OptimizeRx Corporation. (NASDAQ:OPRX) Q2 2023 Earnings Conference Call August 14, 2023 4:30 PM ET

Company Participants

William Febbo - Chief Executive Officer
Edward Stelmakh - Chief Financial and Operating Officer
Stephen Silvestro - Chief Commercial Officer
Marion Odence-Ford - General Counsel and Chief Compliance Officer
Andrew D’Silva - Senior Vice President, Corporate Finance

Conference Call Participants

Ryan Daniels - William Blair
Sean Dodge - RBC Capital Markets
Eric Martinuzzi - Lake Street

Operator

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.

William Febbo

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 on the future of digital marketing in health care. 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 impact 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, which 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. And as you will see when you review the numbers, even with lighter top line than expected, we were able to limit spend 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 start-ups, company pivots and roll-up strategy, which is crowded and distracted the market. As a result, our clients are looking for a higher level of transparency as to 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 effect 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 client needs, we will deploy our resources to the areas with the overwhelming majority of our revenues.

In the second half of 2023, we will also reduce our cash OpEx run rate going into 2024 by at least 10%, which would 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 best performing. Three years ago, we launched an RWD.AI solution, enabling life science organizations to engage doctors at 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 channel alongside a point-of-care to build a truly integrated, health care-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, to still 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 both 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 health care 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 implication 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 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 don't 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 being 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?

Edward Stelmakh

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 downward 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 date. Meanwhile, our gross margin decreased from 64.3% in the quarter ended June 30, 2022, to 56.6% in 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 3 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 3 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, to which we bought back $526,999 and 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 when 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.

Net revenue retention rate is showing improvement at 89% from 86% in Q1 2023. New while revenues 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, much 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?

William Febbo

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

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Your first question comes from the line of Ryan Daniels from William Blair. Please go ahead.

Ryan Daniels

Thanks [Ph] 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 3 areas you highlighted, which are medical legal reviews pushing business out, which is a timing issue, macro headwinds and then the noncore business weakness, how did each of those contribute to the lower outlook.

William Febbo

Yes. Thanks, Ryan. Good to hear your voice. Yes, I would say it's about 1/3, 1/3, 1/3 spread out pretty evenly. On the medical legal review, obviously, there's -- that's -- yes, it'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 1/3 as well inside the adjustment. On noncore, we had some non-core 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 3 together and you've got yourself this 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. And in this market, we want to be conservative.

Ryan Daniels

Okay. And then what are kind of the biggest variables now for the remainder of the year? We're sitting here in 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?

William Febbo

I think there's two things, and I'll let Ed or Steve comment as well. The two things that come to my mind are just swifter decision making. We think the noise is dying down. It still exists, but it's dying down, and we're -- given our focus in some of the recent attention to AI as a piece of the strategy to reach physicians and patients. We're really well positioned for that. We also believe we've got a nice connection into the agency world, which obviously manages a lot of the media dollars and have continued expanding landing pads to capture some of those dollars. Ed, Steve, anything else you want to add to that?

Edward Stelmakh

Yes, Ryan. So just a couple of things to mention. So kind of the book ends right now for the range as far as commitments signed and really to go were 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 state for current opportunities in the pipeline as well as expected RP season to fill that gap.

Ryan Daniels

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 is that? 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.

William Febbo

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 were statistically very strong and have always been very 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 will look to move past it. And so, I think it was 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.

Operator

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

Sean Dodge

Thanks. Will, you mentioned you all won another 3 RWD deal, which I think brings the total to 9 now. The 3 new ones, is there any more detail you can give us on what those entail? How similar or dissimilar are they to the first 6 you've signed, maybe some sense of how big they could be and when they should start to ramp?

William Febbo

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

Stephen Silvestro

Yes. Happy to hear Sean. Good to hear from you. So yes, we are up to 9 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, upsell in the last, I would say, 12 to 18 months for our RWD.AI solution, which was extremely novel to the market took a little bit for pharma to be able to understand it to get it through MLRs you've heard Will and had already talked about. But now that it's through, we're now starting to see a more rapid adoption, and it's pretty exciting.

Sean Dodge

Okay. Great. And then the RWD.AI deals that are active now, are any of those approaching any type of renewal? I guess is the expected still that these things kind of 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?

Stephen Silvestro

Yes. I can.

William Febbo

Go ahead. Go ahead, Steve. Yes. Great.

