Heartbeam Inc (BEAT) 2017 Q4 法說會逐字稿

Good afternoon. Thank you for joining us for the BioTelemetry Fourth 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 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. (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. I'm joined by Heather Getz, our Chief Financial Officer.

I'll start with a recap of our fourth quarter performance and other key developments. 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 throughout 2018. After our prepared remarks, we will open up the call for questions.

As you will hear, we had a truly exceptional quarter. I could not be more pleased with how the team is working together to deliver on our objectives. On this call, we will update you on the faster-than-anticipated integration of LifeWatch and the realization of the associated synergies, which are running well ahead of schedule. You will also learn that our Research Services division has regained its momentum and that backlog stands at a record level.

We will elaborate on our role as a contributor to the high-profile Apple Heart Study. We'll also detail how our population health business is progressing. Last, you'll learn that we didn't miss a beat while integrating LifeWatch and posting another record-setting quarter, in which we set all-time highs in revenue, EBITDA and EBITDA margin, making it our 22nd consecutive growth quarter. As you can tell, there is no shortage of good news to report this quarter. So let's dig into the detail behind these many positive accomplishments.

For the full year, we far exceeded what were fairly aggressive growth objectives, driven in large part by the highly strategic acquisition of LifeWatch AG back in July. Since that time, the integration has been tracking well ahead of schedule. In many cases, we have achieved key milestones months in advance. Naturally, the focus since the acquisition has been to manage the successful integration of operations while continuing to execute on our business objectives in the same fashion we did prior to the transaction. I'm pleased to report that is exactly what is happening.

As I mentioned on our last call, as we work through the integration we are highly focused on 2 areas of vital importance: Maximizing customer retention and adopting best practices. Key metrics in these areas have been excellent. As a result, we are now in a much stronger competitive position and better able to execute on our plan.

For those of you who are new to the company, it's important that you understand the 3 principles which guide our strategy and have led to the consistent growth we have had for more than 5 years. Every initiative we undertake can be tracked back to one or more of these themes, which are: To go deeper and wider in cardiac monitoring in order to expand our leadership position; to continue to build upon our leading Research Services business by expanding our service offerings; and last, to identify other markets that would benefit from the application of our wireless platform and proprietary technology.

The acquisition of LifeWatch was obviously consistent with our intent to solidify our leadership position in cardiac monitoring. Our global cardiac monitoring capabilities and reach are now unmatched, providing us an enviable position from which to launch other connected health solutions.

In support of our second key initiative, we purchased VirtualScopics in 2016 to broaden the scope of our clinical research capabilities, which is already helping to deliver solid growth.

The third element of our plan was advanced with the addition of Telcare, providing us a running start towards capitalizing on enormous opportunities in adjacent connected health markets. Let's take a few minutes to review in more detail some of the fourth quarter highlights.

During the period, revenue grew by 70% to $91.7 million, exceeding the upper end of our expectations. Organic revenue growth was an impressive 10%. Full year revenue was $287 million, up 38% from 2016, again driven in large part by the LifeWatch acquisition. Overall margins continued to improve, as quarterly EBITDA grew by 80% to $22.9 million, exceeding our expectations and bringing full year EBITDA to $65 million, representing an increase of 36% over 2016.

We ended the quarter with $36 million in cash, up nearly $10 million in the quarter, which is amazing given all the onetime expenses associated with the integration. MCT volume was up 12% on a pro forma basis. Our Research Services team continued to expand backlog well ahead of expectations, closing 2017 at record highs for bookings and pipeline.

We continued efforts to build upon our new digital population health management business through key partnerships and internal investments, and we became the cardiac monitoring provider for the much touted Apple Heart Study.

As a reminder, we took operational control of LifeWatch on July 24, and we have made tremendous strides during the first few quarters of the integration process. I would like to again thank the entire team for the way they have embraced this combination. I have done numerous acquisitions and integrations throughout my career, and I can honestly say that I have never seen one work this efficiently, which is a testament to all of those involved. As a result of everyone's focus and hard work, we are well ahead of all key milestones, including reaching our $30 million synergy objective.

In addition to making tremendous progress on the integration, during the quarter we continued to see excellent growth with the MCT product line, which was up an incredible 12% on a pro forma basis. We saw similar growth numbers in August and September, the first 2 months post the acquisition. Instead of pulling back or flattening out, which would be typical in a combination of this kind, MCT growth has actually accelerated post-merger, and has done so off of a much larger base of business. It is great news for our remote cardiac monitoring business that our flagship product line is performing so well. The feedback we've been hearing about the transaction has been very positive and the marketplace is clearly confirming these sentiments.

Additionally, we have done an excellent job retaining our largest and most valued accounts. Within our top 500 customers, which account for 50% of our total Healthcare business, we have actually experienced revenue increases since the acquisition. We look for continued growth throughout 2018 as we move into full market release of our latest version of the MCT. As a reminder, this new system incorporates our unparalleled arrhythmia detection capability in a product that can be configured as a patch or use lead wires when patients prefer not to wear a patch.

