Augmedix, Inc. (NASDAQ:AUGX) Q3 2022 Earnings Call Transcript November 14, 2022
Operator: Greetings and welcome to Augmedix, Inc. Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ji-Yon Yi, Investor Relations. Thank you. You may begin.
Ji-Yon Yi: Thank you, and thank you all for participating in today’s call. Joining me are Manny Krakaris, Chief Executive Officer; and Paul Ginocchio, Chief Financial Officer. Earlier today, Augmedix released financial results for the quarter ended September 30, 2022. A copy of the press release is available on the company’s Web site. 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 contained in this call that relate to expectations or predictions of future events, results or performance, are forward-looking statements.
These forward-looking statements are based upon our current estimates and various assumptions and involve material risks and uncertainties that could cause actual results or events to materially defer from those anticipated or implied by these forward-looking statements. 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 and management discussion and analysis of financial condition and results of operations in our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, and similar disclosures and subsequent reports filed with the SEC. Also during our call today, we may discuss non-GAAP financial measures which adjust our GAAP results to impact certain items.
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You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today’s financial results press release. This conference call contains time sensitive information and is accurate only as of the live broadcast today, November 14, 2022. 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: Thank you, Ji-Yon. Good afternoon, everyone, and thank you for joining us. I’m very pleased to announce a record third quarter. Our results reflect our team’s continued focus on executing across our strategic priorities to drive enterprise customer expansion, differentiating our AI driven core platform and flexible product solutions, and intelligently scaling our business model. Importantly, these initiatives are driving operating leverage, which has resulted in a reduction in our operating losses and cash burn quarter-on-quarter. As we stated in Q2, we expect that trend to continue and for operating losses and cash burn to decline in 2023 versus 2022. Our third quarter results service validation. They were gaining traction and at the front end of realizing meaningful operating leverage.
Improving operating leverage will be a key theme for Augmedix in 2023 as we continue to aggressively grow the topline. Total revenue for the third quarter of 2022 was $7.9 million, representing a 40% year-over-year growth rate. This is our fourth consecutive quarter near the top of our 30% to 45%. multiyear revenue growth target range. Retention and staffing shortages remain at the forefront of concern for health care organizations across the U.S. Recent published report by Bain and KLASS cited labor shortages and wage inflation as major catalysts to driving demand for solutions that improve productivity and alleviate labor needs. Moreover, COVID-19 era staffing shortfalls combined with burnout among physicians, nurses and other clinicians continue to plague providers, which is — which in turn has been exacerbated by substantial wage inflation over the past 18 months.
We see these industry tailwinds boosting demand for our differentiated documentation solution, which directly address these labor challenges by reducing administrative burden, improving productivity and increasing retention. The strong demand environment, our effective go-to-market strategy and differentiated market positioning have resulted in a very healthy pipeline for what is typically a seasonally slower fourth quarter. Notably, we also had record bookings in the third quarter, with September representing the largest bookings month in our company’s history. We have a number of additional large orders in the pipeline, which underscores how our solutions are addressing the human toll of physician burnout, and are resonating with both existing and new clients.
This highlights our continued commercial momentum, as the health of our pipeline reinforces our optimism for 2023. We continue to drive meaningful organic revenue growth through our land and expand strategy with enterprise accounts. As an example, one of our larger East Coast based health systems wanted to specifically address its retention issues, and increase efficiencies to enable their physicians to see more patients. We implemented our solution among an initial cohort of physicians who believed — who we believe would be prime beneficiaries of our services based on their individual productivity metrics. The health system realized an ROI from our service that was in line with the target we have established for that system at the outset of the program.
Based on those results, the health system placed our largest ever single order. Our footprint at this enterprise will cover a significant portion of their total physician population. Our partnership with Google continues to generate strategic introductions to large health systems. In the third quarter, we successfully converted another introduction into a new customer. As a reminder, our Google partnership expands beyond engineering collaboration, and now includes a systematized go-to-market effort, which harnesses the power of over 1,000 enterprise focused Google Cloud reps. During the third quarter, we formalized our integration into the Google Cloud Platform marketplace, allowing GCP Health System customers to allocate their GCP financial commitments towards the purchase of Augmedix services.
Turning to our product development efforts. We are excited by the positive response we’re starting to see with the commercial release of Augmedix Prep, our pre-charting solution. Augmedix Prep addresses another distinct administrative workflow challenge for clinicians. The time and resources spent before patient encounter begins with respect to a patient chart. Our Pre charting solution enabled the extraction of relevant historical information from a patient’s health record into a current chart or medical note. We believe that Augmedix Prep can save clinicians about 1.5 hours of administrative burden each day, providing relief with respect to staffing shortages, amazing challenge for our health systems today. We are additionally pleased with the commercial rollout of our iOS client device to complement our existing Android client device operating system.
With this rollout, we are now able to offer clinicians the option to personally select their preferred operating system for our client application, thereby broadening our reach to include all clinicians and health care enterprises, regardless of which operating system they use. We believe that offering such choice will further enhance clinician satisfaction and retention. Our customer facing software products also remains on track to be commercially released in 2023. This ambient class solution addresses a large segment of the medical documentation market. This is a software product that clinicians themselves use to generate medical notes with no human intervention on our part. We anticipate it will enjoy even higher gross margin than our current product portfolio.
Finally, we continue to make impactful advancements with our proprietary Ambient Automation platform and Notebuilding technology in our pursuit of enabling fully automated medical notes. As we begin to realize the benefits from our machine learning, the percentage of notes that is automated has been increasing at a steady pace, and now represents a meaningful proportion of the 50,000 plus medical notes we generate every week. We anticipate realizing gross margin benefits from increasing levels of automation. In closing, we are very pleased with our third quarter results. We remain confident that we are firmly positioned with large opportunities ahead. We continue to execute on our strategic initiatives and focus on delivering strong growth, improving gross margins, and increasing operating leverage.
