NantHealth, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the NantHealth 2020 Second Quarter Financial Results Conference Call. My name is Tanya, I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Robert Jaffe, Investor Relations for NantHealth. Please go ahead, sir.

[Robert Jaffe:]

Welcome, everyone, and thank you for joining us today to discuss NantHealth's 2020 second 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 principles 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 second 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's 2020 second quarter financial results conference call. We hope all of you and your families safe and well. We'll talk more about COVID-19 in a moment including actions we took to support the healthcare community. But first, I'd like to discuss our recent strategic acquisition of OpenNMS Group, which we completed on July 22. OpenNMS is a premier open source network management company, its application platform provides comprehensive event, fault, performance and traffic management for enterprise networks. OpenNMS platform is scalable and easily integrated across multiple environments workflows. And its customer base includes major Fortune 100 companies as well as multiple large health providers. We acquired OpenNMS because it expands and diversifies our software and portfolio and service offerings and enhances our artificial intelligence, cloud and SaaS capabilities. Importantly, it also helps us diversify the opening up market opportunities beyond healthcare. Turning now to COVID-19, fortunately, we took swift action on the outset of the pandemic, among other things, we implemented processes and procedures for virtually all of our employees to work remotely. As a result, the impact in our employees has been relatively minor. We made our NaviNet AllPayer platform available to providers for free during the entire month of May. Our CEO, Dr. Patrick Soon-Shiong, presented a series of video exploring and discussing the science behind COVID-19. And medical experts from our team hosted two webinars to educate payers, providers and partners on COVID-19. Both webinars generated considerable interest, each with more than 900 registered viewers. Now, let's briefly turn to our financial results. Total revenue for the 2020 second quarter was $17.6 million, of which SaaS revenue was $17.5 million. Gross margin increased to 58% of net revenue, compared with 56% last year's second quarter. Total operating expenses were lower due in part to a reduction of SG&A by nearly $2 million. Bob will discuss our financial results in more detail shortly. Now let's discuss our software and services business, in our clinical decision support division, we implemented through a channel partnership, Eviti Advisor clinical decision support platform with a leading non-profit medical center in New York City. In July, we significantly expanded Eviti Connect across the Medicaid population of a leading US health insurance company with the addition of two states. We leveraged the Eviti platform to educate users on the implications of COVID-19 for cancer care and the science behind emerging treatments. We also added a feature that enables payers to gain insights in COVID-19 testing relative to oncology treatment plans. We released enhancements to the Eviti platform, these included

[Bob Petrou:]

Thank you, Ron. For the second quarter of 2020 revenue was $17.6 million, this compares to 2019 second quarter revenue of $20.1 million, which included $1.3 million of home health revenue and $491,000 of GPS revenue. SaaS revenue decreased year-on-year by 4% to $17.5 million from $18.3 million. The primary drivers for the decline in SaaS performance were various changes in revenue streams, including our AllPayer for free promotion in May 2020 to help providers during the CVOID-19 pandemic. Q2 sequencing and molecular analysis revenue was $64,000, down from $491,000 in the same quarter of 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 full coverage determination from CMS of our full list price. This may require a PLA code under ADLT status, which has not been submitted yet. Q2 gross profit percentage grew to 58% of revenue compared with 56% in the same quarter a year ago. The gross margin improvement was primarily due to changes in product mix. Q2 total operating expenses decreased 23% to $17.1 million from $22.2 million in the prior year second quarter, reflecting our continued cost management efforts and removal of costs tied to the divestiture of the home health business. We continue to manage our cost base but intend to invest through the year on new product offerings, growth in data sciences, and including investments in our recent acquisition of OpenNMS in July 2020 that will generate future benefits. Accordingly, we expect to see overall OpEx increase modestly through this year as I have previously mentioned. For the second quarter, net loss from continuing operations was $48.3 million, which included a non-cash charge of $30 million related to losses and impairment of our NantOmics investment as well as the $7 million unrealized loss due to changes in the fair value of our bookings commitment liability. Without these two non-cash charges, our net loss from continuing operations would have been $11.5 million in Q2 2020 versus $15.9 million in the same quarter last year. On a non-GAAP basis, Q2 net loss from continuing operations was $7.5 million or $0.07 per share, up from $6.9 million or $0.06 per share for the second quarter of last year. This is mainly due to the lower SaaS revenue tied to our free AllPayer initiative as mentioned above, as well as other investments in R&D. However, on a year-to-date basis non-GAAP net loss from continuing operations decreased to $13.6 million or $0.12 per share from $17.4 million or $0.16 per share for the same period prior year showing continued focus on improving our financial results. Finally, cash and cash equivalents were $37.5 million at June 30, 2020, compared with $47.5 million at the end of the first quarter. Net cash burn was approximately $10 million in Q2, which included semi-annual interest payments of approximately $3 million and other front-end loaded payments in the year, leaving a small net operating cash burn in the quarter. With that, I will now turn the call back over to Robert.

