Heartbeam Inc (BEAT) 2012 Q3 法說會逐字稿

Good afternoon. Thank you for joining us for the CardioNet Third Quarter 2012 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 in a listen-only mode. The floor will be opened for questions and comments following the presentation. It is now my pleasure to turn the floor over to hour host, Mr. Joseph Capper. Sir, you may begin.

Thank you, operator. Good afternoon, everyone. I'm Joe Capper, President and CEO of CardioNet. Our thoughts and prayers are with the many families and individuals who are most affected by - and in many cases still dealing with - the devastation caused by last week's storm. I apologize if scheduling our call caused any inconvenience.

Today, I will provide commentary on the third quarter, with specific attention to the progress made against the strategic plan we have been pursuing in order 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.

As a reminder, the three broad strategic objectives we continue to pursue are - number one, further solidify our leadership position in cardiac monitoring for the healthcare services market through a variety of tactical initiatives.

Number two, diversify the uses of our current technology into adjacent markets, in particular the research services market. And, number three, identify one or more diagnostic markets that would benefit from the application of our wireless platform.

In the quarter, we made substantial progress on the first two objectives, and are pleased with how the business is developing.

In a few minutes I will share more details about the evolution or our cardiac monitoring strategy, our new product launch and some phenomenal claims data analyses, which shows huge healthcare cost savings associated with the use of MCOT. We see this as potentially ground-breaking information in the payer market.

We completed the CardioCORE acquisition and our focus in the quarter was to ensure a smooth transition and integration. This transaction is certainly consistent with our strategic intent of a positive impact on future results. Also, revenue, EBITDA and total patient volume were all up in the quarter, compared to the same period 2011.

Heather will spin on our results in a moment. However, I want to make a few points about the topline.

Revenue in the quarter was $27 million. This is a positive indicator for the following reason. Historically, our business has experienced a significant decline of revenue during the third quarter of each year. For the first time in three years, a sizeable decline did not occur.

In 2009, 2010 and 2011, revenue dropped sequentially in the third quarter by 13%, 14% and 16%, respectively. Without CardioCORE, the seasonal decline this year would have been approximately 8%.

With one month of CardioCORE sales, our sequential revenue was essentially flat. This is also the first time in 6 quarters that we had revenue growth over the prior year quarter, another indicator that the business is moving in the right direction.

At this point, I'll hand the call over to Heather to provide more detail on our results.

Thank you, Joe. And good afternoon, everyone. As Joe mentioned, revenue in the third quarter was $27 million, a $400,000 improvement over the third quarter of 2011.

Despite higher overall patient volume, our patient services revenue did decline slightly year-over-year due to a higher percentage of our patients being serviced on a vent and Holter Monitor, versus MCOT. This shifting was partially driven by the action of ECGC scanning earlier this year.

In addition, our product revenue declined year-over-year due to the timing of orders. These declines were more than offset by the addition of the August acquisition of CardioCORE.

Our gross margin as a percent of revenue increased compared to the prior year as a result of the operational efficiencies and cost reductions, which contributed 300 basis points to our margin. In addition, the previously discussed extension of the useful life of our MCOT devices also had a positive impact on the year-over-year comparison.

Both the year-over-year and sequential comparison of our gross margin percent were slightly impacted by the addition of CardioCORE, which carries a lower average gross margin percent, typically in the low to mid-50s.

On a go-forward basis, this will have a larger impact, approximately 100 to 150 basis points on a gross margin percent due to a full quarter impact.

Year-over-year, our adjusted operating expense declined $900,000, despite the addition of ECG scanning and one month of CardioCORE expense. The reduction was due to operational efficiencies that resulted in lower headcount related expense, as well as the cost reductions implemented at the end of 2011.

Sequentially, our adjusted operating expense increased due to investments we are making in the sales and service infrastructure, as well as the addition of CardioCORE.

As a result of our fiscal discipline and the impact of our acquisition, we generated positive EBITDA of $300,000 during the third quarter. This compares to a $2.3 million EBITDA loss for the third quarter of 2011. Sequentially, our EBITDA did decline with the increased investments in the business and the seasonality impact of revenue.

With position contributions from both acquisitions and the ongoing performance of our patient service business, we expected to be EBITDA-positive for the fourth quarter and the full year 2012.

Now, turning to the balance sheet. We ended the quarter with $17.9 million in cash despite the outlay of $23.5 million for CardioCORE. Our cash in the quarter was positively impacted by the timing of our Medicare collections.

As I discussed in our prior calls, we had to hold our Medicare claims as we waited for Medicare approval of our San Francisco monitoring center. At the time of our last call, we had just received approval and started to bill the outstanding claims.

