Heartbeam Inc (BEAT) 2017 Q1 法說會逐字稿

Good afternoon. Thank you for joining us for the BioTelemetry First Quarter 2017 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 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 form -- 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. As on our previous calls, I'm joined by Heather Getz, our Chief Financial Officer. I'll start with commentary about our first quarter performance. Heather will take you through a more detailed review of our financial results. I will then provide commentary on how we see the business continuing to evolve in 2017 and beyond, especially in light of our recently announced offer to acquire LifeWatch. After our prepared remarks, we will open up the call for questions.

Let's get started. I am extremely pleased to report this afternoon that we started out the New Year the same way we exited 2016, with another record-setting quarter, during which we surpassed all expectations, posting our 19th consecutive growth period. This performance is even more noteworthy given the first quarter is typically our most challenging, especially in terms of EBITDA and cash due to certain front-end loaded expenses. You will also recall that on our last call, we stated our intention to invest more heavily in certain growth drivers like sales and marketing and our digital population health initiative. All of which is occurring according to plan.

As a benefit of our consistent performance over the past several years, we are able to make these growth-enhancing investments while still maintaining a solid financial position. Clearly, we intend to continue to drive this high-growth agenda for the foreseeable future as evidenced by the announcement to acquire LifeWatch, which is in keeping with the guiding principles that shape our operating strategy. As a reminder, those principles include going deeper and wider in cardiac monitoring in order to expand our leadership position, continuing to build a leading research services business by expanding our service offerings, and identifying other markets that would benefit from the application of our wireless platform and proprietary technology. We are highly confident that if we deliver on these 3 objectives, BioTelemetry will realize its full potential. We have made great strides in our current markets, which still possess significant opportunity.

As I will explain shortly, we also see our platform as an extremely valuable asset capable of addressing vast yet mostly undeveloped additional areas for remote patient care. But first, let's take a few minutes to review some of the Q1 highlights and updates on the key areas of the business. During the period, revenue grew by 15% to approximately $56 million, at the upper end of our expected range. Overall, margins came in as expected with EBITDA of $10.8 million. We ended the quarter with $25.1 million in cash, up from $23.1 million at year-end, in spite of some heavier spending in Q1 as discussed.

The launch of CardioKey continues to be an outstanding success story as we've already serviced nearly 30,000 patients. Our research services team continued to expand backlog ahead of expectations, and we began the process of identifying investments critical to building out our digital population health management platform around the recently acquired Healthcare business.

Turning now to the business segments that have been producing these excellent results. In our Healthcare Services division, we saw our comprehensive approach continue to generate greater market penetration. All pre-service types, MCT, Event and Holter grew in the quarter in spite of a tough comparison to Q1 of last year. Since no other competitor in our space can match us in terms of breadth of product portfolio and commercial execution, we expect this trend to continue.

Those that have studied the cardiac monitoring space know that MCOT is the most accurate option available, providing the highest diagnostic yield and the fastest turnaround time. As such, MCOT remains the product of choice when accuracy and speed to diagnosis are paramount for the treating physician, which is exactly why we must continue to invest in and extend this important product line.

To that end, we took an exciting step during the quarter when we began beta trials for our next-generation MCT system. As a reminder, this system is a 4-lead, 2-channel telemetry device that will be available both in a lightweight, easy-to-use patch format and a lead wire configuration for those who would prefer not to wear a patch. This system incorporates our proprietary algorithm and detection capability, which have established MCOT as the gold standard among remote monitoring options.

Additionally, CardioKey, our extended wear Holter, has been a fast rising star in the class with patient enrollments nearing 30,000. Although relatively new to the market, CardioKey is taking the extended wear segment by storm and has several distinct advantages over other extended wear Holters, allowing it to grab share at tremendous pace. To compliment CardioKey, during the quarter, we launched ePatch, which is an extended wear Holter in a patch format. The early reviews for this product have been outstanding. With CardioKey and ePatch now available, we are able to offer additional flexibility to customers in the extended wear market segment.

