Joseph H. Capper - Chief Executive Officer, President and Director
Heather C. Getz - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary
CardioNet (BEAT) Q4 2012 Earnings Call February 13, 2013 5:00 PM ET
Good afternoon. Thank you for joining us for the CardioNet Fourth Quarter and Full Year 2012 Earnings Conference Call. Certain statements during the conference call and question-and-answer period to follow may relate to future events and expectations, and as such constitute forward-looking statements within the meaning of the Private Securities and Litigation Act of 1995.
Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company in the future to be materially different from the statements that the company executives may make today.
These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. [Operator Instructions]
And it is now my pleasure to turn the floor over to your host, Mr. Joseph Capper. Sir, you may begin.
Joseph H. Capper
Thank you, operator. Good afternoon, everyone. I'm Joe Capper, President and CEO of CardioNet. Today, I will provide commentary on the fourth quarter with specific attention to the progress made against the strategic plans we have been pursuing in order to improve the performance of our company.
As always, I am joined by Heather Getz, our CFO, who will provide detail on our operating results. We will also allow time for a brief question-and-answer session.
The fourth quarter was a very successful one for CardioNet in many respects. Most important, we completed a transformational change in our business model that will benefit the trajectory of the company for years to come. I highlight this point, as many of the seminal changes that have been made will not be apparent in this quarter's financial performance, but we expect them to yield results in the coming quarters.
One significant change we undertook and finalized in the fourth quarter was a strategic shift in our go-to-market strategy for our patient services business. In Q1 2013, we launched a new strategy that better leverages our competitive advantages as the leader in cardiac patient monitoring services, and we are encouraged by the early results. To support our new comprehensive strategy, we launched wEvent, a best-in-class wireless event monitor that will further strengthen our technology leadership in the market. We also continued to streamline our operating structure and reduce overall expenses. Finally, we have solidified our position as a key competitor in the $1 billion-plus research services cardiac monitoring market.
CardioNet is a vastly different company as we start 2013, thanks to the steps we undertook over the past year. We begin this year with the most diversified revenue stream in the company's history and now have multiple growth drivers that we have added or augmented through our recent acquisitions. To remind you, CardioNet is employing a three-pronged strategy to achieve our financial goals. First, we seek to solidify our leadership position in cardiac monitoring; second, we endeavor to build a leading research services business; and third, we look to identify diagnostic markets that would benefit from the application of our wireless platform and proprietary technology. These initiatives are designed to provide more diversified and balanced growth in the future. By diversifying our payor sources, as was the case with the Cardiocore acquisition, and by now fully addressing the entire patient monitoring opportunity, we become less dependent on any single revenue stream. Furthermore, we can also achieve faster growth by partnering with other companies which possess competencies that are complementary to those of CardioNet. I would also point out that despite the considerable focus on improving the foundation from which we operate, the business did not miss a beat -- no pun intended.
In the fourth quarter, revenue was $30 million, up $3 million over the prior year quarter and sequentially. This is the second consecutive quarter we have seen annual revenue growth and marks the best fourth quarter revenue performance since 2009. EBITDA was $700,000, despite taking some additional reserves, which Heather will expand on. Patient monitoring was up 17% versus Q4 2011, and we monitored over 1,300 wireless event patients in the quarter with a continuing ramp up as we entered the new year.
So with that brief overview, I will now turn the call over to Heather to provide more detail review of our financial results. Heather?
Heather C. Getz
Thank you, Joe, and good afternoon, everyone. As Joe mentioned, revenue in the fourth quarter was $30 million, a 12% increase over the fourth quarter of 2011. We posted revenue gains in our product segment due to higher volume, which was largely timing-related, and in our research services segment, due to the impact of the Cardiocore acquisition.
In our patient services segment, patient volume increased 17% while revenue declined due to our changing service mix. Compared to the third quarter, revenue increased due to the full quarter impact of Cardiocore as well as increased revenue from our products segment. Much of our quarter-over-quarter and sequential growth was driven by our acquisitions, which supports our strategy to diversify revenue so that we are less dependent on third-party reimbursement and less concentrated under a single CPT Code. Our progress toward this initiative is evidenced by the fact that in the fourth quarter of 2012, the MCOT CPT Code represented about 60% of revenue. This compares to almost 80% in the fourth quarter of 2011.
Turning to gross margin. As a percent of revenue, our margin declined 480 basis points compared to the prior year. Growth in research services and products, which carry a lower gross profit margin than patient services, impacted margin by about 300 basis points. Lower ASP and service mix, partially offset by the impact of our expense reduction measures, accounted for the remaining difference.
For the fourth quarter, our adjusted operating expense increased $1.8 million to $19.3 million due to the addition of Cardiocore. Excluding Cardiocore, our adjusted operating expense was lower, reflecting operational improvement and the cost reductions implemented at the end of 2011. On a sequential basis, excluding the full quarter impact of Cardiocore, our expenses declined due to lower bad debt expense and additional cost reductions implemented during the quarter. While bad debt expense was lower sequentially, we reserved an additional $1 million in the quarter. As we have improved our processes, our collection cycle has shortened significantly and we have adjusted our reserves to reflect the shortened cycle.
With the increased margin dollars stemming from the higher revenue helping to offset increased operating expense, we generated positive EBITDA of $700,000 during the fourth quarter.
Turning to the balance sheet, we ended the year with $18.3 million in cash. Excluding the $27.8 million used for acquisitions, we were essentially free cash flow neutral for the year despite the outlay of $6 million for capital expenditures and $1.6 million for the settlements of the shareholder and patent litigations.
Our continued reduction of accounts receivable caused DSO to drop to 56 days, a 19-day decline compared to year end 2011. We have an effective process in place to manage our receivables and DSO and we will continue to look for operational improvements to help accelerate collections and potentially further reduce DSO.
