HeartBeam, Inc.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

Good day. Thank you for joining us for the CardioNet Second Quarter 2013 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.

[Joseph H. Capper:]

Thank you, operator. Good afternoon, everyone. I'm Joe Capper, President and CEO of CardioNet. I'm pleased to be with you this afternoon to report on another highly productive quarter for the company. I will provide brief highlights on the second quarter performance, as well as a review of the corporate realignment we have just completed. I am joined by Heather Getz, our CFO, who will provide more detail on our operating results. After our prepared remarks, we will open up the call to your questions. I'm very pleased to report that our second quarter was successful on many fronts, as we demonstrated tangible progress toward our strategic objectives. I am confident these significant advancements will be transformative for the company and will have a meaningful impact for years to come. As you will hear, our second quarter was filled with considerable operational activity and excellent financial results. For the fourth consecutive quarter, we experienced year-over-year revenue growth up 17% over the prior year quarter to $32.1 million. EBITDA was $3.4 million, the highest quarterly EBITDA in 4 years. This compares to $1.7 million in Q2 2012 and $2.4 million last quarter. For the second consecutive quarter, patient services achieved record volume and we ended the quarter with $19.3 million in cash and no debt, up $1 million from last quarter. In addition to these strong results, we signed a key new payor agreement, launched another exciting new product, continued to build our research services pipeline and completed the process to realign our corporate structure, which officially takes effect in a few days. As has been my practice, I would like to remind everyone that we continued to manage the business around 3 broad strategic objectives

[Heather C. Getz:]

Thank you, Joe, and good afternoon, everyone. As Joe mentioned, revenue in the second quarter was $32.1 million, a 17% increase over the second quarter of 2012. While this increase was largely attributable to the acquisition of Cardiocore, we posted increased revenue on our patient services business of $0.5 million and saw a 4% increase in total patient volume. All products contributed to the patient services growth. Compared to the first quarter of 2013, revenue declined 1%. After a very strong first quarter, we still experienced sequential growth in our patient services and research services businesses, combined of $600,000 or 2%. This increase was more than offset by a decline in our product segment of $1 million. The strength in our patient services business can be attributed to our CardioNet comprehensive strategy and the launch of our wEvent and 2

[Joseph H. Capper:]

Thanks, Heather. As you have witnessed, we have made several significant improvements to the company in the last few years. These enhancements have been borne out of our strategic growth plan, which has increased the profitability of our operations, driven the acquisition of key assets and led to the addition of seasoned leaders, experienced in managing high-growth health care service companies. Given the considerable scope of these initiatives, it has taken time to put many of these elements into place. But that is exactly why I'm so pleased that we are now beginning to see the results of all of our planning and hard work. The company is now on a trajectory, which is driving improved revenue growth and increased diversification, as well as generating higher margins. Given the success of our more balanced go-to-market strategy, it is only fitting that we update our corporate structure and company name. I'm excited to report that our plan for corporate realignment was approved at our Annual Shareholders Meeting last week and will go into effect August 1, at which time the company's name will officially change to BioTelemetry, Inc. trading under the same symbol BEAT or B-E-A-T. BioTelemetry, meaning remote detection and measurement of a human condition activity or function, is the best description for what we do today and how we plan to grow the company. Nearly every company in health care makes the claim as an element of their mission to improve outcomes and reduce costs. We are no different in that regard. Where we are different is that we have proven our ability to do so. By providing technologically advanced remote monitoring services, we are eliminating the need to keep the patient in a high-cost acute care setting for a prolonged period of time. Given the well-publicized trends in health care, particularly the projected growth in costs, proven solutions to curb in-patient expenses will continue to be sought out and implemented. This bodes well for the future of BioTelemetry. Before I open the call to questions, I want to take a minute and thank all of those at CardioNet who helped deliver the highest EBITDA in 4 years and record patient volumes for Q2. We have never been better positioned in our history to grow the business and leverage our technology. We are just starting to see the results of our strategic initiatives take hold and don't expect us to take our foot off the gas. Today, we use telemetry-based technology to remotely monitor over 1 billion heartbeats a day. Expect us to find new ways to employ our technology, grow the number of patients using our systems and streamline our operations. We have a new name and new momentum that will undoubtedly carry us to new heights. With that, we will now pause and open the call to questions. Operator, we are ready for our first question.

[Operator:]

[Operator Instructions] And our first question comes from the line of Brooks O'Neil from Dougherty & Company.

