Heartbeam Inc (BEAT) 2014 Q4 法說會逐字稿

Good afternoon. Thank you for joining us for the BioTelemetry fourth-quarter 2014 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 Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance, or achievements of the Company in the future to be materially different from the statements that the Company executives 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.

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

Thank you, operator, and good afternoon everyone. I'm Joe Capper, President and CEO of BioTelemetry. Also with me on the call is our Chief Financial Officer, Heather Getz. I will provide commentary on our fourth-quarter performance, Heather will take you through a more detailed review of our operating results and we'll then open up the call to your questions.

It is my pleasure to report this afternoon that we capped off 2014 with another excellent quarter during which we successfully executed on our key objectives and set another quarterly revenue high for the Company. We also delivered outstanding organic volume growth in patient services and continued to build a backlog in the research division.

The full-year 2014 was a breakout year for BioTelemetry. We generated solid organic growth and made several important acquisitions which drove record revenue, EBITDA, volume and backlog. These positive milestones stem from the successful execution of the strategy we have outlined on our prior calls.

As a reminder, there are three tenants of our strategy which we focus on every day to drive growth. They are to solidify our leadership position in cardiac monitoring, establish a leading research services business around the Cardiocore platform, and look to identify markets that would benefit from the application of our wireless platform and proprietary technology. Our adherence to these overarching principles is incorporated into every facet of our decision-making and has been instrumental in generating our strong results in 2014.

As I mentioned, we finished the year with excellent momentum. Let's take a few minutes to review the Q4 highlights.

The fourth quarter was our 10th consecutive period of year-over-year growth. Revenue grew by 32% to $44 million, another record high for the Company. EBITDA was $6.3 million, up 20% over the prior year. The patient services volume continued to gain momentum with total volume up 95% year-over-year and NCT volume rising 24%. In total, we serviced nearly 550,000 patients in 2014, almost doubling prior-year volume.

During the quarter we entered into a credit agreement with the General Electric Capital Corporation providing financing capacity as opportunities may arise to accelerate our strategic plan and for the consolidation and repayment of our existing debt. And we ended the quarter with $20 million in cash.

In our patient services division, we saw our comprehensive approach continue to generate greater market penetration. Our 95% volume growth clearly outpaced the market. As I mentioned on our last call, the integration of the acquisitions we made in 2014 are progressing according to plan and meeting or exceeding all expectations. The scale and synergy created by these acquisitions will continue to improve our operating margins over time.

Additionally, market share expansion in advance of launching our next generation mobile telemetry system will help drive rapid acceptance when we introduce the product later this year. With the demand for remote monitoring solutions on the rise, our patient services business is incredibly well-positioned. We have gained scale through acquisition and have dramatically improved our organic growth rate due to our comprehensive approach to the market. We are moving through the integrations in an expeditious fashion, extracting efficiencies from the business wherever possible, and creating additional revenue opportunities with the exciting new products that will be coming to market in the near future.

Turning to research services, during the quarter, we continued to see improvement in the outlook for this important division as we made excellent progress in several areas. First, we made headway in our effort to expand our footprint outside of the US by formalizing a co-marketing agreement with Vitalograph, a European-based respiratory core lab. This collaboration is complementary for both parties, providing our mutual customers the seamless benefits of an expanded geographic footprint and service line offering. We are currently determining what additional resources will be necessary to add to our international operations in order to support anticipated growth.

Second, we added key talent and leadership to support the imaging core lab we acquired earlier in the year. Consistent with our strategic intent for the research business, the imaging line broadens our cardiac imaging offerings and adds new oncology, musculoskeletal, and neurological imaging capabilities supported by a state-of-the-art file-based analysis platform.

Lastly, we saw further improvement to our backlog during the quarter, which has more than doubled since the beginning of 2014, setting the stage for an excellent 2015.

In addition to the advancements in our core business, we continue to invest resources toward further diversification, which I've spoken about on previous calls. We're making progress with our at home INR monitoring service, which allows us to leverage our current IDTF and sales and marketing infrastructure.

During the quarter, we entered into a provider agreement with Roche Diagnostics, the leading manufacturer of INR home testing devices. The agreement provides for marketing support as well as more advantageous pricing.

