Heartbeam Inc (BEAT) 2011 Q3 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet third-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 take today. These risks are described in detail in our public filing 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 question 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, operator. Good afternoon, everyone. I'm Joe Capper, President and CEO of CardioNet. I will provide commentary on the third quarter and more importantly on the actions we plan to take to improve the trajectory of our business given the down market we experienced in the quarter. 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.

After three solid quarters, starting with the fourth quarter of 2010, we are now coming off a period of fairly disappointing results. For the third quarter 2011, we recorded revenue of approximately $27 million, down $1 million compared to the same period last year and $5 million sequentially. While our average selling price continued to decline in line with expectations, revenue was negatively affected in the quarter by decreased volume associated with a down market.

According to industry data, physician office visits were down 6% in the quarter versus the third quarter 2010. These patient census trends are in line with a drop in the US consumer confidence index, which fell to its lowest level in over two years. However, CardioNet's overall volume drop was less than that of the patient census, demonstrating the continued demand for our suite of products despite volatile healthcare industry trends.

While year-over-year volume and average selling price were down, we were able to more than offset these declines to a 10% reduction in operating expenses, leading to improved year-over-year earnings. We had an adjusted EBITDA loss of $2.3 million in the quarter versus a $3 million loss in the third quarter of 2010, on $1 million of less revenue. Year-over-year EPS improved by $0.04 per share. Our Biotel division continues to exceed expectations and will have a positive contribution to our earnings for the year.

On an extremely positive note, we continue to manage a healthy balance sheet and cash position even in the face of a challenging market. We finished the quarter with a cash balance of $43 million with no outstanding debt, versus $45 million at year-end. After adjusting for one-time costs, we would have generated $1 million of cash year-to-date.

Also in the quarter, the Company incurred certain expenses related to the integration of Biotel, charges related to legal fees incurred in connection with current litigation, and professional fees related to ongoing strategic opportunities. Aside from dollars spent, Senior Management dedicated a significant amount of valuable time pursuing these opportunities.

A few weeks ago, we announced the appointment of Kirk Gorman, an existing Director, as Chairman of the Board, replacing Randy Thurman, following the successful completion of a planned transition. I have worked closely with Kirk since joining CardioNet last year and can assure you he is an excellent steward of the Company and the perfect person to fill this role. I would again like to thank Randy Thurman for his service and dedication to CardioNet during some very difficult times. We wish him continued success in all current and future endeavors.

In late August, we announced that we received a Civil Investigative Demand issued by the US Department of Justice. While we do not have an update at this time, I want to emphasize that we intend to continue to fully cooperate with the Department of Justice, that we do not believe our third-quarter patient volume was impacted by the investigation, and that the investigation does not put into question the MCOT technology or its clinical superiority.

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

Thank you, Joe, and good afternoon, everyone.

Revenue for the quarter was $27 million, a 3% decline compared to the prior-year quarter and a 16% decline sequentially. Contributing to these results was lower patient volume as well as ongoing pressure on our commercial reimbursement rates from contract re-negotiations after the establishment of the National Medicare Rate in January 2011. We believe our volume decline is largely attributable to overall macro economic conditions, which are forcing patients to make tough decisions as a result of the increasing cost of healthcare. Partially offsetting the decline in Patient Service revenue was $3 million of OEM and Clinical Research revenue from Biotel, which we acquired in December of 2010.

Our gross margin was 3 percentage points lower than the third quarter last year, with approximately half of the decrease coming from the addition of the lower margin Biotel business, and the remainder from patient and price dynamics, as well as costs associated with the development of our next-generation product. Looking forward, the pressure on margin will be mitigated as we phase in our C5 device, increase long-term patient volume, and continue to streamline our processes. Our adjusted operating expense was lower by 10% year-over-year, largely due to a reduction in bad debt expense as we continued to strengthen our billing and collection processes. Our selling expenses were also lower versus the prior year due to the discontinuation of the contract sales organization and other consulting expenses that were incurred in the prior year. Looking forward, we have identified $5 million to $7 million in annualized cost savings that we expect to have implemented by January 1, 2012.

Turning to the balance sheet, we ended the third quarter with $43 million in cash and investments, a decrease of $1.8 million from the second quarter 2011, and a decrease of $2.3 million from year-end 2010. This reduction was primarily due to cash outlays for one-time items, as well as capital expenditures. For the remainder of the year, we expect to deploy cash for strategic initiatives and capital expenditures for the launch of our next-generation device. Our strong balance sheet affords us the opportunity to invest strategically and positions us to withstand the challenges of an ever-changing healthcare environment.

While we experienced a decrease in our Accounts Receivable balance compared to the second quarter 2011, and fourth quarter of 2010, our DSO increased to 93 days at the end of the quarter. Several factors are impacting this number. First, an increased portion of our receivables is due from patients as co-pays and deductibles increase. We are also experiencing an increase in the number of carriers that are requesting additional documentation in order to adjudicate our claims. Both of these factors extend our collection cycle and increase our DSO.

