Heartbeam Inc (BEAT) 2011 Q1 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet First Quarter 2011 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities and Litigation Act of 1995.

Such statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that the company's executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements.

At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Joseph Capper. Sir, you may begin.

Thank you, Juneta. Good afternoon, everyone, and welcome to our first quarter conference call. I am Joe Capper, President and CEO of CardioNet. I will provide commentary on the quarter and on the progress we're making on our five key objectives. I'm joined by Heather Getz, our CFO, who will provide detail on our operating results. We will also allow time for a brief question-and-answer session.

First of all, I would like to thank and congratulate the CardioNet employees for a tremendous job in the first quarter. I know we have a lot of work in front of us and being the pioneer in an industry is not for the weak. However, we should all be proud of the progress we are making. On our last call, I reported fourth quarter results that were much improved over the third quarter. That trend continues as today, I am pleased to report operating results for the first quarter of 2011 that substantially exceed our previous quarter and surpassed expectations.

In the quarter, demand for MCOT was up over the fourth quarter. Revenue was up $5.3 million sequentially to $34 million. EBITDA was a positive $1.8 million, a $3 million sequential improvement. We ended the quarter with $43 million of cash and made additional improvements in our collections area, resulting in a 77 day DSO and less than 8% bad debt expense as a percentage of revenue. We continue to add back sales and marketing resources necessary to fund growth and we made considerable progress integrating the Biotel business.

We now look at our product portfolio in four groups; MCOT, which is 78% of revenue; Holter and event, is 12% of revenue; Equipment sales, which was a Biotel business, is 9% of revenue and we now have a small clinical research business also from Biotel, which is 1% of revenue. Granted, this is a relatively modest operation. However, it is an excellent example as to how we can leverage our existing products and infrastructure into adjacent markets.

Before I comment on our objectives, I would ask that Heather provide more detail on these results.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, our operations have improved significantly over the past year, enabling us to achieve improved results and placing the company in a more secure financial position.

As mentioned, revenue for the quarter was $34 million, a 19% sequential increase compared to the fourth quarter, due to higher patient revenue as well as the addition of Biotel. MCOT service revenue increased 6%, while event and Holter revenues increased by 10%, collectively.

As Joe will discuss further, we implemented a new policy regarding non-covered patients, which had no impact on MCOT revenue in the quarter, but did increase our event revenue.

Our gross margin was 60% for the quarter, a 2 percentage point sequential increase. The increase was primarily due to the cost efficiency measures implemented as well as the positive impact of reducing our exposure to non-covered patients. The increase was partially offset by the addition of the lower margin Biotel business, and certain one-time costs associated with the launch of C5.

We continue to evaluate process improvements and look to gain additional efficiencies in the future. However, we expect to see pressure on gross margins in the coming quarters as commercial payers migrate toward the Medicare rates.

Beyond 2011, we will benefit from the launch of the C5, which has a lower product cost than our current generation device. The impact on 2011 will be minimal due to the phase in of the devices.

Our adjusted operating expense for the quarter was 6% higher sequentially with the addition of Biotel as well as increased development costs related to C5 and the addition of sales resources.

The first quarter did benefit significantly from a reduction in bad debt expense of $2 million compared to the fourth quarter of 2010. Bad debt as a percentage of patient revenue was less than 8% for the quarter.

Turning to the balance sheet, we ended the first quarter with $43 million in cash and investments and no outstanding debt. In the quarter, we had negative free cash flow of $2.6 million, which is typical for the first quarter as we prepaid a number of items as well as made incentive plan payments. Looking forward, we would expect to be free cash flow neutral to positive and do not foresee any significant capital expenditures outside of our device purchases.

As for accounts receivable and DSO, we are continuing to see the benefits of recent changes that we implemented in the billing and collections areas. We experienced a strong cash collections on patient revenue during the quarter of approximately $26 million despite the typical first quarter challenges arising from the resetting of patient co-pays and deductibles.

This allowed our DSO to remain relatively flat at 77 days, the lowest in the history of CardioNet. As we look forward, we have targeted a number of additional changes in the billing and collections area. While these changes could cause minor disruptions as employees are trained or retrained and could cause a short-term increase in DSO, we believe the longer term benefit to collections will be positive for the company. Ultimately for the year, we anticipate that our DSO will be lower than the year end 2010 number of 78 days.

