% in the fourth quarter. Sales and marketing expense grew throughout the year primarily due to higher salary expense associated with the larger sales and marketing effort and more activities in sales and marketing.
Overall, operating expenses decreased by 1.4% in the fourth quarter of 2014 compared to the previous quarter, the third quarter of 2014. Net loss was 4,515,000 or $1.10 per share, an increase of 2,282,000 compared to a net loss of 2,233,000 or $2.84 per share in the previous year.
Weighted average number of shares was 4,105,754 for the 12 months ended December 31, 2014. And an increase of 3,398,004 compared to 786,750 for the 12 months ended December 31, 2013.
Cash and restricted cash was 6,256,000 which includes 2.1 million of restricted cash and that is an increase of 5,522,000 from the previous year. As we had discussed, our primary focus during 2014 has been to expand our base of established clients who our insurance plans with Medicare Advantage patients.
Now to reiterate, these contracts have long lead times but we expect them to have a high return. We concentrated our efforts on these contracts and insurance companies rather than physician contracts which are smaller but have a quicker sales cycle.
And this strategy resulted in an accelerating year-over-year revenue growth curve through 2014. In the fourth quarter, our largest customer increased the size of their orders presumably as they realize the benefits of December products in generating good medicine and more compensation for their services.
Semler’s in the risk assessment industry. That risk is being assessed to help the patients.
The parties interested in this information, our insurance plans and physicians who care for their patients. The information on a patients risk, guides, management, and care it is also important for insurance plan to physicians to have this information as risk assessment affects their compensation.
So currently the risk assessment industry is comprised of companies that do retrospective assessment of patient’s medical records to accurately code for their risks. What companies that do perspective risk assessment by conducting examinations and tests on the patients.
In the broader sense diagnostic testing or wellness examinations instead of annual physicals, they are all risk assessment services. Now Semler’s entry into this market is to create proprietary patented solutions that substantially improve risk assessment because Semler’s products are intended to be faster, more practical to use, more accurate, less expensive or require less expensive personnel or a combination of these attributes.
For using proprietary solutions is the way into risk assessment market, Semler plans to add product and service offerings to a menu of solutions towards growing base of established customers. So we start with our first product and then add on additional products into it once we’ve established a base throughout the country of footprint in the plans that are important.
Now the value to the customer of the Semler solutions is tied to their economic importance in terms of generating revenue or reducing cost. The Semler team is expert at understanding the disease process, care management, and the evolving regulations regarding payments to insurance plans and physicians.
So Semler utilizes this expertise to create solutions that maximize return to its customer from the use of its products and services. Now here is how we do it.
We identify a clinical need, for example vascular disease in leg arteries. It's undiagnosed in approximately 75% of cases which is about 12 million Americans.
The sequela of vascular disease is very expensive for the government. Heart attacks, strokes, hospitalizations so finding vascular disease earlier may lead to preventative management that improves patient lives and reduces healthcare cost.
So Semler created a fast to pragmatic accurate alternative called FloChec which is used by the primary care physician office rather than by specialists and its operated by a medical aide rather than a vascular technician, all of this decreasing cost and making it practical. So we shift the point of diagnosis to the family practitioner or the general internist and shift the reimbursement dollars as well.
The specialist benefits from increased referrals but also from more accurate referrals from these people so they are happy as well. So we believe insurance payers are the lynchpin to the current U.S.
healthcare market, that’s why we target them as our customers. Trying to see the importance of progress among largest payers one needs to be aware of the pattern of concentration of Medicare Advantage Life.
The top 15 payers in the country account for more than 70% of the entire 16 million patients of Medicare Advantage market, a market that is growing. So establishing a footprint in that market means gaining contracts with the largest insurance providers in the country.
Our goal is to help physicians evaluate these patients now in order to save medical cost later, early diagnoses leading to more prevention and lower healthcare cost. As the gatekeepers who see patients are more than 250,000 primary care physicians in the United States alone.
We believe that one reason that more than 75% of patients with vascular disease in the leg are undiagnosed is that the old standard methods used to diagnose the disease called PAD or Peripheral Artery Disease are blood pressure cuffs and Doppler systems that are just not practical on the primary care office. So our FloChec product has many advantages to the old standard test for vascular disease.
