Q3 2021 Electromed Inc Earnings Call
Greetings and welcome to the electro Med, Inc. Third quarter fiscal 2000 of 21 financial results Conference call.
At this time all participants are in a listen only mode of <unk>.
<unk> and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I'll now turn the conference over to our host Kelly all of the equity group. Thank you you may begin.
Thank you Diego and good afternoon, everyone.
The electric Mats third quarter of fiscal 2021 financial results were released today after the market close.
A copy of the earnings release can be found in the Investor Relations section of the company's website at Www Dot smart <unk> Dot com.
The company has asked me to remind you that some of the statements that management will make on this call are considered forward looking statements, including statements about the company's future operating and financial results implants.
Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected.
Any such statements represent management's expectations as of today's date, you should not place undue reliance on these forward looking statements and the company does not undertake any obligation to update any forward looking statement for any reason, even if new information becomes available or other events occur in the future.
Please refer to the company's SEC filings for further guidance on this matter.
Joining us from electro med this afternoon, our Kathleen <unk>.
President and Chief Executive Officer, and Mike Mccourt, Chief Financial Officer.
Kathleen will begin with some opening remarks, after which Mike will present, a summary of the company's third quarter fiscal 2021 financial results and then we will open the call for questions.
Now, it's my pleasure to turn the call over to Kathleen.
Thank you Kelly good afternoon, everyone and thank you for joining us to discuss the electromotive third quarter fiscal 2021 financial results.
This quarter, our net revenue totaled $8 8 million compared to $8 7 million in the prior year period, reflecting a four 2% year over year increase in home care revenue, partially offset by year over year decrease in the institutional home care distributor and international revenue.
Although this winter is a resurgence of new COVID-19 cases, and hospitalizations dampened our homecare revenue in January and February we were pleased to finish the quarter with record monthly home care revenue and record referrals in March.
Exiting the quarter, we benefited from increased patient visits to clinics and greater access for our sales representatives as vaccines started to become more widely administered throughout the country.
During the pandemic, we've continued to benefit from our hybrid virtual and face to face selling approach and from the provision of CMS waiver the temporarily relaxes certain rules for the prescribing devices like ours to the noncommercial Medicare population.
With the CMS waiver, we have experienced an increase in approvals for previously non covered diagnoses and faster approval times for cover of diagnoses.
Non commercial Medicare historically represents approximately 50% of our total payer mix for home care revenue.
We were pleased that CMS recently extended this waiver until July of 2021.
Moving to the institutional side of our business revenue remained challenged due to reduced hospital purchases in light of COVID-19, and precautions related to aerosols spread that said we are very encouraged by this quarter's 43, 4% sequential revenue growth in our institutional segment.
Noted stronger quoting activity that has continued into the fourth quarter.
Institutional strategy remains unchanged, we are focused on fortifying the hospital call point and strengthening our partnerships with those integrated delivery networks.
As a reminder growth in our institutional business should augment our home care revenue as the high frequency chest wall oscillation or HFC CW of brand used in the hospital is often the default prescribed when discharging a patient.
Shifting to the bottom line during the quarter, we generated positive net income of approximately $224000 or <unk> <unk> per diluted share despite managing through ongoing COVID-19 headwinds in the early part of the quarter.
While continuing to make strategic growth oriented at the investments in R&D and SG&A.
Reflecting our optimism about the long term market opportunity for smart best this quarter, we continued to make significant strategic investments.
Ailes marketing infrastructure market research and product development to augment future revenue growth.
We are in the process of recruiting and hiring for additional direct sales employees and a regional.
Manager sales manager, all who should be fully trained and on board in July and we do anticipate continuing our sales force expansion throughout fiscal 2022.
Our planned sales team expansion will incorporate metrics to measure and manage new sales reps to maximize our return on investment.
Over the past years two years, we have benefited from our focus on the sales rep productivity fine tuning of recruiting profile and revised our onboarding and training that has improved our time to productivity and return on investment that's been demonstrated by strong annualized home care revenue per direct sales represent.
Yes.
At the end of our third quarter, we had 48 total field sales employees of which 39 were direct sales.
This compares to 44 total field sales employees of which 37 were direct sales at the end of the prior year period.
We also have added key employees in our marketing and engineering teams to strengthen our capability in clinical and market research and product development, while continuing to invest heavily in direct to consumer marketing campaigns to increase awareness of bronchiectasis and smart best as an effective treatment.