Overall, we are pleased with our results for the quarter, as they are a testament to the progress that the company has made over the past year. While we remain committed to continuing these trends, we are cautious due to the pressure on commercial reimbursement as payers migrate toward the Medicare rate, and the impact this may have on results. Therefore, we will not to be providing revenue or earnings guidance at this time.

Thank you. I will now turn the call back to Joe.

Thank you, Heather. I truly believe this progress happens when a team like ours stays focused on a handful of important business objectives. I outlined our five key areas of focus on our first call with you in August of last year and have provided brief comments on each call since then.

The first is to accelerate volume growth. While we continue to tweak our messaging and look for ways to augment the selling effort that support promotions, the primary way we go to market is through the deployment of a well trained highly professional direct sales force. As I mentioned on our last call, we added 10 additional sales territories during the fourth quarter, which contributed to the increased demand for MCOT.

Again, we will continue to add sales reps on a selective basis, if it makes sense to do so, and we will attempt to augment this growth through acquisition. Although volume growth is critical to our success, we need to be far more disciplined in the way we run our business. As a result, we instituted a new policy whereby we have become more selective as to when and if we put the patient on MCOT service. Specifically, we have tightened up our insurance verification and acceptance criteria. If it is clear that a patient's insurance company is not going to pay for MCOT, the patient is offered the option to self-pay, the choice to use an event recorder or to simply not go on service.

The net effect of this change is slightly lower MCOT volume, improved gross margin and potentially higher revenue as the event business grows. In today's reimbursement environment, we simply cannot risk non-payment for services we provide. Hopefully, insurance companies that are still denying their beneficiaries access to this life saving technology will soon make it available to them.

Which leads us to our second objective; to press for greater reimbursement coverage for MCOT. We continued to make progress gaining access under private insurance plans and improving pull-through once the contract has been signed. In addition, we furthered our discussions with Medicare in hopes they will change certain assumptions they have made about the nature of this service and set the price at a more appropriate level.

As we are all acutely aware when CMS nationally priced Mobile Cardiac Telemetry last year, they dramatically missed the mark. The reimbursement offered to an independent diagnostic testing facility operating in our region is 34% below where it was before the 2009 reduction, and it is well below what is reasonable.

To put this in perspective, based on the length of time and [patterns] prescribed by the average physician and assuming the previous higher reimbursement rate of $1123, Medicare would be paying $3.34 an hour for remote mobile cardiac monitoring performed by trained technicians around the clock, a service that dramatically increases the probability of detecting atrial fibrillation as well as other potential problems. It is indisputable that this early more accurate diagnosis provided by MCOT will save lives and save the healthcare system millions of dollars. One has to wonder if Medicare reimburses any other service that provides such clear value at such a low price.

Third, we continue to make significant strides towards building a culture of customer service excellence. I've mentioned customer service on every call since joining CardioNet and I'm proud of the progress we've made. However, we still have a long way to go and we are committed to achieving excellence in this area.

Fourth, we expect to begin to commercialize C5, our next generation MCOT device, in the second half of 2011. We recently achieved a major milestone when alpha testing began. This product is obviously coming to market later than we had expected. However, we are excited about the performance we are seeing and the additional features that have been incorporated.

Last but certainly not least, we remain focused on finding ways to reduce our overall cost structure. We have made great progress in bringing down our bad debt allowance and controlling all other operating expenses. The launch of C5 and a few other key initiatives will further reduce cost of sales. A lean, leverageable cost structure is essential to excel in today's healthcare environment.

With that said, we will now open the call to questions. Operator, we are ready for our first question.

(Operator Instructions) Your first question comes from the line of Matthew Dolan with ROTH Capital Partners. Please proceed.

Good afternoon, everyone. This is Matt Pommer filling in for Matt Dolan. Thanks for taking the questions. Let's see. So, first of all, I'd like to ask is there a way you can quantify the benefits and losses from the more selective patient acceptance policy?

Yes. Hi, Matt, this is Heather. What we can say -- we don't want to give specifics around what the actual numbers were. What we'll say is that it resulted in lower patient starts, but no impact to our MCT revenue, because this would have been for patients who we would have recorded no revenue for upfront. But on the other hand, a lot of these patients opted to go on event, the event service, so that led to an increase in the revenue there, which ultimately leads to a better bottom line. In addition, we don't incur the cost to put these patients on service whose insurance more likely than not won't pay. So, we achieved better profitability as a result.

