Q1 2023 UpHealth Inc Earnings Call
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Speaker 3: During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and 0. As a reminder, this conference is being recorded.
Speaker 4: Please go ahead.
Speaker 3: Thank you, operator. During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings, including the quarterly report, to be filed on Form 10Q for a summary of the forward-looking statements, the risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements.
Speaker 3: will refer to pro forma revenues, pro forma growth margins, and adjusted EBITDA. These metrics are not determined in accordance with GAAP and therefore are susceptible to varying calculations.
Speaker 3: financial results provide useful information regarding certain financials and business trends and results of our operations.
Speaker 3: I will now turn the call over to Sam Meckie, Appel's Chief Executive Officer. Sam.
Speaker 5: Thank you, Shannon, and good afternoon, everyone. Thank you all for joining us today.
Speaker 5: Marta and I are very excited to discuss our first quarter performance with you.
Speaker 5: When we last spoke in March, we shared our plans to recalibrate our business in 2023 and to implement our three-year plan to write us the business, providing the necessary foundation to achieve our growth ambitions.
Speaker 5: We view this work as critical to achieving our mission, which is to enable high quality, affordable, and accessible healthcare for everyone. Executing our plan will enable us to create solutions that combine technology and services to improve access to care, which is needed now more than ever.
Speaker 5: as society emerges from a pandemic and deals with unprecedented challenges moving forward.
Speaker 5: Since that conversation in March, we have focused on executing our plan.
Speaker 5: You will see from our first quarter results that we made the changes necessary to launch our recalibration year. We acknowledged the macroeconomic realities of the market and we responded accordingly.
Speaker 5: We shifted our focus to fewer objectives.
Speaker 5: We reduced our cash burn and improved our operating discipline. We stabilized our core businesses and are accelerating the growth of those businesses. We told you that we would shut down any initiatives and businesses that were not working and did just that, ending our managed care and sovereign nations pursuits and closing our provider practice in Missouri.
Speaker 5: Today, we closed on our deal to divest Innovations Group Incorporated, or IGI, our pharmacy compounding business to Belmar Pharma Solutions.
Speaker 5: We have reduced headcount by 12% since August and we continue to decrease contractor and external vendor spend.
Speaker 5: Our team's commitment to aligning our expenses to our current revenue is best illustrated by the reduction in our operating expenses. As a percentage of revenue, total sales and marketing, R&D, and general and administrative expenses decreased from 46% in the first quarter of 2022.
Speaker 5: to 40% in the first quarter of 2023. I would like to take a moment to discuss in further detail the progress we have made on execution.
Speaker 5: Starting with the recently completed sale of IGI.
Speaker 5: Today's closing is a significant milestone toward right sizing our business and further defining our key focus on the strategic directions for growth.
Speaker 5: With the sale of IGI, we solidify our balance sheet with $56 million in gross proceeds.
Speaker 5: providing the company with a necessary financial pudding that execute on our current initiatives and future growth plans and to solidify our three-year plan with 2023 serving as our recalibration year.
Speaker 5: While most of our actions in the first quarter were focused on reducing headcount, heading costs and recalibrating the business.
Speaker 5: We also took steps to pivot to growth.
Speaker 5: In our US telehealth business, we signed contracts with 29 new clients that will generate incremental revenues over the next 12 months.
Speaker 5: Additionally, we saw a minute growth of 58% in the first quarter, which contributed to the business achieving $17.5 million of revenue. Our services segment revenues were $20.8 million, representing an increase of 17% compared to revenues by the first quarter of 2022.
Speaker 5: primarily due to higher census and improved payer mix and upheld behavioral and an increase in the volume and sales price of prescriptions in the pharmacy business.
Speaker 5: Integrated care management revenues of $3.9 million, representing an increase of 48% compared to the revenues of the first quarter of 2022, were primarily due to growth in professional services revenue from existing customers as we focused on customer retention and relationship expansion.
Speaker 5: Revenues in the first quarter of 2023 were 42.1 million, representing an increase of 17% compared to the revenues for the first quarter of 2022 up 36 million. It is important to keep in mind the first quarter includes revenues of 8.8 million from IGI in going forward. We will have 12 months of unfavorable comparison after IGI closes. Gross margin continued to expand to 54% from 39% in the first quarter of 2022 as a result of improvements across your business in favorable care mix.