Complementing MCT growth are the extended-wear Holter products, CardioKey and ePatch, which will continue to expand quite nicely as we get further into the year. With the combination complete, we are now the largest and most profitable connected health company in the world. We process over 4 billion heartbeats a day. We have the most accurate and advanced technology in the marketplace, which generates the highest yields with the fastest turnaround time for the more than 30,000 physicians who refer our products each month.

In terms of sales force performance, no other company is even close. To put this in perspective, in 2018, the Healthcare division will generate approximately $320 million in revenue with 100 reps, a productivity of $3.2 million per sales professional. This is not some metric we hope to get to in the future. This is what we are doing now.

As I mentioned on our last call, while much of the attention has appropriately been on the transformational acquisition and integration of the LifeWatch business, the other parts of the company continued to make steady progress against their specific objectives. Our Research Services team had an incredibly productive year. As you may recall, our focus for Research in 2017 was to integrate disparate systems resulting from the acquisition of our imaging platform in mid-2016, with the intent of streamlining operations and creating scalability within the business.

Throughout the year, we also continued to deal with the headwind in the cardiac safety side of the business, resulting from unclear guidance from the FDA around study requirements. Given the strong internal focus and the slowdown in the cardiac safety market, we expect that the modest organic growth we experienced in Research for the whole year 2017. However, what we did not anticipate happening so quickly was the team's ability to reposition the business and leverage the portfolio in order to accelerate the rate at which we add to our backlog, which is the leading indicator of future revenue.

Throughout 2017, the Research team made consistent progress building backlog, growing 50% year-over-year and ending 2017 at a historic high for the company. As a result, revenue began to pick up in the fourth quarter, growing 20% over the prior year quarter. This portion of BioTelemetry is now poised for strong double-digit growth in 2018, a rate at least twice that of the industry. Just as importantly, our operations are more integrated and better prepared to scale, as we anticipate adding to the momentum we have created last year.

Okay, I just said a lot about the progress of the 2 main segments of BioTelemetry, Healthcare and Research Services. So let's recap where we stand.

These 2 divisions account for over 95% of our revenue and both are growing at double digits. The Healthcare Services portion of our business leads its market in every meaningful metric. The Research business is in a stronger position than at any point in its history. Both businesses are firing on all cylinders, growing, getting more efficient and producing excellent returns. And both of these markets represent attractive large opportunities with robust growth potential. This provides us a luxury not many companies experience at this juncture of their life cycle. It creates a possibility for us to extend our leadership position in the emerging connected health market by allocating more time and resources to other developing opportunities. And that is exactly what we are doing.

A few months back, we announced our collaboration as cardiac monitoring partner for the Apple Heart Study. With this study, Apple is attempting to validate the use of their Watch as a screening tool for heart rhythm abnormalities in a general population. They have made clear that the Watch is not a diagnostic tool and not on a path to becoming a regulated medical device. However, this initiative does have the potential to expand the cardiac monitoring market by alerting undiagnosed patients of their need for cardiac monitoring and potential treatment. Our participation leverages our gold standard arrhythmia monitoring technology and a world-class project and data management of our Research division. This study is in its early stages and we are excited to see how this potentially significant opportunity develops.

Additionally, last year, we made our first investment into the digital population health management market with the acquisition of Telcare. As you will recall, PHM programs are designed to provide information, education and assistance in an effort to modify the behavior of people living with expensive chronic conditions, ultimately improving outcomes and lowering the overall cost of care. Population health management programs need to be high touch while fitting into the lifestyle of the patient in order to be effective. Coupling latest technology and 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.

Our current PHM offering in the diabetes market is gaining traction and provides us an entrée into a large market with estimated direct annual cost in the U.S. of over $245 billion, and in desperate need of connected health solutions like the ones we provide. Our focus in 2017 was to make investments necessary to scale the business and to develop several key partnerships, including the exciting one which was mentioned on our last call.

In 2018, we will focus more on these partnerships and on other business development activities.

To sum up, we closed out 2017 better than expected, providing us with tremendous momentum as we entered the new year. We are ahead of schedule on our key milestones and our performance metrics look outstanding. The new, fully-aligned organization is poised for another spectacular year. In 2018, we will service in excess of 1 million patients. Our revenue will be north of $380 million, with an EBITDA margin in the mid-20s. And the company will be generating a significant amount of free cash, allowing for accelerated investments into other connected health solutions. Solutions which will improve the quality of care and dramatically reduce the cost to deliver that care.

I'll 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 just announced, the fourth quarter of 2017 marked our 22nd consecutive quarter of year-over-year revenue growth, with total revenue of $91.7 million. This represents a 70% increase as compared to the fourth quarter of 2016. Healthcare revenue was very strong, with an increase of $36.3 million, resulting from volume increases driven by the acquisition of LifeWatch, a 12% increase in pro forma MCT volumes and a favorable payer mix. Partially offsetting these positive drivers was the lower Medicare rate that became effective January 1, which again, as expected, impacted us by about $1 million in the quarter.

On a pro forma basis, our Healthcare revenue grew by 10% and if we did not have the Medicare rate reduction, the revenue growth would have been 12%. Our Research revenue increased 20% or $1.7 million, largely due to a higher volume of imaging studies resulting from new customers. This increase was partially offset by pressure on our cardiac safety side of the business.