[Robert Jaffe:]

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

[Operator:]

Thank you. [Operator Instructions] And we have a question from Charles Ree [ph]. Please go ahead, sir.

[Unidentified Analyst:]

Yes. Thanks for the question - taking the questions here. Ron, maybe talk a little bit more about OpenNMS and I understand that it diversifies the business and extends outside of healthcare. Maybe talk a little bit more about it, because my understanding is most companies have multiple network management solutions that they run. And I think this business started really as an open source business, so it's free. I think, you're trying to convert it into sort of pay model. Can you talk a little bit more about that and sort of what that process will look like from a financial standpoint for you guys? And then, lastly, just tying it all together, what is the - what do you envision sort of the strategy going forward and what is the strategic vision here from NantHealth as you bring in OpenNMS, are we not really a healthcare company anymore? Are we going to be just more of a just a traditional software company that serves healthcare? How do you see the company's vision as we look out further? Thanks.

[Ron Louks:]

Sure. So, I'll try to remember all of them. I'll maybe take the last one first and then the original question. So, I think, if you look at, they have a very large healthcare customer base. And if you looked at our customer base in a lot of the times that we're dealing with the negotiations and finalizing the deals with our customers, we tend to interface primarily with the CIO of the organization, obviously the CFOs are involved in decision making, but the primary interface is typically the CIOs. And the CIOs, if you look at their - from their budget point of view is one of the largest costs for them is network management tools. And to your point, in some cases, customers do use multiple network management tools, in other cases that they only use one network management tool. It depends on the complexity of the business and if the tool will match up to all their needs. And so for us, it seemed like a natural progression as businesses are looking at their bottom line on a continuous basis and when you get in there for renewals of our core products, if we can find an advantage by bringing in another product to be able to help with the negotiations and offer them some price breaks on that tool on the network management side that just helps their overall budget situation, I think it helps with our renewal process. So, we see good synergies, I guess, along that line. And then if you look at the - on the network management side, to your point, I mean, I think, what your original question is that it did start from an open source point of view, it is free and has been for many years. They do charge for customization and things like that, if you've [ph] custom APIs that you want to develop. But we fully expect to go to a SaaS-based model when we go to the cloud version, and if you look at it similarly to sort of what Red Hat has been able to do. And so we expect to follow a model very typical to what Red Hat has been able to do. And every one of our customers on the OpenNMS side is different. We do have some customers that solely use OpenNMS as the network monitoring tool. And we have situations where OpenNMS is used along with other tools, and in such a wide customer base, as you look at the overall from the Fortune 100 to other companies as well. Did I cover them all?

[Unidentified Analyst:]

Yes, yes. I think so. Yes. But maybe if I can follow-up, I mean, when you look at OpenNMS and obviously maybe not all of them will go to the SaaS model. But, for argument sake, let's say, everyone does, what would the customer revenue mix look like? Would we still like - would we still be over 50% healthcare or - at that point? Because I know when you and I've talked a little bit in the past about this. They have some very large customers who are in retail, in financials and in consumer tech. Would we still be predominantly a healthcare focused company or what would we look like?

[Ron Louks:]

So, NantHealth itself, obviously, we're predominantly in a healthcare focused company. The OpenNMS itself, I think, on the initial rollouts of the cloud-based solution and we've already got two - our first two beta customers to rollout on cloud are in the fortune top 10, I guess, is the best way to describe them. They are non-healthcare, but we do have a top healthcare company that will be the third one in there. So, I would expect, in the first sort of year, a rollout of the cloud that it would be probably more heavily weighted towards the non-healthcare to their traditional customer base. But over time we expect that to grow as - and it's specifically chosen, I think, for the rollout as to which customers and that was already in the works from OpenNMS. We don't want to disrupt that if that makes sense. And, so - but we do expect it to pick up on the healthcare side and we expect some of our existing customers back to when we put on the renewals that are not customers there [ph] today to take OpenNMS' solution as well.

[Unidentified Analyst:]

Okay. And then - okay, that's helpful. And so, is it fair to think that as you think about the - where your investment dollars go going forward here, we've obviously spent about $10 million to bring on OpenNMS. Are there other kind of tools and solutions that when you have these discussions with clients on renewals on some, let's say, the core NaviNet, Eviti kind of solutions. Are there other holes that you see that there is a need that you're thinking about going out to add on then?

[Ron Louks:]

Yes, exactly. That's exactly the strategy. And I think in the end what we hope to be is obviously the de facto standard for network monitoring tools for the healthcare industry, and put a lot of effort and focus along that space.