In addition to the investments made in new product launches, we recently added sales and marketing resources with a focus on leveraging our position to maximize opportunity within the payer market. As you will recall, the nation's largest payer, Anthem, recently modified its policy on MCOT, allowing for its use within the cryptogenic stroke patient population. This was an incredibly positive development and represents an opportunity to build a relationship that may be to increase indications for use. We continued the process of contracting with the 14 Anthem subsidiaries, 3 of which have been completed with several others pending.

The additional sales resources are intended to ensure we realize our fullest potential when these opportunities arise. With demand for remote monitoring solutions on the rise, our Healthcare Services business is incredibly well positioned to continue to outperform the market. Our high organic growth rate, expanded payer coverage and introduction of innovative new products are all contributing to the tremendous momentum the business is experiencing. These factors and others all played into our decision to pursue the acquisition of LifeWatch at this juncture, which I will speak more about in my closing remarks.

Not to be outdone by all the excitement in the Healthcare segment, the Research Services leadership team has been doing an excellent job executing against their key priorities. Post last year's acquisition of the imaging business, our focus has been on fully integrating the technology platforms, ensuring speed, data security, flexibility and labor efficiency. As this process unfolds, the market continues to respond amazingly well to the combined offerings. While we do not make public our pipeline and backlog numbers for competitive reasons, we do measure them against challenging internal objectives. During the first quarter, we exceeded our benchmark for booking contracts into backlog by more than 35%, an excellent leading indicator for the business.

In addition to the great momentum we are experiencing in healthcare and research, we remain extremely excited about our latest venture into the rapidly evolving population health management or PHM market. This market provides BioTelemetry a pathway to grow into a significantly larger company over time. Our current markets in cardiac monitoring and research services represent attractive large opportunities with robust growth potential. However, we view population health management with equal importance given its potential to offer BioTelemetry much larger markets in which to capitalize. What excites us most is that we believe the demand for these services already exists and is awaiting the right platform and solutions to service it properly. Furthermore, we believe, we have the know-how and technology to transform those massive undeveloped markets into significant growth for our company.

An overarching objective within the healthcare system is to identify solutions that lower cost without forgoing quality of care. PHM services are designed to help control the cost of care among certain patient groups, typically, those living with expensive product conditions, while improving outcomes; organizations responsible for the cost of care or the customers for these types of programs, typically, health insurance companies and accountable care organizations.

The objective of population health management initiatives is to provide information, education and assistance in an effort to modify behavior of people living with challenging chronic conditions. If they can be coached into a healthier lifestyle, they will cost the healthcare system far less in a long run. Population health management programs need to be high touch while fitting into the lifestyle of the patient in order to be effective. Coupling the latest technology in wireless connectivity with the tools used in traditional PHM programs allows for the continuous transmission of important information, dramatically improving the efficiency and effectiveness of these programs.

We see connectivity as a critical missing ingredient necessary to effortlessly integrate PHM initiatives into an individual's daily routine. The acquisition of Telcare Medical Supply, a digital PHM business focused on the diabetes market, is providing us with an excellent entrée into this high-growth market. Telcare's cellular-enabled blood glucose monitoring system transmits real-time results to a cloud-based analytical engine, which simplifies the data, monitors trends and provides caregivers with critical information about the patient's health status and potential need to intervene. We chose the diabetes market for our first major digital population health management initiative because of its overall burden on the healthcare system, (inaudible) made a direct annual cost in the U.S. of over $245 billion.

Since the acquisition in December, we have spent time assessing the resource requirements necessary to accelerate the growth of this business, and we have had excellent early success on the business development front. We are in the process of developing several pilots, which could lead to a few large and exciting partnerships.

As you can see, we are firing on all cylinders. The Healthcare and Research segments continue to plan, and we're making first-rate progress developing a digital PHM platform, which we believe will be a superb contributor to our future growth. We look forward to completing the acquisition of LifeWatch and continuing to provide record setting results.

I'll now turn the call over to Heather for a detailed financial review of the quarter.