As of the end of the quarter, we had collected substantially all of the outstanding AR, with only some secondary and co-payments remaining. This is evidenced by the almost $7 million decline in our AR and the 21-day reduction in our DSO to 67 days, the lowest level in the history of CardioNet.

Looking ahead, we expect to end the year with approximately $18 million in cash as we continue to invest in operations and purchase additional devices. This is slightly lower than our previous forecast due to us accelerating the purchase of devices into 2012, as well as us paying for CardioCORE with 100% cash, and not a combination of cash and stock. Lastly, we expect our DSO to continue to decline through the year-end.

To summarize, we are pleased with our progress in the third quarter. We will continue to invest in our operations to optimize the business, and we will remain focused on both top and bottom line growth. Finally, before I turn the call back to Joe, there are two items I would like to review.

First, due to the timing of the CardioCORE acquisition, our third quarter results include only one month of CardioCORE. Looking at Q4, we expect CardioCORE to contribute approximately $4 million to $5 million in revenue and be accretive to our adjusted EBITDA.

Second, the medical device tax is due to take effect in January 2003. We are planning with the assumption that the tax will not be overturned.

While the tax will have some impact on our bottom line, we believe the tax will be far less than 2.3% of our revenues. Based on our current understanding of the regulations, the impact will be closer to 2.3% of our capital expenditures for the devices. We continue to review the regulations and will keep you informed of any changes in our assessment.

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

Thank you, Heather. In regard to the cardiac monitoring business, we have evolved to a more comprehensive approach than seen from CardioNet from the past. As such, we intend to introduce additional products and services and to more actively promote this comprehensive offering.

While MCOT remains far and away the most technologically advanced remote cardiac monitoring system, providing diagnostic yields that are second to none, we see this broader approach as an excellent way to leverage our current sales and marketing infrastructure.

Coupled with other diversification strategies we've been pursuing, this plan also helps mitigate much of the revenue concentration and reimbursement risks associated with the MCOT-only mindset we had in the past.

To illustrate, two years ago, 90%-plus of our revenue came from MCOT. In the third quarter of 2012, 65% of our revenue came from MCOT. And in the fourth quarter, we expect it to be approximately 60%.

Again, this is not to imply that we have in any way lessened our commitment to further develop the mobile cardiac monitoring market. On the contrary. We know that increased MCOT utilization will lead to far greater detection rates of life-threatening arrhythmias and, ultimately, much lower healthcare costs. I'll come back to that thought.

However, to be overly reliant on a single product and a single CPT code in today's' environment, does not make good business sense.

To that end, we are pleased to report that we are in the final stages of testing our soon-to-be released wireless event monitor. This device will incorporate the most advanced feature sets in today's market and will be integrated into the same monitoring platform used by our MCOT system.

This is an extremely important point. The integration of multiple products into a highly scalable common processing platform will contribute to an enhanced customer experience and improved back office efficiencies. We anticipate announcing the full market release of this system in the very near future.

Following the introduction of MCOT-OS earlier this year, the wireless event will constitute our second major product launch for 2012, a first for CardioNet. We now offer the most extensive suite of products and services in the remote outpatient cardiac monitoring business. And we plan to build on this position.

Earlier I mentioned the use of MCOT leads to lower healthcare costs. We now have some very exciting news to share with you. Several months ago, we commissioned a study to analyze insurance claims data in an attempt to validate the return on investment associated with using MCOT versus an event Holter.

It seems intuitive that the much higher diagnostic yield provided by MCOT ultimately leads to lower cost of care. The theory being that if the condition can be more accurately diagnosed in a shorter timeframe, it can be treated properly. This timely and effective treatment would eliminate numerous inpatient costs associated with an otherwise less efficient trial and error approach.

While this makes great sense, the question remained. How much cost is actually being reduced and is it worth the investment of using MCOT? This was what we set out to uncover and the results are significant. The study analyzed claims from just under three million patients that came from a pool of 10 million beneficiaries.

Numerous precautions were taken to ensure that observed differences in consumption of healthcare resources were truly related to the use of the monitoring device and not to haphazard external factors. It was also established that the savings were not the result of the patient delaying utilization of healthcare resources into the future.

Among other findings, the analysis shows that, compared with an event monitor, the use of MCOT lowers inpatient costs by a staggering $9,000 plus per patient in the first year alone. This is a minimum of a 12 to 13 times return on the incremental investment associated with using MCOT.

This is the first time CardioNet has commissioned such a claims-based study. And we're obviously thrilled by the insight uncovered. Our plan is to have this study published as soon as possible, and look forward to sharing it with the entire community.

On another note about the healthcare services business, we had an update meeting with representatives from the Department of Justice in early September to discuss the status of their ongoing investigation. While I have nothing material to report from the meeting, it is fair to say that the process continues to move forward, albeit at an agonizing pace.