Our collaboration with Wellbridge Health, a CHF care management solutions company aimed at reducing unnecessary hospital readmissions and emergency room visits, continues to develop according to plan. Wellbridge's first two pilot programs have demonstrated results far better than anticipated. As a result, they will be expanding these programs and moving into a revenue-generating phase later this year.

Also as mentioned in previous calls, we've been assessing how best to position the Company as a player in the emerging consumer mHealth market, a segment that many believe will evolve into a sizable business. As a reminder, our approach will be to collaborate with potential consumer and medical device companies looking to leverage our expertise in remote monitoring and our ability to make data relevant.

And with that, I will now turn the call over to Heather for a detailed financial review of the quarter. Heather?

Thank you, Joe, and good afternoon, everyone. As Joe mentioned, 2014 was a great year for BioTelemetry. We finished the year with fourth-quarter revenue of $44 million, an $11 million or 32% increase over the fourth quarter of 2013 and for the third quarter in a row, our highest quarterly revenue in the Company's history. The increased revenue was coming from all three of our segments but due in large part to a $9 million increase in our patient services business. As Joe mentioned, our patient volume grew 95% due to our acquisitions of Mednet and BMS as well as strong organic growth of about 15%.

Moving to gross profit, our adjusted margin was 57% compared to 63% in the prior-year quarter. This decrease in gross margin percentage was due to the product mix of our acquisitions which service a higher proportion of event and Holter patients, both of which carry lower margins. In addition, the leverage gained from the increased volume in our base business was essentially offset by lower ASPs driven by the reduction in Medicare reimbursements that occurred January 1, 2014.

I would like to remind everyone again that, through our acquisitions, as well as through our CardioNet comprehensive approach, we have made a conscious decision to create scale in our patient services business at the expense of some margin. By design, our strategy has caused a shift in our product mix in favor of event and Holter which carry lower margins than MCT.

While our MCT event and Holter volumes are all growing, our base event business grew more than 30% year-over-year. That being said, we believe this approach has led to greater market penetration, increased growth, and higher same-store sales, which in return will create greater SG&A leverage. Essentially, any gross margin percentage that we are giving up we expect to more than make up in operating margin over time. To demonstrate this leverage, while our gross margin percentage was flat to Q2, which was our first full quarter including the acquisitions, our EBITDA increased in absolute dollars from $5.1 million in Q2 to $6.3 million in Q4, and our EBITDA margin increased from 12% to 14.5%.

Moving back to the year-over-year comparison, as I just mentioned, we generated positive adjusted EBITDA of $6.3 million for the fourth quarter 2014 compared to $5.2 million in Q4 2013, a 20% increase. We were able to achieve this 14.5% adjusted EBITDA return in spite of the Medicare reduction that went into effect January 1. This is an approximate 250 basis point increase in EBITDA margin as compared to 2013 after adjusting for the Medicare reduction.

Now, turning to the balance sheet, we ended the quarter with $20 million in cash, which was down $2 million compared to 2013. For the full year, we generated $8.8 million in cash from operations which was used to acquire Mednet as well as for capital expenditures, primarily medical devices and an investment in our new operating system.

In the fourth quarter, we entered into a credit agreement for a $25 million five-year term loan with an additional $15 million revolver that remains undrawn. As Joe mentioned, this new agreement provides us additional financing capacity while allowing us to consolidate and repay the Company's existing debt. This debt is subject to standard financial covenants, including a minimum fixed charge ratio and a maximum leverage ratio.

Shifting gears now, I'd like to touch on the outlook for 2015 and more specifically on the first quarter. As we laid out on our previous conference call, we have seen momentum in our overall business led by organic volume growth in the patient services segment and bolstered by the acquisitions of Mednet and BMS. In addition, research services is doing well, which is reflected in its expanding backlog. We will continue to build on our CardioNet comprehensive strategy with the launch of our low-cost Holter and next-generation MCT in a patch form factor. We are also investing in our international locations which support our research services and product segment.