Okay. And maybe moving to bad debt, I mean it was down significantly in the quarter. For modeling purposes, is this a good assumption going forward and will it trend down from here given the deductibles in direct pay throughout the year, et cetera?

Well, I mean obviously we record our bad debt on an aging basis, so there could be some variation. But I think that the -- in absolute dollar terms, the level will be relatively stable.

Okay, great. And with respect to MCOT revenues, can you help us understand the growth? You said it was up 6%, what are the underlying pricing and volume trends?

Well, this is Joe. We're not in a position to put out volume and I know that frustrates you guys. And one of the reasons we can't put out volume is because we're making business (inaudible) changes like we just explained. Had we not changed our enrollment policy, volumes would have been higher for the quarter, but our EBITDA performance would have been worse. So, we're a little bit skeptical about talking too much about that trend. I think it's fair to say that as we progress through the year, we anticipate more pressure on reimbursement, which will be offset by volume growth.

The good news is one of the ways we measure demand for the product is through gross referrals, which is -- it's not a factor of selection criteria, it's a factor of how much demand there is in the market place driven by our sales and marketing efforts. Demand in terms of gross referrals was up in the quarter for the first time in a year. So that was a very positive leading indicator for us.

Okay. Great. And maybe finally here, a number of moving parts on the gross margin this quarter. I was hoping maybe you could quantify the drag from the Biotel business and maybe tell us if this is going to improve as you progress further in the integration process as well as any general commentary on gross margin direction for the year? Thank you.

So, I mean from a percentage point perspective, if I look year-over-year our gross margin percent was down about 3 points. About half of that is because of incorporating the Biotel business into ours, and because it is such a small piece of the business right now, I don't expect to see much benefit from better margins on their side coming through our results.

Looking forward with gross margin, if we assume that the prices migrate down steadily and we see an increase in volumes, our gross margins should be stable to improving. But I mean that's an if. We are always hesitant to say exactly what the ASPs will do. But if those factors are taken into consideration and it migrates down steadily, we should see stable to increasing margins.

I appreciate it. Thanks for taking the questions.

You're welcome.

Your next question comes from the line of Amit Bhalla with Citi. Please proceed.

Hi, good afternoon. Can you talk a little bit just about the sales force numbers? Where you ended the quarter -- just wanted -- I don't think I heard that in the prepared comments?

We have 107 territories, and I would say that we're almost completely filled at any given day; we have a little bit of turnover in there. But we're functioning at 107 territories today and again, that was an expansion in the fourth quarter, in the latter half in the fourth quarter of about 10 additional territories. And as I mentioned, our plan is that as we continue to return on that investment, we'll incrementally add.

And then just a couple of quick follow-ups here. The Biotel revenue in the quarter was higher than I think you had outlined last quarter. I think you said $8 million to $10 million for the full year. It's coming in higher than that. Do you have a different outlook for Biotel?

Yes, I would expect that Biotel will probably be in excess of $10 million for the year.

Okay. I think that's what I was assuming. But, are you talking like it's --- is it going to be sequentially growing much faster than that? I mean you can get to $10 million pretty easily.

Right. We had a few one-time type sales in the first quarter, so I wouldn't expect to see the same Biotel number each quarter going forward. That's why we're still sticking to the $10 million -- around the $10 million number for the year.

The other thing, Amit, is we've only had the business for a quarter and we're still developing the right strategic approach for this business, how we're going to integrate parts of the business into the CardioNet business, how well the CardioNet sales organization will be able to generate leads for the Biotel side of the house. So, I think there is some crossover opportunity there, and I think there is some upside opportunities. We're just -- as you could probably tell from the last few calls we had, we're relatively cautious when we put out any kind of a discussion like that.

Okay. And just my last question, I guess just two parts. A part of your strategy, you are targeting reimbursements, but it sounded like you've made a change in ahead of reimbursement during the quarter. So can you talk about how the reimbursement group is functioning? And then kind of tied to that, I guess patient deferral trends, can you comment on what those are looking like? Do you finally feel like you've hit a bottom and you're going to be working up from that standpoint?

I'll talk a little bit about the change first of all. The gentleman who was running that shop for us had made a number of significant contributions to the business. However, given the changes we see in the marketplace, especially really as it pertains to migration of decision points or decision making and the potential impact of things like ATOs in the marketplace, we decided to modify this role and put more emphasis on really the strategic selling aspect of the job. So that was the driver for why we made a shift there. And I think in the coming quarters you'll start to hear us talk a little bit more about how we intend to shift our selling focus given trends we see in the marketplace. But as far as the deferrals, you want to comment on that?