Moving to gross profit, our margin for the fourth quarter was 59% versus 61% in the fourth quarter of 2016. The decline in margin was primarily due to the impact of the LifeWatch and Telcare acquisitions, which carry a lower margin than our existing business, and the Medicare rate reduction. This decline was partially offset by volume and operational efficiencies.

Our third quarter adjusted EBITDA of $22.9 million was our highest quarterly adjusted EBITDA in the company's history and represented a 25% return on revenue. Similar to the dollar amount, this return is the highest EBITDA return in the company's history and was above our expectations. It reflects the positive impact of targeted investments and faster-than-anticipated synergies realized from the integration of LifeWatch. Remember, pre-acquisition on a pro forma basis, the combined companies' EBITDA return was approximately 18%. In less than 2 quarters, we have been able to realize a 700 basis point improvement in our return.

To expand on the synergies from LifeWatch, as you know, we committed to deliver $25 million to $30 million of synergies. I announced on the third quarter call that we have already specifically identified $30 million. In Q4, we realized approximately $5 million in synergies, bringing the total amount realized in 2017 to over $8 million. By the end of 2018, we will reach the run rate necessary to fully achieve these annualized savings.

I would also like to provide some clarification on the adjustments to our GAAP numbers. These adjustments are laid out in detail in our earnings release, but I wanted to review them now at a high level.

In the fourth quarter, we incurred $29 million of charges that are not part of our ongoing operations or are removed for comparative purposes. These costs fell into 3 main categories. The first category is acquisition, integration and other cash charges of approximately $5 million. This includes things like severance and retention. The second category is non-cash items totaling about $15.5 million, resulting from integration and purchase accounting for write-offs of assets including tradenames, equipment and some developed software that will not be utilized going forward, as well as the amortization of acquisition-related intangibles. And the third category is an $8.7 million non-cash write-down of our deferred tax assets.

To elaborate on this $8.7 million, as many of you know, the tax reform enacted in December called for the federal statutory rate to drop from 35% to 21%. This reduction in rate required us to revalue our net deferred tax assets at the new rate and to write off the difference. Our actual cash taxes for 2017 were approximately $700,000.

Moving on to the balance sheet. We ended the quarter with $36 million in cash and $204 million of net indebtedness, which was used to acquire LifeWatch and refinance our existing debt. Year-to-date, we generated $23.8 million in cash from operations and used $13.7 million for capital expenditures, which provided $10.1 million in free cash flow.

$8.3 million of the CapEx was for additional devices in our Healthcare segment, with another $4.5 million for a refresh of hardware in our data center to support additional security protocols and the acquisition of LifeWatch. The remainder of the CapEx was for leasehold improvement, software and tooling needed to support our growth.

Before touching on the first quarter 2018 outlook, I wanted to mention the new revenue recognition standard also known as ASC 606. While there are some small changes in our revenue recognition and there is a need to provide more robust disclosures, we do not expect the new standard to have a significant impact on the way we record revenue. We have provided a more detailed update on our implementation of the revenue recognition standard in our Form 10-K.

Shifting gears, I will now touch on the outlook for the first quarter of 2018. Last quarter, we guided to 2018 full year revenue of over $380 million and EBITDA of over $90 million. This represents a 10% increase on the top line and EBITDA return in the mid-20s. We believe the momentum we experienced in 2017 coming out of the transaction will continue into 2018. Adding to this momentum will be the positive impact expected from the launch of our MCT patch product, growth in our extended-wear Holter business and the positive impact of synergies and operational efficiencies.

Looking at the first quarter, we are expecting revenue to be approximately $91 million to $92 million and EBITDA of about $20 million or a 21% return. As in prior years, these projections reflect certain expenses that are more heavily weighted to the first quarter such as payroll taxes and sales meetings. As we progress through the year, we expect to achieve the full year EBITDA return in the mid-20% range.

In addition, to end the first quarter -- we expect to end the first quarter with about $30 million in cash, a slight reduction versus the year-end balance. During the quarter, there will be cash outlays related to the acquisition including severance, retention and the remaining shares of LifeWatch. And finally, we will use cash in Q1 for management incentive payments and increased capital expenditures to service our growing number of patients.

To summarize, the company remains in a strong financial position with modest leverage and additional capacity if needed. We just posted our 22nd consecutive quarter of year-over-year revenue growth. We are ahead of schedule on the integration of LifeWatch and are seeing the tangible benefits. In less than 6 months post-acquisition, we grew pro forma revenue by 10% and drove a 700 basis point improvement to our EBITDA return. These results and consistent growth have provided and will continue to provide 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 an excellent fourth quarter, building on the momentum we have cultivated over the last 5 years. Our strategy is yielding the results we expected and we continue to broaden our opportunities. We are in the early stages of several potentially significant drivers of future growth. The importance of the acquisition of LifeWatch should not be underestimated. This transaction has advanced our growth plans by several years.

To ensure our continued success throughout 2018, we will focus on: Completing the integration of LifeWatch; expanding our comprehensive approach with a full market release of a series of patch products, both MCT and extended-wear Holter; continuing to grow our Research Services backlog at the accelerated rate we are now experiencing and converting that backlog into revenue; building out our digital population health management business and expanding on key partnerships we have developed.

