Q3 2019 Earnings Call
Welcome to that Intricon Corp, third quarter 2019 earnings conference call. At this time, all participants are in listen only mode meters. We will conduct a question answer session and instructions will follow at the time.
Anyone should require assistance during the conference. Please press Star then the number here and you touched on top.
As a reminder, this conference call is being recorded I would like to turn the conference over to your host Ms. Leigh Salvo Investor Relations. Please go ahead.
Thank you.
Before we begin I would like to propel the mark with the customary safe Harbor statement.
Today's conference call contains certain forward looking statements. These statements are based on the current estimates and assumptions into cost management and are subject to uncertainty and changes in circumstances. Given these uncertainties you should not place undue reliance on these forward looking statements.
Actual results may vary materially from the expectations contained in today's call important factors that could cause such differences include among others. Those set forth under the headings risk factors and managements discussion and analysis of financial condition and results of operations and our 10-K filing for the year ended December 31st 2018.
With that I would now like to introduce Intricons CEO , Mark Gorder for view, the company's third quarter performance.
Got long, but the company COO and CFO will then cover the financial results in more detail and we'll open the call for your question.
Thank you Lisa Thank you everyone for joining our call today.
As we enter the final quarter of 29 team our teams remain vigilant that executing against the priorities. We established at the beginning of this year.
Short these priorities <unk> want to meet the volume ramps that trial.
To to pursue business development opportunities in our medical Biotelemetry business.
Leverage our core competencies and diversify our revenue base.
Three to seek partnerships with best in class entrance in the emerging otcs aggregate market.
Sure.
When we expanded our direct sales initiatives with hearing help express well tempering, our marketing and advertising programs.
Importantly, I'm confident that we're on the right path to expanding our existing market opportunity you're not to core businesses.
Nickel biotelemetry on hearing health.
As we have much of the past expanding into new markets for our strength as a micro literature device producer allows us to enhance the mobility and effectiveness of body more devices is key to our continued progress.
I'd like to take the next few minutes to provide recent highlights both of our core businesses.
Outlook for the remainder of 29.
Encouragingly, we anticipate seeing momentum of continuous glucose monitoring adoption and increased penetration in international markets commencing in the next few months following clearance in Germany, and other targeted EU countries.
We expect you initial ramp up the gradual with further acceleration than 2020 as customer support including patient education rolls out.
Looking further out a recent interactions with the leadership team at Medtronic diabetes.
Provide us with even more confidence in a to Z hasn't well relationship the exciting developments in the pipeline.
In addition to our commitment to Medtronic. We also made at the priority this year to seek market expansion opportunities that could best leverage our medical Biotelemetry design development and expanded manufacturing capabilities.
As we've commented on previously or other builder medical business has been expanding primarily due to our medical coil expertise.
Our new business development efforts have identified surgical navigation as a perpetual gulfmark or it can capitalize on our core technologies, including medical costs.
We intend to leverage or Microcor with value added Mike Coyle assembly capabilities by investing in strategic platforms addressing surgical navigation.
Typically in the areas of interventional Pulmonology electrophysiologist.
Leveraging the coordination of apartment miniature electronics precision molded and medical coil technologies into markets that have high growth rates in steep technology curves overage significant potential for entercom.
We look forward to sure in more details as these opportunities unfold in the coming quarters.
The manufacturing front, we've completed the required validations and quality qualifications that are new facilities and equipment.
And are now waiting for specific customers to complete their internal validation that qualification.
Upon completion of this we will be operating at approximately 60% capacity.
Excess capacity positions as well.
To be anticipated demand over the next several years.
Turning to our circuit core business second.
No we have made many strategic decisions and material adjustments throughout the year to ensure we are best positioned with the right resources infrastructure.
To be a significant player and new market opportunities.
Well result from proposed changes in legislation that opened the hearing aid market you over the counter shells.
We believe will come from the start of meaningful change in hearing health in 2020.
Given the high cost of hearing is today.
We are excited it's like a tremendous potential this change could have for hearing impaired consumers as well as open the market up to those with mild to moderate hearing wash the can't justify the current high cost of your age.
We estimate the change of hearing health regulation will create a 3 billion dollar addressable hearing health market or the U.S.
Why enabling greater penetration up to 30 billion plus hearing impaired individuals that remain uncertain today.
Additionally, we are beginning to see international opportunities with boats that are seeking alternative sourcing bottles and nontraditional delivery options.
