Electromed, Inc.
Q3 2017 Earnings Call Transcript

Published: 16 May 2017

[Operator:]

Greetings and welcome to the Electromed, Inc.’s Third Quarter Fiscal 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Kalle Ahl, The Equity Group. Please go ahead.

[Kalle Ahl:]

Thank you, Darren, and good morning, everyone. Electromed’s third quarter fiscal 2017 financial results were released yesterday after the market close. A copy of the earnings release can be found under the Investor Relations section of the Company’s website at www.smartvest.com. As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the Company’s 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. The words belief, expect, plan, intend, estimate, anticipate, should or could and similar expressions or words that are used to identify forward-looking statements. But their absence does not mean a statement is not forward-looking. In addition, any projections as to the Company’s future performance represents managements estimate as of today, May 16, 2017. You should not place undue reliance on these forward-looking statements. We expressly do not undertake any duty to update forward-looking statements whether as a result of new information, future events or otherwise. We ask that you please refer to the Company’s SEC filings for further guidance on this matter. Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some openings remarks after which Jeremy will present a summary of the Company’s third quarter fiscal 2017 financial results and then we’ll open the call for questions. Now, it’s my pleasure to turn the call over to Kathleen.

[Kathleen Skarvan:]

Thank you, Kalle. Good morning, everyone, and thank you for joining us to discuss Electromed’s third quarter fiscal 2017 results. We are very pleased with the traction, our sales and reimbursement teams continued to gain this quarter particularly in our homecare segment. Homecare revenue grew 13.5% year-over-year quarter three fiscal 2017 which in turn drove 10.5% increase in total revenue and a 38.9% rise in net income comparing to the same period last year. Our institutional sales while a relatively small portion of our net revenue declined slightly year-over-year creating a modest drag on our overall growth. We are working on several initiatives to reinvigorate institutional capital sales. Clearly our Homecare segment is benefitting from a larger, more productive sales team and solid execution by our reimbursement group. We ended the quarter with 35 field sales employees, up from 29 at the end of the same period last year. Our sales force continues to mature with an increasing percentage of field reps having greater than one year tenure. Our expanded sales staff combined with a higher level of referrals per sales employee drove another quarter of record referrals and higher approvals as compared to the prior year period. We also continued to expand our payer coverage universe. We believe our strengthening sales growth this quarter also reflects our ongoing strategy to build awareness amongst physicians of the benefits of SmartVest and high frequency chest wall oscillation or HFCWO therapy for patients with non-cystic fibrosis bronchiectasis. Principally through evidence based marketing approach. If you recall the most recent study we published in January 2017, demonstrated a 60% reduction in overall healthcare utilization and cost due to a material decrease in bronchiectasis related exacerbations for a population of patients who used SmartVest. Additionally, secondary benefits such as the potential to reduce hospital readmissions and the potential to impact deterring antibiotic resistance may have even greater benefits than decreasing cost. To further advance our bronchiectasis awareness efforts to this quarter we formed an Electromed Physician Advisory Board, which will focus on engaging clinicians, payers and patients with evidence based medical information such as the findings of our January 2017 study. We expect to make a formal announcement of the advisory board's composition, which includes some of the country's preeminent, medical scholars and practitioners specializing in patients with bronchiectasis at the end of the month. We also continue to advance development of our wireless enabled SmartVest SQL device called SmartVest Connect. To date we have received overwhelmingly positive feedback from clinicians participating in our SmartVest Connect beta testing program. We believe SmartVest Connect's easy to use, well appeal to about clinicians and patients fostering improved therapy adherence and better outcomes. We remain on target for a formal launch in June 2017, initially we envision a full launch to the pediatric market, where physicians have been particularly vocal and asking for feature to track their [indiscernible] and a more targeted launch for the adult market. Finally, we were thrilled to announce our agreement with Monaghan Medical Corporation in February to distribute and sell Aerobika Oscillating Positive Expiratory Pressure or OPEP Device into the U.S. homecare market. The Aerobika OPEP device is a best in class airway clearance therapies for patients with compromise pulmonary function they may not need SmartVest or qualify for HFCWO reimbursement. It is truly portable airway clearance solution for patients on the go and sells for $99. With Aerobika OPEP and SmartVest devices, Electromed now offers a continuum of airway clearance therapy for patients to use in their home. In summary, the execution of our growth strategy is tracking on plan, we're strengthening our sales and reimbursement platforms, increasing physician and patient awareness of SmartVest for treatment on non-cystic fibrosis bronchiectasis and advancing meaningful product innovation. We continue to invest in our business and plan to expand our sales team in the coming quarters. In fiscal 2017 we're on target to achieve another other of organic revenue growth, higher quality referrals and higher reimbursement on referrals, while maintaining the highest standards of integrity respect and privacy. I’ll now turn the call over to Jeremy for a more detailed discussion of our financial results. Jeremy?