Finally, in 2015, we expect the full integration of our 2014 acquisitions to increase leverage in the business. These factors allow us to reiterate the 2015 guidance of low double-digit revenue growth for the full year and adjusted EBITDA of over $30 million, a 50% increase over 2014.

Before I turn the call back to Joe, I would like to provide some color on the first quarter as well. We clearly expect Q1 2015 revenue and EBITDA to exceed Q1 of 2014. With that being said, Q1 is typically our lowest EBITDA dollar and margin quarter as our expenses tend to be higher. This is due in part to the timing of certain sales meetings and the resetting of payroll taxes. As a result, we expect Q1 2015 to be flat to lower than Q4 2014. In addition, our cash balance typically declines in Q1 due to the higher expenses as well as payment of management incentive bonuses and the prepayment of other annual expenses.

And with that, I'll now turn the call back to Joe.

Thanks Heather. As you have just heard, we had a highly successful fourth quarter of capping off a record-setting 2014. Our growth strategy is working as designed and the Company continues to build momentum. As such, we have high expectations for 2015 as all parts of our business are seeing more opportunities for growth than ever before.

For example, with the increase in the scale from our acquisitions and expanded payor coverage combined with expected near-term reimbursement stability, our patient services business is well-positioned for continued success. To ensure this happens, we will stay focused on completing the integrations in a manner which maximizes customer retention, realizes appropriate savings, and creates a stronger overall patient services business.

In addition to integrated related synergies, we have several other ongoing cost reduction projects that will create incremental operating margin for the Company in 2015. We will also continue to build on our comprehensive approach to the market by introducing new products, first with the launch of CardioKey followed by our next generation telemetry system. Our research division will continue to build backlog by leveraging our expanded service offering, European operations and recently established co-marketing agreement. And we are excited about the progress being made on various initiatives to develop additional resources -- additional sources of revenue.

As mentioned, we are looking at double-digit revenue growth for 2015 and in EBITDA, which should grow by more than 50% year-over-year. While these are lumpy expectations, our strategy has us well-positioned to benefit from the rapid pace at which the market for remote patient monitoring solutions is evolving. As a result, we are highly optimistic about our prospects going forward.

In closing, I would again like to think all those at the Company who helped deliver our 10th consecutive growth quarter and another record high in quarterly revenue. Your efforts are greatly appreciated most of all by the scores of patients for whom you provide critical and sometimes life-saving information.

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

(Operator Instructions). Alex Silverman, Special Situations.

So, just walking through your 2015 revenue guidance, organic patient service revenue has grown 15%, 18%, 20% the past few quarters, you know, a flat reimbursement rate, a full year of acquisitions, better research services. I get to something much better than a low double-digit revenue growth rate. Am I missing something?

Yes, sorry Alex. So the organic growth that you are referring to on the patient services is on the volume side, so that 15% growth is patient services volume. On the revenue side, it's in the 5% to 8% range.

Is that because of mix?

It's because of the mix as well as the Medicare reduction that occurred earlier in the year.

Right, but in 2015, there won't be a reduction. It will be flat.

That's right. So when you go into 2015, that's why we are looking at low double-digit growth for 2015 on the revenue line (multiple speakers).

So that would suggest -- do you expect organic revenue patient volume to decrease from that 15%-plus rate?

Yes, so we are --.

Alex, always best guess, right?

Yes.

We don't see any indications in the marketplace that we won't see decent organic growth coming into 2015. But we've spent a year and a half, the last year and a half pulling through the United contract which probably gave us a quicker left. So this approach, low double-digit volume, low double-digit revenue, is probably the right approach for now and we'll see how the year progresses. But I think given that and given what we know about the market, you know, we like the pace of the market. We like the trend in the market but this is probably the best approach right now.

Okay, that's very reasonable. Thank you guys.

Bruce Jackson, Lake Street Capital.

First, to the revenue line, with the Q1 revenue, is it going to be up sequentially from Q4?

What we talked about was flattish.

Bruce Jackson

Okay, flattish.

From Q4 to Q1.

With the revenue.

That's what we are guiding to right now. I think overall the message we want you guys to get is Q1 is not the best quarter of a year. Your revenue was affected by insurance deductible season, things like that, and then clearly the EBITDA is somewhat affected, as Heather talked about, by higher than usual expenses.

