OptimizeRx Corp Q2 FY2023 Earnings Call

Good afternoon, everyone. And thank you for joining OptimizeRx’s Second Quarter Fiscal 2023 Earnings Discussion. With us today is the Chief Executive Officer of OptimizeRx, William Febbo. He is joined by company Chief Financial Officer, Ed Stelmakh; Chief Commercial Officer, Steve Silvestro; General Counsel and Chief Compliance Officer, Marion Odence-Ford; and Senior Vice President of Corporate Finance, Andrew D’Silva. At the conclusion of today’s earnings call, I will provide some important cautions regarding the forward-looking statements made by management during today’s call. I would like to remind everyone that today’s call is being recorded and will be made available for replay via webcast only. Instructions are included in today’s press release and in the Investors section of the company’s website. Now I would like to turn the call over to OptimizeRx CEO, William Febbo. Sir, please go ahead.

Good afternoon everyone and thank you for joining our second quarter earnings call today. While we are disappointed with the quarter’s results, we are seeing unprecedented change in the pharma industry in their adoption of digital and tech-enabled marketing solutions. We are now coming out of the post-COVID heavy piloting phase within pharma, and the basic decision-making has slowed as they look for scalable partners. We saw this firsthand with many clients. We are evaluating their marketing models, product delays, and a higher demand for data-driven solutions. Despite this, we remain excited about our business. We are laser-focused on optimizing our resources for the future of digital marketing in healthcare. In Q2, we saw revenue push into the second half due to clients needing more time for medical, legal, and regulatory review. While delays are frustrating and impactful at our stage, they are typical in today's environment, and we do not view them as a negative indicator. We have solid confidence in our core offerings, which built us up to where we are today, and we believe it will drive growth into the future as we get past the headwinds mentioned on previous calls. Our clients are experimenting with new digital solutions for customer engagement and patient access as we partnered alongside them on their journey. We've seen many areas of opportunity. We've identified those areas where we believe we are best positioned to address based on how our customers buy from us today, and we plan to optimize those prospects through the second half of 2023 to position for growth in 2024. We have a strong presence and awareness among our clients, partners, and the market. Our balance sheet and shareholder base are terrific. As you will see when you review the numbers, even with lighter top-line results than expected, we were able to limit spending and post an effectively breakeven non-GAAP net income. Our team is solid, and we're very focused on delighting our clients by continuing to expand with additional channels and technology our clients want to leverage into the future. So how do we address this dynamic market and come out stronger and bigger? With COVID, the enablement of physicians and patients to rely on digital connectivity has skyrocketed. In response, we've seen a rapid rush of startups, company pivots, and roll-up strategies, which is crowding and distracting the market. As a result, our clients are looking for a higher level of transparency regarding their reach and return with point of care than even six months ago. The compounding effect of this dynamic has been a slowdown in decision-making and spending within the pharma community. While we are not alone in seeing the effects among our peers, we believe this will subside as we get through 2023. Pharma will have a clearer view of the preferred partners around digital commercialization, and we believe we will be one of those partners. To ensure we remain at the forefront of our pharma clients' needs, we will deploy our resources to the areas that represent the overwhelming majority of our revenues. In the second half of 2023, we will also reduce our cash operating expense run rate going into 2024 by at least 10%, which will be based on the expense run rate we had during the first quarter of 2023. Our focus will be to continue to build out our platform for our clients with renewed attention on innovation and scaling closer to our core. Going forward, our primary emphasis will be on our AI-enabled healthcare technology platform, which helps pharma acquire and onboard patients. This is the most differentiated and growth-oriented part of our business, one in which we have seen 186% year-over-year growth, and it is still climbing. We intend to keep it that way in the face of shifting markets and customer expectations by directing our efforts towards that part of the business that is performing best. Three years ago, we launched an RWD.AI solution, enabling life science organizations to engage doctors at the point of care. We have expanded our AI solution this year to accommodate data sources that go beyond the traditional RWD and to incorporate digital mass media channels alongside point-of-care to build a truly integrated, healthcare-focused omnichannel platform, which is already producing excellent results for our clients. We have top pharma clients engaged in a pipeline here, which will get us back to growth. In Q2, we closed three additional AI deals with our clients. Recall, we started this offering over three years ago, meaning we have been in the market longer than anyone in this space. More importantly, the wins are indicative of a rapid industry adoption of AI for customer engagement and the use of machine learning to digest, distill, and interpret massive data sets to drive valuable connections between doctors, patients, and manufacturers. This enables our customers to streamline precise engagement at scale and changes the dynamic of decision-making along the patient journey for patients and providers alike. We expect to see continued infusion of new data and customer scrutiny into the marketing approach. We have a head start here with years of our own proprietary engaging data, experience putting that alongside clinical data, and patent-pending AI methods at the point of care to bring healthcare stakeholders together in support of better care. We are the company best positioned to even the playing field for pharma between traditional digital media such as social and web, and provider-focused engagement at the point of care. As we scale, we will help our clients be agile and data-driven with their marketing efforts. While all of these changes have implications in the short term, we firmly believe that we are in the right space at the right time of a very nascent but growing AI movement as it relates to commercialization at point-of-care. Our long-term trajectory remains unchanged as per our update in the spring. In the near term, aside from differences between the origination of proposals and the closing of deals, our pipeline remains very healthy, and we currently have nearly 50 active contracted enterprise deals worth approximately $25 million. We are very excited about our new path forward as we differentiate ourselves from our competitors that do not have our point-of-care connectivity alongside AI at their disposal. We are choosing to focus on the fastest growth segment of our business where we are ahead of the new market entrants. We believe AI-driven engagement is an area that will come full circle in the next 2 to 5 years and where we will become the market-leading transforming standard industry best practice and a true partner with our clients. Now with that, I'd like to turn the call over to our CFO and COO, Ed Stelmakh, who will walk us through the financial details for Q2. Ed?

