Heartbeam Inc (BEAT) 2011 Q4 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet fourth quarter and full-year 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 filings with the Securities and Exchange Commission, including our latest periodic report on Forms 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, Operator. Good afternoon, everyone. I'm Joe Capper, President and CEO of CardioNet. I will provide commentary on the fourth quarter and more importantly what we are focused on to grow the business in 2012. As always, 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.

In the fourth quarter of 2011 we had sequential growth over the third quarter and performed better than expected. For the quarter, we recorded revenue of approximately $27 million, up slightly from the third quarter. As you may recall, in the third quarter of 2011 we experienced a fairly significant drop in our operating performance, driven in large part to and consistent with overall industry trends. Specifically, industry data indicated a drop in physician office visits of approximately 6% in the quarter versus the third quarter of 2010. These trends flattened out in the fourth quarter and volume was steady.

After the down third quarter, we made some fairly significant adjustments to our cost structure. As a result, we had an adjusted EBITDA for the fourth quarter of $1.3 million, compared to an EBITDA loss of $2.3 million at the end of the third quarter, or an increase of $3.6 million sequentially.

We continued to maintain excellent cash management discipline, always important, but especially given the volatility in our market. As a result, we ended the year with $46.5 million in the bank and no debt. This was up $3.3 million sequentially and $1 million year-over-year.

Our Biotel division had another good quarter and exceeded expectations for the year.

On our last call, I announced an initiative aimed at eliminating $5 million to $7 million from our overall cost structure. I am happy to report that we have surpassed this goal, taking out approximately $7.5 million in costs. We opened a new monitoring center on the West Coast, providing for higher levels of customer service to our West Coast based patients, physicians and payers. And will also allow us to allocate monitoring resources to optimize reimbursement rates, which differed geographically. We will gradually ramp up our activity over the coming months and expect to be fully operational during the second quarter.

We began a limited market release in C5, our next generation MCOT device in the fourth quarter. The results thus far have been outstanding, with the system outperforming expectations. As such, we are in the process of an expanded but controlled rollout and expect greater market penetration as the launch continues.

Speaking of greater market penetration, on February 10th we announced the acquisition of ECG Scanning, a cardiac monitoring company headquartered in Ohio with operations in Michigan. ECG Scanning has an excellent reputation and strong market position throughout much of the Midwest and achieved 2011 revenues of approximately $7 million. The majority of ECG's 2011 revenue was related to event, Holter and pacer monitoring. They had been in the proces of introducing a telemetry device, making the timing of this merger perfect. We now have access to a much larger customer base in which to introduce MCOT.

With the revenue growth opportunity and some natural cost synergies, we expect the acquisition to be slightly accretive in the first year. I would like to welcome all of the dedicated employees of ECG Scanning to the CardioNet team.

With regard to the previously announced Department of Justice investigation, we continue to maintain a completely transparent and cooperative posture, and are working hard to get this process behind us in the most efficient way possible with minimal impact on our business. Again, there is nothing about this inquiry that calls into question MCOT technology or its clinical superiority.

Lastly during the quarter, we reached an agreement to settle the outstanding shareholder suit.

At this point, I will turn the call over to Heather to provide more details on our results.

Thank you, Joe, and good afternoon, everyone.

Our full-year revenue was $119 million, essentially flat compared to the prior year. The additional revenue from the acquisition of Biotel was offset by a reduction in our patient services revenue. This reduction is attributable to anticipated price erosion in addition to slightly lower patient volume. As Joe mentioned, we believe this volume decline resulted from lower patient census in the physician's office, stemming from overall macro economic conditions.

Our gross margin for 2011 was 2 percentage points lower than the full-year 2010, which was caused by the inclusion of the lower margin Biotel business. While we expect our margins in Q1 2012 to be relatively flat to the full-year 2011, margins for the remainder of the year will be positively impacted by our cost reduction initiative and the rollout of C5 with the increasing useful life of our devices.

With both C3 and C5, we have experienced a significantly lower failure rate, causing our devices to last longer than they have historically. As a result of this, we expect our devices to last four years as compared to the previous generation's three years. And this has favorably impacted our fourth quarter margin by approximately 2 percentage points and will continue in 2012.

Our previously announced cost reductions will also positively impact our 2012 gross margin by approximately 2 percentage points. These reductions totaled over $7 million with approximately 35% in cost of sales and 65% in operating expense. Our fourth quarter results were favorably impacted by approximately $500,000. As of January 2012, all of the savings have been implemented.

Our adjusted operating expense for the year was 9% lower than 2010, partially due to a $6.5 million reduction in bad debt expense, resulting from the strengthening of our billing and collection processes. Also, as I just mentioned, the Company continues to reduce expenses in the base business, which more than offset the addition of Biotel in 2011.

Despite the top line challenges, our ability to control expenses resulted in positive adjusted EBITDA of $3.6 million for the year, a $3.3 million improvement over 2010.