FloChec is as or more accurate, it takes only four minutes to perform, and can be performed by a medical aide instead of a vascular technologist. The big value driver for a physician is payment from insurance companies.
So of the 80 million patients over 50 years of age with approximately 16 million under Medicare Advantage and another large proportion of diabetics, and many of these patients signing up for healthcare exchanges. So in both of these programs, advantages of healthcare exchanges, plans and physicians may do risk sharing for a fixed yearly rate.
And if that happens they can substantially increase or get higher annual payments if they identify patients with vascular disease who are previously undiagnosed. And FloChec helps to evaluate this population and generates revenue for both the physician and the plan, that’s why we are becoming well accepted.
The Semler sales force is organized to have a small number of extremely talented sales reps who target these large payer accounts. Other members of the sales force are clinical specialists who ensure quality uptick of the FloChec case in the utilization which leads to further business with established clients.
And we have an advisory group of about 10 professionals that reach their contacts with our plan, describe the FloChec advantage program, [audio gap] introductions to the sales team. Finally, we broaden our distribution to physicians with the help of our co marketing partners and that partner is C.R.
Bard and Company, symbol BCR and they have a very well established position in the market for vascular products. Semler does not sell FloChec, rather we license the product to customers on an annual or monthly basis.
Revenue from licenses has recognized on a monthly basis, cost of revenue was amortized over 36 months and consists predominantly of the cost of acquiring our assets for lease. Semler uses contract manufacturing to produce its products sold, we have ample production capacity without the need to make a capital expenditures, and similarly we use contract R&D so we can have larger teams complete product development sooner and then lower our expenditures quickly as there is no fixed overhead or headcount.
As an example, in the fourth quarter you saw 20% reductions in an R&D expenditure compared to the third quarter. So as we have established, FloChec in the marketplace is a standard of care, we intend to offer other products that have similar features of quick, easy, cost effective to the primary care provider and our goal for our products is to be significant revenue generators for both the plan and the primary care physicians.
So to list the goals that we accomplished in 2014; one, we reorganized our board and we brought on an independent thought leading healthcare business professional. Two, we expanded our marketing and sales infrastructures.
Three, we upgraded our current product offering by adding encryption features, cloud storage capability, and enhanced electronic record compatibility. Four, we added other major insurance plans to our growing list of customers.
And five, we decreased operating expenses on a sequential quarter basis in the fourth quarter and continued to improve margins throughout the year. Semler’s position to benefit from the new era of healthcare reform as we deliver cost effective wellness solutions for the care of patients with chronic diseases, we provide economics that work for the providers, the facilities, the insurance plans, the government and the patients, and we assist providers to identify patients with chronic disease initiate preventative measures and receive higher reimbursement for each patient.
Future Semler products intend to expand upon this strategy. So to conclude we have a recurring revenue model, we are seeing month-to-month revenue growth, directionally we stabilized at our decreasing operating expenses, and we hope to continue and improve upon these trends.
So thank you for your interest in the company and joining us, and now if the Operator could open the lines for questions we can take them.
Operator
[Operator Instructions]. Our first question comes from Brian Marckx of Zacks Investment.
Your line is now open.
Brian Marckx
Hey, good morning Doug and congratulations on the quarter, great quarter.
Douglas Murphy-Chutorian
Thank you very much.
Brian Marckx
One or two on the income statement if I could, the gross margin as you mentioned was a great gross margin in Q4. So do you think that that’s sustainable somewhere in the low 80s, 82?
Douglas Murphy-Chutorian
I think what you’re seeing is almost every quarter we improve it by about a percent or so. I don’t have the numbers in front of me but that’s the trend that we’re on and apparently we feel comfortable that, that could be the case.
The underlying margins of the company really approach in the 90% but we do have some employees who oversee contract manufacturing and until that cost is absorbed by increased volume that’s why we’re only now in the low 80s. But we expect the trend to continue and perhaps stabilize, obviously it doesn’t go up forever.
Brian Marckx
Right, okay. So increasing volumes, increasing economies of scale, and then increasing margins, so great.
A - Douglas Murphy-Chutorian I might add just other thing is that we, if you calculate the value of what our product does for insurance plans, they have enhanced position and excellent return on investment, outstanding. And because of that we are also in a position we think that we are providing more value than we are charging at this point in time.
