NantHealth, Inc.
Q1 2020 Earnings Call Transcript

Published: 12 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the NantHealth 2020 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Robert Jaffe, Investor Relations for NantHealth.Sir, the floor is yours.

[Robert Jaffe:]

Welcome everyone and thank you for joining us today to discuss NantHealth's 2020 first quarter financial results. On the call today are Ron Louks, Chief Operating Officer; Bob Petrou, Chief Financial Officer; and Dr. Sandeep Reddy, our Chief Medical Officer. This call is being broadcast live at www.nanthealth.com. A playback will be available for three months on NantHealth's website.I'd like to make the cautionary statement and remind everyone that all of the information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The company's discussion today will include forward-looking information, reflecting management's current forecast of certain aspects of the company's future and actual results could differ materially from those stated or implied. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with US Generally Accepted Accounting Principle and may be different from non-GAAP financial measures used by other companies.Investors are encouraged to review NantHealth's press release announcing its full 2020 first quarter financial results for the company's reasons for including those non-GAAP financial measures in its financial results announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's press release, issued earlier today. In a moment Ron will provide a brief overview of the quarter and discuss the business, followed by Bob, who will discuss the financial results in more detail. We will then open the call for questions.With that said, I will now turn the call over to Ron Louks, Ron?

[Ron Louks:]

Thanks, Robert. Good afternoon everyone and welcome to NantHealth 2020 First Quarter Financial Results Conference Call. We hope all of you and families are safe and well. These are highly unusual times with COVID-19 impacting all of us. I'd like to begin with some heartfelt thanks to our employees who have responded with resilience and dedication to the challenges related to COVID-19.Our employees have put forth extraordinary effort to make sure our business continues to operate. To aid that effort, we are focused on our employees well-being, we follow CDC guidelines and implemented processes and procedures for virtually all of our employees to work remotely. As a result of these efforts, the COVID-19 impact on our employees and business state has been relatively minor. With that, let's take a close look at our 2020 first quarter. During the quarter, we completed the sale of our Connected Care business for more than $47 million. The divestiture of this business significantly strengthened our balance sheet, further streamlined our operations and along with the sale of our home healthcare services business last June, allows us to focus our energies and resources on our primary SaaS business.For reference, the financial results for our Connected Care business are now classified as discontinued operations for the current and prior periods.Having said that, and for those interested, the Connected Care business generated sales of approximately $1.2 million for the course in Q1. Our financial results for our continuing operations in the first quarter of 2020, total revenue is $18.2 million of which SaaS revenue was $18.1 million representing a 2% increase over the prior year quarter.Gross margin increased substantially to 60% of net revenue, compared with 49% of net revenue in last year's first quarter. We also made excellent progress reducing operating expenses, especially SG&A. Regarding our leadership, we strengthened our Board of Directors in addition Deanna Wise. Deanna brings extensive clinical information technology experience in the hospital and health care industry. Her expertise will be particularly helpful in shaping our future product strategy and strategic direction. Turning briefly to our balance sheet at March 31, our cash position was $47.5 million, which increased substantially as a result of the sale of the Connected Care business.Now, let's discuss our software and service business and our Clinical Decision Support division, we presented Eviti Connect real world data on treatment patterns for patients with advanced colorectal cancer or CRC at the 2020 Gastrointestinal Cancers Symposium sponsored by the American Society of Clinical Oncology, ASCO in January. The ability to identify treatment patterns for data analysis can provide unique and critical information to pharma, payers and provider networks to optimize treatment strategies. Also, in January we signed a three year renewal agreement look at one of the largest non-profit rural health plans in the US, expanded an agreement with a leading US health insurance company to roll out Eviti Connect across the Medicaid population to additional states.We deployed significant workflow and database enhancements to the Eviti platform. The enhancements include, warning notifications which allow users to configure a warning and/or deviation notification to alert the submitter when a drug does not comply with the preferred drug program. The saves review cycle time, ensures patients receive correct care.Payer-customized messaging which allows users to indicate when specific data is required in order to complete the Patient Insurance ID field reducing submission delays. With regard to our NaviNet payer engagement solution, in January, we added the Health Plan as a new customer. The Health Plan is a Community Health Organization servicing members in Ohio and West Virginia. 5-year agreement includes NaviNet Open as a key component of The Health Plan's payer-provider collaboration strategy.We launched significant enhancements to the NaviNet Open Platform, including, a new all-payer self-service, subscription management workflow. This new storefront enables the provider office to quickly create, manage subscriptions for our AllPayer offerings allowing providers expand their NaviNet access to nearly all health plans. For our sequencing and molecular analysis business in February, we presented the GPS Cancer data revealing increased opportunities for HER2 directed therapy for colorectal cancer patients at the 2020 Gastrointestinal Cancer Symposium, sponsored by the American Society of Clinical Oncology.The data showed that upto 40% more patients may be eligible for HER2 directed therapy, which have implications for drug development and clinical trials. In January NantHealth and NantOmics presented initial report and on a novel artificial intelligence, AI platform creating pathologists in image-based lung cancer subtyping at the Society for Imaging Science Technologies International Symposium on Electronic Imaging 2020.The novel machine vision software platform accurately subtypes lung cancer pathology and achieves high concordance with analysis performed by trained medical pathologists. In February NantHealth and NantOmics announced the publication of a peer-reviewed study in breast cancer research on a novel, AI technique in breast cancer. The study reports on a novel deep-learning system of digital pathology images and omics data used together to more precisely identify mechanisms of therapy resistance.To sum up, we recorded a solid first quarter, especially in light of the challenges with COVID-19 compared with last year's first quarter. SaaS revenue increase and the gross margin rose significantly. In February, we completed the sale of our Connected Care business for $47.25 million in transaction, and substantially improved to cash position and financial flexibility, and we continue to enhance our product offering, adding customers and expand our existing customer agreements.With that overview of the business. I'll turn the call over to Bob to discuss our financial results in more detail. Bob?