Additionally, we invested in a new revenue cycle management platform, which we deployed this quarter and believe that it will increase overall productivity from our reimbursement team and provided additional analytics to help drive the revenue.
Furthermore, we have invested in comprehensive market research working with leading health care industry consultants to gain insights that will help us make key business decisions such as expanding adoption to physicians not currently prescribing HFC WL growing market share by targeting <unk>.
CW of prescribers not currently prescribing smart best.
And expanding our sales force in the highest potential geographies.
Finally, we continue to invest in R&D at an elevated level to develop our next generation device for HFC WL.
We are optimistic that the strategic investments, we are making in SG&A and R&D today will augment our future revenue growth and position us for increased market share.
Closing this quarter, we once again successfully navigated challenges related to the pandemic and really could not be more proud of our amazing dedication and for all of our employees, whose health safety and wellbeing do remain our top priority we.
We generated two consecutive quarters of homecare revenue growth versus prior year periods and generated positive net income and strong operating cash flow all the way continue to make increased growth oriented investments in SG&A and R&D.
We know that smart vest is associated with the lower risk of respiratory infections, which can be serious or life, threatening and that can read the costly hospital admissions.
Reducing comprehensive cost of care we've.
We've published multiple of outcome studies, demonstrating that bronchiectasis exacerbation rates dropped significantly when using our devices.
We also know that non cystic fibrosis bronchiectasis represents a significant and growing market opportunity estimated at more than 4 million individuals in the United States.
For those of you who know our story well.
We believe that approximately 630000 people with the bronchiectasis diagnosis could benefit from each of CW therapy.
Yeah. The only an estimated 77000 patients in the Medicare population are currently being treated with the device like smart best.
The growing body of clinical evidence combined with the powerful patient testimonials that we retrain. The return routinely hear support the use of our smart <unk> system as the standard of care for individuals with bronchiectasis.
In this context, we remain committed to delivering long term profitable growth, while maintaining the highest standards of integrity respect and privacy with that I'm going to turn it over to Mike for a more detailed discussion of our financial results. Thank.
Thank you Kathleen and good afternoon, everyone.
Our net revenue in the third quarter of fiscal 2021 increased <unk>, 5% to $8 8 million from $8 7 million in the third quarter of fiscal 2020, driven by growth in home care revenue.
Home care revenue increased four 2% to $8 2 million, primarily due to higher referrals and approvals compared to the prior year period.
Institutional revenue decreased 27, 3% to 443000 from 609000 in the prior year period.
Primarily due to of decreasing the volume of devices and disposable rep sold due to COVID-19 has continued impact on hospital purchasing activity.
Home care distributor revenue decreased 36% to of 105000 from 165000 in the prior year period.
International revenue, which is not of strategic growth area for electromagnetic decreased 45, 5% of 76000 compared to 137000 in the prior year period.
Gross profit in the third quarter of fiscal 2021 increased one 6% to $6 7 million or 76, 3% of net revenue from $6 6 million or 75, 4% of net revenue in the prior year period the.
The increase in gross profit percentage was primarily due to a higher mix of home care revenue and a favorable mix of Medicare within homecare.
Operating expenses, which include SG&A as well as R&D expenses totaled $6 5 million or <unk> 73, five per cent of revenue in the third quarter fiscal 2021, compared with $5 7 million or 65% of revenue in the same period of the prior year.
SG&A expenses increased 14, 4% to $6 1 million in the third quarter of fiscal 2021 from $5 3 million in the same period of the prior year per.
Primarily due to increased payroll and compensation related expenses associated with a higher average number of sales and marketing personnel.
Greater temporary resources to assist with systems infrastructure investments and increased incentive payments on the higher home care revenue.
We also incurred higher discretionary marketing expenses related to a direct to consumer marketing campaign, and a comprehensive market research project as well as higher professional fees using.
These increased expenses were partially offset by lower travel meals and entertainment expenses.
R&D expenses increased to 407000 or four 6% of net revenue in the third quarter of fiscal 2021 from 392000 or four five per cent of net revenue in the prior year comparable period.
Primarily due to investment in our next generation product development.
We estimate that R&D expenses will continue to be in the 4% to 6% of net revenue range through the remainder of calendar year 2021.
Operating income totaled 243000 in the third quarter of 2021 compared to 913000 in the prior year period.
Net income before income tax expense totaled 253000 in the third quarter of fiscal 2021 compared to 947000 in the third quarter of fiscal 2020.
