Earnings call: Semler Scientific reports mixed Q3 results amidst Bitcoin focus

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Semler Scientific Inc. (NASDAQ:SMLR), a company specializing in medical technology and services, reported mixed third-quarter financial results for 2024, with a decline in revenues but a strong income from operations. The company's aggressive Bitcoin treasury strategy, which involves purchasing Bitcoin as a primary reserve asset, was a focal point during the call.

Despite lower revenues, the company has seen a gain from the change in fair value of its Bitcoin holdings. Semler Scientific continues to innovate in its core medical product offerings, with an emphasis on its flagship QuantaFlo device, which aids in the early diagnosis of peripheral arterial disease (PAD).

Key Takeaways

• Third-quarter 2024 revenues decreased by 17% year-over-year to $13.5 million.
• Income from operations remained strong at $5.1 million.
• Semler Scientific used most of its cash to purchase Bitcoin, holding 1,058 Bitcoins as of November 5, 2024.
• The company is exploring additional financing options to further increase its Bitcoin holdings.
• Semler is seeking a new 510(k) clearance for an extension to its QuantaFlo product, expected in the first half of 2025.

Company Outlook

• Semler Scientific anticipates its fourth-quarter revenues to follow a similar pattern to the previous year.
• The company maintains a focus on tight expense control.
• Semler's long-term vision includes expanding its reach to additional cardiovascular applications.

Bearish Highlights

• A significant revenue decline of 17% compared to the third quarter of 2023.
• Two customers comprised a large portion of quarterly revenues, indicating potential concentration risks.

Bullish Highlights

• The company's Bitcoin treasury strategy is viewed as accretive to equity.
• Confidence in the investment upside of Bitcoin remains high.
• The company benefits from a strong operating cash flow and an at-the-market offering program to support Bitcoin acquisitions.

Misses

• Despite strong operational income, the decrease in revenues may raise concerns about the company's growth trajectory in its core business.

Q&A Highlights

• Semler Scientific is considering issuing bonds or convertible debt to fund additional Bitcoin purchases.
• The company is not currently meeting the public float requirement for options listing but may in the future as it increases shares outstanding through its ATM program.
• Demand for QuantaFlo software licenses continues, with expansion into new customer markets.
• Semler Scientific is focused on maximizing operating income and allocating excess cash to Bitcoin investments.
• The company monitors Bitcoin yield as a key performance indicator and may include it in future press releases.

Semler Scientific's third-quarter earnings call highlighted mixed financial results, with a notable decline in revenues but a robust income from operations. The company's strategic emphasis on accumulating Bitcoin as a treasury reserve asset was evident, with significant investments made using both operational cash flow and equity issuances.

While the company's core medical products and services business, especially the QuantaFlo device, remains a priority, the aggressive Bitcoin strategy and exploration of additional financing options to acquire more Bitcoin indicate a dual focus. The company's pursuit of a new 510(k) clearance for QuantaFlo suggests ongoing commitment to medical innovation.

As Semler Scientific navigates the balance between its medical technology business and its Bitcoin investment strategy, stakeholders will watch closely how these dual priorities unfold in the coming quarters.

InvestingPro Insights

Semler Scientific's mixed third-quarter results and its bold Bitcoin strategy are reflected in several key metrics and insights from InvestingPro. Despite the reported revenue decline, the company maintains impressive gross profit margins, with InvestingPro data showing a gross profit margin of 88.67% for the last twelve months as of Q2 2024. This aligns with the company's ability to generate strong income from operations even in the face of decreased revenues.

An InvestingPro Tip highlights that management has been aggressively buying back shares, which could be seen as a vote of confidence in the company's future prospects, including its Bitcoin strategy. This aligns with Semler's focus on maximizing shareholder value through both its core business and its cryptocurrency investments.

The company's valuation implies a strong free cash flow yield, according to another InvestingPro Tip. This could explain Semler's ability to allocate significant resources to Bitcoin purchases while maintaining operational efficiency. With a P/E ratio of 12.94, the company appears to be reasonably valued, especially considering its innovative approach to treasury management.

It's worth noting that analysts anticipate a sales decline in the current year, which is consistent with the reported Q3 results. However, the company's strong return over the last month (19.93%) suggests that investors may be responding positively to Semler's Bitcoin strategy and overall business outlook.

For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Semler Scientific, providing a deeper understanding of the company's financial health and market position.