[Jeremy Brock:]

Thank you, Kathleen and good morning, everyone. Our net revenue for quarter three of fiscal 2017 increased 10.5% to $6.7 million from $6 million in quarter three of fiscal 2016 driven by strong growth in our homecare sales. Homecare revenue increased 13.5% to $6.1 million primarily due to the increase in approvals and referrals and the increase in referrals was predominantly due to the growth in the number of our field sales employees. Institutional revenue was $437,000 approximately flat compared to 440,000 in the prior year quarter and international revenue which is not a strategic growth area for Electromed totaled a $155,000 compared to $240,000 in the prior year period. Although quarter-to-quarter sales variability can be expected due to the nature of our business we anticipate another year of overall revenue growth in fiscal 2017 and continued revenue growth into fiscal 2018. Gross profit increased 14.8% to $5.3 million or 79.7% of net revenue in quarter three of fiscal 2017. It was up from $4.6 million of 76.7% of net revenue in quarter three of fiscal 2016. The increase in gross profit resulted from increases in our domestic homecare revenue and a decrease in our manufacturing cost of the SmartVest SQL as compared to the prior year of fiscal quarter. While this quarter we approached the 80% gross margin threshold, we believe gross margins will return to the mid to upper 70s which is more inline with our previously communicated expectations. In part reflecting new contracts that we assigned and planned for at a lower than average reimbursement allowable. These new payer contracts will help us broaden our ability to grow revenue and our gross profit dollars and improve the utilization of our resources as individual patients who went out of network will become in network. Operating expenses which includes SG&A as well as R&D expenses totaled $4.3 million or 64.1% of revenue in quarter three of fiscal 2017 compared to $3.9 million or 64.5% of revenue in the same period of the prior year. SG&A expenses increased 10.2% to 4.2 million in quarter three of fiscal 2017 from $3.8 million in quarter three of fiscal 2016. As primarily due to the higher payroll and competency related expenses and travel meals and entertainment expenses. R&D expenses totaled 81,000 in quarter three of fiscal 2017 compared to 84,000 in quarter three of fiscal 2016. Operating income increased 40.9% to $1 million in quarter three of fiscal 2017 up from 376,000 in quarter three of fiscal 2016, again primarily due to our increased gross profit driven by higher revenue which was partially offset by higher payroll and compensation related expenses in sales and add physicians. Net income before income tax expense rose 42.3% to $1 million in quarter three of fiscal 2017 up from 723,000 in the prior year quarter. In quarter three of fiscal 2017, income tax expense totaled $380,000 compared to $256,000 in the same period of the prior year. Our effective tax rate in quarter three of fiscal '17 was 37% compared to 35.4% in the prior year. Our net incomes increased 38.9% to $648,000, or $0.08 per basic and diluted share in quarter three of fiscal '17 up from $467,000, or $0.06 per and diluted in the prior year quarter. Briefly recapping our nine months year to date fiscal 2017 financial performance. For the first nine months of fiscal 2017 revenue increased 7.4% to 18.6 million from 17.3 million in the same period of fiscal 2016. And gross margins were 78.4% compared to 77.4% in the same period of the prior year, while net income was $1.3 million or $0.15 per diluted share compared to $1.9 million or $0.23 per diluted in the same period of the prior year. Now moving to the balance sheet and operating cash flow. Our balance sheet at March 31, 2016 include the cash and cash equivalents of $5.4 million long-term debt including current maturity of $1.2 million, working capital of $14.6 million and stockholders' equity of $18 million. Cash flows from operations in quarter three of fiscal 2017 totaled $767,000 and was up 52.4% compared to $503,000 in the prior year quarter. Overall, we’re very pleased with the direction of our business and where we're heading and this concludes my remarks. Operator, could we start the Q&A portion this call, please.