[Brooks G. O'Neil:]

I have a couple of questions. I'd like to start first by asking you if you could just describe a little bit about the history of your relationship with United? My sense is that, historically, they reviewed your device and services and have rejected a reimbursement. And I'm just curious, in particular, what changed?

[Joseph H. Capper:]

That's an accurate statement. They had reviewed the material that we have put forth several times over the past few years. And guess what has changed, is we continue to provide more and more studies, both clinical and economic. We provided that information to them. They don't share a whole lot about their review process with us publicly. But from what they published, our understanding is that they've done a pretty thorough review of all the available information and made a decision to reverse their long-standing negative coverage policy towards MCOT and cover for it.

[Brooks G. O'Neil:]

That's great. And I don't know if you comment about it in the past, but would you anticipate other payors taking a look at your materials and considering reimbursing for the device?

[Joseph H. Capper:]

I would. We have pretty good coverage policy -- pretty good coverage today for all of our services, but it's something that we're constantly trying to improve. And there are still a few decent-sized insurance companies that don't provide any coverage, or adequate coverage, for the service. So it's a constant and -- or should I say ongoing effort. And certainly, we anticipate that improving over time.

[Brooks G. O'Neil:]

Great. Could I just ask you, I have a sense there is some ongoing patent litigation. Could you give us just a quick update on where you're seeing with that? Whether you spent money in that effort this quarter and what you anticipate for the year?

[Joseph H. Capper:]

I don't know if we've disclosed exactly how much money we spent. But we have spent money. We are pursuing potential violations of a set of patents that we own. We think that our position is pretty obvious but it will take a legal process for that to unfold. We have worked through a good portion of that to date. We expect one of those to go -- to actually start trial later this year and we'll see how it unfolds. But we like our position there.

[Brooks G. O'Neil:]

Good. And then I guess, the last question, obviously, in light of the name change in your description of some of the things you're thinking about. Could you just help us think about what some of the broader areas you might consider for remote monitoring in the future?

[Joseph H. Capper:]

Yes. Brooks, I'm a little bit reluctant to say that -- the specifics ones that we're working on. We're working on more than 1 potential line extension to the portfolio internally. We're always looking external to the company to see if it makes sense to accelerate this plan via acquisition. So with both internally and externally, anything that's going to keep a patient out of a high-cost setting via some sort of remote monitoring, particularly for those disease states or conditions that have caused the health care system a lot of money. So you can imagine the areas we're looking at.

[Brooks G. O'Neil:]

But clearly beyond cardiology though?

[Joseph H. Capper:]

Yes, clearly beyond cardiology, potentially related to cardiology. It's helpful if we can focus on chronic conditions for a lot of reasons, particularly their cost in the health care system, most of the dollars being spent somewhere in the neighborhood of $0.75 out of every $1. And still -- and there's so many affiliated conditions and crossover conditions now -- co-morbidities, I guess, you could say, that there's likely to be some relationships as we move forward. And for us, given the size of the company, it makes the most sense if we can leverage a lot of what we already have, right? So either leverage our call center infrastructure, our distribution channel, our nearly 100 sales reps with relationships in the top cardiology market, our patient base, our reimbursement capability and relationships with payors. So there's a lot of competencies within the company that we can leverage to kind of extend into sort of tangential business lines.

[Operator:]

And our next question comes from the line of Alex Silverman from Special Situations Fund.

[Alex Silverman:]

Can you spend a minute, Heather, on bad debt? It continues to tick down and, I mean, that's sound money. What's a good level going forward?

[Heather C. Getz:]

So Alex, I think that you're not going to see as much of an improvement from a percentage standpoint as we've seen in the past, but we continue to improve our processes, getting things in faster and appealing quicker. So I do expect to see some more improvement in that number through the course of the year and a good number to think about is probably in the 7% range eventually.

[Alex Silverman:]

Okay.

[Heather C. Getz:]

Overall.

[Alex Silverman:]

Okay. And then your adjusted EBITDA, if you add back the stock comp, works out to about 13.5%, 14% EBITDA margin.

[Heather C. Getz:]

Correct.

[Alex Silverman:]

Given the fixed nature of your business and the addition of United, can we assume that, that number should go higher?

[Heather C. Getz:]

Yes, I think that over -- what we kind of look at is that we'd like to get to about a 15% EBITDA return. So if we -- over time, I'm not sure if we'll be able to get there this year, but that's our target. Alex, you have anything to add?

