What happened

Shares of medical diagnostic company Semler Scientific (SMLR -0.10%) were plunging today, down 36.4% as of 10:39 a.m. ET.

Semler Scientific reported third-quarter earnings last night, showing just flat revenue growth and slightly lower earnings per share than the year-ago quarter. However, the company also lowered its fourth-quarter and full-year guidance, as some major customers lowered their spend unexpectedly.

So what

Semler's main product is QuantaFlo, a sensor and software solution that detects peripheral arterial disease, or PAD. Semler actually sells QuantaFlo not as a one-off machine sale but as a recurring subscription, either in the form of a fixed fee subscription or a variable payment model on a per-test basis.

While Semler believes PAD is often undiagnosed and may affect many Americans -- therefore making its addressable market quite large -- growth has stalled over the past couple of quarters. In Q3, revenue was $14 million, flat year over year, while earnings per share of $0.46 were lower than the prior-year quarter's $0.51 per share.

Semler also lowered its full-year outlook to a range of $55.5 million to $58 million, down from a prior range of $58 million to $60 million. While Semler also lowered its guidance for expenses, thus preserving margins, investors apparently didn't like the revenue weakness.

On the earnings call, management said that testing at a large variable-fee customer didn't materialize as anticipated, while Semler saw a shift from higher to lower-priced products. In addition, one of its large customers achieved a volume-based pricing discount. Given that Semler is a small-cap company with a limited number of customers, that was apparently enough to tip the scales in a negative direction.

Now what

Investors may be coming to realize that Semler has a problem common among many smaller-cap stocks -- customer concentration. Last quarter, Semler's top two customers accounted for 41% and 26% of revenue, respectively.

That not only puts some pressure on the company should one large customer decide to slow purchases or tests, but large customers can also negotiate favorable pricing, which stands to potentially put pressure on Semler's margins.

On the bright side, Semler is profitable, unlike a lot of other smaller-cap companies and start-ups, and the company continued to build its cash levels to $45.5 million -- roughly a quarter of its entire market cap. The company also bought back stock last quarter at $43.08 per share – much higher than the price right now.

Trading now at only 16 times earnings after today's fall, and even cheaper when stripping out its cash, Semler could make an interesting target for value investors -- just be aware of the risks associated with a one-product small cap.