[Bob Petrou:]

Thank you, Ron. As Ron mentioned earlier, for the first quarter of 2020 revenue was $18.2 million compared to $20.2 million in the same quarter of the prior year. Included in the $20.2 million from the prior year was $1.6 million of home health revenue and $814,000 of GPS revenue and when removed in such, thus leaving just SaaS revenue.SaaS revenue increased year-over-year by 2% to $18.2 million from $17.8 million. The primary drivers for the improved performance were the addition of key contracts and partners as mentioned in the previous quarters. Quarter-on-quarter SaaS revenue declined slightly mainly due to the ending of amortization of services that were occurred in 2019. Q1 sequencing and molecular analysis revenue was $59,000, down from the $814,000 the same quarter the prior year.As we have referenced in the past, we expect to continue to see minimal sequencing and molecular analysis revenue impact until we receive a positive coverage determination from CMS. Our Connected Care business, which we sold earlier this year, in February, generally the partial quarter of sales or approximately $1.2 million. As a reminder, this amount is not included in our total revenues, as this business is reported as discontinued operations.Q1 gross profit grew to $11 million or 60% of revenue, compared with $9.9 million or 49% of revenue in the same quarter a year ago. The significant gross margin improvement was primarily due to the changes in product mix, specifically the continued growth of our software-related business. Q1 total operating expense decreased 17% to $16.8 million from the $20.2 million in the prior year first quarter, reflecting our continued cost management efforts, and the removal of costs tied to the divestiture of the Home Health business.We continue to manage our cost base budget -- do intend to invest through this year, on new product offerings that will generate future benefits. Accordingly, we expect to see overall OpEx increase modestly through this year. For the first quarter, net loss from continuing operations was $8.9 million or $0.08 per share, a significant improvement from $19.6 million or $0.18 per share in the prior year first quarter. On a non-GAAP basis, net loss from continuing operations was $6.1 million or $0.06 per share, down from $10.6 million or $0.10 per share in the first quarter of last year.Finally, cash and cash equivalents were $47.5 million at March 31,2020 compared with $5.2 million at the end of the fourth quarter. This increase of $42.3 million was primarily the result of the DCX sale. Excluding the inflow of cash from the sale, net cash burn was approximately $5 million in Q1, which includes various closing costs and other front-end loaded costs.With that, I will now return the call back over to Robert.

[Robert Jaffe:]

Thanks, Bob. Operator, we've completed our prepared remarks. We'd now like to open up the call to questions.

[Operator:]

[Operator Instructions] You have a question from Charles Rye [ph]. Your line is open.

[Unidentified Analyst:]

Yes, hey guys, thanks for taking the question and hope everyone is safe and well here. I wanted to ask about -- actually, let me just touch on last thing about cash here. So, it sounds like we had burn about a minus $5 million; if we didn't have the closing costs and some of the upfront costs related to the sale of DCX, do you have an estimate of what cash would have been? Should we increased cash or can you give me a rough estimate?