Stephen Silvestro

Thank you. What we've seen, Sean, is that these -- of all the solutions we have, these are the most sticky. And the reason why they are is because you're doing a basically creating an audience, meaning identifying a patient profile, there's work that goes into that build. And then when those execution functions perform, it's very easy for the manufacturer to just carry on. So our view on the renewals is very optimistic. It's factored into our current thinking on guidance. We've been -- as you've heard, both Will and I'd say we've been conservative with that guidance. I think that covers also what we're looking at on the RWA front. But we have every reason to be very optimistic with this specific line of our business and are pretty positive about it.

Sean Dodge

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

Stephen Silvestro

Thanks, Sean.

Operator

Thank you. [Operator Instructions] And your next question comes from the line of Eric Martinuzzi from Lake Street. Please go ahead.

Eric Martinuzzi

Yes, I wanted to focus on the guidance here at the mid-50s to low 60s, I'm coming up with roughly a $58.5 million for the year, which would be down about $10 million versus your prior guidance. And given the $27 million that we've done in the front half of the year, it's looking like that 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?

William Febbo

Ed, do you want to take that one?

Edward Stelmakh

Yes, sure. Yes, I would say, you 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.

Eric Martinuzzi

Okay. And then I thought I understood what noncore was, and now I'm not so sure when -- Will you referred to it as less than 10%, so I mean, if we just take Q3 in round number -- or sorry Q2 and round numbers, the stream was looking for 14.8% and you guys delivered $13.8 million let's start with that $13.8 million. You're saying that noncore is less than $1.4 million of that $13.8 million?

William Febbo

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

Eric Martinuzzi

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

William Febbo

We have not broken that out yet. But as we fine-tune this model to really be driven by that as our key differentiator of value proposition, we'll get closer to that. It's going to be a combination of AI and enterprise. That's what's the stickiest, it's the best margin. It's actually the most value for the client, the doctor and the patient. So you'll see as we get through the next two quarters, we'll fine-tune that more and more because that's -- at the end of the day, obviously, we've all read about AI endlessly. When you actually try to apply it in health care, it's very tricky. But when you're working with these data sets that we are and your platform is connected the way we are, it's actually the perfect application for machine learning to help our clients find and get patients on the locations they need. So yes, we're going to get more and more focused on that.

As I referenced the three years in because I do not want the market to think we're just being opportunistic here. This is something we've been working on for, as I said, a couple of years, got a team that's now really good at working with the clients and our partners and data providers. So that's a really unique skill set that's all tech-enabled. So we're very excited about it. But we'll get more specific about that, Eric, over the next couple of quarters.

Eric Martinuzzi

Got it. Thanks for taking my questions.

William Febbo

Thanks, Eric.

Operator

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

Unidentified Analyst

Hi, this is William [Ph] 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 2Q and then for the how we should expect for second half?

William Febbo

I'll start, and then I'll see and Steve. We're in that part of the year where RFP season is kicking in, 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 going on. And that part has been very encouraging. But I'll let Steve talk specific disease in the trench day today.

Stephen Silvestro

Yes hey William, thanks for the question. Yes, it's exactly what Will said, were it to 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 side 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 to support the entire portfolio of oncology and so forth. And those are good places to be.

I think also one of the other piece that feels like a pretty good 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 is angelizing the solutions to other parts of the organization. And so, 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 to a really good year next year.

Unidentified Analyst

Got it. Appreciate that extra color there. One last one additional one. You mentioned originally that you had basically 30, 30 and 30 on what drove sort of 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?

William Febbo

Yes. I think, look, we're -- you'd still see an FDA behind 2021 -- year 2021 approvals that's still a real headwind. That's for everybody in the industry that's focused on specialty medications and marketing dollars, while we're not seeing people jump to other companies, if you just pay attention to LinkedIn, you're also seeing these companies not growing in terms of people if anything, they may be doing the opposite at the manufacturing level. So there's still disruption there.

But -- and then obviously, the headwinds of just noise in the market that we've talked about. But I think the noise is going to start to subside through RFP season I think the way we are addressing this issue is really to double down on what's working and what's stickier and really is the most exciting part of the business where the growth is. I think just by doing that, by simplifying the entire team focused on that, we'll see an uptick in productivity across the board. So stay tuned on that. We're pretty excited about it, and we're very focused.

Unidentified Analyst

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

William Febbo

Thank you.

Operator

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

William Febbo

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 with which we have been entrusted to shoulder 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.

Operator

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 with the definition of Section 27A and 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 word 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 the 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 not 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 running through 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.