Thank you, Joe, and good afternoon, everyone. As Joe just announced, the first quarter of 2017 marked our 19th consecutive quarter of year-over-year revenue growth with total revenue of $55.9 million, which was at the high end of our expectations. This represents a 15% increase as compared to the first quarter of 2016. Healthcare revenue was strong with an increase of $1.4 million, resulting from strength in volume across all products as well as a favorable product mix. Partially offsetting these positive drivers was the lower Medicare rate that became effective January 1, which, as expected, impacted us by about $1 million. Our research revenue increased $3.9 million, largely due to an increase in imaging revenue from the 2016 VirtualScopics acquisition. To conclude, the technology segment increased $2 million bolstered by sales of wireless blood glucose monitors through our Healthcare division.

Moving to gross profit. Our margins for the first quarter was 59% versus 63% in the first quarter of 2016. The decline in margin was primarily due to the initial costs associated with launching 6,300 devices into the field to meet demand, the impact of the Medicare rate reduction as well as the 2016 acquisitions, which carry lower margins than our existing business. Partially offsetting these declines were volume-driven efficiencies and favorable product mix.

We generated adjusted EBITDA of $10.8 million for the first quarter and a 19.4% return on revenue. This was in line with our expectations and reflects the impact of targeted investments that we have started to make as well as the Medicare rate reduction.

Before moving on to the balance sheet, I want to touch on our adjustments to our GAAP results and remind you of how we are reporting our income tax on a GAAP and adjusted basis. Our total adjustments to our first quarter results included the impact of 3 unusual items. First, we recorded a $2.5 million charge for a settlement stemming from an incident that occurred over 5 years ago where 2 unencrypted laptops were stolen from employees of the company. As required under HIPAA, we reported the incident at that time. Subsequently, we have completed several third-party assessments of our HIPAA compliance program without any material deficiencies. Second, we incurred $1.7 million for expenses related to the diligence on the LifeWatch acquisition. And third, we recorded $1.5 million for the second half of a noncash, onetime performance bonus paid to a third party in the form of stock compensation. The first of the 2 performance criterion was met during the fourth quarter of 2016, while the second performance criterion was achieved during the first quarter of 2017.

Next, regarding 2017 taxes. You will see some variation from quarter-to-quarter in our GAAP tax rate with the expectation that the full year tax rate will be approximately 38%. However, as we discussed last quarter, due to the utilization of the net operating loss carryforward, we expect our 2017 actual cash tax rate to be in the 3% to 4% range. Moving to the balance sheet. We ended the quarter with $25.1 million in cash and an equivalent amount of indebtedness. During the quarter, we generated $4.7 million in cash from operations and $1.7 million of free cash flow. The $3 million used for capital expenditures was substantially all for the additional devices in our Healthcare segment.

Now shifting gears, I will touch on the outlook for the full year and second quarter of 2017. Our strategy continues to deliver strong results, which enabled us to achieve our first quarter expectations. We expect that success to continue throughout 2017, allowing us to reaffirm our full year guidance of double-digit revenue growth and approximate 23% EBITDA return. For the second quarter, we are forecasting revenue growth of over 10% or $58 million to $59 million and an EBITDA return of about 21%.

To summarize, the company is in a strong financial position with more than $25 million of cash, low leverage and additional capacity if needed. We just posted our 19th consecutive quarter of year-over-year revenue growth. That consistent growth has provided us with the financial strength and flexibility to execute on our key growth initiatives.

And with that, I will now turn the call back over to Joe.

Thanks, Heather. As you have just heard, we had a highly successful first quarter, starting 2017 with excellent momentum. Our strategy is yielding the results we expected, and the organization continues to broaden its opportunities. To ensure continued success in 2017, we will focus on expanding our comprehensive approach with the full launch of our next-generation MCOT system and the continued market penetration of CardioKey and ePatch, contracting with additional Anthem subsidiaries and pulling through those services, continuing to grow our Research Services backlog at the accelerated rate we are now experiencing, and building out a world-class digital population health management business. In addition to these topical initiatives, we will continue to work diligently on completing the strategic acquisition of LifeWatch with the anticipation of closing the transaction by mid-summer.

As I mentioned when we made the announcement a few weeks ago, the proposed acquisition of LifeWatch is wholly consistent with a key tenet of our corporate strategy. We believe the acquisition will bolster our growth momentum and improve our ability to expand within and beyond the cardiac monitoring market.

