Electromed, Inc.
Q2 2021 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Greetings, and welcome to the Electromed Second Quarter Fiscal 2021 Financial Results Conference Call. . As a reminder, this conference is being recorded. It's my pleasure to turn the call over to Devin Sullivan, Investor Relations for Electromed. Please go ahead, Devin.

[Devin Sullivan:]

Thank you, Kevin, and good afternoon, everyone. Electromed's second quarter fiscal 2021 financial results were released today after the market closed. A copy of the earnings release can be found in the Investor Relations section of the company's website at www.smartvest.com. The company has asked me to remind you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. Please refer to the company's SEC filings for further guidance on this matter.

[Kathleen Skarvan:]

Thank you, Devin. Good afternoon, everyone, and thank you for joining us to discuss Electromed's second quarter fiscal 2021 financial results. We are pleased to report that our net revenue this quarter increased 11.1% year-over-year to a record $9.5 million, driven by 16.1% growth in home care revenue. On the home care side of our business, successful execution of our hybrid virtual and face-to-face selling approach, combined with the ability for prescribers to more easily provide care with the provisional CMS waiver, drove a 16.1% increase in home care revenue compared to the prior year period. The home care success more than offset the ongoing challenges to the other portions of the business negatively impacted by the pandemic, most clearly seen in the year-over-year decline in our institutional business. However, compared to the first quarter of our current fiscal year, our business benefited from our sales team's execution of a hybrid virtual and face-to-face selling approach, increased face-to-face interaction between patients and physicians and improved access to clinics for our sales staff. The CMS waiver temporarily relaxes certain rules for prescribing HFCWO devices to the non-commercial Medicare population during the COVID-19 pandemic. With the CMS waiver, we have experienced an increase in approvals for previously noncovered diagnosis and faster approval times for covered diagnosis. Noncommercial Medicare historically represents approximately 50% of our total payor mix for home care revenue. We believe that the CMS waiver has helped offset a challenging and still ever-changing environment related to COVID-19 pandemic that has impacted our sales team execution due to patient face-to-face clinic visit concerns and reduce clinic access for our reps. We were pleased that CMS recently extended this waiver until April of 2021. An additional positive trend is with our commercial Home care revenue that also increased compared to prior year benefiting from strong sales team execution and an improved on -- and improved on a sequential quarter basis for the same reason, but also due to improved clinic access for sales reps and increased patient face-to-face visits. At the end of the second quarter, we did have 45 field sales employees, of which 38 were direct sales. This compares to 40 total field sales employees, of which 34 were direct sales at the end of the prior year period.

[Michael MacCourt:]

Thank you, Kathleen, and good afternoon, everyone. As Kathleen shared, our net revenue in the second quarter of fiscal 2021 increased 11.1% to $9.5 million from $8.5 million in the second quarter of fiscal 2020, driven by growth in home care revenue. Home care revenue increased 16.1% to $8.9 million, primarily due to higher referrals and approvals compared to the prior year period. Institutional revenue decreased 37.4% to $309,000 from $494,000 in the prior year period, primarily due to a decrease in the volume of devices and disposable reps sold due to COVID-19's continued impact on hospital purchasing activity. Home care distributor revenue increased 13.7% to $149,000 from $131,000 in the prior year period. International revenue, which is not a strategic growth area for Electromed, decreased 46.6% to $135,000 compared to $253,000 in the prior year period. Gross profit in the second quarter of fiscal 2021 increased 12.7% to $7.5 million or 79.2% of net revenue from $6.7 million or 78.1% of net revenue in the prior year period. The increase in gross profit percentage was primarily due to a higher mix of home care revenue and a favorable mix of Medicare within the home care market. Operating expenses, which include SG&A as well as R&D expenses, totaled $5.9 million or 62.6% of revenue in the second quarter of fiscal 2021 compared with $5.1 million or 59.8% of revenue in the same period of the prior year. SG&A expenses increased 9.5% to $5.4 million in the second quarter of fiscal 2021 from $5 million in the same period of the prior year, primarily due to increased payroll and compensation-related expenses associated with higher incentive payments on stronger home care revenue and higher average sales and marketing headcount as well as increased direct-to-consumer marketing expenses, partially offset by lower travel, meals and entertainment expenses. R&D expenses increased to $507,000 or 5.3% of net revenue in the second quarter of fiscal 2021 from $143,000 or 1.7% of net revenue in the prior year comparable period, primarily due to investment in our next-generation product development. We estimate that R&D expenses will be in the 4% to 6% of net revenue range for the duration of fiscal 2021. Operating income totaled approximately $1.6 million in both the second quarter of fiscal 2021 and the second quarter of fiscal 2020. Net income before income tax expense totaled approximately $1.6 million in both the second quarter of fiscal 2021 and the second quarter of fiscal 2020. In the quarter, income tax expense totaled $389,000 compared to $419,000 in the same period of the prior year. Our effective tax rate in the second quarter of fiscal 2021 was 24.4% compared to 26.1% in the prior year period.

[Operator:]

. Our first question today is coming from Kyle Bauser from Colliers.

[Kyle Bauser:]

Great to see that the CMS waiver was extended. Is it reasonable to assume this should continue to be extended? And even if it wasn't, do you think there'll be some lasting efforts to it? It seems like the turnaround has become very quick for the Medicare channel. Just kind of wondering how you think that plays out?

