Electromed, Inc. (NYSEMKT:ELMD) Q3 2018 Earnings Call November 14, 2018 9:00 AM ET
Kathleen Skarvan - President and Chief Executive Officer
Jeremy Brock - Chief Financial Officer
Kalle Ahl - The Equity Group
Greetings, and welcome to the Electromed Inc First Quarter Fiscal Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Kalle Ahl of The Equity Group. Thank you. You may begin.
Thank you, Matt, and good morning everyone. Electromed's first quarter fiscal 2019 financial results were released yesterday after the market closed. A copy of the earnings release can be found in the Investor Relations section of the company's website at www.smartvest.com.
As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company's results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected.
The words believe, expect, plan, intend, estimate, anticipate, should or could, and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking.
In addition, any projections as to the company's future performance represent management's estimates as of today November 14, 2018. You should not place undue reliance on these forward-looking statements. We expressly do not undertake any duty to update forward-looking statements whether as a result of new information, future events or otherwise. We ask that you please refer to the company's SEC filings for further guidance on this matter.
Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Jeremy will present a summary of the company's first quarter fiscal 2019 financial results, and then we'll open the call for questions.
Now, it's my pleasure to turn the call over to Kathleen.
Thank you, Kalle. Good morning, everyone, and thank you for joining us to discuss Electromed's first quarter fiscal 2019 financial results. This quarter our net revenue grew by approximately 15% year-over-year, driven by strong home care sales and a significant increase in institutional sales. Sales in our home care segment grew roughly 14% reflecting an increase in referrals generated by our expanded field sales force, as well as ongoing operational excellence from our best-in-class reimbursement team, which produced a greater referral to approval percentage once again.
While a smaller piece of our overall mix, institutional sales grew by 42% as we increase sales volume with our new dedicated institutional sales leadership, and our strategic focus on penetrating integrated delivery networks. By increasing our institutional market share, we also support home care growth since often the brand used in the hospital setting is a default brand when discharging a patient with high frequency chest oscillation therapy or HFCWO. Awareness among physicians and patients of the prevalence of non cystic fibrosis bronchiectasis or NCFB within the COPD population is growing evidenced by the increased number of published studies, white papers and editorials in clinical journals referencing this disease.
This expanded awareness is critical to our long-term success, as well as educating physicians and patients of the benefits of HFCWO, which is provided predominantly in the home setting via devices such as Electromed's SmartVest. Consistent therapy adherence with SmartVest has been proven to improve patient quality of life, reduce exacerbations or lower respiratory infections, and reduce overall healthcare utilization and costs. We believe our SmartVest Airway Clearance therapy is ideally positioned as the US healthcare system moves away from fee-for-service towards value-based care.
We estimate that more than four million individuals in the United States have NCFB and the pool is growing approximately 9% per year. Of those with NCFB, we believe approximately 633,000 could benefit from HFCWO therapy yet only an estimated 66,000 have been treated with a device like SmartVest today. These numbers suggest a significant, long-tailed growth opportunity and bolster our confidence for achieving double-digit organic growth over the next few years especially given the investments we made in our sales force in fiscal 2018.
Keep in mind, our sales force grew to 49 at the end of the quarter compared to 41 at the end of first quarter fiscal 2018. We are benefiting from a greater number of feet on the street for sure, and believe that we can do even better as we execute on key sales force productivity initiatives to drive a higher level of referrals per Clinical Area Manager or CAM.
In this regard, we are emphasizing a greater frequency of visits to targeted clinics and hospital system that more actively prescribed HFCWO therapy versus greenfield locations with limited sales activity. We also are focusing on higher quality referrals that improve our referral to approval conversion rate. Digital marketing initiatives to increase the awareness of SmartVest directly to patients. Leadership co travel with new sales employees in the field, upgraded sales training programs, enhanced Sales account planning tools and better CRM utilization all remain key elements of our sales productivity plan.