[Operator:]

[Operator Instructions] Our first question comes from Brooks O'Neil of Lake Street Capital Markets. Please proceed with your question.

[Brooks O'Neil:]

I'm curious if you could talk just a little bit your sales strategy, clearly the expanded sales force and more productivity is great, but can you just talk about how you're achieving that and what your focus is going to be from a sales prospective over the next 12 months or so.

[Kathleen Skarvan:]

Thanks, you Brooks, I'll take that question. So our sales strategy is really going to be similar to what we just described and what we been doing over the last year. And it's really about going out and talking about the product differentiation, we did an engineering related study comparing all three devices relative to the feel for the patient and the idea there was our peak and trough pressures really give the patient a more comfort feeling. So we're using that differentiation in that study with the physicians along with the clinical evidence of the cost savings that can be realized and the reduced infections and use of antibiotics. So those studies that were published as we mentioned in January are those that we’re focusing on as well. And then thirdly we’re really going after more strategic accounts because we have that evidence, we have those differentiated studies, we can go after more strategic clinics that are larger, that we think we can leverage more quickly related to our referral growth. And then of course we’ll continue to grow our sales strategy, but that I think helps summarize that true way that we’re out there selling.

[Brooks O'Neil:]

Great. So I just wanted to be clear in my mind, so you’re targeting individual physician and physician's groups with this strategy?

[Kathleen Skarvan:]

That is correct. You know our primary focus is on adult pulmonology and we certainly continue to support pediatrics which has cystic fibrosis is important, but the real growth is in that adult pulmonology field. Four people suffering from bronchitis, or more severe chronic obstructive pulmonary disease and so those group physician practices are certainly our target and in the higher populated areas across the United States.

[Brooks O'Neil:]

You’re doing things with the payers as well? It sounds like you offer tremendous benefit to payers in terms of improved care for the patients as well as potentially significantly lower cost.

[Kathleen Skarvan:]

It’s very true, Brooks. So of course we are licensed to do business in every state in the United State and part of that is that we then support Medicaid and we also of course do business with Medicare across the United States. And then there are those individual commercial payers and we continue to bring on new lives covered through the commercial payer segment of that group. And Jeremy maybe if there is some additional information you would like to provide there on the commercial payer coverage?

[Jeremy Brock:]

Yeah, so we provide, as Kathleen said, the ability to do business in the 50 states which has a D&E company does get more complicated with all the rules and regulations that we must follow. So that ability gives us a strong foothold on what’s going on throughout the United States and really shows what we can do to the payers. We do have the significant majority of lives in the United States covered under contract, there are contracts that we don’t have, that we continue to work to get none of them -- they are not the major players across the U.S., but we continue to work with them. And we have seen a significant portion or increase in our ability to gain contracts this year and add covered lives which is important because the patient then becomes in network and our product shows up as an in-network product for them versus having to work through going out of network and you can understand how difficult through your own or people you know are experienced trying to get a service from a provider that was out of network. So that’s something we continue to work hard on, we continue to execute on and we will continue to see the benefits from what we have done and the lives we have added under network coverage this year.

[Brooks O'Neil:]

Right. And then last question from me. I understand that institution is a small part of your business, but can you just talk a little bit about what you’re seeing there and what opportunities you think you have to kind of turn that business around?