Thanks, Will. As with all our calls, the press release was issued with the results of our second quarter ended June 30, 2023. A copy is available for viewing and may be downloaded from the Investor Relations section of our website, and additional information can be obtained through our forthcoming 10-Q. Second-quarter revenue was $13.8 million, a slight decrease from the $14 million we've generated in the same period in 2022. The decrease in revenue was primarily due to macro headwinds and program approval delays. Meanwhile, our gross margin decreased from 64.3% in the quarter ended June 30, 2022, to 56.6% in the quarter ended June 30, 2023, slightly below the lower end of our previous annual gross margin guidance range. The decrease was due to solutions and channel partner mix, including the impact of delayed decisions in our RWD.AI programs. Given these dynamics, we are adjusting our gross margin range for the year from 58% to 62% to a new range of 55% to 59%. Our operating expenses remained relatively consistent year-over-year and came in at $12.7 million for the three months ended June 30, 2023, versus $12.9 million for the same period in 2022. We had a net loss of $4.2 million or $0.24 per basic and fully diluted share for the three months ended June 30, 2023, as compared to a net loss of $3.9 million during the same period in 2022. On a non-GAAP basis, net loss for the second quarter of 2023 was $0.2 million or $0.01 for basic and fully diluted share outstanding as compared to a non-GAAP net income of $0.7 million or $0.04 per basic and fully diluted share in the same year-ago period. Operating cash flow came in at a loss of $2.4 million for the quarter and was materially impacted by upfront integration fees paid to our channel partners, which are being amortized on our P&L over the life of the contract. Our balance sheet remained strong with cash and cash equivalents totaling $62.7 million on June 30, 2023, compared to $74.1 million on December 31, 2022. The majority of the decline was due to our share repurchase program, where we bought back $526,999 shares of common stock for $7.5 million during the quarter. We remain well capitalized to execute against our growth strategy and believe our balance sheet positions us to further invest in our core business while driving profitable growth. In addition, we are actively looking at M&A opportunities that fit within our strategic priorities at more attractive valuations compared to last year. We remain confident in our long-term growth outlook. However, given current market conditions, we are revising our 2023 full-year revenue projections to come in between the mid-$50 million to low $60 million range. Our new range is built around reasonable applications for existing backlog, mid-year upsells, and new program launch opportunities. Now let's turn to our KPIs for the second quarter of 2023, which have largely stabilized when compared to the prior quarter. Average revenue per top 20 pharmaceutical manufacturer is stable at $2 million as we continue to work with 18 of the top 20 largest pharma companies in the world and 100% of the top 20 that don't have the majority of their sales tied to COVID-19 vaccines. The net revenue retention rate is showing improvement at 89% from 86% in Q1 2023. New revenue per FTE came in at $560,000, slightly below $65,000 in Q1 2023. As you can see from our KPIs, our sequential quarterly metrics are starting to show signs of stability and in some cases, improvements as we continue to work our way through the external market dynamics. And now with that, I would like to turn the call back over to Will. Will?