If you looked at last year, I think we did a little -- about $3 million in the first quarter --

That's correct.

-- and we did $20 million for the year. We will obviously do better than that and the comp on revenue will be better because we have a full effect of acquisitions. But the fourth quarter was probably a little bit better than we thought it was going to be. Each quarter has been a little bit better than we thought, so let's hope that trend continues.

Okay, great. And then on the research services business, you've got -- you've been building up a backlog here. How does that flow into the revenue line over the course of 2015? Is it going to be steady or more backend loaded?

A little bit backend in 2015. The way that business works obviously is you have a pipeline or a funnel that converts to backlog, it converts to the revenue.

So when we talk about the growth in backlog year-over-year, the backlog was kind of soft as we came into 2014. The team did an excellent job realigning priorities and growing that backlog. That's an all-year backlog, so that's the good sign here. We're going to see nice revenue growth in out years as well. But in 2015 versus 2014, we'll have decent growth. And you're right. Some of it will be backend loaded.

Okay. One more question. Just on the litigation front, you've got some ongoing litigation with ScottCare. Any updates on that?

No. That was postponed I think until summertime, the June timeframe, at the other side's request.

Okay. Thank you very much.

Charley Jones, Dougherty End Markets.

It seems like a nice quarter and everything is kind of as expected I guess. I missed the 5% to 8%. So it sounds like your volume growth is 15%, Heather, and then you're seeing low double-digit revenue growth. And I'm missing what the 5% to 8% was.

That's approximately what our top line organic revenue growth has been over the year.

And so you made an acquisition part of the way through the first quarter or something last year and so we are going to pick up a little bit of growth and how much is that and net the difference between the organic 5% to 8%, the low double-digit?

No, the 5% to 8% was for 2014 Charley, not for 2015.

Okay.

The vast majority of the 2015 growth is organic.

Okay. I guess on -- I have some big picture questions then, Joe, I guess on expenses and just on your product costs for the next generation product I think for both you and Heather. And I guess I'd just like to understand maybe a philosophy of where you are at on your spending and operating expenses and if you feel like the growth you are going to be able to put up is going to need extra headcount and extra expenses, or if you can absorb it and you see growing your people count over time through acquisition more.

I guess the question is you are getting at how much leverage we think is in the business, it sounds like Charlie. And I think the short answer is service-based business, that will require headcount over time as you grow. However, there is leverage. There's leverage both on the patient services side and the research services side. So we do see improved operating margin over time.

Our philosophy has been take some of that leverage and let it drop and then take some of that leverage and fund growth. And I think it's been working okay for the last couple of years because we are seeing improved margins. If you went back and corrected for the Medicare rate cut last year, we've seen unbelievably improved margins really with leverage that came with scale.

So, I think that we've taken the right approach so far. We haven't dumped everything back into the business, nor have we dumped everything on the bottom line. And I think that's the approach you can expect to see from us going forward.

I guess I'm going back to your last-quarter call. I think you had talked about maybe wanting to reinvest a little bit faster and kind of being uncertain about that in your last quarter call. I was just wondering if you are feeling like -- do you want to put maybe a little bit more push on the sales side or during this period of time?

And then I guess I'll start asking my question on the margin side. How much smaller is this product? How much less are you shipping? What's the upfront cost of this product, Heather, versus the other ones that have a docking station or does it hook up to your phone? And just remind us if you could go through the variable costs of your -- of an MCOT system through your shipping and whatnot and how this product is maybe going to -- start to tease out where the cost savings are in the product.

I would say a rule of thumb, think of it this way, cost of goods as a portion of cost of sales, about what percent?

The depreciation?

Yes.

It's about 15% of that.

About 15% of cost of sales and the new system should reduce that by about 50%, 60%. That's sort of the given. How it affects the rest of the operations is yet to be seen.

And to your point about investing in the business, yes, we've made those statements in the past. I think that's pretty consistent with what I just said. It shouldn't affect operating margin that much. It may affect cash a little bit more if we decide to accelerate a build on equipment, but again obviously that's capitalized.

