Hooper Holmes (NYSEMKT:HH) Q2 2014 Earnings Call August 12, 2014 8:30 AM ET
Andrew Berger -
Henry E. Dubois - Chief Executive Officer, President and Director
Thomas E. Collins - Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Treasurer
Good day, and welcome to the Hooper Holmes 2014 Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Berger of S.M. Berger. Please go ahead, sir.
Thanks. 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 second 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 earlier this morning and is available on our website. You should also have received a copy of the slides accompanying management's presentation this morning, which is also available on the website. Participating on the call today are Henry Dubois, Hooper Holmes' President and Chief Executive Officer; and Tom Collins, the company's Chief Financial Officer. At this time, I'll turn the call over to Henry. Henry?
Henry E. Dubois
Thanks, Andy. Good morning, everyone, and thanks for joining us. When we spoke last, I reminded you that Hooper was now focused on a growing and vibrant market, the Health & Wellness market. We had just moved our headquarters to Olathe, Kansas and we had more to do in our transition. We had just announced our strategic alliance with CRL. And when we spoke last, we reported 38% revenue growth on a year-over-year basis in the first quarter compared to the first quarter of 2013.
As you can see on Slide 3, we are reporting more progress this morning. In the second quarter, we moved even closer to reporting as a stand-alone Health & Wellness business. The revenue and gross margin lines in our financials now reflect only our Health & Wellness business, while Heritage Labs and Hooper Holmes Services are now treated as discontinued operations. Until the transaction with CRL closes, we will continue to incur some transition costs associated with exiting the life insurance sector.
Our strategic alliance with CRL is nearing completion. We are actively working IT integration between our 2 companies and believe we will close the transaction on or before September 2. Once that happens, we will be able to report our business as a pure Health & Wellness company. We closed the sale of our New Jersey property on August 7, adding $2.5 million net cash proceeds to our cash balance. We are reporting today nearly 54% revenue growth on a year-over-year basis compared to the second quarter of 2013. Bear in mind that historically, we receive approximately 60% of our revenues in the second half of the year.
For the second quarter of 2014, we completed 37% more screenings than we did in the second quarter last year. Our price per unit increased in the second quarter 2014, driven by one of our long-term government research contracts. We believe we will continue to improve margins going forward based upon several initiatives that we expect to have positive impacts. All told, we like what we see and the trends are positive.
Now I'll turn it over to Tom for the numbers.
Thomas E. Collins
Thanks, Henry, and good morning, everyone. As you can see on Slide 4, consolidated revenues for the 3-month period ended June 30, 2014, were $6.7 million, an increase of $2.3 million or 54% from the prior year period. Our revenue increase is primarily due to an increased number of screenings. Our Health & Wellness operations performed 37% more health screenings in the second quarter of 2014 compared to 2013. Screenings were also up 35% for the 6-month period ended June 30, 2014, compared to 2013.
As Henry mentioned, revenue increases for the 3-month period ending June 30, 2014, were also driven by annual price adjustments related to one of our long-term government study contracts. Our Health & Wellness business saw 32% gross margin in the second quarter, bringing our year-to-date gross margin to 27%. The improvement in gross margin is a result of operating initiatives implemented towards the end of Q2, as well as the impact of the annual price adjustment previously mentioned. In terms of our balance sheet, our cash balance on June 30, 2014, was $3.1 million with no debt, and working capital of $6 million.
Turning to Slide 5. SG&A expenses for the 3-month period ended June 30, 2014, decreased $0.5 million to $4 million compared to the prior year period. The decrease is due to reduced corporate headcount and lower consulting services. These improvements were partially offset by transition costs and investments in Health & Wellness sales, account management and marketing. Included in SG&A for both the 3- and 6-month periods ended June 30, 2014, were $0.4 million and $1.5 million of transition costs, which were incurred in connection with the relocation of the corporate headquarters to Olathe, Kansas. Transition costs primarily include the salaries of individuals located in the former corporate headquarters, as well as costs associated with moving our IT infrastructure and administrative functions to Olathe and operating the real estate that was held for sale in New Jersey.
Our loss from continuing operations for the 3-month period ended June 30, 2014, was $1.9 million or $0.03 per share on both a basic and diluted basis, compared to a loss of $3.8 million or $0.05 per share on both a basic and diluted basis in the same period of the prior year.
And now I'll turn the call back to Henry.
Henry E. Dubois
Thanks, Tom. As we focused on growth in the Health & Wellness market, we have taken actions to reengineer our cost structure while adding to our cash balance and strengthening customer service. We highlighted 2 of these steps here on Slide 6. As I mentioned earlier, we closed the sale of our New Jersey property on August 7, adding $2.5 million to our cash reserves. And we have formed a strategic alliance with CRL, under which CRL will become our exclusive partner for lab testing services and Hooper will become a member of CRL's preferred provider network for wellness programs.
On these agreements, we will sell the assets and businesses of Heritage Labs and Hooper Holmes Services to CRL for $3.7 million. The agreement is on track to close on or before September 2. Over the last number of weeks, we have made progress on the operational integration between our 2 companies. We are excited about bringing the full range of CRL's testing capabilities to our customers, and we are excited about supporting them as one of their biometric screening providers as they serve their wellness clients. We are already planning screening events with them for the fall season.
Turning to Slide 7. We believe we have accomplished a lot in the first half of 2014. We are nearing the completion of our exit from the life insurance services market. We are focused on Health & Wellness growth. We have reduced both operating and corporate costs. We continue to drive efficiencies and we are growing top line revenues. We welcome being measured on the basis of performance. Here on Slide 7 is the task list we showed you at the end of our first quarter conference call in May. When we spoke to you then, we said we would do many things. We're making progress in each of these areas, and Tom and I are both looking forward to continuing to report our progress.