Great, operator, let's go to Q&A.

Thank you. Your first question comes from Ryan Daniels from William Blair. Please go ahead.

Thanks for taking the questions and for the update. Will, can you go into a little bit more detail regarding the guidance reduction, specifically, if we look at the three areas you highlighted, which are medical legal reviews pushing business out, which is a timing issue, macro headwinds, and then the non-core business weakness, how did each of those contribute to the lower outlook?

Yes. Thanks, Ryan. Good to hear your voice. Yes, I would say it's about one-third, one-third, one-third spread out pretty evenly. On the medical legal review, obviously, that's not new to the space. Like I said, frustrating and impactful, but it's just part of the current dynamic. Relative to the other pieces, I would say they represent about one-third as well inside the adjustment. On non-core, we had some non-core disruptions, particularly when you think about access and patient engagement. We just had some disruption there and it's an evolving space. It's also less than 10% of our revenue, so not as impactful. But you put the three together, and you've got a slight pipeline miss but the team is focused on it. The clients are there, and luckily, that base is pretty solid. So I think we can bring some of it back, but not enough. In this market, we want to be conservative.

Okay. And then what are kind of the biggest variables now for the remainder of the year? We're sitting here with less than 4 months left, and you still have a pretty broad range if we think of the new range you provided tonight. So what are some of the things that would need to hit or miss to get you towards the upper and lower end of that range you provided?

I think there are two key points, and I'll allow Ed or Steve to add their thoughts as well. Firstly, we're experiencing quicker decision-making. While some distractions remain, they are diminishing. With our emphasis on AI as part of our strategy to engage with physicians and patients, we believe we are well-positioned to capitalize on this trend. Secondly, we have a solid connection to the agency world, which manages a significant portion of media budgets, and we have been expanding our efforts to capture those funds. Ed, Steve, do you have anything further to add?

Yes, Ryan. So just a couple of things to mention. The book ends right now for the range as far as commitments signed and really to go are between 80% and 90% in the bank. So we basically have between 10% and 20% of our total revenue for the year that is still outstanding. So we feel we've got enough in the pipeline, as well as expected RP season to fill that gap.

Okay. And then last one, I'll hop in the queue. When you talk about the 10% reduction in the operating expenses. Obviously, good operating expense control this quarter to have in line bottom line despite the revenue mix. But what does that mean? Is that going to be a workforce restructuring? Is it just keeping expenses in check despite the fact that you'll start growing again? Is it kind of a refocus on go-to-market efforts with specific products? Just a little bit more color there on what's going to be driving that? Thanks.

Yes, Ryan. So obviously, this is a people business, and we love our entire team, and that comes first. So we're not going to rush into any decisions; we're statistically very strong and have always been responsible with that part of the business. But we're really going to hone in and focus on what's working well. And if something is not, then we'll sunset it and look to move past it. I think it's a combination of we're just going to hold off on hiring, right? We're going to have some attrition, and we're going to shift the focus into the sort of core business that built this up today. I think if you add all those things up, you get there. But again, I want to emphasize we're not in a rush to do that. And we will take a very, very good approach to handling it.

Thank you. And your next question comes from the line of Sean Dodge from RBC Capital Markets. Please go ahead.

Thanks, Will. You mentioned you all won another three RWD deals, which I think brings the total to nine now. The three new ones, is there any more detail you can give us on what those entail? How similar or dissimilar are they to the first six you've signed, maybe some sense of how big they could be and when they should start to ramp?

Sure. I'm going to ask Steve Silvestro to answer that one. Thanks, Steve.

Yes. Happy to hear, Sean. Good to hear from you. So yes, we are up to nine deals, which is I think a pretty good accomplishment where, as you heard Will say earlier in the call, we're far ahead of anyone that would be trying to compete in this space in terms of bringing something to market that actually is executing. The deals are pretty consistent in terms of composition. They all follow a very similar sort of setup structure execution function. And size-wise, they're all sort of similar as well. I think one of the things that's noteworthy that I would probably call out here is in several of the manufacturers where we did the early work last year and sort of generated ROIs, we've expanded to other assets within those same manufacturers, meaning we are supporting other disease states for the same manufacturers based on the good work and performance that the team did with the prior efforts. And I think, Sean, that gives you kind of an idea of future opportunities. You've heard us talk a lot about cross-sell and upsell in the last, I would say, 12 to 18 months for our RWD.AI solution, which was extremely novel to the market that took a little bit for pharma to be able to understand it and get it through MLRs you've heard Will already talk about. But now that it's through, we're starting to see a rapid adoption, and it's pretty exciting.