While we continue to monitor legislative progress.
We are making exciting progress with potential partners as well as selectively targeting direct sales opportunities.
As we've highlighted in the past I go to market strategy and hearing health includes three channels.
Indirect and consumer direct to consumer kind of legacy OEM.
I'd like to take a few minutes cover some recent recent updates in each of these channels.
Starting with indirect and consumer.
In the third quarter, we once again experienced amenable meaningful decline in revenue associated with the restructuring activity within a large insurance customers hearing health business.
We now believe that this providers model his pivoted towards a more traditional brick and mortar approach to hearing health.
But no longer aligns with our partnership strategy approach to reaching the end customer.
As a result, we expect revenues related to this agreement will continue to diminish throughout the remainder of 2019.
Despite the short term revenue decline, which would allow us to real reallocate our resources efforts to enhance our ecosystem, our consumer centric ecosystem of care a target other opportunities with the potential better long term results.
Partnerships remain a key component of our growth strategy in this segment.
We're especially excited about another recent developments potential business market leaders in the consumer electronic space, who have we are aware.
Oh for scoring.
Health care initiatives.
Establishing these partnerships will enable us to be a dominant early participant in this emerging valued based hearing health market.
We are confident that we're taking the right steps to best aligned Intercard with high pool filed partners.
Value our ability to deliver superior hearing age self healing software and customer care can the U.S. Mark.
Turning to our direct to consumer business. We continue to see hearing help express is a long term opportunity that are closely monitoring expenses as we optimize our model for entry after the over the counter market to directly reach hearing aid customers.
Importantly, once the final ODC hearing aid Act regulation has been issue.
We will be able to deploy technology and customer support to enhance gel efficiency.
Customer satisfaction.
And finally legacy already revenue, which represents products sold into the traditional hearing health market continued to decline as anticipated.
I am confident that our long history.
Unique ability to deliver state of the our technologies, including wireless digital hearing AIDS and sophisticated so sitting software solutions.
With our customer care competency positions us to be a significant partner and participate in participant in this exciting and expanding mark.
In summary, we have an exciting range of growth opportunities ahead of us.
We have taken many of the necessary steps to best position Entercom for success in those markets.
In addition to our long term partnership with Medtronic diabetes group.
We're making significant pipeline progress identify partners.
That could benefit from our medical biotelemetry expertise.
It will enable us to expand into new growth markets.
With the upcoming legislative changes that promise to opens the door to affordable over the counter adhering to answer the U.S. or hearing health business segment has the opportunity to see meaningful growth.
Well indirectly through partners and directly to the on consumer.
[laughter] supporting this opportunity, there's a tremendous leadership team and a strong balance sheet.
Now I'd like to turn the call over to Scott Scott to discuss our financials and guidance in more detail.
Thank you Mark.
Turning to our financial results for the 2019 third quarter as Mark noted, we reported net revenue of 26.9 million a decrease of 9% over the prior year period.
My core business segment revenues that are medical biotelemetry business for the quarter were 19.1 million, 1.3% decline year over year and represented 71% of total revenue.
This decline was largely due to the continued impact of the timing of Medtronics ongoing global commercial product launch for the 670 G insulin pump system.
Partially offset by increased sales to our medical <unk> customers.
And our hearing health business segment total revenue in the third quarter was 6.4 million.
Down 22.5% give you the part of your third quarter.
This decrease was largely due to the continued decline in sales to a large insurance customer that mark referenced earlier in his comments.
Within the hearing health segment.
Indirect and consumer revenue was 2.4 million direct and consumer revenue through our hearing help express business is 1.5 million and legacy OEM revenue was 2.4 million.
Third quarter gross margins were 25.2%.
Down from 31.6% in the part of your third quarter.
Gross margins will constrain primarily due to lower volume.
As well as ongoing validation and qualification expense and excess capacity related to the recent manufacturing expansion to meet the anticipated higher volume requirements of our existing and future customers.
Operating expenses for the third quarter were 7.2 million compared to seven billing in the prior year period.
Increased stem from higher noncash stock compensation expense 640000, and severance expense.
Slightly offset a decrease in advertising expense and our direct and consumer business.
We are committed to closely monitoring costs and gaining efficiencies in this segment of our hearing health business as we refine or sales model to better align with emerging market opportunities.