Speaker 5: Adjusted EBITDA for the first quarter of 2023 improved by $7.9 million to $6.6 million compared to adjusted EBITDA for the first quarter of 2022 of negative $1.3 million. While we are pleased with our first quarter results and are encouraged by the direction of the company, the path ahead still has its challenges. It is imperative that we leverage our cash position wisely.
Speaker 5: Before I turn the call over to Martin, I want to thank you for continuing with us on this journey. As evident in our first quarter results and our recently completed sale of IGI, we are making progress on our recalibration and we look forward to continuing to deliver on our strategic plans and priorities and most importantly in delivering for our shareholders. I will now turn the call over to Martin to discuss our financial results in detail before we open up the call for questions. Martin? Thanks very much, Sam. We appreciate everyone joining us today.
Speaker 6: Before I begin my review of our first quarter results, I want to first comment on the presentation in our earnings release as it pertains to the results in comparison periods.
Speaker 6: Recall that we deconsolidated our Indian Telehealth subsidiary, GlowCal, from our financial reporting effective July 1st, 2022. So Q1 and Q2 of 2022 include the financial results of both the Indian and US Telehealth businesses in our virtual care infrastructure group.
Speaker 6: and 4% growth over $2.4 2022's $40.5 million in revenue. First margin for the quarter was 54% compared to 41% in pro-former Q1 2022 and 45% in Q4 2022. In Q1 2023, our health recorded a just a debit of $6.6 million compared to 2022's pro-former adjusted the debit of negative $1.6 million and $1.9 million of adjusted the debit of $2.2 million compared to 42% in Q4 2022.
Speaker 6: The company's sequential and neurobeer growth in quarterly revenue, gross margin, and adjusted EBITDA represents strong progress towards our goals. But as Sam mentioned, we have additional work to do to reach out goal of achieving positive operating pre-cash flow. Looking at revenue breakdown by segment, services.
Speaker 6: which again includes our pharmacy and behavioral health businesses, was the largest contributor to the company's Q1 2023 revenue with $20.8 million dollars, or 49% of the total revenue.
Speaker 6: Services revenue grew 17% in Q1 2023 over Q1 2022 and 9% from Q4 2022.
Speaker 6: IGI contributed approximately $8.8 million to our health's Q1 2023 revenues, and we expect to recognize approximately 40 to 45 percent of that amount in Q2 2023.
Speaker 6: The sale of IGI will result in a drop in revenue starting in the second quarter, which we will endeavor to recover through growth in our other businesses over the course of the year.
Speaker 6: Virtual care infrastructure, which for Q1 included only the US telehealth business and not the Indian business, was next with $17.5 million worth of revenue, or 41% of the company's total Q1 2023 revenues. US telehealth revenue grew approximately 42% from pro forma Q1 2022.
Speaker 6: The company's revenue SMQ-1 2023 continued to shift toward the high-margin U.S. telehealth business, and we expect that trend to continue throughout 2023.
Speaker 6: Integrated Care Management, or ICM, had revenues of $3.9 million in Q1, 2023, which represented probably more than 9% of the company's total revenues.
Speaker 6: I see I'm revenue grew 2.5% from $3.8 million in the fourth quarter of 2022 and grew approximately 48% from 2.6 million dollars in Q1 2022.
Speaker 6: The company's gross margin for the first quarter of 2023 was 53.8% and gross margins by segments for the quarter were as follows. Integrated care management, 66.7%, virtual care infrastructure, 58.3%, and services, 47.6%.
Speaker 6: We view gross margin as a key metric for our health and as being useful for industry comparison purposes.
Speaker 6: Accordingly, let me also provide some additional color on our gross margins from a trend perspective, as well as framing them within the context of our overall financial model.
Speaker 6: ProSargents in virtual care infrastructure increased to 58.3% in the first quarter, from 47% in pro forma Q1 2022 and 51% in Q4 2022. As we continue to see operating leverage and increasing utilization of video telehealth services.