Given our excellent results, the momentum of our business, the stable reimbursement environment and greater visibility into the synergies created by the acquisition, the company has never been in a stronger position. All in all, things are tracking better than anticipated. Heather spoke about how we see 2018 beginning to take shape. We are clearly in store for another great year.

While we are pleased with the progress of the company, we get far more excited about what lies ahead. We currently operate powerful cardiac monitoring and clinical research businesses, which have the potential to produce solid growth for years to come. This provides an excellent platform from which to commercialize additional innovative connected health solutions. As such, we plan to be more assertive during 2018 in developing these opportunities.

As I close, I would again like to thank those of you who helped deliver our 22nd consecutive growth quarter. Let's continue to build on the excellent momentum we have built together.

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

(Operator Instructions) Our first question comes from Brooks O'Neil with Lake Street Capital Markets.

I was wondering if you would elaborate in any way on sort of what we should expect in terms of the pacing of your launch of the new MCOT products and extended-wear Holters.

As far as MCOT, Brooks, we put a few thousand patients on it in the fourth quarter, feedback was tremendous. So we're in the process of accelerating the production of that product. Probably by, kind of the end of, I'd say more like the middle of March, we'll see full production up and running. We are rolling the product off the line now. So kind of the end of the first quarter, well into the second quarter, we'll be at full capacity. And that's not a product, it's a swap-out, it's kind of an in-line update to the existing MCT product line.

Okay, and how about extended-wear Holters, Joe?

Same, pretty much the same schedule, Brooks. We did not build enough to meet demand last year. So we accelerated the production of that as well. Heather talked about some of the uses of cash in the quarter. That had something to do with it. So we're accelerating that production as well. And pretty much on the same schedule I just outlined for MCT.

Great. And would you estimate that you will realize all of the available synergies related to LifeWatch in 2018? Or do you think there could be a tail that might go into 2019 as well?

I think by the end of 2018, we will be on the run rate to have achieved the $30 million. What we're somewhat conservative about, Brooks, is any dis-synergies, right, what additional expenses do we incur to operate the business that we didn't anticipate pre-merger? So we like the $30 million number, that's the one we sort of pegged in our public statements. We're tracking well ahead of schedule. Initially, we thought that we wouldn't get as much upfront as we've been able to realize. As you know, when you do integrations like this, squeezing the last few drops tend to be the more difficult ones to get out, so to speak. Integration of systems and products and things like that take a little bit longer.

Sure, that's great. So I just wanted to ask one more. You commented about some of the future partnerships and opportunities in population health. We obviously have some sense of what's going on with the Apple project. Can you just talk a little bit about the diabetes work you're doing? And would you be willing to say if some of the work you're doing with partnerships goes beyond what's been announced so far? Or are we really still thinking about what you've talked about publicly?

We definitely have a few more interesting conversations that are ongoing, Brooks. And obviously, I can't elaborate. I would've liked to spend a little bit more time on that business in 2017; that was my intent as we entered the year. Obviously, we were able to acquire LifeWatch and close that transaction. So as you would expect, the executive management team's focus sort of shifted. So I would anticipate putting more emphasis on that business in 2018; we really like it. We think that there's big potential. So more to come. And so yes, there are other conversations that are ongoing.

That's great. I just would sneak in one last one. Are we thinking that you could get beyond arrhythmia management and diabetes in 2018? Or is that going to be your primary focus?

If I could just continue to build out the current business in PHM, maybe add a few more capabilities to it. I'm not as concerned about moving into other disease states at this juncture. I think the main thought process here is let's build a platform that's flexible enough that we could add other capabilities. I don't want to just go out and collect capabilities until I'm ready to handle them all.

And our next question comes from Bruce Nudell from SunTrust.

Joe, the extended Holter market seems to have enjoyed a renaissance with the emergence of Zio. How do you view the durability of that segment's growth? And how competitive do you believe the ePatch to be? The competitive dimensions that I'm interested in are length of monitoring, 7 versus 14 days, sensitivity, specificity, predictive accuracy as well as ergonomics.

Yes, so let me answer it in reverse.

We actually have 2 products in the category. We have CardioKey, which is a very lightweight lead-wire configuration with micro patches that attach to the body. And that is easily a 14-day product, very easy for the patient to move around. And then we have the ePatch, which as you mentioned, has a shorter duration today, but there's projects in development to extend that. And that's strictly a patch product today, but again, there's a product -- a project to move that into a more flexible configuration as well so it could also be a lead-wire configuration.

So one of the feedback is, patches aren't for everybody and this came back very loud and clear to us from our market research. So I do think we have a comparable product line. In fact, I think it's more flexible than the one that's out there today. That's the initial feedback that we're getting.

We also know that when you sell a product, it helps if you have more than one choice. One-size-fits-all is not the answer for most health care markets that I participate in. So our portfolio approach, the reason we still market traditional 24, 48-hour Holters, Event and MCT and now extended-wear Holters, is because we're trying to offer the broadest product portfolio possible -- helps quite a bit in relationship building with large accounts.

