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Hooper Holmes (NYSEMKT:HH)

Q3 2013 Earnings Call

November 15, 2013 8:30 am ET

Executives

Andrew Berger

Henry E. Dubois - Chief Executive Officer, President and Director

Thomas E. Collins - Chief Financial Officer and Senior Vice President

Analysts

Matthew Patrick Reiner - Adirondack Research & Management, Inc.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hooper Holmes 2013 Third Quarter Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Andy Berger. Please go ahead, sir.

Andrew Berger

Thanks, George. On behalf of the management of Hooper Holmes, we are extremely pleased that you have taken the time to participate in our conference call. And thank you for joining us to discuss the company's 2013 third quarter financial results and business outlook.

Before I introduce management, I would like to remind everyone that certain statements made during the course of this conference call, especially those that state management's intentions, hopes, beliefs, expectations or predictions for the future, are forward-looking statements. It is important to remember that the company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's annual report on Form 10-K, copies of which may be obtained by contacting either the company or the SEC.

By now, you should have received a copy of the news release, which was issued yesterday after the market closed and is available on our website.

Participating on today's call are Henry Dubois, Hooper Holmes' President and Chief Executive Officer; and Tom Collins, Chief Financial Officer. At this time, I will turn the call over to Henry. Henry?

Henry E. Dubois

Thanks, Andy, and thank you, everyone, for joining this morning. We've gone through many changes since the last time we hosted a conference call. Resuming conference calls has been one of my priorities since I became CEO and I'm dedicated to having an open dialogue with all our shareholders. However, as you may understand, we needed time to undertake the significant changes to our business plan and financial model before we could be in this position to communicate. Now is the right time. 2013 is a transition year. It marks the end of an emphasis on life insurance exams and the beginning of a new focus on healthcare solution, which plays in a very large and growing market.

We also have a new leadership team. I started consulting with the company in January, was announced CEO in April and became an employee of the company in September. We appointed Tom Collins as our new CFO in September, and we are consolidating our headquarters in Olathe, Kansas, which is already home to our Health & Wellness operations and Heritage Labs. With this transition, we will next turn to selling our New Jersey building and further add to our cash balance.

We closed the sale of our Portamedic service line to American Para Professional Systems on September 30. That transaction marked a major milestone for our company. There are complex issues surrounding the accounting for the sale. And as a result, we have not yet finalized our financial statements for the quarter that ended September 30, and we are working with our auditors and financial teams to make sure they are correct. We do not believe our financial statements will change materially from the results we released last night and will be discussed today. We expect to file our 10-Q by November 19.

The Portamedic transaction closed on September 30 and the purchase price added to our cash balance. We retained Portamedic receivables, which as they are collected will also add to our cash balance. And more change is coming as we transition to a lean, health and wellness-focused culture in Olathe. While we have more work to do, I am excited about our opportunities in leading this company forward.

Because of the transaction and the many changes to our company, I would like to focus this call on describing our business, why we are optimistic about our future as we profitably grow revenues and some of the steps we're taking as we reposition the company. However, first, I'd like to turn the call over to Tom to walk us through the Portamedic transaction and review third quarter financial results. Tom?

Thomas E. Collins

Thanks, Henry. As mentioned by Henry, during the third quarter, the Portamedic business was sold to American Para Professional Systems, or APPS, for $8.1 million in cash. There are complex issues surrounding the accounting for the sale. For example, the Portamedic business is now treated as a discontinued operation for the third quarter and the full year 2013, and we need to adjust the comparative period with 2012. We expect to file our 10-Q by November 19. This transaction, which closed on December (sic) [September] 30, was for select assets associated with the Portamedic service line but did not include the accounts receivable. There are 2 $1 million holdbacks that cover indemnification claims and closing adjustments. These holdbacks are expected to be released in 2 tranches, one within 90 days of closing and then the other, 1 year later. As a result of the transaction, Hooper Holmes' cash and cash equivalents totaled $6.7 million at September 30, 2013, with $2.6 million of borrowings outstanding under the company's $10 million credit facility. Hooper Holmes' accounts receivable were $16 million at September 30, 2013.