So the other way to improve margins of course is by capturing a great amount of that value in the future with newer products or with new way to deliver the same products.
Brian Marckx
Okay, in terms of the sales force do you expect to add any headcount in 2015?
Douglas Murphy-Chutorian
Right now the plan is to just stay where we are. We have built up the sales team, increased our operating expenses, and now we like to see revenue growth exceed operating expense growth as we show the trend that should be established of course by all company.
So that’s really the goal is to keep that relatively on the flat side, relative to revenue growth.
Brian Marckx
Okay, in terms of the Medicare Advantage plans that you may have in the pipeline, do you foresee any going live in 2015?
Douglas Murphy-Chutorian
That’s a good question. We had reported in the third quarter I believe that we had one large customer from the previous year who is increasing.
We had added two more insurance plans. We also lifted the top 15 in the country.
You can assume that we’ve been in touch with all of them and are at some level of progress with many of them in terms of either introductions, piloting it, or initial orders. That is our goal for the year is to increase the number amongst that top 15 for sure.
And as you should expect to see that from us. We may not be identifying our customer list for competitive reasons but you’ll be able to see our progress on the revenue line.
Brian Marckx
Okay and it’s fair to assume that the existing customer base is expected to continue to increase or it sounds like in Q4 there was a nice increase from your largest customers, is that right?
Douglas Murphy-Chutorian
There was and what we’d expected this follows the process is these things are hard to do. There are so many people involved, the insurance plans and they are so large to get their attention.
We get their attention because some of our advisors actually work with the plans before or have excellent contacts. Once they have your attention, they see the value proposition that we discussed.
We really have usually a very favorable response to that but there are many steps along the way to get approval because of so many people involved. A typical step would be that they say okay we want to get started but they only make a small order either piloting for couple weeks or just a small order.
And they sit and wait and gather information. And then after that information, they go through another round of considering it and then all of a sudden it seems that we then start to get more sizeable orders.
Pilots can range from a few to a relatively good number in terms of first orders but we’re really expecting that there is as with the first customer who we mentioned is part of the United Group. We are expecting that maybe even a year after your initial orders come in is when you start seeing the bigger orders come in.
Brian Marckx
Sounds cool.
Douglas Murphy-Chutorian
So when we have the number already as current customers, more to follow and we hope to get that second bump so to speak after their analysis and they see the benefits of the product.
Brian Marckx
Okay, great. One more on the pipeline product that you mentioned in your prepared remarks and in the earnings release, is there anymore that you can talk about relative to that or when you think it may come to the field?
Douglas Murphy-Chutorian
I think that in terms of what we are looking at is taking our initial product and delivering it in different ways to the customers. For example, some of them prefer us to do the testing for them which we could subcontract.
Some of them may prefer at a higher price. Some of them may prefer to work with -- directly with a subcontractor who wants to pay us on a per test basis and in addition there are other products that we could if you will test that we can add into these models which maybe proprietary or may not be proprietary.
We have at least three of those that we are working on or working with plans at this moment in time. Trying to see is that a sustainable market and if it doesn’t do what we want to have from the sales standpoint.
And we will be able to report more on success or failures of those new things. So the new products are in the field and being tested and I want to say new products or product areas there is a new product or service.
So we hope to hear more from that but that’s where we stand at this moment in time.
Brian Marckx
Okay, great. Thank you Doug, that’s all I had.
Douglas Murphy-Chutorian
Thank you, Brian.
Operator
Thank you, our next question comes from Yi Chen of Aegis. Your line is now open.
Yi Chen
Hi, thank you for taking my questions. First of all can you comment out of the top 15 payers, how many are currently your former customers, how many are currently on pilot programs?
Douglas Murphy-Chutorian
We haven’t really -- we realized with 15 in it and after a while everybody those are customers lets go to 15. So we’d say that we have certainly more, we announced before that three were customers.
We certainly have more than additional three in that pipeline that are doing things with us at this moment in time. But we are just not going to name at this point, I think that’s where we are going.
There are by the way, that’s the top 15. There is another 135 insurance plans who have these programs, that we are also approaching, we just really haven’t discussed that as well.
So, there is a plan with 50000 lives is terrific, obviously a plan like United with 3 million is unbelievable. So we have a lot more growth to go even from the established customers we have.