In terms of viability of the market, I don't know. It's -- that product was on the market for several years before, as you said, it had a resurgence or renaissance. It was on the market with no competition. And interestingly enough, it still operates under a temporary code, which I'm sure as you're aware, means that there is a tremendous amount of inherent risk around reimbursement. So that's the thing that kind of gives me a little bit of odds when I think about growing that product category. I can assure you that if it does have viability, if it moves into the permanent CPT code, we will take our unfair share of that market.

And just to follow up on that question. In terms of magic sauce via discrimination, accuracy, predictive -- sensitivity, specificity, predictive accuracy for your product line and the extended Holter demand?

We think that we're as good if not better than everybody else, and that's one of the reasons why you have multiple wear options like lead wires. Lead wires produce a better signal. Some clinicians are definitely more concerned with product signal quality, which leads to specificity and sensitivity and ultimately, diagnostic yield. So we think we compare favorably to what's out there.

And my second question is in regards to segmentation in the MCOT market. Patient segmentation, of course, is different than in the extended Holter market, probably with more syncopal patients rather than AF patients, but AF is still probably in the majority. What are the patient segmentation factors in the AF segment that drives a doc to choose an extended Holter like your products or a Zio versus an MCOT? Also, I believe that Zio AT is a 2-week product versus a 4-week product in MCOT and how would that influence a doctor's choice if they think telemetry is required?

So I would tell you that the average -- again, I'm going to work this backwards, if I can. The average wear time is north of 2 weeks, it's in the 3-week range, or between 2 and 3 weeks, it fluctuates over time. So clinicians want to be able to write for the period of time that they want covered. As you know, the code requires that the service line work for up to 30 days. I don't know how you will overcome those challenges. So my guess is your product has to be flexible enough to meet those code specifications.

As far as segmenting, the MCT is used for all general -- all arrhythmias, right? So it's used for AFib, it's used for syncope, it's used for V-tach. It's most often used for AFib because AFib is the most prevalent arrhythmia in the marketplace. There's a misconception that it has, it's used more narrowly; that's just not true.

So put yourself in a position of a clinician, right? You have a patient that is showing symptoms of arrhythmia; it may be AFib, it may be something else. It may be something a little bit more life-threatening and time sensitive. You're probably going to want the most accurate device that provides you information in the fastest amount of time. I mean, time has a lot to do with luxury -- or has a lot to do with convenience. So when we look at it, we look at it in terms of what's best for that clinician. And clinicians have different prescribing behaviors.

Some do look at what's more comfortable for the patient. Some clinicians have a better handle on symptoms leading to various arrhythmias, some don't. But if you have a product line that's as extensive as ours, you can meet all of those needs. And then if you have a product that is as accurate as the MCOT, with near real-time turnaround time with results, you can't miss, right? So our approach is, "Here are the capabilities, doc. Here's what we would recommend in terms of customer segmentation. But ultimately, you're the decision maker and our goal is to give you service capability, flexibility, so that you can do what you need to do for your patient," if that makes sense.

It does. And just in terms of just in a thumbnail, like which of the patients that are more likely or better served by telemetry rather than an extended Holter?

Again, if you think about what I just said, if you're the patient, what do you want? Do you want the most accurate device? Clearly, all of the clinical evidence supports MCOT as the most accurate device. If you have AFib, it can detect AFib at levels that no other device can detect, and it can do it with a tremendous amount of specificity. This is a device that's accurate up to 100%, with a run of 30 seconds of AFib. Nobody else can make that claim. Do want that? Or do you want something that's accurate to a tune of about 75% or 80%? So you got a 20%, 25% of the device calling it wrong. And do you want those results now or do you want them in 30 days? I mean, some of these arrhythmias are life-threatening. We have people that die that are wearing these devices, so we try to get the information back to the clinician as fast as possible.

We make emergency calls, we make urgent notifications 25% of the time to our clinicians who are using these devices to try and diagnose these life-threatening events. So I always say to people, "Look, the only drawback, the only drawback to using an MCT versus any other product line, is it's a little bit more expensive." If you look at it, the fact that it goes out to 30 days versus 14 or 21 and you do it on a per hour basis, it's probably one of the cheapest devices in the market.

And our next question comes from Nicholas Jansen from Raymond James.

I want to kind of take the opposite. We've seen the ICM marketplace really explode lately, favorable reimbursement; we've seen some new devices being approved by the FDA. I just want to kind of get your thoughts on kind of the segmentation there between MCT and ICM and whether or not there's anything that you can do on that end to perhaps partner with -- leveraging your kind of channel and your resources?

Yes, it's been on the market for -- I would say, it's been marketed more aggressively over the last couple of years. We see it as a complementary product line. A lot of our clinicians will use an external monitor like MCOT prior to using a implantable device. Some insurance companies actually require it now. So we see it as kind of complementary. So once you're post 30 days, it's kind of your only choice, right? It's a much more expensive, obviously invasive and a less -- far more, far less accurate device than the MCT. But there's a niche for it, there's a market for it. And docs make a lot of money when they implant it. So there's some demand -- there's obviously demand for it and it's done well. We think, if anything, it's kind of risen the entire market.

