SMLR - Semler Scientific: Not Much To Get Excited About This Year

Summary

• Semler Scientific downwardly revised revenue for the full-year 2022.
• Operating expenses are expected to drop in the fourth quarter but will still be up year-over-year.
• Fixed fee and variable revenue mix will probably remain a headwind for the company in the near term.

Since November 1, 2021, the share price of Semler Scientific, Inc. ( SMLR ) has been getting hammered, plunging from approximately $151 per share to a 52-week low of $26.70 per share on November 2, 2022, after revenue, net income and EPS were all down year-over-year.

While the share price of the company has jumped nicely from its 52-week low, to trade at a little under $40.00 per share as I write, I believe it's gotten ahead of itself because of the lack of short-term catalysts.

When the next earnings report is released, I think the company is going to take another big hit, unless there is an earnings surprise that isn't visible at this time.

Another reason for a probable correction in its share price, besides weak fundamentals, is the strong probability investors are going to take profits; specifically, those that took new positions close to the low in early November. I would if I had a position in the company because there's not much upside left in the stock in the foreseeable future.

In this article we'll look at some of the recent numbers, generally unfavorable fee mix, and why the company isn't likely to improve margin and earnings much in the quarters ahead.

Some of the numbers

Revenue in the third quarter of 2022 was $14.047 million, compared to revenue of $13.99 million in the third quarter of 2021. Revenue for the first nine months of 2022 was $42.9 million, compared to revenue of $41.5 million in the first nine months of 2021.

Revenue guidance for full-year 2022 was revised downward from a range of $55.5 million to $58 million, from previous guidance of $58 million to $60 million. The downward revision was attributed primarily to the increase in fixed fee license revenue.

Fixed fee revenues in the third quarter of 2022 were $8.6 million, up 10 percent year-over-year. Variable fee revenues were $4.9 million, down 16 percent year-over-year.

Total operating expenses in the reporting period climbed to $9.58 million, compared to total operating expenses of $8.74 million in the third quarter of 2021. For the first nine months of 2022 operating expenses came in at $29.3 million, compared to total operating expenses of $23.75 million in the first nine months of 2021.

The company guided for operating expenses for full-year 2022 to drop from previous guidance of $42.5 million to $44 million, to $38.8 million to $40.3 million, based upon an improvement on expense management and a surprise to the upside in the efficiency of its sales force.

Net income in the third quarter of 2022 was $3.68 million, or $0.46 per diluted share, compared to net income of $4.15 million, or $0.51 per diluted share in the third quarter of 2021. Net income in the first nine months of 2022 was $11.1 million, or $1.38 per diluted share, compared to net income of $15.7 million, or $2.34 per share in the first nine months of 2021.

Cash and cash equivalents at the end of the third quarter of 2022 was $45.5 million, compared to cash and cash equivalents of $37.3 million at the end of calendar 2021.

Fixed fee and Variable fee revenues

Fixed fee revenues in the reporting period were $8.6 million, up 10 percent year-over-year. Variable fee revenues came in at $4.9 million, down 16 percent year-over year.

Since fixed fee revenues don't have the impact on the bottom line in the normal way variable fees do, the increase in fixed fee revenue, while boosting the top line, put some downward pressure on the bottom.

But also unusual was one of its largest customers reached a milestone in variable fees, which resulted in it getting a volume pricing discount. The combination of higher fixed fee revenue and the variable fee volume discount is a rare occurrence and isn't likely to be repeated on a consistent basis.

Fixed fees provide a steady stream of predictable income, while variable fees tend to have wider margin but less predictability.

Another factor in revenue was the customer mix transitioning from a higher priced customer to lower-priced customers.

Even with superior margins, when asked about there seeming to be a shift to fixed fee revenue, management stated they would prefer fixed fee revenue because of the long-term, predictable benefit of it.

While that may or may not be true, in the near term it's not a positive outcome for customers to shift to fixed fee revenue, although the company said at this time it was happening at a very modest level.

Even so, it's definitely something important to watch if the fee mix gravitates further to fixed fees in the near term; it would be a headwind for the company because of margin compression.

Finally, concerning fee mixture, two of the company's largest customers account for 67 percent of revenue as of the third quarter. If there is any meaningful change in that, it would have a devastating impact on the performance of SMLR.

The obvious example is what just happened on the variable fee side when one of the top customers triggered the discount. But if one of them were to pull back on doing business with SMLR in any meaningful measure, it would be a huge blow.

Conclusion

After the weak earnings report, the share price of the company plunged from approximately $43.00 per share to under $27.00 per share. And since then, it has had a nice rebound, but based upon the numbers and guidance, I'm not seeing any reason the company will be able to hold those numbers.

I think the next earnings report is going to be a weak one, and if that's how it plays out, the share price, depending upon the specific numbers, could once again test its 52-week low.

It has found some support at approximately $31.00 per share, but any surprising numbers to the downside will probably break through that level.

At the current price level, I think the stock will more than likely have a strong correction, and from then on trade flat for a while until its next earnings report.

Until there is more visibility in the near term and a return to sustainable growth, SMLR is not going to do much, as there are no clear catalysts at this time that would be a tailwind for the company.

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