That was kind of going into the other bigger picture question. It sounds like you've made this new distribution agreement. I just want to kind of get a sense for how big it is over the next year and then longer-term. And I'm a little bit -- maybe we understand a little bit more about what you are selling for them and whether or not there's going to be some stocking orders midyear and how that builds over time, maybe how that affects your working capital, Heather?

Could you clarify which distribution? Are you referring to the Roche distribution agreement for INR business?

I actually thought you mentioned two. So, you had the Roche. I'm curious about that one as well. But I thought there was a different agreement for this respiratory opportunity. It sounds like they're going to get your product. And so it sounds like you are opening up the European distributor over there basically. I'm curious what they have rights to and what it is.

All right, so let's clarify. One is the Roche agreement which is for our INR business, which is a small newly developed product line, it's for at-home testing for an INR test, which is the primary test used for monitoring anticoagulation medication levels. So that's a standard distribution agreement. We buy the equipment from Roche. We then provide the equipment to people who use it at their home. We provide services around that and then we collect results, redistribute the results back to the physician, and we bill insurance companies and Medicare on their behalf. IT's very similar to the model we have in our patient services business, so we are able to leverage a lot of that infrastructure. You need to be an IDTF to provide the service and bill. You have to be an IDTF for our patient services remote cardiac monitoring business, so it made a lot of sense. It's the same sales channel. It's a relatively small business that we'll build over time. Not a tremendous strain on capital. I couldn't tell you off the back of my hand what the payback is, but we can provide that to you. But it's not a big capital-intensive business.

The second distribution agreement we mentioned is with a company called Vitalograph, and that is a research services core lab headquartered in Europe. It's a company we've dealt with in the past quite a bit. We've formalized our relationship to kind of tie the companies a little closer together. They provide us better logistical support and some access to the European markets, and we do the same for them in the US market. We have a relatively small presence today to support our research division in Europe. And as we've mentioned on previous calls, we've been looking to build that out over time. So that's a collaboration. It doesn't require an investment on their part. It doesn't require a big investment on our part. Does that make sense?

Yes. Can you run Europe out of your US facilities? Can you run monitors over there out of the US or do you have to have a European presence?

So, what happens is when you enter into a study, you'll have research sites both in the US and ex-US. There's logistical support required in both cases to get equipment and to collect equipment and to train people, so on and so forth. So having logistical support on the ground is quite helpful. And, some of the monitoring may be done there, but a lot of the monitoring will be actually done back here.

All right. Well, unless somebody else ask it, I guess I do want to know, Heather, if you could tease out the volume on the three different monitoring modalities on the quarter and the year for 2014. And sorry for all the questions, but thanks a lot and have a good night.

I think the last one Charley said was about MCOT and then of course there is Holter for 2014 and we talked about the split between the three.

(technical difficulty).

The overall revenue split was 80% patient services. And of that, we had about 55% of it is MCOT and the remainder is event and Holter.

Thanks a lot and have a nice night.

Jan Wald, Benchmark Company.

Nice quarter. I think a lot of sort of the questions have been asked, but in terms of patient services, I guess it has been coming on and I guess someone asked already about I guess the shape of the revenue for research. What do you see in the shape of the revenue for patient services? Is it going to be linear or do you expect it to -- how do you expect it to grow over 2015?

As is typical in our business, we typically see basically a little bit of growth between Q1 and Q2 with a flattening to down in Q3 and then another pop up in Q4, so not directly linear but progressive through the year with a potential decline in Q3, but we haven't seen that in the last year.

Yes, it's a great question. There's a little bit of seasonality, a little bit of choppiness to the business. As Heather indicated, one pops up to two, usually flat a little bit to three and then up to four. Last year we saw, I think we saw a step up in every quarter and we saw -- and part of that could've been just the way the business was growing, the way the market was growing. We were pulling through the United agreement. As so again, we took a pretty conservative approach to the way we looked at this year but we -- you know, worst-case I think it will look a lot like the year before versus last year, but optimistically it will look a lot like last year, which was up every quarter.

Okay, thank you. And I guess in terms of the competition that you're seeing with MCOT, Medtronic is making a lot of noise with their new LINQ device. Do you see that in the marketplace at this point or is it having much of an effect?

