Q2 2020 Earnings Call
Ladies and gentlemen, thank you very much for your patience then the conference operator, this letting everybody knows that we will we be getting the conference in about two to three minutes. Once again. Thank you very much for your patience will be starting in about two to three minutes. Thank you.
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Please note today's event is being recorded I would now like to hand, the conference over to Chris witty P.L. each Investor Relations Advisors. Please proceed sir.
Thank you and good morning, everyone on the call with me today exact Parker, President and Chief Executive Officer, Kathryn Johnbull Chief Financial Officer.
The company's earnings release, and Powerpoint presentation are available on our website under the Investor Relations page.
I mean I went to provide a brief safe Harbor statement, which has also shown on slide two other presentation.
This call May include forward looking statements that relate to the company's outlook for fiscal 2020 and beyond.
These forward looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements.
Please refer to the risk factors contained in the company's annual report on form 10-K, and then there are other filings with the Securities and Exchange Commission.
It does not undertake any duty to update any forward looking statement.
On today's call, we'll do everything both GAAP and non-GAAP financial measures.
A reconciliation reconciliation of our non-GAAP results chart reported GAAP results is included in our earnings release any investor presentation on deal Ages web site.
President and CEO Zach Parker speak next followed by CFO, Kathryn Johnbull after which we'll open it up for questions with that I'd now like turn the call over This act. Please go ahead.
Thank you, Chris and good morning, everyone.
Welcome to our second quarter conference call.
Of course, the world has changed quite drastically since we began 2020.
But the Oasis posted solid results in the face to face of these challenging economic times.
If you'll turn to slide three let me begin by providing a high level overview of our financial performance.
Some color around the outlook for the rest of fiscal 2020 to 2020.
The company posted revenue of 54.8 million for the quarter.
A new record.
Since our restructuring.
Reflecting the positive contribution of asked <unk> of the S. Three acquisition as well as our organic growth across the company.
Well, our second quarter is often strong from a top line perspective.
This year's performance was helped by an additional demand for mail order prescriptions. Another program services, reflecting the current Kobin 19 environment.
Operating income rose to 3.8 million in the second quarter.
And we posted EBITDA of 5.6 million also a new record.
We generated 3.5 million of operating cash in the quarter and as previously noted paid down 3 million of our senior debt in January.
Catherine discuss cash flow and our other debt position more in a moment.
I'm also pleased to announce that during the quarter.
The veteran Affairs organization Council as previously issued request for proposal for the pharmacy services under our our CE Mark umbrella contract.
As you May recall. This RFP included in additional requirement that the prime contractor would be service disabled veteran owned small business, which we would have precluded us from continuing to perform as a prime contractor.
[laughter] after many months of consideration and analysis the government determined that it would change the requirement and restart the solicitation process at a later date.
Well, we do not yet know exactly how or when the revised procurement process will proceed.
<unk> does expect its current contract for these services to be extended.
[noise]. This remains highly valued work to us and we look forward to participating in the future process.
As we adjust to the current economic conditions and the various repercussions from the onset of Kobin 19.
We're doing everything possible to safeguard the health of our employees and our customers and our investors can find more information about this topic on our website or in our 8-K filings also be happy to address a any of those specifically during the Q a nice session.
We see many opportunities to leverage our technology enabled healthcare solutions and help bring relief to our country.
If you look at slide four we show our portfolio of National mission critical operations.
And the solutions that are well suited to the challenges of our time.
Through the various agencies in markets that we serve where help in the U.S. attack. The Kobin 19 challenge and improve the lives of millions as.
As you can see on the slide we're involved in a plethora of programs that help that the health care for veterans communicate health care strategies, and emergency information and assess medications as well as potential vaccine.
I'm very proud of the work that we're doing in this arena.
And during the in particular during this about this volatile time in our nation's history.
We're proud of our people for their hard work and their commitment to D. L age and the agencies that we serve.