[Kathleen Skarvan:]

Sure. Thank you. So institutional business as you mentioned is a small percentage. It is not as strong as a focus, but its important to us because typically the brand that’s used in the hospital, critical care is often what that particular physician will prescribe and its what the patient wants to use if they are then discharged with HFCWO therapy. We do run into occasionally capital purchase issues that the hospitals dealing with. as you've probably heard hospital systems throughout the United States are having a lot of budgetary issues. About a third of the hospitals are going to be probably having to merge or be acquired because of their losses, another third may go out of business, just because of the same situation and so that becomes one of the challenges for us. So we're continuing to look at our business proposals to understand how we can best provide the right business proposals for those hospitals, so that they can afford this therapy that is very important for them to control their readmissions from diseases or conditions like pneumonia or COPD. And we also naturally think that that could move in a more positive direction as we continue to expand our sales force the territories will become smaller, which is going to provide more opportunities for those sales people to renew their focus in some of these institutions. So that hopefully helps to answer your question Books.

[Operator:]

[Operator Instructions] Our next question comes from Beth Lilly of [indiscernible] Partners. Please proceed with you question.

[Unidentified Analyst:]

So I wanted to ask -- I wanted to follow up on Brooks' question in terms of the institutional market, just gained better visibility into that market. And then also wanted to ask about your margins in the quarter, I mean you have come in a very long way in a very short period of time in terms of your margin structure in this quarter, your operating margins were 15.5%. And it sounds like based on Jeremy comments a lot of that is due to the extension on the gross margin which is going to trend downward. So if you look at your operating margin on a three months basis its 15.5%, but on a nine months basis its 10.8%. So can you talk as you look out over the next, let's call it, two to three years where you see operating margins going?

[Kathleen Skarvan:]

So Beth, let me start there and I think Jeremy will have some additional details to add. We're going to -- we think that there could be a little more pressure on margins as we continue to focus on taking advantage of the opportunities that there are in this adult pulmonology market. So we're real mindful of our profitable growth strategy and so we're always balancing that growth versus continuing to show strong margins. We think though that as we continue to add sales people in the corresponding needs that we have here internally, as we want to find or build a different additional evidence for the cost utilization and the great effective of this particular product, thus we could see a little more pressure there. So Jeremy would you like to add on that as well.

[Jeremy Brock:]

I would agree what Kathleen said and I would also add that as I spoke about earlier that, we will be seeing on a portion of additional added revenue that we see. We will see some slippage in our ASP or allowable amount in order to get in in certain geographical regions, into some of their regional players as far as who is providing DME or who the intermediary that maybe providing DME. While we don’t think its majority or even close to getting to that point, there will be some slippage to that as we go along, which will be somewhat offset by our focus on Medicare and our Medicare patients which is, Medicare being one of the higher allowable amount. So we believe there will be some offset, but not a significant amount.

[Unidentified Analyst:]

Okay. So for the nine months your operating margins are 10.8%. So do you think over the next, let’s call it over the next six quarters, we’re going to start to see those margins expand or will they stay flat?

[Jeremy Brock:]

Our expectations is, they would be right in within the range of the three months to the nine months over the foreseeable future. And a lot that will fluctuate, just like our revenue does on a quarter-over-quarter basis. Our margins go right along with that based on the referral that we get in the insurance or the provider that those individual patients have.

[Unidentified Analyst:]

Yeah, okay. Great that’s helpful. Now the other thing, its interesting, I was looking at your February slide deck and you know this is just a follow-up to Brocks' comments in terms of the institutional question. You know its interesting it seems to me that the institutional marketplace is this -- the majority of your revenues are the Homecare market and yet the institutional market seems to me to be a much bigger market. So I am wondering about your ability to penetrate that market more effectively.

[Kathleen Skarvan:]

I think that -- thank you for the question, that’s around institutional. But if you think about the total served to market, the institutional market is smaller percentage of the Homecare market and even our largest competitor finds that homecare to institutional market is not quite the same ratio as ours, but the homecare is the great majority of that. And so our view would be a little different on that in the homecare market still is the much larger opportunity for growth. The amount of critical care units that still may now use HFCWO though still does present an opportunity for us and I think the key there is being able to help them understand what that value proposition is around sending people home with clear loans using something like HFCWO versus most institutions right now will use the hand held OpEp device similar to what we’re going to be selling now to some on hand medical. So they are using their way clearance and they are not using the same type of therapy in all of those in those hospital admissions. So that’s really somewhat the story there, I really still think though that the homecare market is much larger.