We posted losses attributed to shareholders of 290000 or three cents per diluted share versus net income attributed to shareholders of 1.9 billion were 22 cents per diluted share.
For the 2018 the quarter.
Turning to our guidance due to lower than expected diabetes revenue.
Revenue loss from our largest insurance customer and the impact of our conference reduction in advertising spend to be cheap.
Now expect full year revenue.
2019 to range between 112 million in 139.
Full year 2019 gross margin is expected to range between 26.5% in 27%.
Now I'd like to turn the call back over the operator, so mark and I can take questions.
[noise], ladies and gentlemen, if he has a question at this time, Please press star and the number one on your telephone keypad.
Yeah.
If your question asked and answered or you see this 30 user so from the Q. Please press the Penske. Thank you.
Our first question, it's from John from Stifel. Your line is open.
Great.
Thanks, guys. Good afternoon, thank for taking the questions.
Scott in the first one or maybe too is for you just to start with the gross margins right I think I'm just surprised at the magnitude the decrementals I'm just sort of running some rough math to revenues were down about 2.7 million.
Year over year, the gross profit was down almost an equal amount into arguably that's with your highest.
Gross margin business be hearing you know a greater percentage of sales in Threeq, you 19 versus Threeq. You 18. So can you just talk about the Threeq to 19 gross margins in light of the additional capacity and maybe most importantly, how we think about it going forward.
Yeah, John I think a challenge was looking 2019 over 2018 was the expansion of our manufacturing capacity.
In 2018, well that began kind of mid year, but by the time that we had that fully up and staff was towards the end of the first part of 2019, so a large part of the.
Titration and margin.
Well it was from the additional overhead cost we had as part of our new.
Expansion and manufacturing footprint.
If you also look at little bit of the makeup of.
The.
Margin year over year slightly lower on the direct and consumer business.
Which had some some minor impact.
Okay.
Got it I guess, a follow up a little bit more offline and then maybe I'll, maybe I'll just expand on that John I think importantly in market on this is once we have.
The final validation from qualifications at the new facility in the equipment.
From our customers will be it roughly 60% capacity. So we have the ability to leverage our infrastructure at which point, we'll see a lot of the additional revenue volume that was anticipating in 2020 to be into pulled the margin one.
Okay. I guess is a quick follow up to that the validation qualification from your customers is that anticipated Scott by the end of this year 2019, or 120 or what do you expect that to occur I would I would say over the next two quarters shot.
[noise] [noise] and then maybe just a couple of follow ups the lower guidance. It looks like roughly three to 4 million at the top line is there way to just even approximately parse that out of what is attributable to the medical business versus what you what earmark for hearing it I guess within hearing it's most likely in that.
Hi, DTC business.
Correct I'd say about two thirds of it's coming from the medical side 30 goods coming from the hearing health side.
Okay.
All right and then Mark for you you alluded to some other medical opportunities Pulmonology erupts electrophysiology the timeline for those to occur I mean, you seemed a little bit more detailed this quarter relative to past quarters, I know I wherever that you have to be designed into so.
Some of these platforms and as a result, it doesn't occur overnight, but I'm just due to you sort of calling out specific opportunities. Maybe you can talk to when do you think these might take hold.
Good question, Josh I think if I look historically, a little bit at what we've been doing and the other medical side.
We have spoken briefly about our expertise and medical coils, which are used as sensors and interventional catheters.
And we have made good strides over the last three years.
Developing good customer relationships with several players who are in that market because weve.
Then you recall also that we brought that flux. Your end I think roughly at the end of 2018 with a focus on.
New business development in.
In the medical area based on our core technologies and since we have made significant progress in medical coils odd one of the first areas that Doug.
Evaluated was the opportunities in the international catheter market as specifically, we filed that we have done very well and.
International Pulmonology add some because to some degree at Electrophysiologist, where we have already.
Developed business relationships with customers in those areas and since we were farthest along there it seemed very appropriate that that would be a great area to look at how do we how do we create a platform that we can build to serve customers in that market, where we can add not only our medical.
Coils, but value added assemblies.
With that generate additional upstream revenue in that market. So.
The reason, we've given that more detailed knowledge that we see that as that.
Emerging opportunity it seems to have a very good growth rate you had a very steep technology curve that.
Offer significant potential for us so I think we will be giving more and more detail out to the to the street over the next few quarters as we.
Become a clear as to how our strategy will be to enter that market more forcefully and then make a continued investments.