[Unidentified Analyst:]

Okay. I will stop there. Thank you.

[Ron Louks:]

No problem.

[Operator:]

[Operator Instructions] And we have Charles Ree [ph] on the line.

[Unidentified Analyst:]

Yes. I just wanted to follow up, I guess, here on the molecular testing side, obviously you've kind of talked about a lot of positive news just starting to come out here. What's the timeline that we're really looking at where we could think of GPS as being a real contributor, again, to top line growth?

[Ron Louks:]

Well, I think, that it will be awhile, to be honest with you, Charles. I think that if you look at the - with the announcement in regards to the CMS coverage is that it still does not cover our costs. And so I think obviously next we would look at TMB for coverage, and then eventually taking the steps towards ADLT. And I think - then once you get to that stage, I think, then we can discuss sort of the commercial rollout strategy, you know what I mean, but that's going to take, in our mind, probably a significant amount of time to be able to get there.

[Unidentified Analyst:]

And when you say significant amount of time, are we talking one year, two years, three years. Any kind of rough sense, I know a lot of it is dependent on other factors but...

[Ron Louks:]

Yes, right. Little out of our control, but we don't see it happening within a year.

[Unidentified Analyst:]

Okay. All right. So, in terms of our models, it's fair to say we should probably not build out much there, at least for the foreseeable future and any kind of guidance around how we should be thinking about that.

[Ron Louks:]

Correct.

[Unidentified Analyst:]

Okay. Last question from me...

[Ron Louks:]

[Indiscernible] regards to the foreseeable, so.

[Unidentified Analyst:]

Okay. In terms of cash, any kind of guidance can you give us around cash flow, cash burn, cash generation as we kind of think past for the back half of the year?

[Bob Petrou:]

Yes. It's Bob here. As you know, cash and cash management has been a primary focus in line since I came on board. I think, we've done a good job as an organization to manage that and get us through the hurdles we had of late. Obviously, Q2 is going to be impact - sorry, Q3 is going to be impacted with the acquisition, so they are [indiscernible]. Beyond that, again, we said we're going to be investing in these businesses and other products and offerings, so I do anticipate OpEx to go up a little bit, but generally speaking on the cash side, again, through Q3, at least from the Q3 perspective, we'll probably be again $12-ish-plus million in burn, which includes the purchase of the OpenNMS which occurred in Q3. So, as of now, I kind of give you that view as it ties to Q3, obviously beyond that there is a lot of factors that will come into play, but definitely, we'd see that started coming down again based on all the activity we're doing in the management of our cost base, although, like I said, we are investing in the business and in our new businesses. So, I'll leave it at Q3 for now. But beyond that, we can touch base through the quarter and give you an update next quarter.

[Unidentified Analyst:]

Okay. Thank you. And then, I guess, my last question, when you look more broadly because of COVID, one of the areas that actually held up pretty well was oncology, obviously makes sense. That's not really an elective condition that people can put off. During this period, can you talk about the sales pipeline and interest in Eviti and NaviNet from oncology through this. And can you talk about has that helped drive the pipeline here and any kind of thoughts on how that might play out for the - for new sales for the rest of the year? Thanks.

[Ron Louks:]

Yes. So, I think, that if you look at Eviti, we feel strongly about the growth opportunities with Eviti and the pipeline continues to be strong. With COVID, we have several purchase decisions that have been pushed out by customers based on the priorities that they had at the time when sort of COVID all kicked in and has been building up. And so, we fully expect they will get back to pre-COVID progress that we were making on being able to close the deals in the latter half of this year. I think, if you look at the NaviNet side, I think, we have had some headwinds in the short-term. Sales cycles for NaviNet solutions are lengthy in some cases. And so, I think we're a little bit - but we're definitely behind our forecast that we expected I guess on the growth side for NaviNet for this year.

[Unidentified Analyst:]

Okay. But when you say that the decision is kind of pushed out, do you expect that side maybe to come back here in the back half as well or is that something maybe on Eviti we can expect it, but...

[Ron Louks:]

Correct.

[Unidentified Analyst:]

But NaviNet, something we could not.

[Ron Louks:]

I think, we can expect it, and I think, on NaviNet we're still - I would - I think, we're going to struggle, I think, to get to where we expect it to, forecast wise, I think, some will carry more into next year.

[Unidentified Analyst:]

Okay. That's helpful. Alright, appreciate all the questions. Thank you.

[Operator:]

[Operator Instructions] We have no further questions at this time.

[Robert Jaffe:]

Thanks, Jenny. Thanks everyone for joining us today. We look forward to sharing our progress on our next scheduled conference call. Have a great day.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.