Now for our third quarter financial results. Again, let me remind you, we are presenting our results with Portamedic treated as a discontinued operation. The company's consolidated revenues for the third quarter of 2013 totaled $11 million, representing an 11% decline from $12.3 million in the third quarter of 2012. The company recorded a net loss of $1.7 million or $0.02 per share for the third quarter of 2013 compared to a net loss of $2.2 million or $0.03 per share for the third quarter of 2012. The net loss for the third quarter of 2013 includes $0.4 million of restructuring charges, $3.5 million of a gain on sale of Portamedic and a loss from discontinued operations of $2 million. The net loss for the third quarter of 2012 included a $1 million loss from discontinued operations. For the 9 months ended September 30, 2013, consolidated revenues were $34.2 million compared to $35.8 million in the comparable period of 2012. The company's net loss for the 9 months ended September 30, 2013, totaled $9.3 million or $0.13 per share compared to a net loss of $10.9 million or $0.16 per share for the 9 months ended September 30, 2012.

The results for the 9 months ended September 30, 2013, includes $0.7 million of restructuring charges, $0.2 million of asset impairment, $3.5 million gain on the sale of Portamedic and a loss from discontinued operations of $4.7 million. The net loss for the 9 months of 2012 included $0.4 million of restructuring charges and a $5.5 million loss from discontinued operations.

Now for the service line basis. Heritage Labs revenue totaled $2.6 million for the third quarter of 2013, a decrease of approximately 16% compared to the third quarter of 2012, primarily attributable to a decrease in revenue from the company's life insurance lab testing service. For the 9 months ending September 30, 2013, Heritage Labs revenues totaled $8.6 million as compared to $10.1 million for the same period in 2012. Hooper Holmes Services revenue totaled $3.4 million for the third quarter of 2013, a decrease of 13% in comparison to the prior year period, primarily due to reduced demand for the company's medical record collection services, and partially offset by increased revenues from the company's underwriting service. For the 9 months ending September 30, 2013, services revenue totaled $11.4 million as compared to $12.5 million for the same period in 2012. Health & Wellness revenue totaled $5 million for the third quarter of 2013, a 6% decline from the third quarter of 2012. This decline reflects lower volumes from one customer, which we understand made changes in their business systems which reduced demand. We expect orders from this customer to rebound in 2014. Growth among all other Health & Wellness customers during the same period increased over 40%. For the 9 months ending September 30, 2013, Health & Wellness revenues totaled $14.2 million or an 8% increase compared to $13.2 million for the same period in '12.

Upon completion of the sale of Portamedic, our liquidity position has improved, and we anticipate cash flow from operations to improve without the Portamedic service line. Additionally, our 3-year loan security agreement with Keltic Financial Partners remains in effect and provides flexible financial support as needed. We feel we have built a good working relationship with [indiscernible] Keltic. Looking ahead, we expect to end 2013 with a strengthened balance sheet. We believe we have sufficient liquidity to move the company forward to profitability. And with that, I'll turn the call back to Henry.

Henry E. Dubois

Thanks, Tom. We are today a very different company than we have been. We're now focused on a rapidly growing market. Today, Hooper Holmes mobilizes a national network of health professionals that provide on-site health screening, laboratory testing, risk assessment and supports clinical research. Our services help our clients benchmark employee populations, monitor them for improvement and drive down health care costs. We serve leading wellness and disease management companies, health plans, insurers, employers, government organizations and academic institutions. With the vast amount of change underway in the delivery of health care services, we expect to benefit from our nationwide capabilities and diverse offerings of products and services. We're excited about the future of each component of our core lines of business which include Health & Wellness, Heritage Labs and Hooper Holmes services. I would like to address each one of the business in turn.

Let me start with Heritage Labs. Our dedicated lab testing capabilities have been focused on the life insurance market but also play a key role in our Health & Wellness business. During this challenging transition, our lab has retained its life insurance testing contract because it offers our customers value, reliability and personal service. We continue to add value as we work to differentiate our testing services. Each year, we test millions of samples, and in cooperation with reinsurers, we have developed data analytics that we believe will benefit underwriters. Our system combines biometrics with lab value. It gives underwriters risk scores that identify the hidden healthy [ph] applicant, along with those cases that need more study. Of course, the value of lab testing extends beyond the life insurance market. As I mentioned, lab testing is an important part of our Health & Wellness value proposition.