Additionally, the merger will yield significant synergies over the next 12 to 18 months, creating the opportunity to dramatically accelerate our strategic plan. We are confident we can achieve the synergy objectives given our in-depth understanding of the cardiac monitoring space. To illustrate the potential, assuming the transaction had occurred on January 1, 2017, and full synergies had been realized immediately, the combined 2017 adjusted EBITDA would be approximately $95 million to $100 million. As you can see, this deal makes great sense both strategically and financially for our shareholders.

The combined company will represent the most comprehensive connected health platform in the world, providing immense benefit to the healthcare system as we bring more advanced solutions to the market. Our offering documents were filed last week. Over the next few months, we will work to receive the requisite regulatory approvals and shareholder acceptance and look forward to completing the transaction in Q3.

In summary, given the success of the business in a stable reimbursement environment, we can comfortably reaffirm 2017 expectations at $230 million to $235 million of revenue with an approximate 23% EBITDA return absent any acquisitions. These projections do, however, contemplate investments back into the business in order to better capitalize on growth opportunities.

In addition to being quite bullish on the potential of the digital PHM business, we will continue to dedicate further resources to key areas of BioTelemetry. These investments will be more than offset as we continue to outperform in the healthcare and research markets and begin to build a world-class PHM platform.

The company has come a long way, but our best days are still ahead. Our business is benefiting from the trends that favor our strengths, and we are excited about our future prospects. As I close, I would again like to thank those at the company who helped deliver our 19th consecutive growth quarter. We have put the company in a position to embark on an exciting journey with the potential acquisition we discussed. However, let's never forget, our mission is to help save as many lives as possible each and every day.

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

(Operator Instructions) Our first question comes from the line of Bruce Jackson with Lake Street Capital.

First on the LifeWatch acquisition. Can you give us a little bit more detail in terms of like what are the next major milestones and regulatory hurdles that you have to get over and when might those occur?

So the next big one for us is to get HSR approval. We filed for that, and we expect that approval around the mid-May timeframe. We'll then or shortly before that start -- the first time period. And obviously, we're hoping to get as much of the shareholder vote in the first time period as possible, and we think the market has responded well to both -- on both sides, both their share price and our share price obviously. So we think the market is understanding some of the potential here. So (inaudible), so if we can get through regulatory and then requisite shareholder acceptance, we should be in pretty good shape.

Okay, great. And then in terms of the extended wear Holter monitor, you've been getting some traction with that. I know that the reimbursement is still fairly new. How are you finding the reimbursement trends in that particular market segment? And how is the year-over-year reimbursement increase for those devices?

So I think we're finding a lot of opportunity in terms of where we can sell the product, and we're -- I think, more and more, we're able to add the product onto existing contracts. One of the benefits we have is we have all the contracted relationships. So our challenge is to go back and add this product line in as many places as possible at a rate that's acceptable. The Medicare rate is obviously quite high. It's not nationally priced at this point. So we're -- we get a little bit nervous about what happens to that rate in the future. As you know, from a past experience, until the product is nationally covered and nationally priced, it's a bit more subject to volatility. But we're -- so far, we're doing pretty good with it. Our unit volume is obviously very, very high, several 100% because we're coming off of such a low base over the prior year. But I think the rates are coming in pretty much as we expected or maybe even a little bit better.

Okay. Last question for Heather, just a housekeeping question on the unit volume growth trends. What was the overall Healthcare Services unit volume growth? And then can you -- can I also get the numbers for MCOT and for the Holter, Event monitoring?

Yes. The overall volume growth was just north of 5% with MCOT and Holter slightly higher than that and Event slightly lower.

We didn't anticipate huge volume growth in the first quarter because we're comping off of a really tough Q1 last year. I think MCOT growth was like 18% last year.

18%, yes.

So we knew that was going to be our toughest comp on a quarterly basis. We were actually glad to see that we got the growth we anticipated. And we had plenty of demand. That's for sure. As we exited the quarter, the demand was on a rise.

Our highest quarterly volume ever.

Our next question is from the line of Marco Rodriguez with Stonegate Capital.