That's helpful. And then kind of going, switching gears to the Apple news that was in November. Now how do you think about that potential if that study is successful, kind of really broadening the size of the market opportunity ahead of you? Certainly, consumers taking more control over their health care decisions. I would assume that this could really result in a big surge in the number of consumers going to their GP or cardiologists and asking for information. So how do you kind of frame that opportunity in your mind? And when do you think we'll have some level of kind of resolution on that front to make a decision or not?

Very difficult to frame, right? So for the first time in a consumer-oriented -- I shouldn't say the first time -- but in a large consumer-oriented market, there is now the ability to detect irregular heart rate and potentially screen for some sort of an arrhythmia, like AFib. So clearly, the folks, their first step is going to go see their docs. So we see it as a potential expander of the market. Don't know how much, Nick, honestly, hard to say. But there's been a lot written and a lot of folks have advocated some sort of general screening for arrhythmia, specifically AFib, especially when you start to look at segments of the patient population that are more at risk. So folks with a CHADS2 score of 3 and above, certain age, comorbid conditions that make them more at risk for arrhythmia and they're undiagnosed, there are folks that have been strong advocates for some sort of screening of that patient population.

This is bit broader than that, right? So this isn't, today, it's not talking about identifying folks that are at higher risk, it's just a general screening. But I do think they will find some, and I do think it will be quite helpful to the health care community. If you can -- in my opinion, if they avoid one stroke, it's been worth it. That's just the way I look at it.

Very helpful. Then quickly for Heather, is there a free cash flow that we should be thinking about for 2018 with the mid-20s EBITDA margin? What type of CapEx are we looking at as we think about cash generation of the business in '18?

No problem. So we're thinking that when you take into account the increased CapEx and then also we have some run-off from the prior year integration and restructuring costs like the severance and retention, it's probably in the $40 million to $50 million range.

And the next question comes from Marco Rodriguez of Stonegate Capital Markets.

I wanted to kind of take a little bit of a higher level view, if you will, of some of the questions here. Obviously, you guys have been doing really well, execution-wise, of integration of LifeWatch. It kind of sounds like the realization of the synergies have kind of taken you guys by surprise in terms of the quickness that you've been able to kind of get them. So is that a fair statement? And then maybe you can talk a little bit about, Joe, you mentioned in your prepared remarks that you've done a lot of acquisitions in your history, and this is by far one of the better ones you've ever seen from an integration standpoint. So maybe if you could talk a little bit about what maybe you think kind of drove those types of successes?

Sure. I wouldn't use the word surprise. I would say, pleased. We were highly confident when we went into the integration process that we would get the synergies. And obviously, there was a tremendous amount of diligence work done in advance to validate that. But once you acquire the company and you move into the integration phase, it's all about execution, and getting a team of folks that are highly focused. And remember, we did several acquisitions before we acquired LifeWatch. So we kind of had an opportunity as a management team to work out the kinks.

The folks that joined the management team from the LifeWatch side came up to speed very quickly. And so the aggregate management team has -- I guess if there's a surprise, I'm surprised at how quick they got it and how quickly they got aligned as a team and executed against the priorities.

Now I think in terms of best practices, we had a really good approach. We had a good structure in place, we had an integration team lead. We had an integration committee, we had outside help. I think we did it the right way. And that's helped from a time line perspective get us to where we are today.

Got you, that's helpful. And did you perhaps like put in sort of incentives or any sort of processes that you learned over the years that kind of helped accelerate this?

Mostly process oriented. And my opinion has always been move prudently, but move very, very swiftly. Have the objectives clearly outlined, communicate as much as you can throughout the organization, have people who are designated to the assignment, get outside help where you need it. You can't do everything yourself, so we got outside help in several different areas, PR, sales consulting, finance, integrate -- tax. There's a lot of different areas that we got help on. And I think you need to do that. This was just too important, we spent too much of our -- of the company shareholders' money to acquire this company to meet a strategic objective that we knew made sense. But realizing it and realizing it at this pace is another thing.

Got it. And then kind of shifting here to the sales and marketing team. Obviously, been doing pretty well here. You called out some impressive statistics here for the team. Just kind of wondering if you could perhaps talk a little bit more as far as how they're sort of being structured since the integration, if like they perhaps entered different territories, different geographies? What sort of incentive structure you may have put in place that might be somewhat different than they had before?

Very similar incentive structure that both companies were -- had in place prior. There is -- in total, there's less salespeople in the company than there were with the 2 companies combined, for obvious reasons. That means almost, if not 100% of the people, either picked up territory, gave territory to somebody else and it required a tremendous amount of coordination, handoff and kind of co-selling to make sure that we were able to retain our largest and most valued customers. I think that's something that we tracked quite a bit and I think they've done a really good job doing that.

Some of it is obviously, incentive-oriented, but a lot of it is management direction. So that has gone about as well as I could have anticipated -- things like leaving the legacy brands behind and renaming the organization. So that team that used to market under CardioNet and LifeWatch will now market under BioTel Heart. Integrating the customer-facing in a very coordinated way. Integrating and transitioning to product labeling and packaging in a very coordinated fashion.

All of that is -- when I tell you there was thousands of line items on the integration task list, I am not underestimating. So that has gone as well as can be expected.

