Electromed, Inc.
Q4 2022 Earnings Call Transcript

Published: 23 Aug 2022

[Operator:]

Greetings. And welcome to the Electromed Fiscal Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to our host, Mike Cavanaugh, Investor Relations. Thank you. You may begin.

[Mike Cavanaugh:]

Good afternoon, and thank you for joining us today. Earlier today, Electromed Inc. released financial results for the quarter ended June 30, 2022. The release is currently available on the company's website at www.smartvest.com. Kathleen Skarvan, President and Chief Executive Officer; and Michelle Wirtz, Interim Chief Financial Officer, will host this afternoon's call. As a reminder, 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 or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter. I will now turn the call over to Kathleen Skarvan, President and CEO of Electromed.

[Kathleen Skarvan:]

Thank you, Mike, and thank you to everyone joining the call today. As always, we appreciate your continued support of Electromed and look forward to updating you on our progress on the five key pillars in our strategic growth plan

[Michelle Wirtz:]

Thank you, Kathleen. Net revenues were $41.7 million in fiscal 2022, a 16.5% increase year-over-year from $35.8 million in fiscal 2021. Revenues for the quarter ended June 30, 2022 were $11.3 million, a 19% increase over the same period a year ago. Home care revenue for fiscal 2022 was $38 million, representing a 15% increase from fiscal 2021. The revenue increase in home care was due to increased referrals and approvals. We also benefited from a Medicare allowable rate increase that took effect in January of 2022. The increase in referrals was primarily due to the hiring of additional direct sales representatives and increased productivity of our sales representatives as they experienced increased clinic access and patient flow and adapted to a hybrid virtual and face-to-face selling methodology. Our approvals continue to benefit from the CMS waiver on the non-commercial Medicare portion of our home care revenue. Institutional revenue for fiscal 2022 was $1.7 million, representing a 7% increase from fiscal 2021. This is due to increased capital purchases and stronger consumable volumes. Home care distributor revenue for fiscal 2022 was $1.5 million, representing a 162% increase from fiscal 2021. The increase was primarily due to demand from one of our key distribution partners. Gross profit for fiscal 2022 increased to $31.4 million or 75.5% of net revenues from $27.3 million or 76.4% of net revenues in fiscal 2021. The increase in gross profit was primarily related to increases in home care revenue, including the Medicare allowable rate increase that took effect in January of 2022. The decrease in gross profit as a percentage of net revenue was driven by higher raw material and shipping costs as well as patient training-related expenses from an increase in face-to-face training. Electromed expects our gross margin percentage to average in the mid-70% range during fiscal 2023, which is consistent with our historical gross margin performance range. Historically, we have occasionally experienced variability in our sales and gross profit due to payer mix as well as a reduction in clinic access or patient flow due to COVID-19-related issues. Fiscal 2023 sales and gross profit may experience similar quarter-to-quarter fluctuations. Operating income for fiscal 2022 was $3 million compared to $3.1 million in the prior year. The decrease was driven by increased strategic investment in sales, general and administrative costs, offset by the 16.5% revenue growth compared to prior year. R&D related expenses for fiscal 2022 were $1.4 million, representing a 21% decrease from fiscal 2021. The decrease was primarily due to reduced professional consulting costs associated with our next-generation platform development activities. R&D expenses were 3.3% of revenue in fiscal 2022 compared to 4.8% of revenue in fiscal 2021. We expect R&D spending to be between 2% and 3% of revenue during fiscal 2023 as we look to finalize our development and product testing work in preparation for an anticipated fiscal year 2023 next-generation product launch. Net income for fiscal 2022 was $2.3 million or $0.26 per diluted share compared to $2.4 million or 27% per diluted share in fiscal 2021. Net cash used in fiscal 2022 was $3.7 million. Of this amount, $1.5 million was used in investing activities, primarily purchases of software and equipment. Another $1.5 million was used in financing activities, primarily a result of our share repurchase program. And approximately $700,000 was used in operating activities. Cash flows from operating activities were offset by a $4 million increase in accounts receivable, a $1.1 million increase in inventory and a $1.3 million increase in prepaid expenses. Three distinct items have reduced our operating cash flow in fiscal 2022, including tax payments on fiscal 2021 net income, increased payments to secure adequate supply of key raw material components and a onetime payout of accrued vacation balances as part of an enhancement to our paid time-off policy. Our cash receipt collection remained strong. The quarter ended June 30, 2022 had a record cash receipt collections, building upon our prior record set in the previous quarter. As of June 30, Electromed had $8.2 million in cash, $21.1 million in accounts receivable and no debt for working capital of $27.5 million and shareholders' equity of $34.2 million. With that, we'd like to move to the Q&A portion of the call. Operator, please open the call to questions.

[Operator:]

Thank you. And at this time, we'll be conducting our question-and-answer session. And our first question comes from Kyle Bauser with Lake Street Capital Markets. Please state your question?

[Kyle Bauser:]

Great. Good afternoon. Thanks for all the updates here. Maybe I'll just start on the overall HFCWO market. Just kind of curious what your sense is there with the latest estimate you have for the growth rate of the overall market.

[Kathleen Skarvan:]

Sure. Hi, Kyle. Thanks for the question. So based on our industry estimates, we would estimate that HFCWO market is growing around 5% annually. And again, that is based on industry estimates that we've been able to research.

[Kyle Bauser:]

Got it. And I mean really nice top-line growth here, 19%. Ballpark, I mean how much of that growth is organic? Or let me rephrase that. How much of that growth is share gains versus kind of capturing new markets?

