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) Q1 2013 Earnings Call April 23, 2013 8:00 AM ET
Good day, ladies and gentlemen. Thank you for joining us for the CardioNet First Quarter 2013 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’s 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] 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 morning, everyone. I'm Joe Capper, President and CEO of CardioNet.
Today, I will provide commentary on our first quarter 2013 performance and specifics around the corporate realignment we announced yesterday. I hope the rescheduling of our call did not cause any inconvenience, however, we felt that it made more sense to share our first quarter earnings results at the same time we announce our plan to realign the company.
I'm joined by Heather Getz, our CFO, who'll provide more detail on our operating results. After our prepared remarks, we will open up the floor to your questions.
I am pleased to report today not only strong first quarter results, but other developments, which we expect to further support our future growth. As you will hear, our first quarter was filled with considerable activity and success. Revenue was $32.4 million, up 20% over the prior year quarter and 8% sequentially. This is the third consecutive quarter we have seen year-over-year revenue growth.
EBITDA was $2.4 million compared to a $400,000 loss in Q1 2012 and a $700,000 gain last quarter. Patient services exceeded our expectations, with volume growth of 8% versus Q1 2012 marking an all-time high for the company.
In addition to these strong results, we saw new key strategic partnerships, commenced the process to realign the company, selected a new name to better reflect our business focus, all while launching our new comprehensive sales strategy. I would like to thank all of our employees for delivering strong operating results despite the extraordinary demand for the quarter.
Q1 was in many ways a new beginning for CardioNet, as it was the first full quarter with our new sales strategy in place. To understand best the rationale behind the developments in Q1, I would like to reiterate the key pillars that drive the way we manage the business. First, we seek to solidify our leadership position in cardiac monitoring. Second, we are building a leading research services business around the Cardiocore brand and platform. And third, we look to identify diagnostic markets that would benefit from the application of our wireless platform and proprietary technology.
We have made considerable progress in the quarter delivering results on these strategic objectives. We have completed the seamless transformation from an MCOT-centric strategy to a more comprehensive sales approach, and we are realizing early positive results. Additionally, we aligned all corporate-wide incentive plans to better reflect this new comprehensive strategy. As a reminder, we employ the industry's largest outside sales force, detailing our full-monitoring product line, which is consistent with the new sales approach.
Physicians who have come to expect best-in-class technology and superior clinical results from MCOT are now becoming more aware of our high-quality event and Holter offerings as well. However, sales and marketing activity alone will not drive sustained long-term results. It is essential that we continue to provide doctors and patients with the latest advancements in technology.
To further solidify our leadership position in cardiac monitoring, we launched the most state-of-the-art wireless event in history during Q4 of last year. Our wEvent, not surprisingly, is getting noticed in the market, having now serviced approximately 6,000 patients in the short period since its introduction. It offers wireless transmission of symptom and activity reporting, provides a higher level of patient convenience and better quality information than traditional event monitors. We believe that our entire product portfolio is unrivaled in the industry.
Given the progress we're making against this plan, it has become clear that we're in need of a corporate structure and business identity that more accurately reflect our current portfolio and long-term intentions, hence, yesterday's announcement to realign under a new holding company. After Heather provides a detailed financial review of the quarter, I will conclude with more commentary about the rationale behind the realignment. Heather?
Heather C. Getz
Thank you, Joe, and good morning, everyone. As Joe mentioned, revenue in the first quarter was $32.4 million, a 20% increase over the first quarter of 2012. While this increase was largely attributable to the acquisition of Cardiocore, we also posted increased revenue in our patient services business of over $1 million and saw an 8% increase in total patient volume.
All products contributed to the patient services growth, but it was largely driven by event and Holter with the launch of our CardioNet Comprehensive strategy.
Compared to the fourth quarter of 2012, revenue increased 8%. The sequential growth was almost entirely a result of higher revenue in our patient services segment due to volume growth across all products, coupled with a stable average selling prices. As we anticipated, our product and research services segments were flat sequentially.
Turning to gross margin. As a percent of revenue, our margin increased 120 basis points to 60.3% compared to the prior year. Efficiencies in the patient services business and favorable price mix led to a 420-basis-point increase in margin. This was partially offset by growth in the research services segment due to the acquisition of Cardiocore, which carries a lower gross profit margin. The inclusion of Cardiocore reduced margin by approximately 300 basis points.
For the first quarter, our adjusted operating expense increased $1.8 million to $20.2 million, largely due to the addition of Cardiocore. Excluding Cardiocore, our adjusted operating expense was lower, reflecting the operational improvements, which led to a reduction in headcount-related expenses and bad debt.
On a sequential basis, our expenses increased as a result of period expenses that typically occur in the first quarter, including higher payroll taxes and sales and marketing expense. With the increased margin dollars stemming from the higher revenue helping to offset the increased operating expense, we generated positive EBITDA of $2.4 million for the first quarter. This compares to a loss of $400,000 of EBITDA in Q1 2012 and positive EBITDA of $700,000 in Q4 2012. While we had expected EBITDA to decline slightly in the first quarter versus the fourth quarter, the top line strength, coupled with lower expense, enabled us to exceed our expectations.