Okay, great. Okay. One last one from me guys and that I promise I'll hop back in the queue, but you also talked a little bit more put some more details around some partners for indirect and consumer hearing calling out consumer electronics market a high level, how how when a partnership with one of those players look how would it be structured and what I.
And by that is.
Would it be exclusive where you were sort of tied to one company. When you expect multiple agreements to someone won an exclusive because they want to keep out are there are potential competitors and consumer electronic openings are you guys far enough along and your discussions where you can conveyed to us how thats structure would look thanks for your time.
That's a great question, John I don't I want to give a little nuance to that I don't think we're far enough along to give a detailed description of how such a partnership might work, but I can tell you that we're talking to partners.
Yes the.
That are complimentary to us that are in the market now people like your goal that we've talked about in past calls we're looking at partners that provide benefits.
Through various plans that could potentially partner with our direct to consumer business insurance companies and the like we're also looking at branding partners, which include major retailers.
Drug stores people like Walgreens Cvs Specsavers in the UK.
The interesting thing is that all of these potential partners can be served by the core technologies that we're developing.
Both on the product side out our self fitting software remote care as well as the things we're doing in the direct to consumer business like a pick pack and ship customer service and tell audiology, it's clear that different partners will value different components of that array of.
Core technologies, so it's not clear to us yet exactly how that will emerge, but we do feel that the investments. We've made are putting us in a position to talk to multiple partners and position ourselves in different ways and I think we have to be prepared to pivot, depending on which opportunities appear to be the most.
Contagious and I'd say, it's premature at this point that I think some clarity over the next 12 to 18 months will.
We'll be possible.
Does that answer the question John .
It does look great guys. Thanks for your time.
Our next question, it's from Andrew So much from B. Riley FBR. Your line is open.
Hey, good afternoon. Thanks for taking my questions just to start off can you. Let me know what a depreciation amortization cash flow if operation that capex was for the quarter and then.
While you're pulling that I'm just looking at the guidance does it take into account ending beneficial happening with Medtronic out to you at all it seems like they announced some progress with reimbursement being established.
In Germany, but.
But like should we just view things as brilliant holding pattern right now until the 780 g.'s out or is there some upside that we should be thinking about internationally with the 670 and interim.
Thanks, Andy This is Scott I'll take the first part of your question.
Amortization depreciation was 820000 for the quarter.
Cash flow from operations was negative 323000.
Capex for the quarter.
Was 1 billion 420000.
As it relates to the guidance for the full year.
What typically we've seen after medtronic gets approvals in certain geographic areas. There's a period of educating the medical community educating their installed base and typically that takes several months. So as we started thinking about.
How we were going to view the rest of the year.
Basically discounted anything.
From the international market as it related to Medtronic now with all that being said.
Mark and I.
In our executive team had the chance to interface with the leadership team the diabetes group.
Last two weeks ago and I can tell you they are very bullish on their business, both domestically and internationally.
So we are we're excited about where they're cutting.
We're excited about how they are executing on the private pipeline overview that they provided at 88 and we think this is going to be a great catalyst.
As we start thinking 2020.
Okay, Okay, great and then as it relates United when they put out there announcement related to the epic integration and acquisition they noted that.
Including access to hearing AIDS that updated like an 80% discount to traditional devices.
What is what they were targeting can you just reconcile how they're able to maintain that kind of a discount relative to traditional brick and mortar while going into brick and mortar not leveraging a a either an online or.
Direct to consumer platform similar to what you.
Andy This is mark I think the they're going to be offering a whole range of services at I. I doubt that all of them will be 80% discount there probably would be some 80% discount so not because they the epic model works through the traditional channel and they provide a they provide subsidies.
For the consumer but in many cases.
They're buying to the more expensive devices, Scott you have anything to add to the health I think that's that's what we'll see and I think.
It's likely that you'll forget about models is typically what these large trends providers do which will get access to the networks and then begin to squeeze.
Costs out of that very rapidly.
So ultimately it will probably somewhere between the 80% in something a little bit higher.
Okay, Okay that makes sense and then.
As it relates to sell fitting the did there was a couple are actually just one.
Item posted on the Federal Register I know, we're still waiting for draft guidance. It come out, but does that self fitting a documentation the code of a federal regulations provide you with a enough confidence or enough of an ability to file your five 10-K for the self fitting aspect and kind of move.
Forward, knowing that that's likely part of the guidance.
