Heartbeam Inc (BEAT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 CardioNet Inc. earnings conference call. My name is Katina and I'll be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Joseph Capper, President and Chief Executive Officer. Please proceed.

Thank you, Operator. Good afternoon, everyone. As mentioned, I'm Joe Capper, President and CEO of CardioNet. I will provide commentary on the first quarter and, more importantly, how we are progressing with regard to the priorities we focused on to grow the business in 2012 and beyond. 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.

I am pleased to announce that Q1 of 2012 represented another solid quarter for the Company. During our last earnings call, I outlined a series of priorities we are focused on to improve the business performance and prepare the Company for future growth. We are making excellent progress on all of these priorities and are excited about the Company's prospects.

In the quarter, we had modest sequential volume and revenue growth over the fourth quarter. Specifically, for the first time in a year volumes for all three product lines; Holter, Event and MCOT was up sequentially in the quarter. We recorded revenue of approximately $27 million, up slightly from the fourth quarter. Adjusted EBITDA was close to breakeven at a loss of $400,000, but much better than we had expected given the effect of some front-end loaded expenses in the first quarter and an anticipated decline in ASP.

We ended the quarter with $37 million in cash after spending $6.3 million to acquire ECG Scanning and $1.3 million to settle a shareholder suit. Additionally, we always use more cash in the first quarter as a result of items such as insurance prepays, higher payroll taxes and year-end bonus payments.

We significantly ramped up operations at our new Monitoring Center on the West Coast providing for higher levels of customer service to our West Coast-based patients, physicians and payors and allowing us to allocate monitoring resources to optimize reimbursement rates which differ geographically. We will continue this effort and expect to be fully staffed over the next few months.

During the quarter, we continued with the market introduction of C5, our latest generation MCOT device. As mentioned on our last call, the system has been outperforming expectations. This is tremendous news for the Company. As you know, the superiority of our technology has provided a continuous competitive advantage for the Company. As such, we are driving a more expanded rollout in order to capitalize on what is clearly the most advanced mobile telemetry system in the market.

As previously announced on March 10, we acquired ECG Scanning, a cardiac monitoring company headquartered in Ohio with operations in Michigan. We have made excellent progress during the quarter integrating the business and, although it's only been a short time, it's performing better than expected. Our focus now is to rapidly introduce MCOT to the many loyal ECG customers as quickly as possible.

We also made good progress working through the Department of Justice investigation maintaining a completely transparent and cooperative posture. We remain optimistic that a resolution can be reached in a timely manner with minimal impact on our business. Again, there is nothing about this inquiry that calls in to question MCOT technology or its clinical superiority.

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

Thank you, Joe, and good afternoon, everyone. Our first quarter revenue was $27 million, a slight increase compared to the fourth quarter 2011 and in line with expectations. The increase in revenue was primarily due to the addition of a partial quarter of ECG Scanning, as well as higher Biotel revenue.

While patient volume across all service lines increased sequentially, continued pressure on our MCOT reimbursement negatively impacted our patient service revenue. It is this continued pressure in addition to lower year-over-year volume that caused revenue to decline compared to the first quarter of 2011.

If you recall, throughout 2011 we saw patient volume declines in line with the market as fewer people went to the doctor's office, making the Q1 2012 to Q1 2011 comparison a difficult one.

Looking forward we expect to see revenue improve as we, one, ramp up operations in our West Coast Monitoring facility which enables us to optimize our reimbursement. Two, put more C5s on the shelves in doctors' offices. In the first quarter we saw a marked increase in patient volume where the C5 was put on the shelf. And three, leverage the acquisition of ECG Scanning. Going forward these factors will also positively impact our gross margin. While we did see a slight decline in gross margin in the first quarter, both year-over-year and sequentially, in both comparisons margins were compressed due to the lower MCOT reimbursement, as well as a higher percentage of our revenue coming from our lower margin OEM business.

Partially offsetting these factors was the previously-discussed positive impact of the rollout of the C5 and the resulting increase in useful life of our devices. Also positively impacting our margin are the cost reductions implemented at the end of 2011, which contributed approximately 2 percentage points to our margin in the quarter.

Our adjusted operating expense for the quarter was 12% lower than Q1 2011, primarily due to the Q4 cost reductions. We continue to stay on track to achieve over $7 million of annualized cost reductions that we discussed at year-end. Partially offsetting the sequential decrease in expense was the addition of ECG Scanning and slightly higher bad debt expense.

On a sequential basis, we saw a slight increase in our operating expenses due to the addition of a partial quarter of ECG Scanning, as well as the impact of certain expenses that typically only occur in the beginning of the year; for example, certain payroll taxes and sales meetings. This was partially offset by a sequential reduction in bad debt expense.