Speaker 6: contribute to improving gross margins in the US telehealth business. Gross margins in the services segment increased to 47.6% from 33% in Q1 2022 and 36% in Q4 2022 as a result of continued strong performance in talks about behavioral health and compounding pharmacy operations.
Speaker 6: Strong pharmacy volumes and normal seasonal increases in capacity utilization, combined with a favorable payer mix in our Florida behavioral health businesses, more than offset weakness in our medical group performance in Missouri as we close down and integrate those operations into our Florida behavioral health business. Gross margins at integrated care management increased to 66.6% in the first quarter, from 62.7% in Q1 2022 and from 61% in Q4 2022, as a result of a higher mix of professional services. The ICM group's gross margins are at levels consistent with the expectations of the growth
Speaker 6: that we've discussed on previous calls. Uphill's first quarter adjusted EBITDA with $6.6 million, up from $1.9 million in Q4 2022. Adjustments were made for certain non-recurring expenses, including legal and restructuring expenses.
Speaker 6: We expect expenses for legal and restructuring costs to continue as we deal with various shareholder litigation matters, including with the former owners of our Indian subsidiary, and as we consolidate corporate operations to drive efficient fees and lower costs.
Speaker 6: As a reminder, adjust the D that's housed in non-GAP measure, and we have included a reconciliation of GAP operating loss to adjust the D that's housed in the press release.
Speaker 6: Now, I'd like to provide more detail on the company's liquidity position.
Speaker 6: be swept to the corporate balance sheet as part of the transaction.
Speaker 6: and will be reflected in the second quarter cash position. In addition, this does not include approximately $7 million held in an account in India, but has been effectively frozen by the emergency arbitrator in our action against the former Glowkal shareholders.
Speaker 6: Additionally, we completed an issue of 1.65 million common shares and 1.35 million pre-funded warrants, raising gross proceeds of $4.5 million on March 13, 2023.
Speaker 6: Interest payments and payments for various professional fees, including legal and consulting expenses.
Speaker 6: impacted our cash balance while our business segments continued to post strong revenues and EBITDA growth.
Speaker 6: As Sam mentioned in his remarks, we closed the sale of the IGI pharmacy business earlier today.
Speaker 6: The gross proceeds of the transaction were $56 million before adjustments to changes in working capital, escrow funding, and various transaction expenses.
Speaker 6: In accordance with the terms of the indentual with our secured note holders, the company will offer to repurchase an amount of secured notes, equaling 20% of the net proceeds of the IGI sale about $15 million.
Speaker 6: The actions that we've taken to bolster our cash position, combined with the financial performance of the business, which continues to trend toward being operating cash flow positive in the next several months when adjusted for extraordinary expenses such as legal fees, provides the company with sufficient liquidity to execute on our growth plans for the foreseeable future.
Speaker 6: We continue to expect 2023 revenues to be in the range of $127 to $135 million.
Speaker 6: This represents growth of 5 to 12% of a pro forma 2022 revenue of $121 million. For comparison purposes, both 2023 estimated revenue and 2022 pro forma revenue include approximately 5 months of operations for IGI and exclude the Indian operations.
Speaker 6: In 2023, we expect gross margins to be in the range of 43 to 45 percent and adjusted EBITDA to be in the range of 7 to 10 million dollars.
Speaker 1: That concludes our prepared remarks. Operator, we're now ready to take questions. Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the...
Speaker 5: Martin, did you give the, I think you gave a telehealth growth rate number on a pro pharmacist? So that's 42% or what was the number?
Speaker 6: Telehealth on a pro forma basis, Mike? I think I thought you gave that number, yeah.
Speaker 6: I did, yeah. Hang on one second, let me just grab it. Sure. I guess the other... Yeah, you heard it right, 42%. So just to be clear, that's...
Speaker 6: So that's pro forma ex-glocal in Q1 2022. Right, right. So, I mean, that's a pretty healthy growth rate. I guess, can you talk a little bit about, you know, just the drivers of that business, you know, the differentiation.
Speaker 7: You hear so much about kind of macroeconomic headwinds, but 42% is really all these numbers. So I guess maybe talk a little bit about that business and why it's doing so well.
Speaker 5: I can take that, Martin. Thank you, Mike, for the question. So there's two things that are really driving the growth of that business. First, we've seen an increase in the number of devices that we have distributed. So...