Why are we so positive about revenue growth? We are confident in the market potential for SmartVest serving more patients with NCFB to improve their quality of life. That is why we initiated investments during fiscal 2018 to support this growth opportunity. We are focused on achieving double-digit revenue growth, being strategic with incremental spending and continuing to maintain careful spending control to ultimately produce improved operating leverage. Stronger bottom-line performance and enhanced cash flow generation also provides us with greater capacity to innovate. And when the time is right expand in existing or new markets and channels.
Finally regarding the bottom line, I am pleased to report this quarter our operating net income nearly doubled compared to the same period last year. Cash flow from operating activities also remains strong. All- in- all, we started fiscal 2019 on a solid note. And I'm enthusiastic about our ability to produce profitable growth going forward. As always, we remain committed to creating value for our shareholders and are dedicated to improving providing our patients with superior customer service, innovative HFCWO devices that are user-friendly, comfortable and designed to drive greater compliance with prescribed treatment schedules.
I will now turn it over to Jeremy for a more detailed discussion of our financial results. Jeremy?
Thank you, Kathleen. Good morning, everyone. Our net revenues in the first quarter of fiscal 2019 increased 15.4% to $7.3 million from $6.3 million in the first quarter of fiscal 2018, driven by strong growth in our home care sales. Home care sales increased 13.8% to $6.7 million primarily due to an increase in approvals and referrals which were driven by improved reimbursement processes and a higher number of field sales employees. Institutional revenue increased 42% to $419,000 from $295,000 in the prior year quarter. And international revenue which is not a strategic growth area for Electromed totaled approximately $135,000 compared to $101,000 in the prior year period.
Although quarter-to-quarter sales variability can be expected due to the nature of our business, we anticipate double-digit revenue growth in fiscal 2019 as we execute our organic growth strategies. Gross profit increased 18.2% to $5.5 million or 76.2% of net revenue in the first quarter of fiscal 2019 from $4.7 million or 74.4% of net revenue in the first quarter of fiscal 2018. The increase in gross profit resulted primarily from an increase in home care revenue.
Operating expenses which include SG&A as well as R&D expenses totaled $5.3 million or 73.4% of revenue in the first quarter of fiscal 2019 compared with $4.6 million or 72.8% of revenue in the same period of the prior year. SG&A expenses increased 16.7% to $5.3 million in the first quarter of fiscal 2019 from $4.5 million in Q1 of fiscal 2018 primarily due to higher payroll and compensation related expenses and increased travel, meals, entertainment expenses which were driven by the expansion of our sales force.
R&D expense is totaled $68,000 in the first quarter of fiscal 2019 compared to $71,000 in the prior year. Operating income in Q1 of fiscal 2019 doubled to $199,000 from $99,000 in Q1 of fiscal 2018 primarily due to increased gross profit, driven by higher revenue which was partially offset by the costs related to the expansion of our sales force.
Net income before income tax expense rose to 124% to $212,000 in Q1 of fiscal 2019 from $95,000 in the prior year quarter, and in Q1 of fiscal 2019 income tax expense total $58,000 compared to $14,000 in the same period of the prior year. Our effective tax rate for the first quarter of fiscal 2019 was 27.3%compared to 14.3% in the prior year period. Our net income increased 91% to $154,000 or $0.02 per diluted share in the first quarter of fiscal 2019, up from $81,000 or $0.01 per diluted share in the first quarter of fiscal 2018.
Now moving to the balance sheet and operating cash flow. Our balance sheet at September 30th, 2018 included cash and cash equivalents of $7.7 million. Long-term debt including current maturities of $1.1 million, working capital of $18.9 million and stockholders equity of $23 million. Cash flow from operations in the first quarter of fiscal 2019 totaled $303,000 compared to $328,000 in the first quarter of 2018.
Overall, we remain pleased with the direction our business is heading and this concludes my remarks. Operator, we can start the Q&A question of the call please.
If there are no further questions. I would like to turn the floor back to management for any closing comments.
Thank you all for participating on the call this morning. We look forward to reporting back to you in February when we will release our second quarter fiscal 2019 financial results. Have a good day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.