It is also accurate to report that we did not learn anything from the meeting that would in any way change my characterization of the investigation, which I shared on last quarter's call. Specifically, we remain convinced that significant cultural differences existed between CardioNet and Life Watch, the company that was the original focus of the government's probe.

Again, it is premature to discuss the details of those differences, or whether they impact the potential resolution.

In terms of our research services business, our focus in the quarter was to complete the acquisition of CardioCORE and begin the integration process with minimal employee and customer disruption.

Since I spent a lot of time on the last call speaking about CardioCORE and how the acquisition meets our strategic needs, I won't repeat myself. However, it is important to mention that performance year-to-date is better than we originally modeled doing diligence. Also, our pipeline and backlog, which are the primary lead indicators of the business, continue to build.

Overall, we are pleased with the progress. And given the FDA's increased focus on cardiac safety in the development of new drugs, we are bullish on this business.

In summary, while MCOT-OS continues to perform well, CardioNet has truly evolved to a more comprehensive cardiac monitoring company as we prepare for the launch of the market's most advanced wireless event.

With credible and significant evidence showing that MCOT has a 12 to 13 times ROI, we look forward to renewed momentum among payers. We are thrilled with the new research services business and all the possibilities that come with it.

Our business did not experience a significant seasonal drop seen in past years. Revenue, EBITDA and volume were all up year-over-year for the first time in three years. And, of course, numbers like a 67 day DSO and $18 million of cash with no debt, post-acquisition, are clear indicators that the business is healthy and getting more and more efficient.

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

(Operator instructions). Your first question comes from the line of Chris Lewis, ROTH Capital Partners. Please proceed.

Hey, guys. Thanks for taking the questions.

Hi, Chris.

Could you guys just first provide a breakout of revenues by segment?

Sure. Do you want the breakdown between MCT and EHP, or just patient services and other?

Between --

(Inaudible).

Yes. The first one.

Okay. Yes. Well, total patient revenue was about 86% in the quarter.

Okay.

And then the products were about 5%. And the research services were around 7% to 8%.

Okay. Great. And then what did CardioCORE contribute to the topline in the quarter?

About $1.7 million.

Okay. Great. And then - so - just looking at MCOT, looks like it's flat to down, maybe, in the quarter. Can you just provide some commentary around that? Is that due to the lack of new accounts being added? Or possibly just a decrease in the utilization within current accounts?

And longer term, what do you see MCOT doing and what needs to be done for MCOT to grow again in the future?

Yes. We did see a sequential drop. Year-over-year volume was actually slightly up - overall volume.

So - you know - what is the cause of that? We don't know. We've seen it every summer. There seems to be - you know - there seems to be a summertime lag in the business, a summertime effect on the business. So - you know - we don't anticipate that for the rest of the year. We think volume will be stable for the rest of the year.

Your question - more about longer term. Probably the biggest obstacle to greater market penetration has been with some of the large payers.

That's why we're really excited about this new claims data information that we've just recently gotten back. We haven't even had a chance to get it published in a formal journal yet. But that's to come.

So, it's really good data, really significant savings. It's kind of validated what we've been saying on the clinical side for years. Now we just did it on the claims data side.

Okay. Thanks. And then, can you talk about the integration process with CardioCORE so far? How's it going? And - you know - and their synergies that you've seen thus far during the integration?

Yes. I don't know if you recall from the last call when we announced the acquisition. It really was more of topline opportunity. We didn't talk a whole lot about cost-related synergies.

The second thing we mentioned was that the business will be run as a division of CardioNet. It doesn't really constitute a lot of heavy integration work.

So, the transition has gone very smooth. Key customers, key employees have all been retained. We haven't seen any major disruption. The business, as I mentioned has kind of out-performed what we had originally modeled back in the due diligence phase of the acquisition.

So, so far, pretty smooth. There's not a whole lot more heavy lifting to do. To the extent that there is a kit if synergy, it's going to be topline synergy.

Okay. Thanks. That's helpful. And then, one last question. I know it's early, but have you guys had any opportunity to quantify any impact you have seen from Hurricane Sandy going forward? Thanks.

No. We haven't. We saw a drop-off, obviously, in the last couple days of last month. But I don't know - I can't tell you whether or not there's a quarterly impact. Too early to say.

Okay. Thank you.

Thank you for your question. (Operator instructions). You have no further questions. I would now like to turn the call over to Mr. Capper for closing remarks.

Thank you, operator. Thanks, everyone, for your continued support and interest in the Company. We will speak to you next quarter. Operator, that concludes today's call.

Thank you. If you joined the conference late today, you may listen to the conference on digital replay, which will be available from November 5 to November 20, 2012, on 888-286-8010 or 617-801-6888, with pass code 23386171.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.