As we enter 2012, we expect to see earnings improvement as we execute on our initiatives, realize the savings from our cost reductions and role in ECG Scanning. We do expect increased expenses in the first quarter due to higher payroll taxes, as well as industry and Company events. For the full-year, we expect to incur approximately $3 million in additional restructuring charges, which primarily relate to legal expenses from the Department of Justice investigation and the start-up costs for the West Coast facility. This estimate excludes any costs related to the integration of ECG Scanning.

Before I move to the balance sheet, I would like to explain our goodwill impairment. We were required by accounting guidance to take a $46 million non-cash impairment charge at year-end, effectively removing all of the goodwill related to our patient services segment. This charge resulted from our stock price being under pressure since the announcement of the civil investigative demand issued in August 2011. I would like to stress that this charge does not impact the Company's ongoing business operations or cash flow.

Now, turning to the balance sheet. We ended the year with $46.5 million in cash and investments, an increase of $1 million from 2010. We experienced a decrease in our accounts receivable balance compared to 2010, which was primarily driven by process improvement and resulted in a DSO of 75 days at year-end. This is the lowest level in the history of CardioNet.

Looking forward to 2012, excluding expenditures related to M&A, we expect to be free cash flow positive for the year. As is typical for a business, we do expect to use some cash in the first quarter. This use of cash stems from a longer collection cycle due to the resetting of patient deductibles, the prepayment of certain annual expenses, the aforementioned higher payroll taxes and a recently announced settlement of the shareholder litigation.

Also potentially impacting our first quarter cash flow is the ramp up of our West Coast monitoring facility. Due to regulatory requirements, there will be a lag between when we begin monitoring patients at this location and when we will be able to bill for those services. This lag will create a temporary use of cash in the period between when we begin monitoring and when we can submit claims.

I want to emphasize that this is simply a timing issue. In line with our cash expectation, and similar to 2011, we anticipate DSO to increase slightly during 2012, but ultimately finish the year below 2011. While we continue to make process improvements that will lower DSO, payers are making it increasingly difficult to collect payment with plans that often require authorization for services, and sometimes medical documentation. It is difficult to quantify the impact this may have on our DSO going forward.

Finally, before I turn the call back to Joe, due to the timing of the ECG Scanning acquisition, there was no impact on our financial statements for the year ended 2011. All necessary purchase accounting entries will be included in our financial statements as of the close date. For 2012, we expect ECG Scanning to add approximately $7 million in revenue and be accretive to adjusted earnings. We do expect to incur some costs related to the integration of the operation, but we will provide additional information on our Q1 call.

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

Thank you, Heather. Clearly we had some ups and downs in 2011, but we exited the year with renewed momentum. Our focus for 2012 will build on this momentum as we do the following things and do them well. Continue to look for ways to drive efficiencies throughout the organization, reducing our overall cost structure as a percent of sales, which will provide for greater reinvestment into the business.

Ensure our West Coast monitoring center is fully functional as soon as possible, work our way diligently through the Department of Justice investigation, execute on an extremely focused annual sales plan built around growing MCOT volume. Complete the integration of ECG scanning and leverage this expanding customer base to grow MCOT volumes, continue to evaluate opportunities to augment our growth through M&A, a process that will be worked in a prudent and cautious manner, continue to focus on greater reimbursement coverage for MCOT technology.

Complete a full market release of C5, the most state of the art mobile cardiac outpatient telemetry product on the market, and evaluate opportunities to leverage our infrastructure into adjacent markets, both domestically and abroad. This is an aggressive agenda, but if executed properly, 2012 will be a great year for CardioNet.

The important thing to note is that most of the initiatives I spoke about are well underway, giving us an optimistic outlook.

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

(Operator instructions) Matt Dolan, ROTH Capital Partners.

Hey, guys, this Chris on for Matt. First question is on the gross margin. Sounds like some of the improvement there is from the product mix. As a percentage of Biotel it was lower in Q4. But can you provide more color on where the rest of that improvement is coming from and how we should think about the gross margins for 2012?

So, Chris, in Q4, as it is with the rest of the year, we experienced about 2 to 3 point negative impact from the inclusion of Biotel on our business. In Q4 we saw a slight uptick in our gross margin, which resulted from our cost reduction initiatives as well as the reduction in depreciation that I had referenced in my script.

So looking into 2012, what my expectation is, assuming that on a price basis, any increase we get in the West Coast is offset by some price erosion on the commercial side, I do expect that our gross margin will increase in the latter half of the year with the cost reductions as well as the improvement in -- or the reduction in our depreciation expense. So we're looking at a couple of point increase versus 2011 full-year.

And then talk about the acquisition strategy with Biotel and now ECG under your belt. Have you seen any true synergy in terms of the ability to cross sell between these offerings or are you simply looking to diversify CardioNet's revenue stream away from services and some of the risks associated with the reimbursement to a more product based Company?