[Kathleen Skarvan:]

It's a little challenging, Kyle, for us to pinpoint that exactly. We do track the SmartVest loyal physicians and repeat referrals or prescriptions from those physicians. We also, of course, do track the amount of revenue coming from new competitive sources, and we just haven't disclosed that specifically for competitive reasons. But I can say that the majority of revenue would still be coming from our current SmartVest loyal prescribers. But that, as we said in our comments on the earnings call, when we look at the estimate of market share gain in home care, we believe, over the last three years, we've taken that market share from 15% to 19% of the total market. So we're really proud and -- of those gains and believe that, that will continue based on our ability to add more salespeople throughout the United States, particularly in those areas of the country with high potential. We're targeting those competitive accounts and also our differentiation. And specifically with the launch of our next-generation product, we think that's going to offer even more differentiation than it's going to help us with additional market share.

[Kyle Bauser:]

No, that's great. Appreciate that. And you've made some nice progress on the recent headcount adds and the sales force and glad to hear you'd be adding five more reps territories. Just kind of curious, how have you been able to find the new reps? And I know in the past, not just for Electromed, for a lot of med tech companies, it's been a tough labor market. So curious kind of how you've been able to find these new reps and how, if at all, compensation has changed for the sales reps.

[Kathleen Skarvan:]

Sure. I will take that. So as you know, we did terminate the relationship that we had with a national recruiter earlier in this fiscal year and have brought on our own full-time recruiter. She's doing just a fantastic job, but the reason she can do a fantastic job is certainly her experience and her background. But it also has to do with the culture here at Electromed that we've been building over the last few years, one that respects people, where they can certainly flourish, they can continue to make an impact and where we have strong training and development for all of our employees, including our sales reps and support. And in addition to that, our Vice President of Human Resources, Diane Kaufman, has worked very rigorously over the last two years to work on having employees refer people. And often, that can be your greatest source of finding experience and people that are a great fit with your culture, and so we do have a high percentage of our employees now that are coming from referrals from current employees. So we are really pleased with the quality of the hires that we've been made, and we've been able to make them in a more timely fashion to meet our deadlines here. Additionally, I would say on the wages, there certainly has been wage inflation, and the sales organization has not been able to avoid that sales -- that wage inflation. We've not hesitated to pay what we believe is competitive to market because we want to attract the very best talent and the very best talent that can help us to accelerate growth in these new territories that we're expanding into. So that is partially why our profitability was impacted this year a bit or why our margins didn't improve this year, but we do believe that over time, that will stabilize and we'll be able to improve our margins.

[Kyle Bauser:]

Thank you. It's good color. And maybe shifting into direct-to-consumer marketing and kind of, I guess, curious about what you're seeing. I mean I always think about maybe more of the cosmetics space where you get patients that come in and ask for devices by name. But clearly, you've got a patient population that has been struggling with these chronic conditions and so probably know all the devices very well. Just kind of curious, are you getting patients asking for SmartVest by name? How have some of those efforts been going? Because I know DTC marketing isn't cheap, so just kind of curious how that's been going.

[Kathleen Skarvan:]

So we certainly are having patients ask for SmartVest by name, and I do believe that our digital marketing is certainly helping to make a difference. We have thousands of individuals visiting our website every week requesting information, then our team here follows up with them as quickly as possible to talk to them about their current state. And in addition to qualifying them, to be eligible potentially for a SmartVest, we also are recommending SmartVest-friendly physicians for them if they believe their physician has not been diagnosing or prescribing appropriately for their particular condition. So that's working. We've had a nice increase year-over-year in our direct-to-consumer prescriptions and revenue. We do track that, although we are not disclosing that at this time. But that also, when you think about it, also has a compounding effect. And that compounding effect is if that is a naive prescriber or a physician that is a new prescriber because this is a patient that went to them and said, Hey, I have bronchiectasis. You've diagnosed it. Now I think I really need SmartVest, then that gives us a reason to send a salesperson to that clinic to follow up on that patient's prescription. And then we, in turn, will follow up with that patient at 30 days and later to see how they're performing, and that information will be fed back to the physician. So it's a really great way to develop a new physician and, again, a longer-term annuity through that patient -- that physician.

[Kyle Bauser:]

Sure. I appreciate that. And then maybe just one last for me on the strategy front. So you're kicking out cash even in the midst of a ramp of the commercial team, and your base HFCWO business continues to perform. So I mean as you continue to drive that business that remains profitable, does it make sense to add kind of incremental high-margin products to the existing call points? Or is that more of a distraction at this point? Just kind of curious separately if there's any updates on the efforts from the Strategy Committee. Thank you.

[Kathleen Skarvan:]

Well, we're always open to evaluating what may be a great complementary respiratory product to our tool bag. We are, though, continuing to focus on HFCWO. We don't want to be distracted because we do think this is an untapped, large opportunity for us. But again, we'll explore those opportunities if we think there is a great return on investment or a really great innovative product. But currently, our focus is on HFCWO and that organic growth.

[Kyle Bauser:]

And then I guess just any updates from the Strategy Committee. Thank you.

[Kathleen Skarvan:]

Yes. Thank you, Kyle. I appreciate all the questions.

[Operator:]

Thank you. It appears there are no additional questions at this time. I will hand the floor back over to Kathleen Skarvan for closing remarks.

[Kathleen Skarvan:]

Thank you all for joining our call this evening. We appreciate your continued support. We are proud of our record quarterly and annual revenue, and we do look forward to continuing the momentum from fiscal 2022 into fiscal 2023. Should you like to schedule a follow-up call, please reach out to our Investor Relations partners at ICR Westwicke. Otherwise, have a great evening.

[Operator:]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.