Full transcript - Semler Scientific Inc (SMLR) Q3 2024:

Operator: Good afternoon, everyone, and welcome to the Semler Scientific Third Quarter 2024 Financial Results Conference Call. All participants will be in a listen only mode. After today's prepared remarks, as time permits, management will take questions submitted prior to this call via email. Please note, this event is being recorded. Before we begin, Semler Scientific needs to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. These include statements regarding the expectations for expansion of the business, the development and marketing of additional products, including receipt and timing of an additional 510(k) clearance for QuantaFlo and our recently adopted Bitcoin treasury strategy that plans to acquire additional Bitcoin. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and our SEC filings. The forward-looking statements made today are as of the date of this call. The company does not undertake any obligation to update forward-looking statements. If you do not have a copy of today's release, you may obtain one by visiting the Investor Relations page of the website at semlerscientific.com. Now I'd like to introduce Doug Murphy-Chutorian, CEO of Semler Scientific.

Doug Murphy-Chutorian: Good afternoon, everyone. Thank you for joining us for our third quarter 2024 results call. Once again, we achieved a strong income from operations and used most of our cash and cash equivalents to buy Bitcoin. As of November - no, November 5, 2024, we hold 1,058 Bitcoins. And now I will turn the call over to Eric Semler, our Chairman, who will provide you with an update on our Bitcoin strategy. Eric?

Eric Semler: Thank you, Doug, and thank you to all our shareholders for listening in today. With our third quarter results, we are very pleased to announce the excellent progress we are making with our strategy of accumulating Bitcoin using both our strong operating cash flow and our ATM program. We have added meaningfully to our Bitcoin per share. As an operating business, we're able to use cash flows as well as proceeds from equity issuances to acquire Bitcoin, which serves as our primary treasury reserve asset. We view our $71 million of Bitcoin purchases to date as highly accretive to our equity. Since announcing our Bitcoin treasury reserve strategy in May, we have even greater confidence today in the investment upside of Bitcoin and the unique opportunity we have to use our balance sheet to drive outsized returns in our stock. We intend to continue to use our operating cash and ATM to buy more Bitcoin. We will act prudently and use our ATM when we believe it is accretive to do so. Furthermore, we are exploring a wide range of additional financing options to raise more cash to acquire more Bitcoin. All financing options will be thoroughly evaluated and pursued methodically and responsibly. Now I'm pleased to introduce our COO, Jennifer Oliva Herrington, to provide an overview and update of our core medical products and services business. Jen?

Jennifer Oliva Herrington: Thank you, Eric. Today, I'll be presenting an overview of our market development and opportunities. Renae Cormier, our CFO, will be providing information about third quarter 2024 financial results. Semler is a pioneer in developing and marketing technology products and services to health care providers to combat chronic diseases. In conjunction with our Bitcoin treasury strategy, we will continue to focus on our core medical products and services business. Our core product, QuantaFlo, is a noninvasive point-of-care device that aids clinicians in the early diagnosis of peripheral arterial disease or PAD. With a SaaS-based model, we generate recurring revenue from a large underpenetrated market. Semler's mission is to improve health care outcomes by supporting early detection of cardiovascular diseases, a major global burden to the health care system. Cardiovascular disease ranks as a top concern in health care expenditures and global mortality, underscoring the imperative for early identification of cardiac conditions. We are committed to expanding our product offerings and advancing research to stay at the forefront of medical innovation. Our long-term vision includes extending our reach to encompass additional cardiovascular applications, reflecting our dedication to continuous expansion. As we continue to innovate, we announced earlier this year that we are seeking a new 510(k) clearance for an extension to our QuantaFlo product. We hope that we will obtain the 510(k) clearance for this extension in the first half of 2025. In the meantime, we continue to promote QuantaFlo as a valuable tool as an aid in the diagnosis of PAD and work to establish it as the standard of care. Our strategy includes expanding our customer base by adding new medical centers, growing within value-based care providers and growing new markets that will benefit from PAD testing. I will now turn the call over to Renae to discuss our financial highlights. Renae?