[Joseph H. Capper:]

Yes. Alex, it's Joe. One of the things we learned as the business grows is we clearly got some leverage in the business. And how much leverage is yet to be seen because we've not run this efficient an organization at these revenue levels in the past. The last time the company was at these revenue levels, was early on and it was a very inefficient operation with a high cost structure. So we've made a lot of improvements to the operation. You would think logically, as you grow, to your point, there is some more leverage we can pull out of it. There is some fixed cost structure that we can take advantage of. Putting a number on that's difficult, I feel comfortable saying that this is a mid-teens health care services growth platform and it gives us enough money to continue to reinvest in the business. I think that's appropriate at and above where we are today and potentially better. We'll see.

[Alex Silverman:]

Okay, and then what have you needed to put in place in order to on-board United as a customer?

[Joseph H. Capper:]

There's a lot of implementation associated with that. Part of the agreement was, as I've mentioned in my script, managed Medicaid plans, that requires, in some cases, contracting and licensing at state level. So it's going to take time to fully implement and roll this out. And we are starting to see some early benefit from it, as you can probably imagine. But a lot of folks don't understand this is not necessarily a homogenous organization, it's a collection of 300-plus affiliated entities and we have to deal with some of them in different ways. So it's going to take a while to fully roll it out. The good news is, it doesn't require us to establish new market infrastructure. We have the relationships with the physicians, we have the sales, trained sales organization in place. It's just some of the administrative mechanics of rolling this out will take a little bit of time.

[Alex Silverman:]

Okay. And then my last question, in your release, $2.5 million of restructuring in legal. I believe the wording is, much of it or most of it is legal. Can you help us with how much of that is discussions with the government regarding settlement of -- or discussions with them regarding the investigation? And how much of that was litigation for intellectual property?

[Joseph H. Capper:]

Yes. Brooks sort of asked the same question. A disproportionate amount of that number is associated with pursuing a patent violation. A smaller portion of it is associated with the Department of Justice investigation. Most of that work is behind us and we're candidly waiting for the government to work through some of their processing.

[Heather C. Getz:]

Yes. There's also in the overall restructuring number a little bit for Cardiocore-type -- integration-type expenses as well, Alex.

[Operator:]

And our next question comes from the line of Nick Leventis from Balyasny.

[Nicholas Leventis:]

So a couple of quick questions for you. Most of mine have been asked. But in terms of the sales force, I know you restructured that part of the business. Is the restructuring there fully done? Or do you have anything left to do to optimize or incentivize sales force to be able to sell across all the product areas in a more efficient way than they have in the past?

[Joseph H. Capper:]

No. I don't think we have a lot more to do there. I think we have the right structure in place. This is sometimes more of an art than a science, optimizing the level of sales resources needed in marketplace. The big thing that we did this year that was different was structured comp plans, incentives, bonus, all throughout the organization, but particularly with the sales force around a more comprehensive approach to the marketplace. We've talked about that several times, that's been well-received. It's working. The strategy is being accepted in the marketplace and the sales organization is performing at a fairly high level.

[Nicholas Leventis:]

Understood. In terms of sales force, would you look -- is the sales force the right size? Or would you be looking to grow sales over time?

[Joseph H. Capper:]

Again, I think it's appropriately sized for the activity they are charged with today to the extent that there's more market. And believe me, we're always working on opportunities to extend the utilization of the technology. That may, at some point in the future, require us to cover more call points per se. And that would drive sales force sizing. But today, I think it's sized fairly well.

[Nicholas Leventis:]

Understood. And then can we go to the MCOT 2

[Joseph H. Capper:]

Nick, one of the things I've learned with this company is we're not going to tell the market what they're going to do. We tried that with MCOT, and the market told us that they'd love it but it's not for every single patient. So the market's going to tell us, over time, what's the right mix. Would I love to be Southwest Airline and have one-size-fit-all, surely, but that's just not the nature of this market. So there are certain customers that MCOTos works much better for it. There are certain customers that don't want it but would rather inventory 2 devices. So we'll see, is the answer -- but over time, I'm going to let the market tell me what's the most appropriate product mix.

[Operator:]

[Operator Instructions] And I see no further questions in the queue at this time. I'd like to turn the conference back to Mr. Joseph Capper for any concluding remarks.

[Joseph H. Capper:]

Thank you, operator. Thank you, everyone. We're going to conclude the call. We will speak to you after our next quarter. Thank you for your continued support in the company. Operator, that concludes the call.

[Operator:]

Thank you. 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 CardioNet website at www.cardionet.com until August 14, 2013. That does conclude the conference for today, and you may now disconnect.