Turning to slide five I want to shed some light on a few very specific examples of the work I just mentioned.
[noise] village has many contracts in place across various agencies, including the National Institute of Health.
Which is primarily to assess potential medications and compiled data on drug efficacy.
As part of the rapid mobilization to search for potential cures and vaccines related to Kobin 19.
We have pivoted, our infectious disease activities to prioritize this pandemic.
I'm sure that many of you have already read about the ongoing clinical trials for run disappear hydro hydroxy Clark win and other synthetic medications that are in the news.
[noise], leveraging our clinical trials network and our strong in house team.
Our preliminary analysis, which is sponsored by the National Institute for Allergies, and infectious diseases has shown.
That rim disappear does accelerate the recovery for patients with advanced Cobot 19.
[noise], we think that.
Yeah. This is especially important work.
That will really demonstrate our ability to provide these kinds of services that would help us in the future.
These analyses provides clear evidence that the efficacy of these therapies that may literally mean differential for life or death between millions of Americans will continue to be in our portfolio.
Well, we're not sure how these results how the results of these studies well in the and the impact of future covert 19.
We are clearly in the right place to make a different far class and our nation in future work.
In addition, we've seen growing interest across the board for our technology enabled solutions and well known expertise and health driven data analytics.
We see incremental growth opportunities that to be a and cross HHS.
The D.A.J. Defense Health agency, C.D.C. and NIH.
As seen from our current work on Kobin 19.
We have longstanding customer relationships with many NIH Act agencies.
Again, including the National Institute for Allergies, and infectious diseases.
And we're well positioned to assist Dr. Falk she's organization across an array of initiatives.
We're bidding on several contracts that leverage the company's leadership in this arena.
Including also our Tele Health solutions program management, and and Big data analytics applications, and we expect rapid decision, making on so some of these activities that are tied to the pandemic.
The need for reliable.
And accurate research testing and analysis has never been greater than now.
As our government in energy and industrial like race to develop medical treatments in vaccines to battle this urgent public health catastrophe.
Now turning to slide six I'd like to remind our shareholders again the de alleges Infinera bike cloud solution is now available on the fed ramp marketplace, the central portal for the government cloud offerings.
Said wrap which stands for the federal risk in authorization management program.
And it didn't get in also indicates that federal customers that deal H. has undergone a security capabilities assessment and meets the need enhanced security requirements of the civilian agencies as well as department of defense.
We're now able to ensure the confidentiality.
Integrity and security.
The health data in a very fast and reliable manner.
Infinera, but then a buyer cloud our secure cloud based platform allows us to provide agencies, what the data storage and access options that they need in a secure environment do they have to provide the analytical tools to do their work.
We believe that this platform as a service marketplace would bolster our new business expansion in the secure data analytics market.
Before turning the call over to Kathryn.
Just want to wrap up by stating that delays is proving once again to be a very strong and stable company. During these kind of volatile times.
We continue to provide mission critical services to a variety of well funded government agencies and the value of our diverse.
Technology enabled platforms has never been more clear.
This is very consistent with our strategy and this translates to a steady somewhat predictable outlook, while many in our industry seem to struggle.
Again delay chest strong margins and strong cash flow.
And were strengthen we're strengthening our balance sheet by paying down our senior debt faster than required with no repayments now required until 2220 22.
Our borrowing capacity in tax benefits and low capex requirements provides substantial liquidity to sustain the business as we look forward.
We take the cobot 19 pandemic very seriously.
But also know that our operating model, our port program portfolio and industry expertise make us a somewhat unique provider critical services. During these times of me.
While safeguarding our employees, we continue to work diligently with many core customers.
And to get Americans through this tragic turn of events and lead the way to a brighter tomorrow.
There was always a way forward and delays just prior to improve the lives of these amid millions of Americans.
As FDR said.
The only limit to our realization of tomorrow, we'll be our doubts today, let us move forward with a strong and active phase.