Speaker 5: As we've talked about, we're up over, we're into over 2800 facilities at this time. We just had several new sales in the first quarter. The second is we've been working very closely with our customers about driving the proper utilization of the devices and making sure that the teams know how they're doing it. So you saw we talked about Round two of the whole story on eBay.
Speaker 5: the growth in the minutes for that business that we saw about 58% in the first quarter. So it's a really good product. We've got good NPS scores with our customers and we've been really focused on adding new customers and new devices out into the market and then making sure that our customers are using them properly to drive and increase same store growth, if you will.
Speaker 6: and away from audio. So that drives revenues and margins.
Speaker 7: Was that a, to say, process change or a technology change?
Speaker 6: A little bit of both. We've certainly made a lot of advancements on the core platform and its efficiency and ability to handle many, many calls at the same time. And also, a reflection of the fact that the video is a superior product.
Speaker 7: Right, right. Okay. Okay.
Speaker 7: And then he also touched on, I think, just pipeline. I think he said it grew 25% sequentially. Is that largely kind of in this telehealth category, or is that growth across the board?
Speaker 5: Thanks, Mike. The pipeline growth is across the board. We've added a couple of new sales leaders to our team. We've been focused on improving the pipeline for the integrated care management business and then also aggressively growing the pipeline for the telehealth business.
Speaker 5: And then it's a slightly different approach for our behavioral health business, but we've added resources there that are helping to drive patient life. So across all three businesses, we've seen improvements in our pipeline. Got it.
Speaker 7: And then if you back out the IGI business, is there a natural seasonality in the rest of the businesses throughout the year? Like an inherent, you know.
Speaker 7: build throughout the year or is there not seasonality in the non-IGI business? I'm sorry. You were broken up on my line. I apologize. Could you repeat that question? Okay.
Speaker 7: Yeah, if you take out the IGI business, the business that's left, is there a natural seasonality in it, meaning one quarter is naturally the lowest of the year and the other quarter is naturally the highest?
Speaker 5: There's a little bit of a natural seasonality in terms of utilization. You see some utilization come down a little bit during the summer months and build back towards the end of the year, but it's still fairly consistent with what you've seen historically.
Speaker 6: Yeah, and I would say, Mike, in the behavioral health business, there is an element of seasonality. Typically, the first and the second quarters are the strongest in that business, and the fourth quarter is the weakest. We talked a little bit about that in terms of capacity utilization on the last call.
Speaker 6: Mike, in the behavioral health business, there is an element of seasonality. Typically, the first and the second quarters are the strongest in that business, and the fourth quarter is the weakest. And we talked a little bit about that in terms of capacity utilization on the last call. Got it.
Speaker 7: And then just very last one is, just again, a clarification. Martin, did you say you expect to be operating cash flow positive within a few months? Is that what you said?
Speaker 8: Thanks very much. Thanks, Mike.
Speaker 1: And our next question is from the line of Bill Sutherland with the Benchmark Company. Please proceed with your question.
Speaker 1: Our next question is from the line of Bill Sutherland with the Benchmark Company. Please proceed with your question. Thanks.
Speaker 8: Good work guys in all respects. I obviously looking at the very nice EBITDA on the quarter.
Speaker 8: is almost at the low end of your annual range. I just want to ask how we should think about, you know, the rest of the year as far as the cadence of EBITDA from here. Thanks.
Speaker 5: Thank you, Bill. Really good question. I would say we are off to a great start for the year. We just closed on the sale of IGI, so that's going to take down some of our revenue and some of our EBITDA. We can't quite annualize or...
Speaker 8: extrapolate that yet fully from Q1, but we're really pleased with the results in Q1 and we're very content to drive to improve that number throughout the course of the year. My sense was, I think from comments in the past, that IHCI's contribution to EBITDA was...
Speaker 8: you know, not a big percentage of the total. So again, what kind of falls off?
Speaker 6: going forward in the continuing ops from a margin perspective. Martin, you want to handle that one or reject me? Sure. No, no. Hey, Bill. So, IGI contributes about $500,000 a month, maybe a smidge more at this point.