Now because of that, right, now you have reach and frequency in the existing territory that you really didn't have before. Before you had 75, 80 reps versus 45, 50 reps competing with each other. Now you have 100 with the same aligned message, which means better reach and frequency, a more extensive product portfolio, adopting best practices across the organization, new products in the pipeline they're about ready to launch; it's pretty darn exciting for these guys. And I can tell you, they're doing an incredible job.

This team is producing at levels that I just did not anticipate. Usually you see kind of a slowdown of your business when you go through an integration process. There's churn, there's customers that leave you, there's people -- there's key employees that leave you. They did a great job managing that process. And let's be honest, that's the first point of contact and relationship that customers have with our company, is through the sales organization.

Very helpful. And last quick question for Heather, I'm not sure if I missed this on the call or your press release, but effective tax rate for '18, should we model in 21%?

Yes, so the GAAP tax rate, but we'll still be utilizing NOLs for 2018. So our cash tax rate will be much less than that.

And where are the NOLs stand right now?

I don't remember the exact number, but I expect them to be -- to start to run out in 2019.

And the next question comes from Eugene Mannheimer from Dougherty & Company.

I wanted to ask about the performance of what I would call non-MCT volumes. Can you share that with us, mid-single-digit or whatever it was? And any guidance on that going forward? For example, would any theoretical decline in Holter volumes maybe be offset by a deliberate conversion of those patients to patches and lifting revenue in that category?

Flattish for Event; and Holter, single-digit. Event, there was a couple of pieces of business that we walked away from that were there in '16 that weren't there in '17. Again, Holter is kind of flat, but I think you hit the nail -- I'm sorry, Event was kind of flat, Holter is kind of mid-single-digit-ish. But I think you hit the nail on the head with Holter, because we're seeing probably somewhat of a conversion to extended-wear Holter.

Sure, okay, that's encouraging. And with respect to the earlier comment, Joe, and I appreciate the comments around MCT as the most accurate device, whether you're testing for AFib or syncope, et cetera, but how does insurance view that? I mean, we're hearing from peers that many health plans limit the MCT to second-line testing for narrower indications, right? And that extended Holters would be the way to go for first-line detection. What is your experience there? And can MCT be covered as a first-line test?

Yes, Gene, actually, the commentary was brought to my attention within the last few days. And it's really disappointing. The comments I heard were MCT, insurance companies typically approve it for narrow indications of use, like for syncope and V-tach. And that is just a materially false statement. I mean, there is -- most insurance companies have broad coverage for MCT. So it's really disappointing to hear that.

And the funny part or not funny part, was that one of the comments also said that the reason that they do that is because there is a lack of clinical evidence. And obviously, you know this is coming from one of our peers and it's ironic, because in order to get a permanent CPT code, you are required to show robust clinical peer-reviewed evidence. And the MCOT has had a permanent CPT code since like probably 10-plus years ago. I mean, it's been years since we received a permanent CPT code.

The only product in our product portfolio that does not have a permanent CPT code are our extended-wear Holters, which are reimbursed under the same temporary code that the Zio is reimbursed under. When we inquired as to why that was, we asked the bodies in charge of this, in the code-setting process, why that was, the response was, at this time there is a lack of clinical evidence to support the issuance of a permanent CPT code for extended-wear Holter, for that product category. So it's ironic to me that those statements are coming out of a company whose entire revenue base is associated with a single product that has a temporary CPT code and a lot of inherent risk associated with it.

Where MCT has been on the market for several years, it has broad coverage, it has ample clinical evidence, it's, the clinical evidence is second to none in the category. There's been north of 40 peer-reviewed studies published on the product. So it's kind of bewildering that folks are making statements like that. And then there was another comment, I guess that most insurance companies require the use of a first-line monitor prior to the use of MCT. Patently false.

Some do, some do require it. When they require it, they require a 24-hour or 48-hour Holter more often than not. I think the statement was that most require a first-line monitor like the Zio patch prior to -- or the Zio Holter prior to the use of MCOT. So I had my folks today do a quick review of all of our MCT contracts. And as you know, we're the largest MCT provider; we have several hundred contracts and the number of contracts we have that require extended-wear Holter, like the Zio patch, prior to the use of MCT was 0.

So it's disappointing you have misleading, false, misleading statements coming out like that. If folks are going to get into the MCT market, they should learn it first.

Got you. Let me switch gears if I could to Research Services. Clearly, record backlog. That's impressive. How does that cadence of that backlog, though, convert? So I mean, I assume it takes some time for those studies to roll out and recognize the revenue there. So is the Research business going to be more of a second half weighted type of impact in the year?

I think you're going to see decent growth year-over-year throughout the year for that product category. So when you receive an award for a study, the studies have varying lengths. Some of them last for several years. So when we reference backlog, we're referencing all years' backlog. Some of that is going to happen in 2018, a portion of it will happen in the out years. We don't bifurcate that and make it for public consumption.

I will tell you that we're really comfortable coming into this year versus where we were at the same point last year in terms of booked backlog. This is contracted business that you have. Obviously, some falls out and you add some throughout the course of the year, but your backlog relative to your revenue, if you look at historic metrics, you get pretty comfortable with where you are coming into the year and what you can expect for the year. So when we say we expect that double-digit growth, we're pretty comfortable it's going to happen and it will probably happen gradually throughout the year. It won't be a hockey stick at the end of the year.