[Kathleen Skarvan:]

Kyle, thank you for the question. So yes, the CMS waiver is really an interesting dynamic that's been a positive outcome for many, many patients since the pandemic. And so we think about the waiver as, yes, it's tied with the public health emergency. And so with the public health emergency being extended in 90-day increments, we would expect as long as there still are many people that haven't been vaccinated, I can't see into the mind of health and human services specifically, but I think the Biden Administration is going to be as positive as possible in doing everything that will help us to get through the pandemic as easily as possible and with the benefits that have been in place that they'll continue. So I do think there's a strong chance that it will continue for a period of time yet.

[Kyle Bauser:]

Interesting. And I appreciate that. And then remind me on the status of enhancements to the SmartVest. Are these something that you envision talking about ahead of a potential 510(k) clearance? Or is this something that we'll learn about upon clearance and I should just stop asking?

[Kathleen Skarvan:]

Well, you can always ask, Kyle, right?

[Kyle Bauser:]

Right.

[Kathleen Skarvan:]

So I think that we will be quite close to the vest or the chest on sharing much about what those new benefits may be from our next-generation product. I think, for competitive reasons, we certainly want to be doing that. And also that before we have clearance, we wouldn't want to share what possible claims could be or those performance or feature and benefit enhancements. So yes, I think we will be waiting until that time frame.

[Kyle Bauser:]

Got it. Understood. That makes sense. And then just lastly, there's some really good testimonials out there, places like YouTube, that highlight the clear advantages of SmartVest over the competition, pretty compelling cases. I'm curious if you have a sense for where your new business is coming from. So if we're talking just new business, what percent, I guess, ballpark is coming from taking share versus actually growing up the bronchiectasis and COPD market?

[Kathleen Skarvan:]

Yes. Thank you again for that question, Kyle. So we do measure the percent of our referrals that are coming in from a current prescriber for SmartVest and those that have not prescribed SmartVest over the last year to 2 years. And so if we would look at that data, I can tell you that about -- almost half of our referrals now are coming in from previously -- from prescribers that previously were not prescribing SmartVest. And that's across a number of physicians in a number of clinics, but that can give you some sense of based on the way we're being able -- we're able to track that -- those referrals, I wouldn't say that's all market share necessarily, but you can get some sense that there is some momentum building around market share.

[Operator:]

. Our next question today is coming from James Terwilliger from Northland Capital.

[James Terwilliger:]

Can you guys hear me?

[Kathleen Skarvan:]

We can, James. Nice to hear from you.

[James Terwilliger:]

Nice job with the numbers. I mean, a very nice quarter, in my opinion, in both year-over-year and sequential growth. I don't want to box you in, in terms of guidance, but how should -- because these numbers, in my opinion, are so strong, how should we think of the second half of fiscal 2021 with all the different moving parts with your true internal growth rate if you're developing the market with COVID, the new Biden Administration, can you give any high-level expertise on how we should think of maybe the second half of fiscal 2021?

[Kathleen Skarvan:]

Well, I think you answered some of your own question there. It's quite -- there's so many variables right now, James. Again, we did say that we are positioned to grow if -- the second half compared to prior year. But to put something definitive around that at this point based on that uncertainty is something that we're going to -- we're going to be less precise about that right now.

[James Terwilliger:]

No, I understand. And again, you've got to manage what's coming through the door. Is there any type of seasonality as we move kind of here just closing out the December month going into the colder months of March and then moving out? Is there any type of seasonality in your core business with your with what you're treating?

[Kathleen Skarvan:]

Yes. So in the past, James, we have often seen the March quarter be one of our seasonally higher quarters and that was often, we believe, linked to the influenza season. And so you might have more people with bronchiectasis or COPD or other lung function issues that might be more susceptible to influenza. And so they're going in to see their doctor and that's at a point where the doc says, hey, now is a good time for us to prescribe HFCWO or SmartVest. As you know, the influenza season is not here like it was in years past due to the fact that people are staying home, they're not socializing and they're wearing masks. So we're not expecting that same type of seasonality necessarily.

[James Terwilliger:]

Okay. That helps a lot, and that makes complete sense. And then just kind of lastly, at a high level, with this waiver, which makes tremendous sense, is this -- 2 questions here. One, I would think this is expanding and growing your TAM, your total addressable market. And two, once they open the door to this type of treatment, is it going to be hard for them to maybe close the door if they expand some of the clinical indications that you can treat and address and help human beings?

[Kathleen Skarvan:]

Well, I think it's a great question. And we've been giving that -- we've been exploring that situation here in depth, and we've been talking to a number of people in the industry to understand better when CMS has a waiver like this in place for as long as they did, how easily is it to go back to what was historically the requirements. And so stay tuned, we'll continue to provide updates on these calls if we're learning more about what that potential might be for an extension or if this is -- if these might be -- if this might now be a phenotype that would continue being approved for HFCWO in the future. But right now, again, we're exploring what that might look like, but it's unknown at this time.

[Operator:]

. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

[Kathleen Skarvan:]

We'd like to thank you all for participating on our call this afternoon. We look forward to reporting back to you in May, when we'll release our third quarter fiscal 2021 financial results. Have a good evening.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.