Second, our DSO is being negatively impacted by the sheer nature of the calculation. With declining revenue, your DSO will naturally accelerate. To demonstrate, if you were to use our average revenue year-to-date as opposed to the third quarter average revenue, our DSO would have been 80 days instead of 93 days. With all of that being said, we believe the increase to be temporary and we anticipate that our DSO will decline over time.

Despite the challenges we face, our $43 million in cash and investments provide us with the stability and flexibility to invest in our infrastructure while exploring growth options that we believe will position the Company to achieve future profitability. Thank you. I will now turn the call back to Joe.

Thank you, Heather. Although some of our year-over-year comparables are slightly positive, it was a rough quarter no matter how you look at it. The market was down and we were down with it. So what are we doing about this?

First, we have to adjust our operating expense structure to more accurately reflect current market realities and trends. As such, as Heather mentioned, we have recently launched an initiative aimed at eliminating $5 million to $7 million from our third quarter 2011 run rate expense structure. This means we will have to make sacrifices, but we do not believe any of the proposed reductions will have an impact on our ability to grow the Company. Second, we are taking steps to open a monitoring center on the West Coast. This will allow us to provide higher levels of customer service to our West Coast-based patients, physicians, and payers. It will also allow us to allocate monitoring resources to optimize reimbursement rates, which differ geographically.

These two initiatives, the cost reductions now underway and the opening of a West Coast monitoring center, will have a positive impact on our 2012 earnings to the tune of approximately $12 million to $16 million. Third, we will remain focused on increasing our patient volume at a rate higher than the market, albeit in a tough environment. As mentioned on previous calls, we continue to evaluate opportunities to augment our growth through M&A, a process that must be worked in a prudent and cautious manner.

Fourth, we continue our focus on gaining broader reimbursement coverage for MCOT technology. We made progress in the quarter with the signing of 13 new payer contracts. And fifth, we expect to begin limited market release of C5, our next-generation MCOT device in the fourth quarter. Among other attributes, this device will enable us to have units on the shelves in physicians' offices, shortening the time to activation. It will decrease manufacturing costs by about a third, and it will provide us with international capability. If we do these five things and do them well, we will have a much stronger 2012.

Additionally, we are actively looking at opportunities to accelerate progress toward our goals through acquisition and investment. Clearly the organization has proven a discipline in cash management and an ability to rapidly integrate acquired assets. We have spent significant time recently evaluating an array of opportunities that would improve our position in the cardiac monitoring market and/or leverage our infrastructure in adjacent markets domestically and abroad.

On our last earnings call, I made the statement that, quote, this is a company that persevered in the face of seemingly insurmountable challenges. Not only have we persevered, we have excelled. With $45 million of cash, no debt, a strong Management team, the Company is now well positioned to grow, diversify, acquire, and prosper. With a minor adjustment to the cash balance due to some one-time expenses, I firmly reiterate this statement. Due to negative trends in the market, our results do not reflect some of the progress we are making. With the initiatives outlined earlier now well underway, we are positioning the Company to better execute on our strategic initiatives as we move into 2012.

To reiterate, we believe the cost reduction program now underway combined with the opening of a West Coast monitoring center will positively impact 2012 earnings by approximately $12 million to $16 million, providing valuable resources necessary to fuel growth. With that said, we will now open the call to questions. Operator, we are ready for our first question.

(Operator Instructions) Our first question comes from Matt Dolan with Roth Capital Partners. Please proceed.

Hi, guys. Can you hear me all right?

Sure can, Matt.

Great. First on the revenue side, can you break down the revenues between MCOT, Holter, and Biotel? And then maybe, Joe, just to layer on top of that, it sounds like you think you're outperforming the underlying market. Maybe you can re-calibrate us on where you see MCOT playing into the market overall in terms of the growth opportunity. I know you saw some shift over to Loop and Holter. Is MCOT something that we could see an acceleration in growth as some of these initiatives come through or do we look at it more as part of cardiac monitoring as a whole? Thanks.

Matt, I'll take the first question. The breakdown of our revenue is about 74% MCOT, 15% event, Holter and pacer, and about 11% Biotel.

So then, Matt, your question really around how does the positioning of MCOT work in the market relative to other products, we still think there's an opportunity to accelerate the growth of MCOT. Awareness of A Fib is on the rise and we think it's a perfect device for early detection. That being said, as I talked to EPs and cards in the marketplace, it's not for every patient. So I think it's a portfolio of -- it's one product in a portfolio of products, and we have more of a, I would say, portfolio selling approach than we have in the past, with emphasis on MCOT, obviously because it's the latest and greatest. It's the best technology out there, but it's not for every patient, as I'm being told.

Sure. Okay. And on the earnings improvement, the $12 million to $16 million, obviously, you called out $5 million to $7 million on the operating side of the equation. Is that through growth, due to the West Coast facility, or maybe walk us through where the rest of that comes.