Turning to Slide 8. The market for screening services is healthy and growing. We are one of the few national providers of these services. Our operations have been engineered to deliver consistent, high-quality services in every city and town in the United States. We believe that gives us a competitive advantage, especially when competing against local and regional players. The number of screenings we have completed in the second quarter of 2014 grew 37% to 103,000 screenings compared to the same period last year, which is the appropriate period to measure against due to the cyclical nature of our business. That growth reflects teamwork with our channel partners to help them win new business.
We believe it also reflects the value of our dedicated account management. Our channel partners don't want a vendor, they want a true partner. They want flexibility, someone who will help them meet their employers' needs. They want someone who will help them increase participation and get more people into screening. That's Hooper. That's us. That's what we do. Over the last year, we have reduced our cost structure, significantly reducing corporate costs. We continue to improve the scale and efficiency of our operations and to expand our national network of health professionals. Our ongoing operations will be further rightsized by our strategic alliance with CRL. Costs associated with maintaining our legacy businesses will be eliminated when that transaction closes.
Turning to Slide 9. We believe we are well positioned as we head into our busy season. Historically, we generate a significant percentage of our annual Health & Wellness revenues in the fourth quarter. That's because many new employer programs could go up during health plan enrollment and many employees will pay less for health insurance if they get a biometric screening. Looking ahead, we will continue to focus on profitable growth. We expect revenue growth to continue, and we expect margin improvements from initiatives now underway. Our strategy is unchanged: work with our wellness channel partners to deliver more screenings for more employers. At the same time, we continue to be excited about the opportunity to bring small- and medium-sized companies the benefits of our affordable screening platform. And we're excited about the opportunity to bring the full range of CRL's testing capabilities to our customers. We continue to look to Cantor Fitzgerald as our partner in exploring opportunities to further accelerate growth.
We believe there are 3 keys to sustainable profitable growth: teamwork with channel partners, exploring new channels and refining our offerings. On Slide 10, you can see the graphic view of the screening market that we have shared with you before. Millions of employee screenings are done each year. Our 2013 share is that small dot on the left. Our channel partners sign up new wellness clients every month. We work closely with them to continue to merit their trust, help them improve their participation rates and win new contracts. Beyond tapping that market opportunity, we are thoughtfully exploring other channels, such as brokers and clinical research, where we've had success in the past. We may also have opportunities at small- and medium-sized companies. Most of these businesses lack the economies of scale to bring wellness programs to their employees. We may be able to work with current and new channel partners to bring these companies the advantages of our affordable screening platform. And we continue to refine our offerings and technology. We're excited about the opportunity to bring the wide range of CRL's lab testing capabilities to our customers.
Looking ahead, our focus remains revenue growth, margin improvements, expanding our services and exploring all growth opportunities. We expect to continue to grow faster than the market. We believe our balance sheet is a good foundation for growth. We have cash, no debt and access to capital.
And now Tom and I would be happy to take your questions.
[Operator Instructions] And there are no questions at this time. [Operator Instructions] And we'll take our first question from Al Shams with American Capital Partners.
I've been a shareholder for a couple of years. I don't follow the company that closely. I don't have a big, big position, probably about 50,000 shares with myself and clients. Do we have any enunciated or announced goals that you can share with shareholders, some stated goals and kind of a timetable for those goals, kind of a yardstick by which we can measure how progress is evolving?
Henry E. Dubois
And as you can tell, we've been going through a significant transformation over the last year as we've been exiting the life insurance sector. There have been a number of things that we've been doing to improve the position of the company to strengthen our balance sheet, to strengthen the outlook on the company. And our main goal at this point is to make sure that we are focused on the Health & Wellness sector, delivering growth and delivering shareholder value. Beyond that, at the moment, we're still working our way through what actual targets could be. But we're really focused on growth. And that's where we are at the moment.
Okay. Do you think you'll need to raise any additional capital, let's say, in the next 4 to 6 months?
Henry E. Dubois
As you can see from our balance sheet, we are sitting on cash. We've just raised capital by selling our building. I think that will give us growth capital. We are now looking at it from a perspective of what capital do we need for growth as opposed to in the past it being to maintain operations. So we're looking at, for this year, to be cash flow-positive. And I believe we're on track to do that.
Good. What about -- I know you've hired Andy Berger. So what is your plan there with respect to getting the message out, getting a wider audience for the stock?
Henry E. Dubois
The Bergers, Andy Berger and Stan Berger, have been working with us for quite some time. And quite honestly, we're quite pleased with the services they're providing. And we are looking at getting that out. We wanted to make sure that we had enough of our way through our transformation before we came out to tell the story. We like to make sure that we're delivering results, and then talk at that time.
Okay. And then lastly, do we have much built-in dilution with respect to executive options and executive compensation packages? Could you talk to that?
Henry E. Dubois
I think it's fairly well reflected in the outstanding share counts and obviously it's always being calculated as we go through our basic and diluted numbers. And as you could see, the prices per share are fairly consistent.
Okay. Well, I mean let's -- what kind of built-in dilution do we have, 10%, 15%, 20%?
Thomas E. Collins
I believe it's less than that.
Okay. And strike prices on average, what kind of strike prices?
Thomas E. Collins
Strike prices for the current management team average someplace in the $0.50 per share to $0.65 per share range roughly.
[Operator Instructions] And we have no questions at this time.
Henry E. Dubois
Well then, I'd like to thank everyone for participating on the call. And we look forward to continue to report progress when we speak with you again the next quarter. Thank you very much.
Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.
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