Venipuncture blood testing is a gold standard for employee screening. More than half of the wellness screenings we complete each year require a blood draw. We typically report results to our clients within 48 hours, which we believe to be one of the fastest turnaround times in the industry.

We also design and assemble sample collection kits for our Health & Wellness business and other companies. That means we can design reliable sample collection processes that are easy for our health professionals to follow. Our national network of health professionals, combined with lab testing and kit assembly capabilities, give us the tools to meet the unique needs of research universities and government customers and provide customized service with the results.

Our next line of business, Hooper Holmes Services, qualifies and interviews insurance applicants by compiling health histories and collecting medical records. We also provide outsourced underwriting services to several large insurance companies. Our call center and risk assessment services are in demand from wellness clients that want call center scheduling in addition to online scheduling.

Now let's focus on our Health & Wellness business. Although Health & Wellness is still in start-up mode and early in its life cycle, we completed approximately 258,000 screenings through September of this year, with the fourth quarter, our busiest, still to come. We see the Wellness business as the cornerstone of our growth. Our Health & Wellness revenues come from more than 50 clients who specialize in wellness and disease management programs. Our wellness sponsors depend upon renewals from their employer clients and from winning new business, that drives their demand for our screening services. Tom mentioned that our year-to-date Health & Wellness results were impacted by changes one of our customers made in their business systems that reduced demand from them by approximately 51,000 screenings this year. He also mentioned that we expect that customer to rebound in 2014. It's worth noting that growth among all our other Health & Wellness customers increased over 40% during the same period. With this growth, we therefore screened 11,000 more participants this year than last, even after accounting for the reduction in volume from that one company. We serve a mix of solid, proven companies, as well as health plans and new entrants that are growing rapidly. Overall, we have seen strong Health & Wellness revenue growth for the first 9 months.

Let me take a step back and talk about what we do in the market we play in. We provide biometric screening for our customers. We screen large population groups of any size, anywhere in the country. We screen study participants for government and university research. Many of our screenings require blood testing and we process millions of samples annually in our lab. And we do this as an early stage Health & Wellness business against the backdrop of the total health care market in the United States. U.S. spends more on health care than any other country, more than $7,000 per capita and over 19% of GDP. More than 75% of these health care costs are due to chronic conditions. These chronic conditions hurt performance and productivity in the workplace. When an employee is in poor health, it's the employer who ultimately bears the burden. That's why more large employers are adopting Health & Wellness programs. The Harvard Business Review has reported that firms realize almost $3 in savings from every $1 spent on employee wellness. The National Governors Association has highlighted a return on investment of $2 per $1 spent. A health risk management program in Oklahoma saved $2.30 for each $1 invested. A recent meta-analysis report reported an average 3:1 return in the form of reduced medical costs over 3 years and a 2:1 return in reduced absenteeism costs over 2 years. And according to a RAMP [ph] study, Health & Wellness programs can reduce monthly medical costs by as much as 20% per participant or $75 per employee, per month. So as you can see, the actual return observed may vary across studies, but all show significant returns for the employers for the dollars that they invest. Small employers are following behind, though slowly, because they cannot match the economies of scale that the large employers apply. They do not have the same access for affordable, economic training and wellness program. We believe this could be a significant market for us, as we seek to deliver -- to develop programs to address it.

And where wellness programs are in place, most target weight loss and smoking cessation. Participation rates are generally low, usually under 50%. This creates more market opportunity for the kind of screening, risk assessment and support services Hooper Holmes provides. [indiscernible] we screen large employers, we look to help small businesses benefit from proactive wellness programs and we help to boost participation rates by encouraging incentives and improving employee communication. The U.S. health care market is growing rapidly.