In the quarter income tax expense totaled 29000 compared to 294000 in the same period of the prior year.
Our effective tax rate in the third quarter of fiscal 2021 was 11, 5% compared to 31% in the prior year period.
The third quarter of fiscal 2021 included a $37000 the street tax benefit as a result of lower state and federal taxes than what was originally estimated in the company's 2020 fiscal tax provision.
Our net income totaled 224000, or <unk> <unk> per diluted share in the third quarter of fiscal 2021, compared to 653000 or <unk> <unk> per diluted share in the prior year period.
Now moving onto the balance sheet and operating cash flow.
Our balance sheet on March 31, 2021 included cash and cash equivalents of $12 5 million no long term debt.
Working capital of $28 1 million and shareholders equity of $32 9 million.
Cash flow from operations in the third quarter of fiscal 2021 totaled 834000 compared to 889000 in the comparable prior year period.
We are pleased to be debt free and with a strong balance sheet to support our long term growth strategies.
We are currently evaluating options regarding the optimal use of our cash to maximize shareholder value we.
We are still on track to complete our long range planning and review of capital allocation by the end of our fiscal year and plan to communicate our strategy during our Q4 earnings call.
This concludes our prepared remarks, operator, please start the Q&A portion of the call.
Thank you.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press Star followed by the number two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Kyle Bowser with Colliers Securities. Please state your question.
Great. Thanks, Thanks for all of the updates today and congrats on the quarter, maybe I'll start on.
The distributor bucket them.
I know, it's not all of that material, but I I'm just curious as you think about adding reps and building out the sales organization can you talk about you know how youre thinking about layering in new reps is it by geography is it under our new structure do you plan on.
Maybe focusing on the western regions, where you do have a distributor to the to increase margins just kind of curious how you're thinking about building out the sales force.
Yeah, Hi, Kyle and thank you for the question.
The only we entered into the distributor market of about a year and a half almost two years ago. Our intent was to understand if it was the opportunity or a sales channel that could help us to increase awareness with physicians around bronchiectasis and really increase the.
The sales of smart bets and I think that it's still a little bit of the of the pilot yet or to be determined what the what the value may be longer term.
With COVID-19 pandemic it did dampen the the.
The ramp that we anticipated with a couple of those distributors.
So I think we'll have more to report on that next quarter on how that's progressing and what are the direction maybe.
You are right, though we will be looking at alternatives to determine should we stick with some of those distributors in the western region or is it going to be more appropriate for us to put direct reps there. So.
I appreciate the question and I think that is something again as I said, we're where we're in the process of evaluating and we'll have more to report next quarter.
Okay got it I appreciate that and I I think of you mentioned in the prepared remarks there.
Was some kind of nonrecurring expenses as it relates to the market Research project.
Hum.
Is that have to do with hiring a consultant and in kind of evaluating them.
Market strategy for deploying resources in the sales organization or is that internal project just kind of curious.
Yeah. Thanks, Kyle for that question as well so we actually pulled in some of those expenses earlier, we were thinking about doing most of that research in quarter four decided to pull it in because as we anticipated, adding new reps sooner.
We determined that that information would be highly valued as we understand better where to place reps. So this is market research and yes, we did work with a very reputable market research firm that understands claims our claims data they understand how to research and better.
Quantify of market for durable medical equipment or those devices that are placed into the home care market.
And so it's really going to be beneficial since we can actually trace of bronchiectasis claims and also claims for or prescriptions for high frequency chest wall oscillation by physician and that's going to help us understand better where we should position our sales reps from of <unk>.
Prescribing standpoint, but also as a sales leader of mine the previous historically would say fish, where the fish are and this is really going to be beneficial and also because we're really focused on market share gain over the next two to three years.
And certainly beyond but that's really where we're gonna have the the growth engine here for revenue and it's going to be extremely extremely beneficial for us to get to assure that we're getting the maximizing return on investment for those new sales reps.
Okay got it and.
And it and then obviously a very strong quarter in the home care bucket as it relates to Medicare and it's nice to see the waiver was extended at the end of July.
So that the year over year growth has been very strong there for the last three quarters. If we think about the commercial homecare bucket of it.
It's kind of been hit or Miss each quarter I think it was down a little bit. This quarter can you just talk about the dynamics between those two buckets in terms of approval rates and.
You would think that the the Medicare advantage waiver or the Medicare waiver would kind of streamline things on the private side eventually, but I'm just kind of curious how things are going in both of those buckets. Thank you yeah theres the theres a fair amount of complexity related to those those the dynamic between.