[Bob Petrou:]

Yes, it's Bob here. I don't think we're in a position yet to say that we -- increase cash, but I think we would have still burned a couple of million dollars in the early part of the year.

[Unidentified Analyst:]

Okay. Is there -- as we think about the impact of COVID here, going forward, what kind of impact are you expecting in the back half of the year? Obviously, a lot of people not able to get to physicians' offices -- those offices are closed; oncology, I think to some extent, sounds like it's a little bit less impacted generally speaking, but still a lot lower level of procedures. How are you thinking about sort of the outlook here as we move forward?

[Ron Louks:]

So, it's Ron, hey Charles how are you doing? Yes. So obviously with Q1, we had no material financial impact due to the virus, and so it's a bit early to tell on the longer term. We feel comfortable as a company for the year, but as you know it's difficult to see -- I think the longer you go out and with closing of deals and can you actually do larger deals over the phone, the smaller deals we've been able to do, and I think as time progresses, we'll have a better understanding of this, and if we can actually be able to deal without happen to be -- face-to-face with the customer. So...

[Unidentified Analyst:]

Okay. Maybe, can you give us a sense of what sort of the backlog cushion, you think you have that will help to the extent that we have some delays in closing deals?

[Ron Louks:]

Yes. Sure.

[Unidentified Analyst:]

Just sort of remind us sort of the -- how long it takes to implement and how much of backlog we have to -- kind of curious to that?

[Ron Louks:]

Well, that is one good thing. I think as far as implementation goes -- a lot also depends on the customer and their readiness on implementation. But the nice thing about us is that we can actually implement virtually with the products both Eviti and NaviNet, and so that's actually worked out well for us. Obviously during this period, being able to do that obviously customers they still prefer -- in a normal situation would prefer on-site and sort of that face-to-face interaction, especially around training. But, in this case, we've been able to continue with installations with the customer.So, I think from that part we're in good shape. Pipeline is still strong for Eviti in particular, we have several deals and progress. We may see some time lags in our ability to close those deals given the location of certain prospects, as well as the customers re-focusing right now and the shorter-term priorities, but the overall interest is still really strong I think, which is a testament for the ROI of our solutions. And so, and back to my previous point earlier on the COVID impact for the year, we still have good expectations that we're going to close some of these larger deals, even though we're not face-to-face with the customer

[Bob Petrou:]

Thanks. And sorry, just -- sorry it's Bob just to expand again. I think the long-term strategies and prospects are still fairly good, I think, short term, we will seek a small impact in Q1 or sorry Q2. We did see a small impact at the onset of the quarter, tied to the providers and the network and also being grows, et cetera and we're also doing some things internally along with our providers and providing support to them. So, we will definitely see an impact in Q2 and vision to be flat to down from a Q2 perspective. So, I just want to give that highlight just to make sure it's clear.

[Unidentified Analyst:]

And then...

[Ron Louks:]

So, I think Charles, just to add to that with Bob. One of the things that we did as part of the COVID, and we felt a responsibility to the community, and our customers is that we're providing the all-payer for free right now, to our customers. And so, we expect to have an impact on the revenue in Q2 based on that. So...

[Unidentified Analyst:]

Is that charged on a transaction basis then, so you are able to just kind of provide for free for now?

[Ron Louks:]

Yes.

[Unidentified Analyst:]

Okay. My last question then is, as we think about the model so we should be thinking about modeling down -- flat to down second quarter. Third quarter, is it because of a lag on delays should third quarter be the same or if, let's say you listen to other companies that think, 2Q the worse in terms of procedure volumes, but then 3Q starting to see a recovery going into 4Q. Is the timing for your business similar that we would see that -- I would imagine on the NaviNet side, perhaps because the transactions -- being good -- things been scheduled or Eviti. Maybe give us a sense for that and how we should be thinking about that?

[Ron Louks:]

I think we're similar to the other companies that you referenced in the same guidance.

[Unidentified Analyst:]

All right, thanks. I'll stop there.

[Ron Louks:]

Thanks.

[Operator:]

There are no questions at the moment. Please continue.

[Robert Jaffe:]

Thanks, Charles. Thanks everybody for joining us today. We look forward to sharing our progress on our next scheduled conference call. Thanks again for joining us today. Have a good one. Be safe.

[Operator:]

Thank you again for joining us today. This concludes today's web conference. You may now disconnect. Have a great day. Presenters, please stay on the line.