Augmedix, Inc. (NASDAQ:AUGX) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Greetings, and welcome to the Augmedix Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Chesler, Investor Relations. Thank you. Please go ahead.

Matt Chesler: Thank you, operator. Joining me today from Augmedix are Manny Krakaris, Chief Executive Officer; and Paul Ginocchio, Chief Financial Officer. This morning, Augmedix released financial results for the quarter ended March 31, 2023. We have posted the press release and an investor presentation on our website at augmedix.com. We’ll begin our call with prepared remarks to be followed by a Q&A session. This call is also being simulcast and will be archived on our website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements that relate to expectations or predictions of future events, results or performance are forward-looking statements. They are based on current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors in management’s discussion and analysis in our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission and similar disclosures in subsequent reports filed with the SEC. Also during our call today, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

You will find additional information regarding these financial measures and the reconciliations to GAAP measures in today’s press release. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 12, 2023. Augmedix disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I’ll turn the call over to Manny. Manny Krakaris Thanks, Matt. Good morning, everyone, and welcome to our earnings call. The start to 2023 is highlighted by strong topline growth, continued development and commercialization of our broad product offerings, strengthening of our financial position at solid momentum exiting the quarter.

Last month, we concluded a landmark strategic partnership and financing with HCA Healthcare. This partnership, with one of the nation’s largest and most forward-thinking healthcare providers, serves as a powerful vote of confidence in our technology and our approach to bringing technology at scale to the point-of-care. HCA is collaborating with us on the development of the technology underlying our Augmedix Go product, that aims to transform the way patient care is documented in the acute care setting. Alongside our largest investor, Redmile Group, HCA also made a substantial investment in Augmedix, serving as a clear indication that we are on the right strategic path. Even prior to our HCA partnership announcement, we were experiencing increased commercial demand from clinicians.

And I’m confident that our collaboration with HCA will only accelerate our commercial momentum. The need for our technology at the point-of-care is real, urgent and growing. The administrative burden on practitioners is significant, leading to higher cost and physician burnout. No health care professional went to medical school to manage documentation. They want to see and help their patients and practice at the top of their license. We are developing products that enable them to do just that, allowing clinicians and patients to truly connect with the point-of-care, improving patient access as clinicians spend less time documenting visits and improving healthcare operating efficiency. HCA fully understands this. With the industry’s increasing adoption of powerful AI tools, such as large language models, we are mindful that all of our products must engender trust among our customers if they are to be adopted at scale.

That is why we take great pain to ensure our automation technology is built thoughtfully and respectfully. While others throw intrusive technology or black box AI to automate their processes, we are developing a platform modeled on practitioner workflow that provides clinicians with transparency and control. Our clinician customers will be able to see how their medical notes are built and can set their own preferences for the notes look and feel. We believe this will instill confidence among clinicians in the finished product. Our medical notes are presented in well-understood formats and focus just on relevant medical issues as opposed to being long and meandering transcript summarization. Beyond the medical note, data we deliver to customers is structured and formatted to be easily ingested by third-party platforms.

Finally, we don’t believe a one-size-fits-all is the right product strategy. So we’ve developed a portfolio of products as part of our platform that provide healthcare systems and clinicians, the flexibility to choose the product that best works for them and provides the highest ROI. We believe thoughtful and responsible use of AI tools, transparency and clinician control in note creation, structured output and product fungibility across a wide spectrum of care settings are key differentiators that set us apart from other players in our space. We generated record first quarter bookings and 38% revenue growth, demonstrating the acceleration in commercial adoption we are seeing even before Augmedix Go is released later this year. We continue to build our base of recurring revenue, adding both new customers and expanding within existing customers.

Existing customer expansion is best highlighted by our dollar-based net revenue retention of 136% in the quarter, up from an already strong 133% in the first quarter of 2022. This NRR demonstrates that our land-and-expand strategy within our large healthcare customers is working. We are adding incremental recurring revenue with minimal increases in fixed cost at an attractive customer acquisition cost. Importantly, we were able to deliver this 38% revenue growth, while holding operating expenses flat sequentially compared to the fourth quarter and was only a 9% increase year-over-year. The effects of high operating leverage become more evident as we scale our offering, providing clear evidence that we are moving toward cash flow sustainability.

As we noted in the announcement of the HCA and Redmile transaction, we expect to reach operating cash flow breakeven as we exit 2024. Our results demonstrate that we are making solid progress towards this critical goal. With that, I’ll now turn the call over to Paul Ginocchio, our CFO. Then, we’ll return with closing comments. Paul?

Paul Ginocchio: Thank you, Manny. As stated, revenue for the three months ended March 31, 2023, was $9.6 million, a 38% increase from the $7.0 million in the same period a year-ago. Growth was primarily driven by existing client expansion, new clients and growth in our notes offering. Dollar-based net revenue retention in the first quarter of 2023 was 136% for our Health Enterprise customers compared to 133% in the first quarter of 2022 and 126% in the fourth quarter of 2022. As many of you know, net revenue retention measures with a dollar of revenue at our existing clients a year ago, grew into in this most recent quarter. It includes upsells, expansion and churn, but excludes revenue from any new logos that were added during the last 12 months.