The traditional Medicare where the CMS waiver applies vs. In the commercial so the commercial would contain commercial Medicare and just the overall commercial plans and so what the challenge. There is is with access to the clinics still being somewhat limits.
Kid and particularly limited last quarter in January and February it makes it more challenging to be able to collect the requisite medical records that may be needed in order to gain an approval for a a cover of.
Gnosis.
And because oftentimes we are managing that here at corporate the reimbursement team is calling the clinic asking for that but there are situations, where we need of rep to go in and and talk to the medical it assistant and say Hey can you take a moment right now and go go copy of though is in fact.
Some to our corporate office and that helps really trigger and make that happen often more effectively so I really think that there is there's some of that that happened with the commercial here between quarter, two and quarter three changing a little of that momentum, but as we said March was record home care.
Our revenue in referrals, and we're anticipating that that that.
Came across for the for the commercial and the traditional Medicare So hopefully that makes it makes sense got it.
Okay, great. Thank you for all of the updates of for taking my questions I'll jump back in queue here, Hey, Thanks Kyle.
Yeah.
Our next question comes from James Terwilliger with Northland Securities. Please state your question.
Hey, guys can you hear me yes.
Yes, we can hi, James.
Hello. Thank.
Thank you for taking my questions. The first two ones are housekeeping and I may have missed it as I was scribbling notes as fast as I could R&D as a percentage of revenue.
You're guiding two of 4% to 6%.
Is that correct and then you said that should be extended for the rest of calendar 2021 day.
That's correct yes.
Okay, Great and then did you give it.
Any guidance on all of them, maybe the SG&A as a percentage of revenue.
No.
You mentioned that.
And it was a little bit higher than what I was looking for but there were some onetime items in there. So should I kind of look is this a good number to maybe go forward with or or does it decline a little bit of those onetime items, but I know you want to hire salespeople. So.
How should I think of SG&A going forward.
Yeah, I'll take that question James I E. If we look at our history versus these continued strategic investments that'll carry over into the next year, we end and yeah and realizing that when we hire a sales rep often their time to productivity can be anywhere from between six and 12 months depending on.
On the region of the country that they're going into and how strong our brand awareness is so we would estimate that that will be at a slightly you know.
Elevated rate as we move into the next year and it could be a range of 65% to 68% something like that.
Oh fantastic.
Sales reps.
Grow the business.
Okay, great. Thank you very quickly to the balance sheet.
Inventories at the hub.
Kind of down nicely is there anything I'm missing.
There are no women, who would like to make when I look at the and I always feel like going back they've.
Trended down from almost like a 3 million $3 million number down to two point to anything.
Anything going on with the inventory.
I mean to some extent the the $3 million peak was of an inflated number right. When COVID-19 hit we decided to proactively buildup of inventory just to have some cushion in case, we have supply chain issues.
Haven't and so we've been just more proactive about managing the inventory back down to more of our historical limits and even creating a little bit of efficiencies and even getting a bit below our normal levels. So just just a little more proactive management and feeling more confident about the supply chain versus the COVID-19 and the timeframe.
No no. It was I mean, when you hear the supply issues at the smart have a little bit in your in your back pocket and then of course, you know it's nice to see you trend in the nice direction. It's a nice decline and then I know youre growing the business a ours is tweaking up a little bit is there anything of the a or that you would like accounts receivable that you'd like to highlight.
I mean I know Greg.
A lot of our growth here over the last year has been in the homecare channel and obviously, we've had declines in the distributor international.
And institutional markets and even within home care a lot of our growth has come in the Medicare space and that's kind of 13 month payment cycle and it's really high quality <unk>. We were collecting interest at the rates that we always have which is of very high collection rate.
But it does build your AAR balanced when youre growing your business through that channel, Conversely, where obviously declining in our other channels and those typically of zero to 30 day.
Our balance of on it. So it's really just a mix of where we are generating in our revenue growth of our cash collections of continued work on there.
The normal historical ranges for different types of revenue by payer.
Okay, Great. That's extremely helpful. And then lastly, I wanted to go to the comment the that was said earlier about the <unk> and maybe if we could expand on it the <unk>.
Much record I've heard this from some other medical device companies or the medical technology companies that that the COVID-19 debt, we talked about especially in California.
And in December the kind of drifted into that January and February and really put pressure on patient volumes, but but it seems like March you said that was the hum.