Okay, great. And then the RWD.AI deals that are active now, are any of those approaching any type of renewal? I guess the expectation is still that these things renew pretty quickly relative to what has been the case in the past? And then, how are you handling that or handicapping that when it comes to the guidance? Is there some assumption that some of these existing active ones renew within the year? Or are you just assuming they just kind of run out and don't?

Yes, I can. William.

Go ahead, Steve. Yes. Great.

What we've seen is that these are the most sticky of all the solutions we have. The reason is that you're essentially creating an audience by identifying a patient profile. There’s a significant effort that goes into that build, and once those execution functions are in place, it's very easy for the manufacturer to continue. Therefore, we are very optimistic about the renewals, and this is already included in our current guidance. As you've heard from both Will and me, we've approached this guidance conservatively. This also applies to our perspective on the RWD front. We have every reason to feel positive about this specific segment of our business.

Okay, great. Thank you guys for taking the questions.

Thanks, Sean.

Thank you. Your next question comes from Eric Martinuzzi from Lake Street. Please go ahead.

Yes, I wanted to focus on the guidance here at the mid-50s to low 60s. I'm coming up with roughly $58.5 million for the year, which would be down about $10 million versus your prior guidance. Given the $27 million that we've done in the front half of the year, it's looking like we get to kind of a, I don't know, $31 million, $32 million across the back half of the year. How should we be thinking about the leading of that $31 million, $32 million across Q3 and Q4? Will we see traditional seasonality where Q4 is a big step up? Or is it just more prudent to model it flat across the two quarters?

Ed, do you want to take that one?

Yes, sure. Yes, I would say, you’re seeing seasonality you used in the past, nothing different. We are being conservative, as we said before, 80% to 90% is the range right now for us as far as commitments are concerned. So our plan, of course, is to hit at least and hopefully exceed guidance this time.

Okay. I thought I understood what non-core meant, but I'm not so sure now that Will referred to it as less than 10%. In Q2, the stream was targeting $14.8 million, and you delivered $13.8 million. Starting with that $13.8 million, are you saying that non-core is less than $1.4 million of that total?

Yes. I mean, we don't break things out, but just non-core did contribute to the miss, as well as the MLR that we referenced.

Okay. And then I saw a percent on the RWD.AI. Have you given an actual revenue number on the RWD.AI?

We haven't detailed that yet. However, as we refine this model to make it our primary value proposition, we'll get closer to providing that information. It's going to involve a mix of AI and enterprise, which is the most compelling aspect and offers the best margins. It truly provides significant value for clients, doctors, and patients. As we progress through the next two quarters, we'll refine that further because, at the end of the day, we’ve heard a lot about AI. Applying it in healthcare is quite challenging. Yet, with the data sets we are working with and our connected platform, it’s an ideal scenario for machine learning to assist our clients in locating and managing patients effectively. Therefore, we will increasingly focus on this area. I’ve mentioned this before, and I want to clarify that we’re not just being opportunistic; we've been developing this for a few years now. Our team has become highly skilled at collaborating with clients, partners, and data providers, and we’re very enthusiastic about it. We’ll provide more detailed information about this in the coming quarters.

Got it. Thanks for taking my questions.

Thanks, Eric.

Thank you. And your next question comes from the line of Neil Chatterji from B. Riley Securities. Please go ahead.

Hi, this is William on for Neil today. Thanks for taking the questions. Just kind of curious if you could provide any additional color on the expected cadence of these RW deals throughout 2023. And how things sort of shaped up in Q2 and then for the how we should expect for the second half?

I'll start, and then I'll see Steve. We're in that part of the year where RFP season is kicking in, and there are a lot of strategic discussions with clients around 2024. So we wouldn't anticipate a lot of big RWD.AI closings between now and the end of the year, but a lot of planning is going on. And that part has been very encouraging. But I'll let Steve talk specific disease in the trenches day to day.