And then I guess as a follow-on to that, if you could give a little more color on your acquisition pipeline and capacity there, that would be great.

Yes, I mean the Biotel acquisition was done over a year ago and there was different reasons for that acquisition. And you're correct in that gave us a little bit of kind of vertical integration, different sources of revenue, both from equipment sales and from the Agility business, which is a small clinical research support business. And there was other issues with that. And that's been a good acquisition for us, a nice return on that investment.

The ECG scanning acquisition is more of a kind of a classic industry rollup kind of acquisition. It is a services Company. They have, as I mentioned, pacer, Holter and event business. They're in the process of introducing an MCT device, just started it. So the plan there would be fully integrate that Company into CardioNet and then look for ways to increase sales by cross selling the MCOT product into their customer base. Real good reputation in kind of that Midwest, Mid South, very nice account mix. So we're pretty optimistic about that. And obviously you get some cross side synergies with a lifetime acquisition like that.

And then talking about organic revenue outlook for 2012, I guess we were hoping to get a little more color around a few items. First, the amount of volume lost by choice due to the lack of reimbursement. And then just if you could expand on the West Coast call center, if you can quantify the impact of revenues and margin impact for the year. And then just for 2012, just kind of give us some color around if flat organic revenue outlook is realistic there. Thanks.

So where do I start? Revenue outlook I think was your last question. We obviously we don't put up guidance, as you know, and we won't for a while just because of the volatility of the business and reimbursement pressures, and so and so forth. But with the plans we have in place, with the initiatives we rolled out, we feel pretty good about growth for 2012. We're just not putting a number on it today, both top line and bottom line growth I think is fair to say.

What was the other question? There was a couple mixed in there that I got a little confused.

If you could just -- I guess two more things. Just the volume loss by choice, due to the lack of reimbursement. And then if you could expand on the West Coast call center impact on top line and bottom line there as well as the margins for the year.

The volume loss due to choice is kind of irrelevant because we were recognizing -- that was all non-contracted business. We were recognizing that on -- any non-comps business on a cash basis by the time we did that. So that was business that wasn't rolling up into the revenue so to speak, right? We would have had the cost of supporting it, but we wouldn't have had any sales associated. So it's kind of irrelevant and it was probably -- I don't know if we talked about it in the past, but it's probably 15% or so of the volume that we were not getting paid on.

The West Coast monitoring, that's dependent on how fast we can get it ramped up. We're not going to obviously get full-year impact this year. It's been -- we'll phase it in throughout the end of the first quarter and throughout the second quarter. So, have be put a number out on that?

Yes, I mean it's about $8 million to $10 million top line --

Full-year.

Yes, for the full-year. But as I mentioned that you do need to factor in to our ASP some price erosion on the commercial side as they move toward Medicare. So we're considering some of these offsetting factors at this point. It will help us maintain our ASP for this year basically.

(Operator instructions) Danielle Antalffy, Leerink Swann.

Just a question on physician office visits. We've been hearing sort of anecdotally January -- well, really probably more December-January visits are looking a little bit better. Are you guys -- what are you guys seeing so far this year now we're almost two months into the first quarter? I know you said they were flat in Q4, but what are you seeing so far in Q1? Are you seeing an up tick or is it safer to just assume sort of that's still flat with Q4?

We're seeing -- it's kind of flat. The industry I would say is kind of flat and the data that we have seen was relatively flat. I think our business will do better than the industry. I think that's fair to say.

And then just trying to understand, so this quarter you did have a little bump in Medicare versus commercial pay. What are the factors there? Is this strictly the West Coast issue? Is this your patient selection issue? What's driving that and is that -- is 54% patient mix closer to what we'll see going forward for Medicare versus commercial pay?

Yes, Danielle, I think you're seeing some of the effect of the policy to not take some of these other patients that we would not have taken. So you've seen our percentage of Medicare patients increase through the year. And there hasn't really been an impact from a price standpoint. It's really just on the volume side we're seeing a greater percentage of patients be Medicare patients. And at least at this point, we don't see that changing substantially going into 2012.

(Operator Instructions) There are no further questions in queue at this time. I will now like to hand the conference back over to Mr. Joseph Capper for any closing remarks.

Thank you. In summary, we're coming off a much improved quarter and have terrific momentum going into 2012. We had positive EBITDA and exceeded expectations for the quarter. More importantly, we took several steps to improve the health of the business and as a result, are now far better positioned to accelerate the Company's performance.

With a strong balance sheet, several growth initiatives well underway, and the acquisition of ECG Scanning complete, we expect 2012 to be an exceptional year.

Thank you for your continued support and interest in CardioNet. We will speak to you next quarter. Thanks, everybody.

If you joined the conference late today, you may listen to the conference on digital replay, which will be available from February 22 to March 7, 2011, on 888-286-8010 or 617-801-6888 with passcode 35475486. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.