So be strong and be well with that I'd now like to turn the call over to our Chief Financial Officer, Kathryn Johnbull Kathryn.
Thank you backend good morning, everyone. Thanks for joining US we're pleased to report another solid second quarter.
Turning to slide seven we posted revenue for the three months ended March 31st 2020, a 54.8 million versus 33.8 million in the prior year second quarter revenue variance reflects the impact of our acquisition of S. Three last June.
Absolutely 18.7 million coming from that transaction as well as strong growth across our other operations. Our second quarter results benefited from higher mail order demand from our VA programs.
<unk>, which more than offset some minor called did related reductions for programs requiring travel.
Turning to slide eight income from operations Rose to 3.8 million for the fiscal 2022nd quarter from 2.3 million last year, reflecting operating margins up 7%, 6.9%, respectively. The greater operating income reflected increased revenue with stronger margins even in the.
Base of higher amortization of acquired intangibles from the S. Three transaction.
DNA rose to 6.3 million in the second quarter from 4.5 million last year, but declined as a percent of revenue just 11.4 million from 13.3 in 2019.
The decline as a percent of revenue was due to greater operating leverage and the timing of some business development activity well, it's always difficult to pin down the exact timeframe. We do expect that business development expenses will be higher inc. quarters, three and four.
We reported net income of approximately 2.1 million or 16 cents per diluted share versus one point threemillion or 10 cents a share last year. The company recorded 8.9 million tax provision this second quarter versus point 5 million in fiscal fiscal 19.
Reflecting higher higher pretax net income and interest expense was also point 9 million in fiscal 2014 versus point 5 million last year the year over year increase in interest expense was due to higher outstanding debt balances in recognition of the S. Three transaction, we continue to pay down debt as expeditiously.
We as possible as our view further in a moment.
Turning to slide nine EBITDA for the three months ended March 31st 2020 was 5.6 million versus 2.9 million in the prior year period, reflecting the F. Three acquisition and improved operating leverage as a percent of sale EBITDA rose to 10.2% this quarter versus.
8.5% last year, a reconciliation of GAAP net income to EBITDA is in our earnings statement and in the back at this presentation.
Slide 10, once again illustrates the progress we've made and reducing our senior debt since the transaction in 2019.
Hi reflected in the presentations, our total debt position at the quarters and we've continued our practice of using operating cash to pay down senior debt and as of today, we've paid down 19 million of senior debt.
An additional 4 million 60 ended the quarter.
And 19 million since the S. Three acquisition in June of 2019.
Our second quarter cash generation was impacted by the integration of the financial systems, but since that's complete our outstanding receivable backlog has decreased with strong collections in April in early May which has a great start to Q3 from a cash flow standpoint, looking forward, we anticipated debt balance up between 42 and 40.
5 million at fiscal year end.
Repaying our debt not only strengthens the companys financial position of course that entered it reduces our interest expense improving our bottom line results.
As mentioned previously we are well in that we are as of today no further debt repayments required until September of 2020 tail.
This concludes my discussion of financial statements with that I would now like to turn the call over it or operator to open the call for questions.
Thank you.
We'll now begin the question and answer session.
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Our first question today will come from Ken Herbert with Canaccord. Please proceed with your question.
Hi, good morning, Zac and Catherine congratulations on a really nice quarter.
Thank you can greatly from yep.
I hope everybody is well what's starting these challenging times I just wanted to first asked.
Historically, Catherine you've seen a nice step up in gross margins from the first have to the second half of the fiscal year I'm wondering with with the different mix style and an S. Three how should we think about gross margins into the third and fourth quarter.
Yeah, I think I think we will be pretty consistent with the second quarter and maybe slightly better. We are of course, which as you mentioned going to see stronger contribution from de da program as that as the volume has increased therapy, which well in gross or absolute growth Mark.
Second is one of the lower gross margin rate parts of the business on the other day and we do think that.