So we really just have our toes in the water so to speak. So we are very excited about that but with these revenue growth rates that’s terrific but the market is substantially larger than we’ve been able to.
Yi Chen
Alright, actually my follow up question is going to be out of this 15, top 15 payers whether you’re going to pursue these smaller size. I think you just answered that and you are, you will park at those smaller payers too right?
Douglas Murphy-Chutorian
And I think, if you look at the market that would be breaking down is insurance plans that have Medicare Advantage. If you remember Medicare Advantage is something that government wants, it's truly a misnomer, it is not really an advantage, it is just a way meant to offload risk through insurance plans.
Insurance plans are happy to do that as long as they took on sick patients, they get paid more for it and that’s the basis of these risk adjustment factors. But similarly the other groups that are attracted to this, they are what I call integrated delivery networks or large group hospitals are buying up for this and salaring [ph] them.
All these groups and there are many in the country, we find a list of about a thousand that we are selectively going to in attempt to have them also work with us because they have the same benefits, just of a different nature. So those plans to go to the integrated delivery networks, large physician groups, etc and we have the vascular side which is predominantly where we see our bar goes of vascular -- centers and their referring doctors.
So that’s a third market segment that we’re in. Then you have groups called home risk assessments that I mentioned.
They go into the home of patients for insurance plans and do test and we are kind of an open source to allow them to do our test and to get paid for it. I know the fourth one and then the fifth one is all the others which would include small physician groups, etc but also you can anticipate that we are talking to the large retail chains as well who do things and other groups that do commercial, etc.
So we have no shortage of targets to go after since they have been trying to focus with, and I call them, the selected rain makers and make sure that we are getting the most leveraged for the amount of money. Add revenue increases and we can get to a situation of profitability we expected therefore to be able to hopefully increase that and target these other market segments in a more comprehensive way.
Yi Chen
Right, okay. So on our fee 16 million in Medicare Advantage market, what market penetration rate would you estimate you are currently at and what penetration rate you expect to achieve say we’re bringing the next two year period?
Douglas Murphy-Chutorian
We haven’t given guidance, so the second part of your question I am afraid I can’t quite answer really to that. But to the question we have estimated before that our penetration is one probably less than 2% right now.
So we have a long way to go.
Yi Chen
Okay and I don’t know if you can comment now at what revenue level can a firm reasonably achieve a breakeven status?
Douglas Murphy-Chutorian
I think on that question if we just try to help because you’ll do the calculation I know on your stuff, at about over $8 million in net operating expenses and we have margins that is 80% plus and growing. If you did that math you’d assume at least that’s going to take us that much to get to that level.
Yi Chen
Okay I am sorry go ahead.
Douglas Murphy-Chutorian
Thanks Yi.
Yi Chen
I have additional question Doug. Do you have any direct feedback from primary care physicians using the products regarding and in terms of concerns and suggestions?
Douglas Murphy-Chutorian
When we started this process before we got into Medicare Advantage and risk adjustment factor list. And we are working through more traditional CPT codes that doctors are using.
Some small groups to larger groups and the feedback from some key larger group was hey we’re missing the boat. We really should be looking at these HCC codes and what we did ultimately switch the program too.
So we take the feedback very importantly. Like all products we will not have a product that everybody loves.
We will always have some detractors, some people take this on a rental model and we’ll openly return it. But with these margins we do very, very well in that regard.
And of course we continue to improve the product with some of the features that I mentioned on the phone which are really important. I mean being compatible electronic medical records is huge and we spent the time and money to make sure that we use an HL7 format and be able to do that.
So it’s a much more seamless and easy for physicians and larger group. So you see our whole goal is if we are going to be working with bigger groups and if the direction of healthcare is to aggregate in bigger groups and to transform itself in terms of how it gets paid, we just want to be forward-looking and really at the leading edge of where that movement is going.
Assuming that we’ll estimate changes along the way and listening to this customer base we are also grappling with the whole new environment. That’s kind o exciting and we don’t really see anybody else there with us.
So to a certain extent unique is probably not the word but we’re a little bit unusual and sometimes people have a little trouble understanding that story. But we see this is where the value is, what is the insurance plans, what are the control about 2 trillion with T in revenue and that’s a big, big client base and so we’re scratching our heads and working our way through it.