Sure. So on the deferral side, Amit, we -- in the first quarter, we typically see the higher patient deferrals. That was in line with what we saw in prior years where we saw an increase in our drop off was due to the policy that Joe had mentioned before where we've been more disciplined in those types of patients that we bring on.

Okay. Thanks a lot.

(Operator Instructions). Your next question comes from the line of Josh Jennings with Jefferies. Please proceed.

Hey, good afternoon. Anthony in for Josh, thanks. Can you just walk through some of the -- in the prepared comments that you have in the release about payer revenue mix and patient volume mix, it seems if you run through those numbers as expected Medicare rates came down, so the overall mix kind of skewed more towards commercial. But is that also indicative as to-date you haven't really seen much of a change in commercial rates, is that how we should be reading that?

Yes, I mean we saw -- I mean, well not significant on the revenue side from a mix perspective, we didn't see a huge change because the Medicare price changed about 2%-ish, and so it wasn't a huge change. And we have not as of yet seen a huge shift in our commercial payers, so that's an accurate statement.

Okay. And any additional million lives you added in the quarter from additional payers for MCOT, I mean, can you give us an idea of kind of where they came in relative to existing commercial payers and relative to the Medicare rate?

No. We don't publish that information when we sign new contracts. Sometimes -- in many cases we're prohibited from doing it; there is confidentiality provisions. But -- so we don't do it on a per payer basis. I would say that the contracts we're signing, we are still signing at a pretty competitive rate. We're pleased with that, but just because we signed a million lives, it doesn't we have many more customers as we all know. That's when the work begins. It gives us access to more regions of the country and to more potential patients.

Sure. And then final two here, just one on C5 and just any update on the rollout there? And if you could share any information on, I guess a little bit more on the gross margin impact later in the year if anything is really expected for this year and how that would work for existing, I think it's C3 uses the migration is that all automatic upgrade or how do you expect that to kind of bring in new customers into the fold with the C5 -- new C5 design?

It's not an automatic upgrade. We expect it later in the year. I think it will give us access to additional customers. One of the nice features about that product is it has the capability to be deployed in the doctor's office for what we call an off the shelf program. Essentially it's forward deployed resources, so it's more readily available for the physician that can help the patient up right in their office. There are some accounts that -- large accounts that we know off that were less competitive because we haven't had that feature. So, the short answer is, yes. We think it's going to open up new opportunities for us and certainly we do see cost of sales on the product development -- the product cost side by about a third or so and I think we've put that number out a couple of times. Is that about right?

Yes.

I think that answers your questions. Anything I left out?

You're not going to see too much of an impact in 2011, Anthony. As it gets rolled out and the thought is initially to roll it out with the increase in patient volumes and at a point in time that makes sense -- if it makes sense to remove C5s from -- or C3s from the market and replace them with C5s, we'll make that decision at the time.

That's great. And a final question here just on [MedAsset], the alliance there and the new C5. Is this new C5 integrating any of the MedAsset CloudCare technology that you have in that alliance? Thanks.

Not prepared to comment on that honestly because that is -- that relationship is still in development and the work that we're doing or will be done with them is still in development.

Your next question comes from the line of Rick Wise with Leerink Swann. Please proceed.

Hi, good afternoon, guys. It's Danielle in for Rick, how are you?

Okay. Hi, Danielle.

Hi. First on the volume growth, I mean revenue came in better than we had looked for. Just if you could talk about going forward what are the sort of puts and takes to potential sources of upside that can drive this sort of sustainable improving volume trends? And then one quick follow-up after that.

Yes. I would say that the number one driver for us as we've indicated remains the deployment of our sales organization. And what we did in the fourth quarter was increase that number by about 10%. We're starting to see early returns on that as sales reps are trained, develop their territories and start to work -- working on a more consistent basis.

If we -- upside would come from continued improvement as the sales organization matures, additional targeting capabilities, which we have -- we're in the process of rolling out the sales organization and adding new reps, and so there is -- other support type things we can do, but mainly adding new reps.