The contributions from the business acquired will continue to grow as we expand on on the contracts. It that discussed in his comments, so where we are continuing to plan towards a 21% to 23% gross margin. We you know we delivered 21.6 this quarter and I think for planning purposes.
I'm looking at around something similar to that to around 22 for the year or for that for the remaining quarters of here.
Okay. That's helpful.
Yeah, Great news on on the seem up there and the change in contract structure is it is it two questions around that first when do you expect a sort of any formal.
Recompete process under sort of the revised structure and then second does you think about your other be a work I know there's been some debate as to whether the other contract streams would follow the proposed seamap structure, but now they backed away from that do you expect you don't expect any changes in the other other streams I would imagine as a risk of a set aside.
Sure. Yes, we are a start with your second question with regard to whats in the pipeline we've been.
Really.
Very actively focused on that work, which is not which we believe is not subject to set aside.
There are certain opportunities of course, where we were going to lean and on a couple of set aside projects, where they where it makes sense for us strategically.
Bolt on additional capabilities.
So it will continue to be a part of our new business pipeline every indication is that.
That we see no really strong prime opportunities in the future.
For de La Chen and again also an opportunity to four for some set aside work too.
With regard to the.
The schedule.
On the new solicitation a revised solicitation.
So difficult to tell it's really too early to tell there've been some some some changes of course in some of their.
Some of their organization as they're looking at the at the.
At the what to do with the new solicitation quite frankly like many other acquisition shops, the pretty much all hands on deck for things associated with over 90.
To support our veterans, so we suspect that with what's going on in the pandemic It will probably slide things to the right.
A bit so we're seeing.
No no impact to that of course, the remainder this fiscal year and best estimates would probably say we would continue through a fair amount of next fiscal year as well.
Well that's great.
And just finally, if I could in light of Oh, obviously, the everything was cobot 19.
Clearly got a.
Very well positioned portfolio now with with the addition of S. Three can you provide any metrics around.
Maybe quote activity or pipeline opportunities that you're seeing in light of the pandemic and I know I can appreciate it's still early and there's just a lot going on right in many different directions, but.
Anything you can you can comment on on [noise].
Just the bid activity levels in response without without thinking about from business, maybe but but how are you seeing this opportunity evolve.
Sure. So you know there's there's a couple of ways in which we have been engaged first and foremost when whenever something this this time sensitive quite often they require companies like ourselves to pivot our resources.
From existing tasking areas to devote Vince devote our resources on the current.
Substantial amount of the work we have done has been in that vein right. So we'll have folks under the direction of or.
Our chief scientist and others.
Really reallocate some of our epidemiologists and how we purpose, our clinical trials and labs and things of that nature. So thats been the first part of it right. So that they don't have to wait through an acquisition cycle same time, we've had and I want to stay in the order of about a dozen bids right. These bids are four.
Were largely for the center for disease control and NIH.
There are some that may be coming also from some other countries for look and support they were entertaining as well.
As you might imagine some of these are small turnkey quick turns right and we've won.
A couple already.
And there will be relatively turnkey opportunities and then as as things start to stabilize and we start to get a handle around the type of therapeutics.
And the type of vaccines that may start to mature that's one of the government can then start to take a look at what's going to be our approach to outreach and what's going to be our additional approach to now gather data and information.
From those trials and studies and move into phases phase twos and threes. So they will continue as we've seen for previous EPAM epidemics and Pandemics.
Continually evolve with some short term quick turn items, and then level set into more sustainable.
Activities later.
So what we'll know more over the course of this next quarter with regard to the quick turns and then we'll.
Of course be able to talk little bit more about what the future. It looks like you know this is clearly as happened as is.
This kind of work goes this is clearly.
Virus is not going to go away.
You are completely anytime soon.
Continue to be doing work on on on other legacy viruses, including this you know HIV and others.