The acceleration of NRR was driven primarily by significant expansions at two of our larger health system customers. Our NRR results put us at best-in-class levels for SaaS companies. Average clinicians in service for the first quarter of 2023 rose 43% as compared to the first quarter of 2022 and compares to 41% year-on-year growth in the fourth quarter of 2022. We define a clinician service as an individual doctor, nurse practitioner or other healthcare professional using either our live or note service. We believe the growth in the number of clinicians in service is an indicator of the performance of our business as it demonstrates our ability to penetrate the market and grow our business. Adjusted gross margin for the first quarter of 2023 was 45.8% as compared to 45.3% in the corresponding prior year period and compares to 46.5% in the fourth quarter of 2022.

The exposure to clinicians serviced out of the U.S. reduced our quarter-on-quarter gross margins, partially offset by efficiency gains. We expect gross margins to benefit later this year from the shifting of a significant number of U.S. service clinicians to outside the U.S., along with continued scale benefits and improving automation. Total operating expenses for the first quarter of 2023 were $9.5 million, flat sequentially from the fourth quarter of 2022. Non-GAAP operating expenses, which excludes stock-based compensation and one-time items, grew 9% compared to the first quarter of 2022, a deceleration from the double-digit growth rates we reported in the past several quarters. You are beginning to see the inherent operating leverage in our model come through as we scale.

We are continuing to incrementally invest in sales and marketing and engineering to drive innovation and growth, but other cost categories are largely flat outside certain costs, such as audit fees and legal fees. Growth in gross profit outpacing OpEx growth resulted in a reduction in our quarterly operating losses for the third consecutive quarter. Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, onetime items and stock-based compensation to net loss, was a loss of $4.1 million in the first quarter of 2023 compared to a loss of $4.8 million in the first quarter of 2022. Along with this improvement in adjusted EBITDA, loss was a year-on-year improvement in our adjusted EBITDA margin from negative 69% in the year-ago quarter to negative 43% in the most recent quarter.

Cash flow from operating activities was an outflow of $6.2 million in the first quarter of 2023 compared to $4.2 million last year. The first quarter is typically our largest cash burn quarter of the year due to some annual payments and bonuses. We continue to expect a reduction in cash burn in 2023 versus 2022 and cash burn will improve from these 1Q results. At March 31, 2023, we had $20.6 million of cash, cash equivalents and restricted cash. At quarter end, we had an additional $5 million of incremental liquidity via AR line of credit. The $12 million in new equity from the financing with HCA Healthcare and Redmile Group in April, $1.60 per share, gives us pro forma cash, cash equivalents and restricted cash of nearly $33 million as of March 31.

In addition to the new equity raised, we have also agreed with Redmile to finalize a $5 million equity line of credit and we are in the final stages of putting it in place. The new equity line of credit will provide further capital certainty and give us backstop capital access even if the markets are closed. But as we have said before, our expectation is that we will reach cash flow sustainability without accessing this facility. In terms of our common share count, we had 37.5 million weighted average common shares for 1Q 2023. For modeling purposes, remember we sold another 3.125 million common shares to HCA and Redmile combined, and a combined 4.375 million prefunded warrants. Positioning the company to reach profitability is a top priority for our company.

With the tremendous opportunity in front of us and our technology platform, we believe we can deliver both strong revenue growth and operating leverage to reach operating cash flow breakeven before net interest expense as we exit 2024. Now moving on to guidance. The positive momentum we saw coming into this year is continuing. We now expect revenue to be at least $42 million for the full-year 2023. Turning to our outlook for the second quarter of 2023. Given the strength of our recent bookings and the health of our current backlog, we expect revenue in the second quarter to be approximately $10.4 million to $10.5 million. We expect GAAP gross margins to be similar to the first quarter 2023 GAAP gross margins. As you saw this quarter, we expect the overall increase in operating expenses in the coming quarters will be lower than the overall increase in revenue and gross profit.

We do expect some incremental OpEx investments in 2023 and sequential OpEx growth in each of the coming quarters. We expect 8% to 10% sequential growth in OpEx into 2Q 2023 from 1Q 2023. At this point, I’d like to turn the call back to Manny for closing comments.

Manny Krakaris: Thank you, Paul. Our product and technology strategies are resonating with customers, as evidenced by our strong topline growth and adoption by five of the top 10 U.S. health care systems. The proliferation of LLMs within the health care industry will inevitably level the technological playing field. However, LLMs alone are not a complete solution to the dilemma facing the industry. Using this technology in a thoughtful and responsible manner and incorporating it into a compelling product portfolio that accommodates the widest range of clinician workflows in both the ambulatory and acute care settings are what set Augmedix apart from others in this space. I am proud of our team’s mission focus and grateful to our customers for entrusting us with this vital work. As we look at the rest of the year and beyond, I remain very excited by the opportunity that lies in front of us. Thank you. Operator, let’s open it up to questions.

Q&A Session

Operator: Thank you. The floor is now open for questions. [Operator Instructions] Today’s first question is coming from Ryan Daniels of William Blair. Please go ahead.

Operator: Thank you. The next question is coming from Brooks O’Neil of Lake Street Capital. Please go ahead.

Operator: Thank you. The next question is coming from Allen Klee of Maxim Group. Please go ahead.

Operator: Thank you. [Operator Instructions] The next question is coming from Neil Chatterji of B. Riley Securities. Please go ahead.

Operator: Thank you. I’d like to turn the floor back over to Mr. Krakaris for closing comments.

Manny Krakaris: Well, if there’s no more questions, look, I want to thank everybody for participating in this earnings call. I’m sure we’ll have more news to share with you as the year progresses. But as I said with my closing comments, we’re really excited about the year and look forward to keeping you guys updated as we progress at end of the year. Thank you very much.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.