Our record and can you expand on.
And what that meant I think it's very important that the you know the.
The trajectory of the speed at which you're exiting.
The the March quarter here.
Moving to the next quarter because of is it staying at that level can you expand anything on.
The record for March and also is there any way to quantify how much lower January February would have been without COVID-19, if we can normalize it.
Well I, it's a we too of course are having many other publicly traded companies come out of ahead of us with earnings and and noticed of course that many companies have the same.
Experience that we did that our access to clinics was sharply declining declined in January and February, but probably even more importantly, patient census was down significantly and we anticipated that that was primarily due to of course cases being up and people being concerned.
But also they were anticipating vaccinations being available. So why would you go out to the clinic. If you can avoid it if you can wait until you receive your vaccine in the near more protected so I think that the that's the combination that was going on there and.
You know again March was was really a great month for US we don't provide guidance into the next quarter, but again March was terrific and when you think about the number of people here in Minnesota, We I think we reached 60% of the population now has the had their first vaccine.
And they are targeting of course, 70% for you.
The second vaccine here too.
It's really exciting and we think that that bodes really well as well as cases, and hospitalizations and deaths solid declining across the United States, We think that bodes well for us and we're optimistic.
No that's fantastic those those vaccination trends.
Back in queue and thanks, Thanks for taking my questions. Thank you very much thanks James.
And just a reminder to ask the question press Star one on your phone.
Our next question comes from Patrick <unk>.
Well the hill with best of the capital. Please state your question.
Maybe Kathleen how are you doing.
Hey, we're doing well thank you Patrick how are you.
Doing great. Thank you.
So I just wanted to ask with the with the step up in investment.
And really curious as to aside from some of the recent momentum from reopening what are you seeing in the marketplace that you've given your conviction that the jump up in the investment is going to result in a <unk>.
Positive return over the next day 12 months 18 months, what's different about today versus maybe a couple of years ago. When we had a similar investment cycle.
Hey, thank thank you Patrick for that question I'd say that the optimism is more us internally and what we've done to improve our leadership capability.
Also what I mentioned to you about the sales organization in general we've been really focused on sales productivity.
And we've demonstrated strong sales productivity as measured by our home care annualized revenue per per Rep. It's continued to stay above eight 850000, an end in quarter. Two we were up over 950000 or in that range. So that gives us optimism we've.
Added additional support for the sales organization as we bring on new reps from of training Onboarding and ongoing coaching standpoint.
And also the market research that we've done continues to.
Give us optimism and also validates much of what we've already been talking about in regard to the the number of patients with diagnosis of bronchiectasis, and how few or using HFC WTO, but yet based on our clinical studies and outcome studies, we know that it's beneficial and it's going to improve quality.
<unk> of life. It's going to include also improved health care economics for the health care system. So it's really a combination of all of that that's coming together and providing that optimism overall.
And if I can just ask one last question the.
The sort of again to that would be on the competitive front have you witnessed any noticeable change in terms of win rates or changes in competitive behavior as things start to normalize and go back to the sort of of pre pandemic state.
The call out there.
Okay.
When it when it comes to the homecare market I would say that we have not seen a significant.
And a significant activity different from what we've experienced the last year or so with the competition again in the home care area.
And I think that our team has done an exceptional exceptional work in in being the first in and gaining access in in creative and innovative ways that our ethical and still following the guidelines of of clinics.
And and also but I would comment on the institutional side instead of the institutional side is probably facing.
No.
Some headwinds from the competition.
And you know we have larger competitors with.
With the.
A bag of respiratory products, so and they do have a presence in the hospital with other.
The products in diagnostics, and so that becomes a little more challenging for us, but what how we've been able to compete is on a differentiated products higher quality.
Garments data have 360 coverage compared to our competition.
And also we can be a little more flexible on our proposals and still really believe it's it's good margin business. So I'm not concerned about it but that has a little more pressure than the home care, but the homecare, we seem to be really hitting our stride and I think doing really well.
Great well, thank you very much in the.
Good luck with the getting appreciate it hey, thanks Patrick.
Thank you we have reached the end of our question and answer session and I will turn the call over to Kathleen <unk> for closing remarks. Thank you.
Thank you all for participating on our call. This afternoon, we look forward to reporting back to you in August when we will release, our fourth quarter of fiscal 2020 one financial results have a good evening.
Thank you. This concludes today's conference all parties may disconnect have a good evening.