As well as the impact that they have on chronic diseases. As we described in our and our presentation and then protection for certain populations such as our veterans in those most most vulnerable I think there's going to continue to be some studies around the most vulnerable and of course in this case is not only our seniors.
But for those in underserved.
Areas in the country and particularly in the minority community and so there'll be a number of we think spent on.
Once we get through this initial phase will be pretty well positioned to support going further.
[noise] exact appreciate all the color. Thank you very much in great quarter again.
Thank you very much thanks, Ken.
As a reminder, if you wish to ask your question. Please press Star then one.
Our next question will come from Chris Pliska Noble capital. Please proceed with your question.
Hi, good morning, and thank you.
Graduations on order hi.
I have two question.
The.
The a revenues up 12.6% year over year can you give a little granularity on what drove that in the sustainability of that increase please.
Well, we think it is sustainable there's there's a couple of things in play right. Now one is there has been just standard organic.
Increases in demand to support for the a from my.
Pharmaceutical standpoint.
In addition, as Katherine alluded to a little bit less.
Late in in the quarter.
In March we started to see some impact relative to.
Over 19 as well.
It is a challenging work environment. So there's some volatility.
Across our workforce to to make sure we can see those demands but.
We do think it's indicative of what's going to be sustainable for for some time to come.
Certainly over the next.
Several quarters. So again, you just got a piece of it.
In in Q2.
But we do expect see continued expansion in in the upcoming quarters as well.
Well, we'll we'll get an idea about where that led to is have a better idea I think by the time, we get to the end of this fiscal year, but we clearly see its growth mode.
Well Katherine anything to add to that I think that's exactly right and there are some things that.
Obviously, the effect of cold that our pervasive and so at one of the holiday knock on effects of that for the VA is that they're obviously trying to specialty distance within their medical treatment facilities, a military treatment hospitals, and so they're steering work that otherwise they would have fulfilled their inside the hospitals, having hit route through simops.
There's a there's a natural.
Just.
Okay. Gen transition up work over to the VA facilities are over didn't seem optical on behalf of the eye and as we mentioned earlier I don't see those practices of trying to minimize.
Traffic through this facilities curtailing anytime very soon so we do we expect that to be sustainable not to mention of which I think it. It's a it's a very cost effective way to managing the business I think once that traffic is steered that way we expect at all it will sustain.
Thank you very much and then.
Just I think you touched on this in response to an earlier question, but specific to S. Three that revenue increase.
$1.4 million.
Thank you had said previously that you thought you see some impact from cobot. So.
As it.
Any of the 1.4 million increase specific to new work relative to the virus.
No no it's really a that's really related to the timing of two particular studies that we already had in play before the.
Currents of the cobot transactions as Jack mentioned and it's it's very not on its very traditional and Barry Barry expected that right now the cobot support is really tree Arash work and it's a pivot of current resources on current contracts to really focus on a priority basis uncoated support the sustainable.
Incrementally or efforts from carpet will come a little bit in small pinpoint kind of activities in the balance for this fiscal year, but the long term longitudinal.
Analysis of the impact of covered on long term other long term chronic diseases and this sort of studies.
Projects that would have to be completed that data that were probably 18 to 24 months away from that because naturally our government customers are prioritizing the tree Arash response right now.
Okay very good thank you and congratulations again on a good quarter.
Thanks for calling and Chris.
Our next question will come from Gary Heffernan.
Walter listed please proceed with your question.
Hello, Exacloud Kathryn.
Hey, your our performance has been admirable and thank you very much for all the hard work that are you running employees are done here.
Great. Thanks for your support.
I guess I guess, perhaps best towards Kathryn.
Interested to understand.
Your positioning your philosophy towards debt and cash.
Certainly paying down the debt at the rapid rate that you.
We have and providing yourself some cushion as to when the next.
Principal payment is due is.
It's comforting.
But then there's also the question where many management teams right now are allowing cash to build on their balance sheet, if possible as opposed to making early debt payments becomes cash inherent is better than a.