Now turning to the balance sheet. We ended the quarter with $18.3 million in cash, which was flat to year end. We typically do see a use of cash in the first quarter due to deductible season, a number of prepayments and the payout of the management incentive during the quarter.
This quarter though, we generated $1.6 million in cash from operations, which was then used to invest in new devices, as well as our new operating system, bringing us to essentially free cash flow neutral. We continue to make progress on reducing our accounts receivable, causing patient DSO to decrease to 49 days, a 7-day decline compared to year end 2012. Our consolidated DSO was 56 days, a 5-day decline from year end. Going forward, as our patient DSO has declined to what we believe to be more the industry norm, I will only refer to the consolidated company DSO.
Finally, before I turn the call back to Joe, as we discussed on our year end call in February, in 2013, we expect to see top line growth across all segments, led by the research services segment. As a reminder, due to the nature of the research services business, there is variability in the distribution of the segment's revenue over the course of the year. The CardioNet Comprehensive strategy should continue to bolster our patient services volume, but we do expect some 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 full year 2012.
We continue to expect to be EBITDA positive for the full year and see year-over-year growth. Thank you. I will now turn the call back to Joe.
Joseph H. Capper
Thank you, Heather. For those of you who have been following CardioNet over the last few quarters, you've witnessed several significant changes in the composition of the company as we have put the business on more solid footing and established it as a healthcare technology and services platform, capable of sustained value creation.
To review, our acquisition of Cardiocore late last year provided us entry into the large and growing research services business. This was a watershed transaction for CardioNet as we're able to acquire a high-quality asset that is well regarded in the clinical research field. Additionally, Cardiocore provided us with much-needed revenue and payor diversification and a $1 billion market opportunity.
Furthermore, as I've discussed earlier, we launched our comprehensive sales strategy for the patient services business and are seeing positive early results. On the partnership front, we formed an alliance with AirStrip Technologies, with the intention of extending the application and utilization of MCOT by interfacing our 2 systems to enhance the data package being delivered to clinicians in a point-of-care setting. We expect to have a working interface by mid summer.
For the creation of our next-generation systems, we formed a multiyear research and development partnership with the Belgium-based nanolectronics research organization, IMEC, and Denmark-based Delta Technologies. Consistent with our desire to more rapidly commercialize an expanded line of state-of-the-art mobile health solutions, this collaboration will couple CardioNet's market-leading software and algorithm set with IMEC's world-class component and system design capabilities. Last, we have recently allocated more resources toward the analysis and development of potential new mobile health markets.
In just a few quarters, we have been able to affect positive change to our business and our future outlook. Clearly, we have emerged as a much different company. We just reported our third consecutive quarter of revenue, EBITDA and volume growth, and we have never been more optimistic about our future prospects.
So in order to facilitate the further execution of our strategy and better position the company for growth, we are now taking the next logical step by creating new holding company structure, under which, we will align our current and future businesses.
In addition to garnering certain functional and economic benefits, we are taking this opportunity to change our company name to one that more accurately describes our business portfolio and focus. As you are aware, the name CardioNet has very positive brand equity within its target market, as do Cardiocore and Braemar. As such, we will continue to market under these brands in applicable markets. However, we have felt for some time that a parent company name with broader market connotations would be more appropriate moving forward.
Going through a name selection process is an interesting exercise as it forces you to assess your true value and how you can best leverage your strengths to create a sustainable growth platform. As we took inventory, the common denominator among all of our businesses was the word telemetry. Derived from the Greek roots tele, meaning remote, and metron, meaning measure, telemetry is defined as the highly automated communications process by which measurements are made and other data collected at remote points and transmit it to receiving equipment for monitoring. As such, the term fairly well captures what we currently do in the cardiology market and how we plan to expand the company.
Given we will remain focused in health care, combining telemetry with the prefix bio, gives us the new company name BioTelemetry Inc. We are extremely excited to begin branding this highly descriptive new moniker, which leaves no doubt as to what to we do. When the new name takes effect later this year, the company will continue trading on the NASDAQ under the same ticker symbol BEAT.
Before I open the call to questions, I want to reinforce a few salient points. CardioNet is not the same company it was a few years ago. Today, we are market-leading telemetry provider, participating in a multibillion per year market for advanced patient monitoring. By repositioning the company in this fashion, we have opened the door to countless growth opportunities, making this a very exciting point in time for the company. That being said, much work remains. While we continue to streamline our operations with the intention of gaining greater efficiency and scalability, we must build around those core strengths which provide us with a sustainable competitive advantage and reduce our focus on those that do not. 2013 is off to a great start, and we are excited about our prospects for the remainder of the year.
With that said, we will now pause and open the call to questions. Operator, we are ready for our first question, if there are any in the queue.
Joseph H. Capper
Operator, if there's no questions in the queue, we'll go ahead and wrap up for the day.
I just want to close by thanking everybody for your continued support and interest in the company. We'll speak to everyone next quarter. Operator, that concludes today's call.
Thank you. If you joined the conference late today, you may listen to the conference on digital replay which will be available from April 23 to May 7, 2013, on (888) 286-8010 or (617) 801-6888, with passcode 17607986. Thank you for joining.
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