A big kind of focus for the organization is getting better at pulling through lives once we sign a contact. A perfect example of this is, as I mentioned in the last call, we have now have access to VA facilities. We are going through a very organized program to contract with those organizations and to begin to pull through lives -- other upside could be cross-selling services in conjunction with the Biotel organization. That's -- they are sort of the areas that we will look for upside.

Okay, great. And then on the sales force point, what do you think is the ultimate ideal number of reps for a business like this or what you see the business ultimately being?

Yes, good question. And I get asked this question a lot. The candid answer is, I'm not quite sure yet. And the way you approach that is, if you look at the size of the market not just in terms of the number of events that are performed annually, but what are your call points, who can your reps call on? In this case, it's primarily EPs, cardiologists, in some cases internal medicine doc, GPs who may have a focus in the cardiology market.

So you look at total market size and then you look at where the people are, and you start to deploy people or sales people where it makes the most sense. It is all about, in this business is not unlike any other medical device business that I've ever been in or ever run, it's all about reach and frequency, building demand for the product. It's repetitive; once the product is prescribed you still need to continue to sell the benefits of the product. So, it's constant selling and I think over time, we'll figure this out.

My guess is it's somewhat higher than we are today, but probably not much higher than -- I'd be surprised if we go over 200 reps at any point in the future, just based on the number of kind of call points I see out there today now. That may increase over time as we find other applications or other uses for MCOT. But I'm asked that question all the time. It's not a science, but there are some scientific ways you can approach it.

Okay, great. And then one quick follow-up on that. You mentioned potential other uses for the MCOT. I mean at what point do you envision, how many quarters of what I think is pretty solid performance like you delivered today, how many quarters of that perform -- that you consider the business stable enough to start looking at additional indications, expanding the business in that way?

I am already looking at ways to expand the business. I think it's imperative that we find other opportunities to use MCOT, other wireless products or devices that we can leverage our infrastructure in. So we're already kind of there.

Does that mean I consider it mission accomplished, we have a super stable business and we'll grow from here? I feel good about it, but there are some things that are outside of my control like third-party reimbursement, and we've talked a little bit about that on the call. That's probably the biggest challenge I have today in getting more comfortable putting out any kind of guiding metrics we look at, or forward-leaning metrics.

Okay. Thanks so much.

We have a follow-up question from the line of Amit Bhalla with Citi. Please proceed.

Hi, thanks for taking the follow-up. In the quarter, total expenses came in under $21 million, so I wanted to know if you can comment about the run rate for the next few quarters given the restructuring and all that's being taking place? And second, Joe, can you just give us an update on United and WellPoint? Thanks.

Yes, I'll work backwards. The update on United and WellPoint unfortunately is there is no real update and we continue to work with them, Amit, and it's strategically important to getting there. We are looking at providing them additional information using outside resources to try to move the ball down the field with those folks, but I wish I could tell you that within the next quarter we're going to sign a contract with one of them, but we're just not there.

I think we're continuing to pound away at them and I am optimistic that we will have some luck with them in the future, probably more WellPoint than United. It would be the smart money, but we don't have anything to report there yet.

So, Amit on the expense side, you can expect our operating expenses to run in that $21 million to $22 million range a quarter this year.

Okay. Perfect. Hey, Heather, that less than 8% of bad debt for the quarter, can you just give us the exact number?

Well, if you look at -- based on patient service revenue, so our MCT and event, which is what that bad debt represents, it's 7.9%.

Okay, got it. All right. Thanks.

Yes.

And at this time, we have no further questions. I would now like to turn the call back over to Mr. Joseph Capper for any closing remarks.

Thank you, everybody. In summary, we're coming off another strong quarter with demand for MCOT up, revenue up, positive EBITDA, a healthy cash balance with no debt and a DSO of 77 days. While we continue to make progress as I indicated, many challenges lay ahead especially in the area of reimbursement. And, as such again as we indicated, we're still not in position to provide guidance. I appreciate your desire to have some leading indicators for the business. However, we need to see more predictability prior to publishing any forward-looking metric.

Thank you for your continued support and interest in CardioNet. We will speak to you all at the end of next quarter. Thank you.

If you joined the conference late today, you may listen to the conference on digital replay, which will be available from May 3rd to May 17, 2011, by dialing 888-286-8010 or 617-801-6888 with pass code 81630268. Once again, that's 888-286-8010 or 617-801-6888 with pass code 81630268. Thank you for your participation. You may now disconnect. Have a great day.