Cash.
At the bank with a promise so can you.
Give us your thoughts as to how you're approaching that too.
For your statement here.
Expecting projected year end debt balance down to 40 to 45 versus leaving.
It at the 55 level and just accumulating a cash balance on the balance sheet of that that differential.
Sure. Thanks for the question, Gary we do have available to us after that first of all we generate strong operating cash flow. So I expect that to really sustain my operating needs going forward I don't expect to being a net borrowing mode, but but if I did have a gross required need for cash I've got access to review.
Offer that I can I can dip into its a 25 million dollar revolver I think I've needed. It may be three times as we've gone through the transition and consolidation of our financial system. So and it's currently sitting at a zero balance. So I've got a lot of capacity there for borrowing and I've got a committed credit credit agreement with the lending group.
That provides the formula for borrowing under that so I don't feel particularly compelled that to accumulate cash.
Because I think I have ready access to cash needed to fund operations, if operating cash flow for whatever reason is not sufficient 'cause because of the growth rate.
So I do I have heard that view I definitely have heard people talk about borrow.
Hoarding cash balance and even drawing down on lines of credit borrowing my whole revolver and all those things are available strategies to us, but but I think we have a given now that you got visibility we have into dirt durability of our revenue and the demand for our services and the customer requirement.
I feel we are able to responsibly continue.
Supporting debt reduction even as we manage operations through this challenging time and Gary I would echo your I think observation that.
And a lot of my peer to peer companies.
A lot of my fear.
Meters certainly looking at that.
The pros and cons given today's environment.
Requirements under.
At the government Federal government has just issued to try to provide additional protections during periods where.
Many of our companies are really really struggling our peer companies are really really struggling where they don't have the ability to still continued to provide services to their clients. We are considered a central.
Essential organization under these areas and not everyone. It does so.
And conditions like this it anticipating conditions like this it would have been great for those kind of companies to taking a different position right as you've described relative to cash.
Creating a larger cash.
That position.
But as Katherine indicated we've we've got a couple of hedges.
Already in place for that we do have designs on continuing to.
Organically and acquisitive look at things over the course of the next year to strategically and we think there's a good balance for US right now we're very minimum risk.
So shaded with our cash position.
Thank you in regards to the $25 million revolver, which as I said zero drawn. It currently could you just to give us idea of what banks that is a establish through and what the maturity date on that revolvers.
Yeah, it's actually linked with my my term credit through the banking. The consortium led by first National Bank that supported Rs. Three acquisition. So as part of securing that new financing that we are committed to some termed out as well as the revolver to complement that they both have a maturity date at in June.
24.
That's great.
Once again, congratulations on a great quarter. Thank you very much willing to work.
Okay.
Thank you Gary good to hear from Gary.
We have no more questions in queue at this time and this will conclude our question and answer session. I would now like turn the conference back over to Mr. Parker for any closing remarks.
Thank you and just to the everyone on the call. We really again appreciate all of your support continued support and interest in the company.
As you as you may be aware I think last time, we chatted with introduced a couple of investor conferences that were.
Right around the block.
As is consistent with our company experience.
We are moving to yeah, we're operating in a very highly telecommuting mood.
And of course, encouraging all of our employees to continue to respect the social distancing guidance from across the country as such.
One or two of those investor conferences have been.
Counseled, one council and the others deferred.
So we'll continue to give you keep you posted on the updates on those we do look for an opportunity to really add some the depth and color around the business.
If it looks like they're going to go.
Be deferred outside too much outside of this fiscal year, we may very well do a stand up stand up a town Hall Road show kind of conference ourselves just give you additional color around the kind of questions. You've had today and then what we're going to see in the maturity of that pipeline in the relative near term so stay.
Hey tune and again, we thank you for your support.
Stay safe be Blessed and we will talk soon bye for now.
The conference has now concluded. Thank you very much great attending today's presentation you may now disconnect.
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