Renae Cormier: Thank you, Jen. I will cover our third quarter financial results and then speak more about our Bitcoin holdings and use of ATM under our effective S-3 registration statement. Following our remarks and as time permits, we will answer questions that have been submitted via e-mail. Total revenues in Q3 2024 were $13.5 million, which was down about 17% compared to the third quarter of 2023. We expect revenues in the fourth quarter to follow a similar cadence we saw in 2023. In the third quarter of 2024, our two largest customers, including their related affiliates, comprised 44% and 29% of quarterly revenues, respectively. Operating expenses in Q3 2024, which includes cost of revenue, were $8.4 million, a decrease of 16% year-over-year. Income from operations was $5.1 million compared to $6.3 million in the prior year. For the remainder of the year, we're focused on tight expense control as we continue to implement our Bitcoin treasury strategy. Other income net was $1.3 million and included a gain of $1.1 million from the change in fair value of our Bitcoin holdings. We have elected to early adopt ASU 2023-08, which is the new standard issued by the FASB for accounting for and disclosure of crypto assets. ASU 2023-08 requires Bitcoin assets to be measured at fair value with gains and losses from changes in the fair value to be recognized in net income in each reporting period. While this may introduce volatility into our reported net income, it will not impact our cash flow from operations, which we intend to invest in additional Bitcoin purchases. Net income was $5.6 million or $0.80 per basic share and $0.72 per fully diluted share compared to net income of $5.5 million or $0.82 per basic share and $0.71 per fully diluted share in Q3 2023. Cash, cash equivalents and restricted cash at September 30, 2024, was $6.7 million. Outside of working capital needs, we intend to use our liquid assets, including operating cash generation to acquire more Bitcoin. In August, our shelf registration statement on Form S-3 became effective, under which we may, from time to time, offer, issue and sell debt securities, common stock and our warrants with a total value of up to $150 million. At the same time, we filed a $50 million at-the-market or ATM offering prospectus covering the offering, issuance and sale of common stock. We intend to utilize the ATM when market conditions are favorable and we'll use the proceeds primarily for general corporate purposes, including the acquisition of Bitcoin. During the third quarter of 2024, we sold approximately 87,000 shares under the ATM for an aggregate net proceeds less sales commission of approximately $2.5 million. We utilized these proceeds as well as cash from operations to purchase additional Bitcoin. During the third quarter of 2024, we purchased 142 Bitcoins for an aggregate cost of $8.4 million. Subsequent to quarter end, we purchased an additional 40 Bitcoins for an aggregate cost of $2.6 million and now hold a total of 1,058 Bitcoins. Now we'll begin our Q&A. We received some questions ahead of the release that we tried to address in the prepared remarks. We do have some time for additional questions.

Renae Cormier: So the process of listing options comes at the request of a broker-dealer to an exchange. The exchange will look at several different criteria that the stock must satisfy in order for options to be traded. We believe that the only criteria we do not meet is a public float of 7 million freely tradable shares given our high insider ownership. We can continue to increase our shares outstanding as we execute on our ATM and believe we can eventually satisfy all requirements in order for the exchange to list options for our stock.

Renae Cormier: Our next question is for Eric. Can you give an update on your capital market strategy? Does the company have any plans to issue bonds or convertible debt to acquire more Bitcoin per share?

Eric Semler: Thanks, Renae. As we mentioned earlier, we plan to continue purchasing Bitcoin with cash generated from operations and from our ATM program, and we are also exploring additional financing options to raise more cash to acquire more Bitcoin, and we fully understand the wisdom and benefits of sourcing cash from straight debt and convertible bonds as long as they are executed on reasonable terms. Renae?

Renae Cormier: Thanks, Eric. I can take the next question. So what's driving the underlying trends in the business? And what do you expect for the remainder of the year?

Renae Cormier: So we continue to see demand for software licenses relating to our QuantaFlo product. We do see continued testing, and we're expanding our customer base beyond managed care, reaching clinics and value-based care providers as the clinical importance of testing is still recognized. Our priority for the rest of the year is to maximize operating income. Beyond maintaining sufficient working capital to support, innovate and grow our operations, we plan to allocate the remainder of our operating cash generation into additional Bitcoin purchases.

Renae Cormier: And so this final question, Eric, you can take, is Semler going to release Bitcoin yield metrics?

Eric Semler: Thanks, Renae. We believe that BTC yield is an excellent KPI for tracking the performance of our strategy to acquire Bitcoin in an accretive way for our stakeholders. Bitcoin yield represents a percentage change period-to-period of the ratio between the company's Bitcoin holdings and its assumed diluted shares outstanding. We closely monitor our Bitcoin yield internally, and we were very pleased with our high teens positive Bitcoin yield in the third quarter. This was driven by a 16% increase in our total Bitcoin holdings, while at the same time, our assumed diluted shares outstanding remained flat. Assumed diluted shares outstanding are based on the assumed exercise of all outstanding stock option awards, not taking into account any vesting conditions or exercise price. This is a relatively straightforward calculation that can be done based on our public disclosures. As we get more experience with this KPI, Bitcoin yield, we will consider including it in our press releases in the future. Renae?

Renae Cormier: Thank you, Eric, and thank you, everyone, for your questions. As we wrap up this conference call, we want to emphasize our ongoing commitment to our medical software licensing business and continued execution of our Bitcoin treasury strategy. We appreciate your participation in today's discussion, and thank you for your ongoing support. Operator?

End of Q&A:

Operator: Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

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