So, I think it's a two-part question. One -- and I'll answer it backwards -- is Medtronic's LINQ system having an impact and having success in the market? The answer to that is yes. Is it impacting our MCOT business I think in a positive way.

The LINQ, as you may be aware, is designed for -- it's an implantable device, quite expensive, designed for patients who are having arrhythmia issues with symptoms in intervals greater than 30 days. And obviously MCOT is good for up to 30 days. MCOT clearly has a much higher detection rate than the LINQ. It's a more robust system, so it's the right system to use first. But you have another organization called Medtronic out there talking about the benefits of remote patient monitoring or long-term monitoring to detect arrhythmia issues which we think is rising all tides, to be frank.

Yes. Well, thanks. Another question. You mentioned I think in your -- I think in the press release that you are now getting larger research studies than you have been in the past. Could you talk a little bit about that? What kind of studies are you getting and how do you see them -- how do you see that unfolding I guess over 2015 and 2016?

Yes, I think the team has become very -- much more successful at winning preferred provider relationships which drive study volume with research partners. They are tending to win a little bit more late phase than earlier phase and they are tending to win with larger pharma companies and frankly their win rate is higher. So a lot of positive indicators for that business moving into the future.

Okay. And I guess one last question if you don't mind. You know, I think I always try to get at this, but if you look at the numbers that are possible I guess and the guidance that you are giving us seems kind of conservative, and I think conservatism is a good thing, but I guess you seem positive about 2015. Could you talk a little bit more about why you are positive and what the year looks like going -- as you go into it with new product introductions and things like that coming?

Jan, I thought you would be doing back flips that I'm giving any guidance at all.

That's right.

(multiple speakers)

I am.

You usually come to the conference pulling your hair out asking for more guidance. And you know, in dealing with both Heather and myself, I think we've proven that we'd rather deliver than under-deliver and it took a lot for us to give this kind of guidance. But we are comfortable with it. We don't think it's a layup, but we don't think it's -- it's not crazy either. So it's a realistic number, both top and bottom line, and it won't preclude us from doing other strategic things as well. So we think it's the right sort of story to be telling right now.

Okay. Thank you very much. I'm done. I should have known better.

(Operator Instructions). Dan Trang, Stonegate Capital.

Thank you for taking my question. Most of my questions have already been answered. So, Joe, you mentioned the consumer mHealth market and looking to collaborate with a larger medical device company and leveraging your company's data. Can you provide some color as to what consumer applications are you looking into and is an agreement with another medical device company necessary to launch any possible applications? Thank you.

Yes, it's a good question, and I would characterize those discussions as relatively early on. And it's not just medical device but just consumer device companies that are looking at the space as well. What kind of products would we supply? Obviously, our expertise is in cardiac monitoring today, collecting data very efficiently, remotely centralizing the data, synthesizing it and then putting it -- feeding it back today to healthcare providers in a usable readable format. So, the conversations we are having are are there other applications? Can we drive that down to the consumer level? Does it require --? And the best way for us, we think, to do that is through collaboration, not to be making all these devices ourselves, especially when you're talking about emerging markets and price sensitivity issues at the consumer level, how big these markets are.

Our position is that the more clinical the information gets, the more valuable it gets, and that's really where our expertise is, is collecting data and making it relevant. So early on, collaboration with companies both from the consumer side and the med device side who are looking at these types of applications.

Okay. Thank you.

At this time, I'm not showing any further questions. I'd like to turn the call back to Mr. Joseph Capper for closing comments.

Thank you, operator. Thank you all for your interest in the Company. Before we close out, I've just got to go on the record saying happy birthday to our outstanding CFO, Heather Getz. And we will speak to you all in a couple of months after next quarter. Thanks everybody. Good night.

Thank you ladies and gentlemen. If you joined the conference late today, you may listen to the conference call via digital replay which will be available through the Investor Information section of the BioTelemetry website at www.biotelinc.com until Thursday, February 26, 2015. This does conclude today's presentation. Thank you for your participation. You may all disconnect. Everyone have a wonderful day.