The Affordable Care Act has several positions designed to expand health promotion and prevention. And there is funding available to bring wellness programs to small businesses with fewer than 100 employees. The ACA also describes preventative and wellness services that certain health plans must offer as of 2014 and recommends a range of preventative services that must be covered without cost share. Our current business has only scratched the surface of the opportunities with large and small employers. And we have the right capabilities to succeed. We have an established, growing and expansive network of health professionals in all 50 states, which enables us to provide our -- drive value to our customers. We look at our value proposition as providing coverage, consistency and compliance. We have a presence everywhere our services might be required. And our network is constantly expanding, thanks to a dedicated team of recruiters. We also have strong supply chain capability to stock, calibrate, pack and ship everything our people need to deliver accurate health screening. And we carefully monitor and measure the results. We track the professionalism and the attendance of every health professional in our network. We monitor performance to ensure we follow the right protocol for the right client. We track each participant and every screening event in our system. And we are constantly refining our metrics to improve operational performance. We believe this attention to the details of the Health & Wellness event from set-up, staffing and follow-up host event makes our event efficient and effective.

We continue to focus our attention on our long-term strategy and believe we have the necessary assets to make the most of our immediate opportunities while positioning the company for long-term growth.

Overall, I believe we are well positioned to complete our transition to a lean, start-up culture focused on health care solutions. We have already made significant operational progress this year, but we still have much to do.

Our cost structure was designed to support a very different business. We will continue to improve our organization and build operational efficiencies. We expect this process to continue through 2014. We are always open to input from our shareholders. We evaluate all ideas and suggestions, but we also see the need to prioritize our resources to focus on those items we believe are likely to yield good results for our shareholders.

Our priorities right now are to complete the transition, improve operations and focus on Health & Wellness. We are also evaluating a number of options pertaining to our corporate structure, our branding and so on, and we will implement those changes that make sense. We are carefully considering the risk, timing, cost and return of any future investments.

So we've covered a lot of ground today. I've described our Health & Wellness business in the context of a rapidly growing U.S. health care market. We've highlighted our assets, including our national network of local health professionals and our unique supply chain capability. I described how Heritage Labs and Hooper Holmes Services complement our focus on health care solutions. We've shared some of the efforts underway to transition the company to a leaner, more efficient team in Olathe. While we have much more to do, we are confident that we are moving in the right direction. While, as I've said, our longer term strategy is still under review, we believe we can build a profitable $100 million annual revenue business over the next 4 to 6 years. That's an annual growth rate of 12% to 18%. The vast majority of our growth will come from the Health & Wellness business line. We believe that should be achievable considering the overall growth of the health care market. As I mentioned, most of our Health & Wellness revenues come from over 50 wellness and disease management customers. If our customers are not successful, we are not successful. Thus we need to continue to diversify our revenues and work with our partners, which we have been working to do over the last number of months. This requires bringing more wellness companies on board and entering new markets.

From my conversations with many of you, I'm sure you would like to know how we will do in the fourth quarter and in 2014. However, I'm not in a position to give specific projections today. But I can say that we believe we have reasons to be encouraged about the future. One reason is that we see new, large employees -- employers signing up for our customer services. For example, we've just finished screening 13,000 managers for a national company that just began offering health incentives to its employees. This is a very good predictor of the future. They've had very high participation rates because their CEO and their senior team were fully behind the program. Based on the success of that program, it would not be unusual for us to screen the rest of that population and of thousands of more participants in 2014.

We also work closely with another one of our customers to help them win a new contract to screen over 60,000 new participants in the first half of 2014. Of course, revenue doesn't count until you get the check. But we believe that to be another -- that is another good predictor of the future. And perhaps the best predictor of the future is our performance. We need to start on time and end on time, staffed by professionals with accurate data reported 48 hours after the screening. I am very pleased to say that our customers have been giving us the highest marks. In some cases, more than 20 percentage points better than the competition. We think that measurable difference is another important predictor of the future. And now Tom and I would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Gregg Lampole [ph], who is an investor.

Unknown Shareholder

I have 3 actually, and the first is, can you just walk me through the net cash position of the company, post the transaction and restructuring? Just want to make sure that I have a good understanding of the pro forma net cash position.

Henry E. Dubois

Sure, Gregg [ph]. Thank you for the question. Let me first note that we filed our preliminary financial results last night and the press release. And we will file our 10-Q with more details by November 19. With that said, our net cash position as of September 30, 2013, is $6.7 million in cash. And we had $2.6 million in debt outstanding at that point in time.