Despite declining reimbursement, EBITDA was essentially breakeven due to positive impact of the addition of ECG Scanning and the fourth quarter cost reductions. This compares to a positive EBITDA in both the first and fourth quarter of 2011. Looking forward with the cost reductions in place, a fully operational West Cost Monitoring facility and the addition of ECG, we expect to be EBITDA positive for the year.

Now, turning to the balance sheet, we ended the quarter with $37 million in cash and investments, a decrease of $9.5 million from 2011. As Joe mentioned, this decrease in cash was directly related to several cash expenditures during the quarter; including $6.3 million related to the acquisition of ECG, $1.4 million for capital expenditures primarily C5, and $1.3 million related to the settlement of the shareholder litigation, as well as certain other operating cash payments that occur in the first quarter.

As expected, our DSO increased slightly to 81 days. While not significant in the first quarter, we did begin to experience the delay we discussed on our last call in our Medicare collections. This delay is due to holding claims until we receive Medicare approval of our San Francisco facility. This did add two days to our DSO at the end of Q1. We expect to receive approval before the end of the second quarter, but CMS currently has a backlog of applications. If we do not receive approval in Q2, $6 million to $8 million in cash collections could be delayed to the third quarter, which would have a direct temporary impact to our cash.

Looking forward in 2012, we expect to be free cash flow positive, but do expect to end the year with a lower cash balance due to the acquisition of ECG. The first quarter was a solid start to the year. We expect to see ongoing investment as we focus on gaining efficiencies, growing our volume and diversifying our revenue.

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

Thank you, Heather. Clearly, 2012 is off to a good start. We ended the year with momentum after ending in 2011 with a much improved fourth quarter. It was important to follow that with another solid quarter as we have just done. We have laid out a tight plan for success in 2012 and we are executing against that plan. Our focus will continue to be on driving efficiencies of the organization in order to reduce our overall cost structure as a percent of sales, which will provide for greater reinvestment into the business.

Maximizing revenue enhancement opportunities associated with a complete buildup of our West Coast Monitoring Center; completing the full market release of C5 and capitalizing on its technological superiority to grow our business. Completing the integration of ECG Scanning and leveraging this expanded customer base to grow MCOT volume, working our way expeditiously through the Department of Justice investigation. Continuing to execute on an extremely-focused annual sales plan built around growing MCOT volume, and gaining broader reimbursement coverage for MCOT technology.

During the quarter, we began to put more focus on evaluating the opportunities to leverage some of our core competencies and infrastructure in order to create additional revenue sources in adjacent markets. I know we have mentioned this a few times in the past; however, we have narrowed our scope and are excited about a few of these opportunities. The priorities being to, one, further solidify our leadership position in the cardiac monitoring space; two, diversify the uses of our current technology into other areas; and three, identify one or more diagnostic markets that would benefit from the application of our wireless platform.

As you all know, this Company has had its fair share of challenges over the last few years. However, I am more optimistic now about the future of our business than I have been at any point in the past. We have great technology and a talented and committed group of employees. Let's not forget, we are in the business of helping physicians save lives and that is a pretty awesome business to be in; one that is easy to remain passionate about.

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

Thank you. (Operator Instructions). Your first question comes from the line of Rick Wise representing Leerink Swann. Please proceed.

Let me start off with West Coast, I guess, it sounds like it's almost up and running but what's left to do, just simply the CMS approval? They have to inspect and approve, that's all that's left to do?

Yes, that's the big milestone, Rick. I mean we're almost fully staffed, but not quite, and it's just a matter of getting qualified technicians hired, trained and through our fairly rigorous training and certification process before we're fully staffed. But the big milestone is getting CMS in to conduct the inspection.

Maybe talk a little bit about whenever it happens, how do we think about the impact on revenues and however you want to say it the following quarter or the following 6 to 12 months? Can you give us any flavor for that now all things equal?

Sure, I mean all things equal the West Coast Monitoring Center will add approximately $10 million of revenue to our top line.

So, just whenever it happens in the next 12 months. A couple of other quick ones, what was the ECG contribution in the quarter and how do we think about it? If we see $27 million as a baseline quarter for this year, how do we think about the incremental contribution for the rest of the year? Maybe, Joe, you kept emphasizing taking CardioNet products to the ECG customer, talk a little bit about how long it takes and what's involved. Again, the incremental revenue contribution, if you achieve some modest success, that could offer maybe in 2013, or again, however you want us to think about it?

Yes, it's a good question, Rick. We won't break it out as a separate entity, because it's a lifetime business. It's going to be fully integrated into the Company. But I would think about it in these terms. It was about a $7 million revenue company on a run-rate basis when we acquired it. We expect it to do at least that and they were predominantly an Event company and they were in the process of introducing a competitive MCT device. Obviously, we've retrained the organization around MCOT and the focus is ramping up on MCOT. So, if you think about it in terms of being able to convert a portion of the business to MCOT, we've been looking at I would say conservatively like another $2 million of revenue on top of that in 2013.