A couple quick housekeeping items. I'm not sure if I caught this. But did you say that there was an incremental $2 million in revenue from Healthcare and the product segment? Did I catch that?

Yes, the product segment increased by about $2 million, and that was mostly related to the sale of Telcare product, yes.

Okay. So mostly related. So not the full incremental was Telcare. Got you. And in terms of Telcare, are you still expecting the annualized $5 million in revenue kind of run rate for this fiscal year?

Yes. We're -- it's a placeholder because we -- it's a brand-new business. We got to see how it develops. I think...

It could be a little bumpy.

Yes, I think it'll be a little choppy early on, but I think we'll do that and probably more.

Got you. And how is the integration coming along with Telcare?

Good, good, really good. We -- really exciting from a biz dev standpoint. We've -- have a lot of activity with potential new customers, some pretty large ones that we'll hopefully be able to talk about in coming quarters.

Got you. And then coming back here to your -- the beta trials on the new MCOT system. Can you talk a little bit about that in terms of timing, when you expect to kind of have those beta trials completed? And any other sort of timing in terms of the launch of the patch version?

Probably full launch third quarter. We'll probably use the rest of the second quarter to kind of finish up the beta work and get the final development work finished. And then I would say probably Q3 -- early Q3, we'll probably have more of a full launch of the product.

Got you. Okay. Then switching here just to kind of a high-level question if I might. Maybe you could talk a little about the competitive environment, how you're kind of looking at it today and if you can kind of compare and contrast that environment to perhaps last year at this time and lastly, how you kind see that environment developing through fiscal '17?

So I think it's still a very competitive market. As you know, there's been several new entrants to the market, in some case, sponsored by really deep pockets. One of the larger competitors is Preventice, and that's partly owned by Merck and partly owned by Boston Scientific. As you know, Medtronic has entered the space with an MCT product and a implantable loop recorder, and they've had a lot of focus on that. We've talked a bit about iRhythm. They're -- they've sort of created the extended wear market. We're a fast follower into that market, and they have stated their intention of expanding their product portfolio. There was several other smaller players that are in the market. I think, my guess is you're going to continue to see these new entrants and some of these more established players invest in the category. Makes a lot of sense. It's a very good category. I would say the barriers to scale are pretty significant. We're the largest, and we've learned along the way that in each additional kind of level within the business, you learn more about yourself and you learn challenges that you didn't anticipate. So we have a significant advantage over folks like that because we've experienced a bit of that already. We have 18 years in the space, and you learn a lot over that course of time. We have an IP portfolio that's second to none. We know that we could protect that IP portfolio. We've demonstrated that. So we feel pretty good about our position, even though it's a highly competitive market, and I believe it will remain highly competitive. I think, it'll stay that way for the foreseeable future. Competition keeps you honest.

Got you. And are the competitors still relatively rational at the moment? Or anything different in that respect?

Yes. I think it's a pretty good competitive set, and as I indicated, the folks that are getting into the marketplace tend to be more sophisticated larger companies.

Got it. And I'm sorry, last quick question. The $1.5 million performance bonus, is there any other anticipated amount in the foreseeable future for that? Or are we done with that?

That's done, and there's nothing else like it out there.

Our next question comes from the line of Mitra Ramgopal with Sidoti.

Joe, I know you did mention about the Anthem relationship. I was just wondering if there are some other opportunities out there for you as you look to expand your payer base.

Yes, I would say that there's still a handful of the Blues within -- the individual Blues within the network that we would like to get contracted with and like to get more favorable coverage policy. They're probably the biggest remaining ones. So I think it was important to get Anthem to change its -- their position being that a lot of the other Blues take their signal from them. And then, obviously, we continue to work with association -- Blue association as well. But the biggest ones are there. And that -- once that's done, we'll have about all the payer coverage we can get. And then the important thing is making sure we have all of our current products and new products on those contracts as we get them and even the existing contracts. So I mentioned getting the extended wear Holter added to the contract. And then eventually, we'll leverage those relationships to expand the digital PHM platform as well. That -- remember, that's a product line that's sold almost exclusively into the payer environment. So part of thing we did -- one of the things we did this year start to invest a little bit more in a smaller, but experienced, sales and marketing team to focus on the payer market and to prepare that market for these additional services that we'll be bringing to market in the near future.