A couple of things. One, I think it opens up a little bit more market for us; it gives us access to some piece of the business we haven't had access to in the past. And probably more importantly, there's higher reimbursement rate set for certain payers, including Medicare, when you're running your business out of certain regions in the country, including the West Coast.

Okay, and the last one. On the time and money that you called out spending on acquisitions, are these deals still in the works or did these fall through? How should we look about the acquisition pipeline today?

A little bit of both. I think the industry is fragmented enough, and we talked about this in the past, that it lends itself to consolidation. Given our balance sheet, our size, our infrastructure, CardioNet is the perfect consolidator, so that's been part of our strategy. Look at other companies that make sense, would complement our current portfolio, would add volume, and so we continue to evaluate opportunities.

Just because we have cash, we're not going to spend it. It's a valuable asset. It's a valuable resource that we will deploy as intelligently as possible. As you know, sometimes, you've got to, as Heather likes to say, you've got to kiss a few frogs before you find a prince. So these processes take some time. And I like to say, it's a marathon, not a sprint. (laughter)

All right. I'll jump back in. Thank you.

Thanks.

Thanks, Matt.

Our next question comes from Rick Wise with Leerink Swann. Please proceed.

Hi, guys, it's Danielle in for Rick. How are you?

Hi, Danielle.

Quick question on the next-gen MCOT device. How do we think about that? So it's launching in the fourth quarter. But then into 2012, how do we think about that launch progressing? How could that impact volumes, and then how quickly can you see the margin benefit there?

Limited release in the fourth quarter, I can't really give you a schedule of how fast that release will accelerate in the marketplace. In terms of volume, we do think it opens up market opportunity for us. We know that in some cases we are disadvantaged, because we do not have an off-the-shelf capability or, what I would say, a very robust or seamless off-the-shelf capability with our current product. This improves that quite a bit. We think that there's some volume that will be derived from that. It also offers other features that will be state-of-the-art in the market place. So we think it's going to have a nice buzz to it, nice excitement. Obviously, coming out a lot later than we had anticipated, but we are committed to making sure it comes out ready for market when it does.

As far as margin, we talked about cost of goods are about one-third less on the product. Go through this, Heather. I don't want to botch it up.

So Danielle, what we talked about is we will launch the product to meet demand and to fulfill, as C3s come to end of life and need to be replaced. And we will evaluate, as we launch the product, the demand for it and whether or not there is a need to accelerate that launch. All other things being equal, we would say that the launch could go over two to three years, but we would accelerate that if it made sense.

Okay, got it. Okay, great. And just on the bad debt expense, so it looks like bad debt was about 12% of revs this quarter. That's up from last quarter. So just trying to get a sense of what's the right number when thinking about bad debt expense going forward? Was this quarter unique? Is this a trend that will persist into 2012? If you could talk about that a little bit.

Danielle, when I've talked about it in the past, what I've tried to guide people to is more the dollar amount, at least for this year, than a percentage of revenue, because of the way we reserve -- our reserve methodology. And I guided people to that $2.5 million to $3 million range. So we came in a little bit higher in the quarter than that guidance, and that was largely due to some cleanup that we did that moved some of these balances into patient buckets that carry a higher reserve.

Okay. Great. And then just lastly, really quickly, this $5 million to $7 million in expenses, can you give a little bit of color about where that is coming from? Is it sales force? Is it back office? Any color there would be great. Thanks, guys.

It's coming from many parts of the Company. Renegotiating contracts with vendors, looking for efficiencies in process. We've identified several areas that we can pull that from. So we are very comfortable with that number. In fact, a lot of the work is being done now. If you break it down, probably about a third of it from cost of sales. About two-thirds of it will come from operating expense. So it's spread across the board. Some of it is cost that we were in the process of looking at taking out when we stopped bringing on essentially every patient that came in the front door. As you recall, a couple of quarters ago we talked about a new enrollment policy which actually dropped the volume on patients we weren't getting paid for. So there's some operating expense that was associated with that, but we were in the process of taking out of the system anyhow.

Okay, great. Thanks so much.

Sure.

(Operator Instructions) At this time, there are no questions. I'd like to hand it back to Mr. Capper.

Thank you. In summary, we're coming off a challenging quarter and a down market with some bright spots. Total patient volume dropped at a rate slower than the market. As a result, EBITDA was negative for the quarter but improved over the same period last year. We continue to maintain an excellent cash position. We had another strong performance from Biotel, and we took steps to eliminate significant operating expenses and to open a West Coast monitoring center, which again, will add approximately $12 million to $16 million to our 2012 earnings.

Thank you for your continued support and interest in CardioNet. We will speak to you next quarter. That concludes the call. Thank you, operator.

You're welcome, sir. If you joined the conference late today, you may listen to the conference on digital replay which will be available from November 8 to November 22, 2011, on (888)286-8010 with a passcode 65422402. That concludes the conference.