[Unidentified Analyst:]

Interesting. Okay, great very, very helpful. Thank you very much.

[Operator:]

Our next question comes from Mike Disler, a Private Investor. Please proceed with your question.

[Mike Disler:]

Just a couple of quick follow up. In terms of the institutional market question which Beth just asked that, I think the point as I was listening to and I think you made it before [indiscernible] was that once the patient sees and recognizes the name plate and go home with it and has use it in the institution itself, it's an easy stickiness that sort of evolves and the name plate goes home and if they use the entire product line down the road, they are going to choose a SmartVest product line versus the competitors. That’s just a comment. My question, I watched the a Aerobika device in hospital recently for the family member and it was convenient, terrific, wonderful, my question is just two falls and its really not urgent, but in terms of the boomers and the elderly currently and the boomers like myself are going through that period in life, pneumonia becomes an issue. Is that really just a -- at a $99 price point, whatever the margins are you have to sell an awful lot of those to have a meaningful revenue growth into a profit growth. However, I do see it as a foot in the door types product and once again having another stepping stone in the stickiness proposition of Electromed's product line, is that the way I should view that going forward or it strictly as an add on to your current SmartVest line, you feel the same?

[Kathleen Skarvan:]

Mike thank you for your comment and for your questions. You are describing just accurately what we believe that strategy is around the Aerobika OPEP device, it is really about offering a very -- a best in class product for airway clearance. But it can be an access issue, it’s the idea of being able to offer an alternative solution to the clinician and to the patient and that full continuum of airway clearance care. And we also believe that there will be individuals that will want both devices, they may need high frequency chest oscillation, they will qualify, they will become reimbursed for it. But they will say, for over $99 I want to have the Aerobika as well. So that when I'm travelling I'm going to use that device or may be when I'm felling, I don’t have an infection, its easier to use the Aerobika once a day and then I will use my HFCWO. I mean there is just so many great opportunities for a patient utilize both therapies to stay out of the hospital to reduce infection. But I think you got the sales strategy, the growth strategy well understood.

[Mike Disler:]

Great thank you, and one little question, I forgot on the last call. Why isn’t Europe like somewhere down the road through the long telescope crossed upon a future priority, what I'm missing there in terms of the market potential for example?

[Kathleen Skarvan:]

So we have approximately, not quite a dozen distributors throughout the world that we continue to support with our SmartVest therapy. In Europe, in particular we do have distributors, and they continue to buy from us periodically. What we found in Europe as well as other countries is that the home care reimbursement is not as well established for this particular therapy as it is here in the United States and so that’s been a bit of a barrier in regard to moving forward with higher demand or higher sales or growth in Europe in particular. Europe also in particular in the UK tends to use manual chest percussion versus using high frequency chest oscillation for airway clearance and where most of our sales for distributors have been in Europe has been in the hospital system where they have seen the efficiencies of using this versus manual chest percussions. I think that it remains on their radar and there could be a time where this becomes more of an opportunity internationally. But again, right now with limited resources and the growth potential that we’ve seen in the United States, that remains our focus.

[Mike Disler:]

Well you actually caught my next question before I even got it. I wanted to ask about the UK, so we’re all done. Great quarter, thank you for your time and your due diligence and keep up the great work. We’ll speak to you next question.

[Operator:]

[Operator Instructions]. If there are no further questions, I would like to turn the call back over to Electromed's CEO Kathleen Skarvan for closing comments.

[Kathleen Skarvan:]

Thank you all for participating on the call this morning. We look forward to reporting back to you in September when we release our fourth quarter fiscal 2017 financial results. Have a good day.

[Operator:]

This concludes today’s conference you may disconnect your liens at this time. Thank you for your participation.