Finally, before I turn the call back to Joe, to provide some commentary on 2013, we expect to see top line revenue growth across all segments led by the research segment.
The CardioNet Comprehensive program should bolster our patient services volume, but we do expect some continued pricing pressure. With these dynamics, we should see some additional shift in our revenue mix in 2013 toward research services and gross margins in line with the fourth quarter of 2012.
Also please keep in mind that due to the nature of the Research Services business, there may be some variability in the distribution of its revenue over the course of the year.
Lastly, as is typical for CardioNet, we expect EBITDA to decline slightly in the first quarter as compared to the fourth quarter due to the resetting of payroll taxes and other expenses that occur in the first quarter, such as trade shows and sales meetings. However, we do expect to be EBITDA positive for the full year.
Thank you. I will now turn the call back to Joe.
Joseph H. Capper
Thank you, Heather. I want to take a few minutes to expand in more detail on some of the comments I made in my opening remarks, and then I will open the call for questions.
With regard to the changes we made in our cardiac monitoring business, I want to walk you through the rationale that led us to employ a more comprehensive approach than you have seen from CardioNet in the past.
We possess the industry's largest direct sales force and a suite of industry-leading monitoring products. Previously, we directed many of our resources toward the promotion of MCOT, given the outstanding clinical and economic benefit it provides patients, doctors and payers. However, much of the testing that is done today still utilizes event and Holter monitors for a variety of reasons.
We firmly believe that MCOT is the gold standard for monitoring and we will continue to make that case. However, we will now more actively pursue the prescriptions written for event and Holter monitors as well. We are confident that we can increase our share of those prescriptions while still communicating the superiority and cost effectiveness of MCOT. We do expect the market to migrate over time to MCOT, but in the interim, we will seek to capture a larger share of the entire market.
To help us effectively take share in event monitoring, we introduced our wireless event during the fourth quarter. We believe our wEvent is the most advanced wireless event product in the market. Thus far, the product is receiving widespread market support and has proven to be an excellent complement to MCOT, especially in those areas where insurance coverage is a challenge.
For 2013, we have fully aligned the sales force and senior management compensation structure with this more comprehensive strategy. Where in the past, MCOT was the centerpiece of all commission and bonus plans, in 2013, we strike a far more balanced approach.
I'd now like to touch on another example of our strategy in action. One of the pillars I discussed earlier was to identify diagnostic markets that would benefit from the application of our wireless platform and proprietary technology, and to partner where appropriate.
Earlier today, we announced a partnership with AirStrip Technologies. This is an exciting alliance, as Airstrip has made tremendous progress primarily in the hospital point of care setting with the cardiology platform. By interfacing our 2 systems, we will enhance the data package that is being delivered directly to commissions, smartphones and tablets in a user-friendly format.
For the first time, Airstrip will be pulling data from patients being monitored in an outpatient setting, dramatically improving the clinician's ability to deliver rapid care. These are exactly the kind of solutions that make the most sense, given the macro trends in today's market.
The aging of the population alone dictates the need for a wider use of technology-based solutions and specifically, remote monitoring solutions in order to leverage clinical resources.
Our 2 companies are committed to completing the interface work and having a market-ready solution by mid-year.
We also expect to continue to develop cutting-edge products in order to build on our leadership position in a remote monitoring market. However, this is another area where we have the opportunity to gain strength by marrying our internal development efforts with those of other companies. Companies that have expertise in technology development that could be leveraged to improve product effectiveness, lower cost and decreased product development cycles. It is a safe bet that you'll hear more about these activities in the near future.
On our last call, I talked about the results of a study that examined insurance claims data in an attempt to validate the return on investment associated with using MCOT versus event or Holter. This analysis is currently being reviewed for publication. As a reminder, the study found that compared with an event monitor, the use of MCOT lowers inpatient costs by a staggering $9,000 per patient in the first year alone. This is a minimum of a 12x to 13x return on investment associated with using MCOT.
In terms of our Research Services business, our focus in the quarter was to complete the integration of Cardiocore and refine the growth plan for 2013. During the first full quarter post the Cardiocore acquisition, the business performed better than expected. Given our pipeline and backlog, we anticipate continued growth in this division. Additionally, we will be looking to make further investments which will enhance our position outside of the United States, create an advantage in terms of equipment cost and differentiation and add services to complement the current core lab offering.
In summary, we closed out the year with excellent momentum and positive trends. As we move further into 2013, our focus is to: grow the patient services business by positioning a comprehensive CardioNet suite of products, achieving further diversification in terms of products, payor and patient acquisition sources and accelerating these efforts to external partnerships; continue to expand the Research Services business through pipeline pull-through and additional investments; continue to look for ways to drive efficiencies throughout the organization, reducing our overall cost structure, which will provide for greater reinvestment into the business; continue to focus on gaining broader reimbursement coverage for MCOT technology by publishing and leveraging the claims data analysis, providing evidence of a 12x to 13x ROI in the first year; and continue to evaluate opportunities, both through internal development and M&A, to leverage our infrastructure into adjacent markets, both domestically and abroad.
By executing on this aggressive agenda, 2013 will be a great year for CardioNet.
We will now pause and open the call to questions. Operator, we are ready for our first question.
[Operator Instructions] No other questions waiting at the moment.
Joseph H. Capper
Operator, if there's no questions, we'll go ahead and wrap up today's call. I want to thank everyone for listening in today, and thank you for your continued support and interest in the company, and we look forward to speaking to you at the end of next quarter. Operator, that concludes today's call. Thank you, everybody.
Thank you for joining today's conference. If you joined the conference late today, you may listen to the conference on digital replay, which will be available from February 13 till February 27, 2013, on (888) 286-8010 or (617) 801-6888, with passcode 37095865.