Yi Chen
Okay, a final question regarding the pipeline product, can you give us a brief description on the FDA leverage or pass way that needs to go through and a timeframe of it?
Douglas Murphy-Chutorian
Yes, trying to indicate maybe I wasn’t as clear that stuff that we worked on is 510(K) is very straight forward. So regulatory times are relatively quick and easy as long as we have done our homework and we’re pretty good at doing that.
But I was trying to indicate to you that service, new product and this model is the new product already in existence. So we have nothing to do with that with regulatory that’s already ready to go and in data testing.
The only thing is we don’t how successful and what the uptake will be. So far it looks terrific but we will be able to comment about that in a future call as soon as we have some substantial enough revenue to mention that.
An example would be we did a small health fair and did the testing on patients that's had a substantial uptick to our usual rates and it went very, very well. And we can get a lot of patients tested that way because some of the insurance plans or even physician groups want the information but they don’t necessarily have the bandwidth to obtain that for them, uptick in terms of pricing and they get the benefits of just having to make one decision -– for them.
We work with subcontractors so you won’t see us adding people to deliver on that kind of contract. So that’s the kind of thing that we had in place for the new products this year.
It’s been running and we just have to see how much I can tell you year.
Yi Chen
Okay. Thank you.
Operator
Thank you. Our next question comes from Herb Berman [ph] of HEM, your line is now open.
Unidentified Analyst
Hello, I am an investor and I appreciate what you folks are doing and I like to congratulate you on a wonderful quarter. And I basically have one question which you may have been just partially answered.
The cash burn, when do you foresee that the cash burn will go down to zero?
Douglas Murphy-Chutorian
Unfortunately we don’t give guidance yet, so to give you that number it’s really a function at this point of the revenue. So it is really wanting to drive that.
So as I said we got it going in the right direction now with expenses coming down a little bit relative to the previous quarter and revenues coming up. So we hope that that’s a direction that we will continue and if we decide to give guidance we’ll be a little bit more specific about that and when that cross over point is.
But that’s the path where we want to be on.
Unidentified Analyst
Thank you for that. One other question, the new product or new services that are in data testing will that cause a further increase in headcount for training purposes or sales purposes or anything?
Douglas Murphy-Chutorian
That’s a great question, the answer is that was why we spent so much money this year relative to the previous year was building up that capacity. So that’s the capacity we have in place all within anticipation and we needed to make sure we had people on board, well trained, because when you are working with such a large accounts we don’t want to have a missed step.
We wanted to go in smoothly, we want them to know that we have a quality product, a quality service, and that they can feel confident because of the repeat business opportunity here and the recurring revenue opportunity. So the reaction we have that in place, so we would certainly be able to handle any capacity we thought we needed without any substantial headcount.
On the other hand if revenues increased faster than where this product takes off then we will have to really wait that situation always to be in but there we will be in a situation where revenue were galloping along faster than the expenses we add on. So we are still where we want to be.
Unidentified Analyst
Very good, back to FloChec for a moment, as we get larger and larger orders which implies I think that more and more physicians are in a process of utilizing FloChec, what level of training is required at the individual physicians office for them to properly use it?
Douglas Murphy-Chutorian
There is training, we are very good at that, have expanded that program. We’ll have probably more news about that later in the year but the key thing is it also can be delivered remotely which is what we have done.
So we don’t have to be present to do it. The system is designed by Dr.
Semler is very easy to use and understand but there is a process to do it. You just can’t pick it up but at the same time if you go through our training which can take anywhere depending upon the experience of the person, 15 to 30 minutes to learn but you have to go through that.
But it can be delivered and we have delivered it remotely or online.
Operator
Thank you. And I’m showing no further questions at this time.
I’ll hand the call back over to Doug Murphy-Chutorian for any closing remarks.
Doug Murphy-Chutorian
Well thank you very much and thanks everybody for their attention and interest. I look forward to seeing some of you in New York City this Monday.
I’ll be there Monday through Thursday for a Non-Deal Road Show. So if you have any more questions we would like to meet in New York next week or just want to call me the numbers are listed.
We appreciate your support and hope that we can continue to do what we thought was an outstanding job as we did in the last quarter. Thank you everyone, good bye.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program.
You may all disconnect. Have a great day everyone.