Yes, hey William, thanks for the question. Yes, it's exactly what Will said. We're at the RFP season right now, and most of the conversations that we're having are larger strategic conversations where they are crossing franchises in the manufacturer. I think that's an incredibly positive sign where we're having discussions now of not just can you support this drug for three to six months or 12 months? It's can you support the entire portfolio of immunology and support the entire portfolio of oncology and so forth. Those are good places to be. I think also one of the other pieces that feels like a great tailwind in terms of RWD.AI in most cases, where we've done and implemented a program and a solution, we've gotten strong C-level support within the manufacturers based on the results. It's really good when you have C-level executives evangelizing the solutions to other parts of the organization. We fully anticipate a successful second half in terms of getting things up and running, and then programs deploying in the first part of 2024 that will set us up for a really good year next year.

Got it. Appreciate that extra color there. One last additional one. You mentioned originally that you had basically 30, 30, and 30 on what drove the weakness during the second quarter. In terms of macro headwinds impacting the second quarter, do we expect the same level of macro headwinds to continue into the second half? And do we have any new strategies that we might be expecting to mitigate those headwinds?

Yes. I believe that the FDA's actions regarding 2021 approvals still represent a significant challenge for everyone in the specialty medications sector. While we aren't seeing personnel leave for other companies, it's noticeable on LinkedIn that these companies aren't adding new hires and may even be reducing their workforce at the manufacturing level. This disruption persists. Additionally, we continue to face market noise that we've discussed before, but I anticipate that this noise will begin to diminish during the RFP season. Our strategy to tackle these issues involves concentrating on our most effective and engaging aspects of the business where we see growth. By streamlining our team to focus on these key areas, I expect an increase in overall productivity. So, stay tuned for updates. We're quite enthusiastic about this and are committed to making it happen.

Got it. Appreciate you taking my questions, and I’ll jump back in the queue. Thanks.

Thank you.

As we have no further questions at this time, I will now turn the call over to Mr. Febbo for closing comments. Thank you.

Thank you, operator. And thank you everyone for joining us on the call today. As we work through these near-term disruptions, we remain active in addressing Pharma's digital needs. With the current pharma digital TAM spend at greater than $10 billion and continuing to grow, we are working towards fortifying our position as the most complete AI-powered digital point-of-care engagement partner for pharma in the marketplace. We hope that the trends that have disrupted our historical growth will subside over the next coming quarters. Lastly, we are being very proactive in our efforts to reverse current results due to headwinds and return our business to its historical growth trajectory. We are greatly aware of the responsibilities entrusted to us by our shareholders. To this end, we are aggressively hunting for accretive assets in addition to strategic alternatives, so long as the value proposition to our stakeholders makes the decision an obvious one. Nothing to announce today, but we are very active in the market. We also plan to have additional communication with investors prior to our third quarter earnings call. With that, I'd like to say thanks, and I look forward to talking to you soon. Bye-bye.

Thank you, sir. Before we go to today's call, I would like to provide the company's safe harbor statement that includes important cautions regarding forward-looking statements made during today's call. Statements made by management during today's call may contain forward-looking statements within the definition of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934 as amended. These forward-looking statements should not be used to make investment decisions. The words anticipate, estimate, expect, possible and seeking, and similar expressions identify forward-looking statements. We may speak only to the date that such statements are made. Such forward-looking statements in this call, including statements regarding estimation of total addressable market size, market penetration, revenue growth, gross margin, operating expenses, profitability, cash flow, technology, investments, growth opportunities, acquisitions, upcoming announcements, and the need for raising additional capital. They also include management's expectations for the rest of the year and adoption of the company's digital health platform. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying these forward-looking statements. The risks and uncertainties to which forward-looking statements are subject to include, but are not limited to, the effect of government regulation, competition, and other material risks. Risks and uncertainties to which forward-looking statements are subject to could affect business and financial results are included in the company's annual report on Form 10-K for the quarter ended December 31, 2022. This form is available on the company's website and on the SEC website at sec.gov. Before we end today's conference, I would like to remind everyone that this call will be available for replay via webcast only, starting later this evening and running for a year. Please refer to today's press release for replay instructions available via the company's website at www.optimizerx.com. Thank you for joining us today. This concludes today's conference call. You may now disconnect.