With that, I will now turn the call over to Paul Ginocchio, our Chief Financial Officer, then we’ll return with closing comments. Paul?
Paul Ginocchio: Thank you, Manny. As stated, revenue for the 3 months ended September 30, 2022 was $7.9 million, a 40% increase from the $5.6 million in the same period a year ago. Growth was again driven by existing client expansion, new clients and higher growth in our notes offering. Dollar based net revenue retention for the third quarter of 2022 was 130% for our health enterprise customers, compared to 122% in the third quarter of 2021. As many of you know, net revenue retention measures on a dollar revenue at our existing clients a year ago grew into in this most recent quarter, includes upsells, expansion and churn, but excludes revenue from any new logos that were added during the previous 12 months. Our 130% NRR puts us at the higher end of most SaaS companies.
Average clinicians in service for the third quarter of 2022 rose 43% as compared to the third quarter of 2021 and compares to 49% year-on-year growth in the second quarter of 2022. Our 2-year stacked year-on-year growth rate accelerated 85% in the third quarter versus 81% in the second quarter. We define a clinician in service as an individual doctor, nurse practitioner or other health care professional using either our live or note service. We believe growth in the number of clinicians in service is an indicator of the performance of our business, as it demonstrates our ability to both penetrate the market and grow our business. Adjusted gross margin for the third quarter of 2022 was 45.9% as compared to 45.3% in the corresponding prior year period, and compares to 44% in the second quarter of 2022.
The improvement in gross margin is a direct result of the increasing scale of our operations. Total operating expenses for the third quarter of 2022 were $9.1 million, down sequentially from the $9.3 million in the second quarter of 2022. Non-GAAP operating expenses, which excludes stock-based compensation grew 28% compared to the third quarter of 2021. Operating expenses increased year-on-year due to annual salary increases, incremental investments in sales and marketing as we expand our commercial team and extend our marketing reach and investments in the engineering team as we further enhance our technology platform, note automation capabilities and expand our product portfolio. And also due to increased G&A costs of being a NASDAQ listed company.
The quarter-on-quarter growth of gross profit, combined with the sequential decline in OpEx allowed us to reduce our quarterly operating losses by over $500,000 versus the second quarter of 2022. We expect mid-single-digit growth in OpEx into the fourth quarter of 2022 from the third quarter of 2022. One of our primary objectives is to consistently reduce our operating losses on a sequential basis. And we are pleased with the strong progress we’ve made in this most recent quarter. Adjusted EBITDA which we calculate by adding back depreciation, amortization, taxes, interest, and stock-based compensation to net loss was a loss of $4.5 million in the third quarter of 2022 compared to a loss of $3.8 million in the third quarter of 2021. Our adjusted EBITDA loss in the third quarter of 2022 decline from $5.3 million in the second quarter of 2022.
We ended the third quarter of 2022 with $27 million in cash, cash equivalents and restricted cash. Additionally, we have access to a $10 million of additional liquidity via an AR line of credit and another term loan tranche under existing credit facility with SVB. Based on our third quarter operating cash burn after CapEx at $3.8 million, we continue to have over 2 years of operating runway. Remember, last quarter, we said that cash burn would decline in 2023 versus 2022, and our third quarter results highlight that emerging trend. Turning to a brief update regarding our third quarter 10-Q. Ahead of our uplisting a year ago, we put plans in place to further strengthen our internal controls, be consistent with larger season public companies.
As part of these steps, we transition to a new top tier accounting firm. With this change, we identify that we should update the application of one accounting policy related to commissions. Previously we expense Commission’s in the quarter of the bookings now we are capitalizing and amortizing commissions over 2 years. We made that change in the third quarter, and it resulted in a positive in material reduction to our losses in 3Q ’22 and in 3Q ’21. This change has no impact on our cash or cash position. We have put remediation plans in place to address the material weakness arising from this change and our filing extension with the SEC regarding our 10-Q. We will file our 10-Q within the 5-day grace period. In summary, management has thoroughly reviewed and concluded their financial statements, present fairly in all material aspects, the company’s financial position, results of operations and cash flow for all the periods disclosed.
Now turning to our outlook for the fourth quarter of 2022. Given the strength of our recent bookings, and the health of our current backlog, we expect revenue in the fourth quarter of 2022 to be approximately $8.5 million to $8.6 million. Our revenue guidance implies a further acceleration of our sequential revenue growth rate. Regarding gross margin for the fourth quarter of 2022, we expect it to be similar to what we reported in the third quarter. Recall at scale, we have indicated that we expect live gross margins to be in the range of 50% to 55% and knows gross margins to be in the range of 55% to 60%. At this point, I’d like to turn the call back to Manny for closing comments.
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A – Manny Krakaris: Thank you, Paul. I’m proud of our team’s commitment to drive our mission forward to rehumanize, the physician patient relationship and address the largest pain points in the U.S health care system, physician burnout and staffing shortages. I’d like to personally thank the entire Augmedix team for the strong results we delivered in the third quarter. There’s growing demand for solutions that directly address the major economic challenges health care organizations continue to face stemming from labor shortages and wage inflation. And we are uniquely positioned to address these issues with our differentiated documentation solutions. We remain confident that the need for our services will continue to increase given the compelling ROI our offerings deliver, we look forward to a solid fourth quarter and beyond and to delivering long-term value to our stakeholders. Thank you. So with that, we’ll now open it up to questions. Operator?
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