And again, I know it's still early in the process, but given the uncertainty of healthcare right now in terms of potential replacement, et cetera, do you think that's actually holding things back a little in terms of healthcare payers maybe wanting to take a wait-and-see approach?

I don't know. I don't want to hypothesize on that.

Right. No, that's fair. And...

(inaudible) I'm staying out of politics, Mitra.

But at least that's not something, yes, that's keeping you up, so to speak, worrying about.

No, no, not really.

Right. Then I had just some housekeeping items. I know you had mentioned the 3 nonrecurring adjustments. I was just wondering, in terms of the line items, where I should be taking that out of.

Sure. So the -- actually, in the back of the earnings release, there's a nice little chart. But if you look at the stock-based comp, that's in G&A. The other charges are mainly -- are in one line item. That's on the P&L.

The other charges.

Yes. So -- because that's like the diligence related to LifeWatch, that $1.7 million. And then the $2.5 million is in -- is below operating income. That was in income before taxes but not in income from operations.

Right. Okay, perfect. And then, Joe, just a quick question also on the digital population health initiative. Obviously, it's still early, but based on what you're seeing, I know diabetes was the initial area for you. But I take it you probably want to wait to see LifeWatch get closed and maybe see some more of Telcare before considering expansion there.

I would, yes. Obviously, when you're making an investment like the one we're making in LifeWatch, it becomes priority #1 to make sure that we integrate that properly, maximize customer retention and achieve the synergies that we forecasted so that we have that done properly. We've made the investment in Telcare. We own that business, and we'll continue to nurture it. We have made an investment in a congestive heart failure startup, makes sense to potentially bring in at some point down the road. And we've looked at the other chronics like COPD and asthma and [sleep], but there are some interesting connected health type of solutions that are being developed. We just can't do it all at one time. We just got to make sure we -- what we're doing, want to do right.

Our next question comes from the line of Eugene Mannheimer with Dougherty & Company.

Yes. I was hoping you could share a little bit more about the debut of the ePatch. When did that launch? What's the early reception looking like? Or are you able to maybe share with us your thoughts on number of patients that will be treated and maybe distinguish it from the Zio patch that's out in the market for us?

Yes. So we're going to have 2 products in that market, right: the CardioKey, which is a lead wire, lightweight product that has been in the market for a little while now, goes up to 14 days; the ePatch device, again, is an extended wear product. It's in a patch format only. The feedback is really, really good. I mean, we've only had it out for a short period of time since the end of March, and it's limited in scope so that we can really get great feedback. So we're not really talking about how many patients we have on it, but the feedback has been exceptionally high. When you look at it compared to some other products out there, one of the major benefits is that you can reuse the sensor. You can take it out of the patch. It's a snap-in assembly, and you could run a -- you could put it into a new patch. So you can use more than one patch during the same monitoring session, and then certainly you can easily reprogram the sensor to be set up for a new patient. So it -- over time, it'll add a lot of flexibility. So one of the other things we're looking at is giving these devices the capabilities, say we download it in a doctor's office. As you know, the iRhythm product is a mail-back product, so it extends the turnaround time of the device. We're going to give the doctors flexibility to download in the office, so that they have a quicker turnaround time. They get the results back in a more timely fashion. So they're kind of the areas that we're looking at. If you want to go longer, that product today goes -- does not go all the way out to 14 days. If you want to go out that far, then we would recommend the CardioKey product. And again, that's another product that we're -- in the future will have the capability to downloaded in the doctor's office, huge benefit.

And then other question would be around the LifeWatch transaction. Do you have any preliminary thoughts on the likelihood that, that'll clear the SHR (sic) [HSR] review?

I don't want to take a guess. I mean, we feel pretty good about it, and our advisers feel pretty good about it.

And I'm not showing any further questions. I'll now turn the call back over to Mr. Capper for closing remarks.

Thanks, everybody, and again, thank you for your continued support and interest in the company. We'll speak to you next quarter. That concludes today's call.

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 the www.gobio.com until Wednesday, May 17. Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.