Let me ask just two more and then and I'll jump back. Commercial rates are obviously under pressure. Heather, again can you help us think about where they are now and what you're assuming for the rest of the year, or how we should think about the rest of year?

When you look at the first quarter, we indicated this at the end of the year. What we expected to see was pressure throughout 2012 on the remaining payors who had not yet renegotiated. We did see some of that in Q1. Our expectation is that as the year goes on that we may continue to see some declines, but they will be offset by the incremental revenue or the incremental price that we'll get from San Francisco. So when you look at it on a year-over-year basis, we should be able to hold our overall ASP.

So, just to extrapolate that, this should be the revenue low point of the year and you'd hope to see, again, all sorts of things permitting, but you'd hope to see sequential revenue growth from here through the rest of the year?

Correct.

From your lips to God's ears, Rick.

Exactly, I'll step out for the moment. Thanks.

Your next question comes from the line of Matt Dolan representing ROTH Capital Partners. Please proceed.

I'm jumping around here, so I hope I'm not repetitive. So just following on that last conversation about the rest of the year, it seems like you may have been a little more optimistic on the prior call about returning to growth throughout 2012. Is it fair to say that CardioNet should start posting positive reported growth rates beginning in Q2 and then obviously through the second half?

Yes, Matt, we did. On the last call we were optimistic and we remain optimistic about growth in 2012, especially as compared to the last two years. What we did say was that you wouldn't likely see that in the first quarter that revenue would be relatively flat quarter over quarter. We don't put out, obviously, guidance around revenue and earnings, but we did exceed internal expectations on both numbers; slightly on revenue and fairly significantly on our earnings for the quarter. So we feel like we're off to a pretty good start. We like the outlook for the rest of the year, but we've got to play the game.

No, I understand. I'm just making sure the tone hasn't changed on your end. Then secondly, looking at your primary competitor in the US, they had a number of announcements in the last month or two and I'm curious as to where CardioNet is on some of these initiatives. One being a DOJ settlement, and two being an agreement with a large payor in United, is that something that we should see across the industry or was that specific to your competitor?

First of all on the DOJ, we're not going to put a lot of detail out on that because it's probably bad practice. But we have been responding to all requests extremely expeditiously, and so to the extent that we can drive that process faster on our side we will do that. So again, I think we're in as good a shape as possible as we can be there short of getting that resolved.

With regard to large payor contracts like United, nobody to date has gotten MCT on a reimbursement schedule with United around the MCOT product. What you're referring to, I believe, were products other than MCOT, or MCOT-like competitive products.

Correct, okay. Then the last one is on the product development side. You've got the next-gen device out and about and you're rolling out on the West Coast, so I understand there's some time there. But anything you can shed light on in terms of the product pipeline, whether it be a vertically-integrated device or I don't know what else you're working on within that R&D budget? Thank you.

Yes, I think again, you never like to put too much out about products, but you hit the nail on the head. We have more integrated devices. There's some work being done on other telemetry products and then we're looking outside the Company as well to invest. So, a little more focus on that, I think, but here's the good news. I would say, Matt, we feel like for the first time in a while we're playing a little bit more offense than defense. Last year, as you know, we spent a lot of time settling suits and working through investigations. We think we're in pretty good shape and we like the outlook for the business.

Okay and I'll guess I'll sneak one in as that just peaked another thought was on the acquisition side of things. Are you looking at deals that are comparable to what we've seen with Biotel and ECG, or if you can maybe frame the strategy a little better if it's outside of that realm? Thank you.

I will. I believe this is the way I framed it up in the past, but I'll do it again. Primarily, we want to continue to grow the cardiac monitoring business. So to the extent there's M&A opportunities within our vertical, that makes sense to us. Moving beyond that, we will look at businesses which allow us to leverage some or all of our current technology in other applications.

As you are aware, we have a small clinical research business that we brought onboard as a result of the Biotel organization. We've hired a few people there. We're looking to kind of stretch that business a little bit more. There are international markets that may lend themselves to this application in the near future. So that's sort of two, if you will. The third bucket would be auto diagnostic products that will lend themselves to wireless monitoring. That's a little bit further out, Matt.

So when we look at the less risky investment, it's things like ECG Scanning. Would we do something on the fringe like a new product? We'd really have to do our homework and we'd have to do a lot of work around that before we allocated any of our precious dollars in that area. But look, there's some that we really like and we're doing some internal work to develop them.

Thank you.

With no further questions at this time, I would now like to turn the call back to Mr. Capper for closing remarks.

Thanks very much. In summary, we're coming off another solid quarter and are poised to have a much improved 2012, as we just discussed. Volume and revenue were up slightly and EBITDA exceeded expectations for the quarter. We made significant progress on the priorities we outlined at the outset of the year and with a strong balance sheet and refined focus on several new growth areas, we are extremely optimistic about the future of CardioNet.

Thank you for your continued support and interest in the Company and we'll speak to you next quarter. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, good day.