And our next question comes from Mitra Ramgopal with Sidoti.

Yes, just 2 quick follow-up questions regarding the sales force. Joe, I was just wondering, I know you had mentioned in your prepared comments, in terms of growing the business and your top 500 accounts, and I was wondering if that was sort of the initial focus coming out of the integration. Going forward, you'll be targeting more new accounts?

We target everything, right? But we put additional focus on our largest accounts. But trust me when I tell you, we're targeting everything. And I wouldn't get hung up on that. I just thought -- I used that metric because I think it's a pretty good indicator of how well the team is doing managing the integration vis-à-vis less churn than you might see in less efficient integrations. But we're focused on the whole book of business.

Okay, no, that's great. And I know you mentioned you have I think about 100, in terms of your reps right now. And given the success you're having, are you more inclined to be looking to add or pretty much sort of go through '18 with pretty much the existing sales force?

I think we will look for opportunities to expand where appropriate. As you know, we've done that in the past, we don't add 50 new salespeople in a year. Our business is a bit more mature than that. So we kind of manage the growth on an organic basis. And where appropriate, we add resources. Sometimes there's things happening in the market, like you see the expanded payer coverage, it makes sense to put more resources in a certain part of the country. There might be consolidation of practices that would dictate a different allocation of your resources. So we're watching it all the time. I think we'll probably expand, but not like crazy expansion.

And our last question in the queue comes from Bill Sutherland with The Benchmark Company.

Real quick. Did I understand correctly the commentary about both the new MCOT and also extended-wear Holter, as far as being essentially supply constrained right now? And as you get to full capacity production-wise, you will be able to meet demand, which kind of implies that the growth could pick up from here?

Yes, it could, right? So I wouldn't say -- somewhat supply constrained. We were -- we had to manage the introduction of the product into the marketplace and get appropriate feedback in different stages of product launch, alpha, beta. And then you make changes to the product, which takes time. I do think there's going to be high demand for the product, or products, I should say. But I don't want to -- I think we're going to see pretty good growth. I think we forecasted the addition of those products. We've assumed those products are available in our growth. We need those products in order to hit these growth numbers. So I would think about it more along the lines of supporting the growth projections that we put out there.

Okay, okay.

And then Joe, not sure how much you're thinking about M&A these days. But what's at the top of the wish list at this point? And is it possible that something maybe on the smaller size could happen this year?

I wouldn't put a time line. So we've never stopped our corporate development activity. We're always looking at opportunities to accelerate our strategic plan. And if we can do it through M&A and it makes sense, then we do it. Obviously, when you make an acquisition the size of the one we did with LifeWatch, your focus has to be integrate, integrate, integrate and get that done properly.

Obviously, we're starting to get more comfortable with how that process is progressing or is progressing. So there will probably be somewhat more emphasis on it, but I don't want you to think it stopped and we'll start all over again. We're pretty active in that corp-dev area and I wouldn't put a time line on a transaction.

Do you think it's more likely to be, as far as your strategic initiatives, more in the pop health side? Or there's really no way to kind of create a rank order there?

Well, I mean, I could, right? So when we talk about our 3 priorities, we'd like them to be a little bit more balanced than they are right now. Obviously, the acquisition of LifeWatch was a once -- well, not a once in a lifetime, but they are rare opportunities that you can merge 2 like-kind assets, accelerate growth and realize the synergies that we're realizing. So that was a deal that we wanted for a long time.

We like the Research business, it makes sense for us to look at additional services there. And obviously, pop health or connected health, it's all still developing. I'm sure we've talked about this in the past, there's not many examples of companies that have built connected health business models like ours that are -- past the mom-and-pop phase and are profitable. Some of them are growing real fast, but there's no profitability.

I'm not sure how big the markets are going to be. I personally think these markets are going to be very, very large and they're going to integrate more into general health care and less kind of segmented. But in the near term, they will probably be somewhat segmented.

So we like pop health, we like Research. In a perfect world, they would be the priorities for me. But there's other areas that we're looking at as well. So I would say that the theme throughout all of our market development, corporate development activity is all -- is connected health. To the extent that we can build businesses that leverage technology in such a way that you can monitor, diagnose, treat patients outside of the 4 walls of a hospital or another expensive infrastructure, a portion of the health care infrastructure, and treat these folks and monitor these folks remotely with technology, it just makes sense, right? And we think that, that's the right side of the equation to be on and that's how we've built our business.

So we'll run a connected health theme through everything that we do and the opportunities that we just talked about, the 3 markets that we're in today, we like. But I think there's other opportunities as well.

Thank you, and I'm showing no further questions in the queue at this time. I'd like to turn the call back to the speakers for any closing remarks.

Thanks, everybody. Well, that concludes today's call and we will talk to you on our next call. It's a shorter period, since we were -- we had a longer period this time. So we'll talk to you in a few months. Operator, that concludes today's call. Thanks, everybody.

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.gobio.com until Thursday, March 28 -- March 8, 2018.

This concludes your call and you may all disconnect. Everyone, have a great day.