Yes, It does Andy that's a good that's a very good comment because the initially both said.
US received.
Did overall approval from the FDA for their so fitting technology, but there was not a lot of.
Documentation forthcoming is exactly what was approved and that that reference you just made clarified a lot of things that were involved in the did overall approval for both add it clearly.
Gives us confidence that what we're doing with our clinical trial for the self setting technology that we have will be very.
Well received by the FDA I think that okay level. So I'll go ahead, sorry, I just want that that obviously what was posted to the federal Register is important but I also think are one of one discussions with the FDA gives us a lot of confidence on where we're headed with or so fitting technologies well good point Scott.
Okay. Good to hear and just last question for me, it's really related to Oh.
Outside of self fitting now that we have some clarity on that like what are there.
A major points do you really need to get hammered out with the guidance for one.
To understand a the indirect.
Partnerships that can be establish and then two.
For your direct to consumer business or what would you need to see the FDA put out for you to move one direction or another.
Well I think the way the regulation is written if they if they implemented per day per the legislation.
That allows us to bypass the professional and make the channel more efficient and when we talk to these potential partners whether their retail partners.
He see partners et cetera, they're all looking for that clearance because none of them want to get into a regulatory BYD with the FDA, where they're trying to.
Trying to sell our service a device that's clearly a medical device.
So the LTC.
Designation of.
Mild to moderate had no interference from any state are critical.
And I think they're going to go forward exactly per the legislation, which will open the market make it more efficient did drive a lot of innovation.
Okay perfect. Thank you very much a good luck closing out the here.
Thanks, Sam Thanks Debbie.
Yes.
Our next one it's from Kyle both through from Dougherty and company. Your line is open.
Hi, good evening, thanks for taking the questions Keith just following up on the clinical activities to support the self fitting five 10-K applications since.
The Boes hearing aid well I'm, assuming be the predicate when you enroll is many subjects. They did I think it was 125 and then what sort of follow up time.
And endpoints are you considering for that trial to support the application.
The good question I mean.
Is it actually run a couple of different trials.
We don't have to run quite as many subjects as Bose I think we're going to run about 85 subjects, but.
But.
The at the.
The FDA is looking for a.
A trial similar in nature to what posted so.
That requires.
About 85 subjects.
And you know we're we're in the process of organizing that and hope to be starting it shortly and I'm not sure exactly the timing yet because findings 85 subjects will be the.
Yes, the long fall in the town.
Right, it's certainly shouldn't take more than a few months 43 to four months.
Sure and so.
Still kind of on track for potential submission I'd say in Q1 for a mid 2020 approval.
That's what we're trying to do yes, okay.
And then following up on John's prior question with regard to one of your priorities to see partnerships.
In LTC market can you speak a bit more about what you're hearing the appetite is for some of these partners tentative market and specifically.
If we assume that they're in a holding pattern pending the release of this draft LTC regulation, what do you think its potential partner the most Pos and I'm thinking about things such as how that they might define mild to moderate hearing loss or.
Potential clinical requirements for Otcs provide any color here would be would be helpful. Thanks.
I think the biggest issue is that the.
That the regulation allows you to use.
Bypass the professional because a lot of these retailers, they're not health care providers. They are not quite a lot to get into the healthcare business. They're looking for partners to provide that aspect of it but they want to be able to position. These devices in their marketing matrix and be able to.
Sell them without any any restrictions from the FDA. So that's I think that's the thing that's given the positive see it any interference from any state regulation.
Specifications are going to be relatively straight forward. What it takes that's got a mild to moderate losses pretty well, though the.
Documents that that Andy referenced.
Yes pretty spot on what that regulate what that specification, we'll probably look like in terms of output power and gain and all those kinds of things so the.
I think the critical point will be that they want to be assured there is no regulatory hassles.
To dispense this device, though interference from any state agencies sure. Okay. That's helpful. That's it for me. Thanks, so much.
That brings us to the end of securities doesn't have to be Scott I'll now turn the call over to Mr., Mark Gordon for any closing remarks.
Thank you operator, thank you again for joining our call today.
The Intercon team continues to locate and act upon new opportunities that grow and diversify our business.
I would like to thank them as well as our shareholders for your continued support.
We look forward to seeing many of you during the upcoming conferences and marketing trips have agreed evening and thank you for joining our call.
This concludes today's conference call. Thank you for meeting you may now disconnect.
[noise].