Speaker 6: in EBITDA and that pretty much all drops to cash flow. So it's not an insignificant amount that we do have to replace going forward. We did a very strong first quarter. We expect the rest of the year to continue to be robust.
Speaker 6: maybe not quite at that level as Sam mentioned, we've got to replace the sales and the margin from IGI. And if we feel that the forecast are no longer reflecting the run rate and potential and results of the business, then we'll revise the guidance accordingly.
Speaker 8: Well, let me come at it a little different way just to see if I can understand it a little bit better.
Speaker 8: Do you expect did you did you say Martin that the gross margins that you achieved in the first quarter the three? segments X IGI are sustainable
Speaker 6: side of the EBITDA contribution was about half a million dollars a month. In terms of gross margins, they were very strong in the first quarter. We were happy with them. I think there were some very positive mix issues that contributed to those margins, which may or may not continue.
Speaker 6: And so we would think of those as kind of the normal costs and steady state gross margins. Maybe they're shifting up a little bit. But at the moment, we're comfortable with what we've guided. And if the perspective changes, we'll make an announcement to that effect.
Speaker 8: I was curious, you mentioned
Speaker 8: that the go-to-market strategy for ICM is being refined. Can you give us a little color on how, you know, what's changing and kind of maybe what that means for the sales cycle and the, you know, the potential of that business to get back in growth mode?
Speaker 5: Yeah, happy to talk about that.
Speaker 5: For our integrated care management business, we've looked at a couple of things. So first and foremost, we've got a lot of great data, and we think there are some analytics capabilities that we can really add into our business to pair with the Cintranet platform to really help our customers clearly identify.
Speaker 5: the next best actions, for example, that they should be taking with some of the members that they're sharing on the platform. We've developed some very, very good use cases beyond the HIE market when you look at the PBM market, for example, where we've got customers that are leveraging the platform and having great results from that. And then the experience that we've gotten with our customers in...
Speaker 5: really packaged together both both technology and a technology enabled service approach to how we serve our payer customers in that market.
Speaker 8: You're alluding to the Medi-Cal contract, I think? Is that the... Mm-hmm.
Speaker 8: you're alluding to the Medi-Cal contract I think is that yeah so um
Speaker 8: So it feels like it's going to, it will take time. That sounds like a pretty big lift to get the engine. Those are long sales cycles I would imagine, right? With other types of government.
Speaker 8: Oh, sorry, Bill. I didn't mean to cut you off. Go ahead and finish. Yeah, I was going too slow there. You know, the other similar systems that I assume you're going after like Medi-Cal.
Speaker 5: Yeah, so there's a couple of proposals that are out for other counties in California. So we've been pursuing some of those. In the first quarter, we really focused on the account retention, and that has been going quite well for us. So we're very happy with the progress there. And so really, it is a long sales cycle, you are correct.
Speaker 5: but the focus on additional markets and upsells to our existing clients with new sales to other clients is well underway. And so we're basically seeing...
Speaker 5: some really good data for us in terms of how we can leverage our Medicaid data and analytics in particular for community-based and exchange work that's underway in some other states. So we've submitted a couple of RFP responses already this year. We're working on that. You are correct. It is a large...
Speaker 5: a little bit of a longer fill cycle, but we think that the work that we're doing to transform our business model, our architecture, and the engineering to really support a full FASH Cloud model and incorporate some of those new initiatives around data and analytics is going to make us much more attractive.
Speaker 8: for the customers that we're bidding on. Okay, sounds promising. I appreciate the color. Thanks guys. Yup, thanks Phil. Thanks Phil.
Speaker 7: And we have no further questions in the queue at this time. I will now turn it back for closing remarks. Thank you, operator. And once again, Martin and I both want to thank everybody for joining us today. This was a very good day, very good quarter for us.
Speaker 5: We're very excited about the direction that the company is taking, getting the IDI sale closed, and really restructuring our balance sheet is something we're very excited about. It's allowing us to pivot to growth and continue to focus on the work that we need to do to recalibrate the business. Again, we're very happy with our first quarter results. We think that's a very strong start to the year.
Speaker 5: And it's our goal and objective to continue that performance throughout the course of the year. So once again, thank you for continuing with us on this journey. We appreciate it and we look forward to talking to you again and sharing results after the second quarter. That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.