Unknown Shareholder

And then if I add the $2 million that's coming 90 days and then another within -- in the coming year. Is that, correct? Is that a pretax number, post tax? Just so I can get a sense of if I bring that to current.

Thomas E. Collins

Sure. Those actually -- then just, and again, the details will be in our 10-Q. There are actually 2 individual $1 million holdbacks. The first is due within 90 days of the closing which was the deal at 9/30. And that will be subject to adjustment. And the second is a $1 million holdback due 1 year -- due 1 year after that, also subject to adjustment and any indemnification.

Unknown Shareholder

Okay, so it's difficult to handicap what those amounts would be based on the potential adjustment?

Thomas E. Collins

At this point in time, we have -- we've put both as $1 million on our balance sheet. We have -- we believe fully in collectability.

Unknown Shareholder

Okay. And then second question just in 2 parts. What do you estimate the annual public company costs to be for the company? And the second part of the question is, why aren't you doing everything possible to move immediately to eliminate these costs?

Thomas E. Collins

So we're evaluating, as Henry said earlier on the call, we're evaluating all of our options as we reposition the company. And we're doing whatever we can to continue to reduce cost, so I'll say that first. As for specific costs related to being a public company, we're not in a position today to address that.

Unknown Shareholder

And then I guess in terms of time frame for coming to conclusions, can you give us any guidance there, and that would be helpful just so we can understand when we should expect an outcome of these decisions that are being made.

Henry E. Dubois

Sure, Gregg [ph]. I mean, as Tom said, we're evaluating all these options as we look at repositioning the company. A lot of analysis is going on, the different initiatives are being reviewed, and it is an ongoing opportunity for improvement. As I said in my prepared remarks, we will be implementing those that are cost effective, that provide the appropriate return. And as they happen, it's not going to be like a big bang, it's going to be a rolling implementation.

Operator

[Operator Instructions] And our next question is from Matt Reiner with Adirondack.

Matthew Patrick Reiner - Adirondack Research & Management, Inc.

Can you go through one more time with me the -- you mentioned the number about all other customers were up 40%. Was that on a year-to-date basis and was that a screening percentage or was that a revenue percentage?

Henry E. Dubois

That's our screening -- the number of screenings and the amount of revenue are very highly correlated, as you can imagine, and that 40% year-on-year growth was between -- was a comparison of the first 9 months of 2012 versus the first 9 months of 2013.

Matthew Patrick Reiner - Adirondack Research & Management, Inc.

Okay. So -- and so obviously, so that one customer had to be pretty significant to make the overall.

Henry E. Dubois

Yes, that one customer was a very significant customer. And to be fair, he still is or they still are a very significant customer. They just had some challenges in some of their business systems. But as Tom said, and I also repeated, we believe they will be bouncing back fairly strongly next year.

Matthew Patrick Reiner - Adirondack Research & Management, Inc.

And when you say next year, is that, like, early next year? Or are we looking at [indiscernible]

Henry E. Dubois

As you know from our financials, we have a fairly cyclical nature in our revenue base. We generate historically about 35% to 40% of our revenue comes in the fourth quarter. And so, yes, it's across the year, but let's keep in mind we do have a cyclical nature. Cyclical nature tends to be driven by the renewals of medical insurance policies in the employer base.

Matthew Patrick Reiner - Adirondack Research & Management, Inc.

Okay. I guess -- so I guess that lends to the difficulty -- I mean, it sounds like -- I mean your fourth quarter tends to be the busiest, but you have a large customer who's probably not going to be as busy this fourth quarter as usual? Am I reading that correctly?

Henry E. Dubois

Well, yes. We're not really getting into a specific customer prediction -- projections on the fourth quarter, but we're feeling you've got a pretty accurate understanding there.

Operator

[Operator Instructions] And I'm showing no further questions. I'll turn the call back to management for closing comments.

Henry E. Dubois

Well, thank you, and I, again, I would like to thank everyone for joining us on the call today. We look forward to speaking again in the -- as we continue to progress towards what we're calling the new Hooper. And with that, I'd like to thank everyone for joining.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.

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