Electromed, Inc. (ELMD) Q1 2018 Earnings Report, Transcript and Summary

Welcome to the Electromed, Inc., First Quarter Fiscal 2018 Financial Results Conference Call. At this time all participants are in a listen-only. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I'd now like to turn the conference over to your host, Kalle Ahl with The Equity Group. Thank you. You may begin.

Thank you, David, and good morning, everyone. Electromed's first quarter fiscal 2018 financial results were released yesterday after the market closed. A copy of the earnings release can be found in the Investor Relations section of the company's Web site at wwwsmartvest.com (sic) www.smartvest.com. As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the company's results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. The words believe, expect, plan, intend, estimate, anticipate, should or could and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. In addition, any projections as to the company's future performance represent management's estimates as of today, November 8, 2017. You should not place undue reliance on these forward-looking statements. And we expressly do not undertake any duty to update forward-looking statements whether as a result of new information, future events or otherwise. We ask that you please refer to the company's SEC filings for further guidance on this matter. Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some opening remarks, after which, Jeremy will present a summary of the company's first quarter fiscal 2018 financial results. And then we'll open the call for questions. Now it's my pleasure to turn the call over to Kathleen.

Thank you, Kalle. Good morning, everyone and thank you for joining us to discuss Electromed's first quarter fiscal 2018 financial results. We are off to a strong start to the new fiscal year. In the first quarter, Home Care revenue grew 16.5% year-over-year, reflecting our ongoing progress executing our growth strategies. We continue to expand our sales force, which totaled 41 at the end of the quarter, up from 31 at the end of the prior year quarter. While investing in our reimbursement team and innovation and value-added services like SmartVest Connect, our new wireless connectivity and patient monitoring solution. As a result of our team's combined efforts, we achieved another quarter of higher referrals and higher approvals compared to the prior year period. As we discussed on Electromed's last quarterly conference call, we made the strategic decision to step up investment in our business beginning this quarter with an eye on penetrating the large underserved bronchiectasis market. Our enthusiasm for the bronchiectasis market opportunity remains as strong as ever and we anticipate that higher investment today will drive higher revenue growth in the future. Based on 2 key studies, we estimate that conservatively 400,000, and that would be Medicare-only patients and 1.1 million total individuals in the United States have non-cystic fibrosis bronchiectasis. When you compare these figures to the roughly 60,000 individuals that we believe have been prescribed high frequency chest wall oscillation therapy today, it suggests a 5% to 15% market penetration. This is why we are so excited about this opportunity. We believe therapy with our SmartVest Airway Clearance System can improve quality of life for a significant number of individuals while reducing overall healthcare utilization. Against this backdrop, this quarter, our SG&A expense increased 28% year-over-year, almost double our top line growth rate as we stepped up investment in our sales force and in initiatives to expand clinician and patient awareness of the benefits of using SmartVest. Despite the higher level of investment this quarter, we remained profitable and generated positive operating cash flow. We also are strengthening our senior leadership team. Last month, we were delighted to announce the appointment of Kathryn Thompson, an accomplished healthcare industry veteran, as our Vice President of Reimbursement. She will lead what we consider to be the best reimbursement and customer care in industry, supporting, referring clinics and patients who use the SmartVest Airway Clearance System. Kathryn previously served as Revenue Cycle Director at Fairview Health Services, University of Minnesota MHealth, where she had direct oversight for all patient access areas, including registration, admissions, financial counseling and financial securing areas for 2 University of Minnesota hospitals and 4 community hospitals. Earlier, in her career, she managed the billing and reimbursement function for Virtual Radiologic, where she led new initiatives to develop and implement revenue cycle process improvement. Kathryn's expertise in the reimbursement revenue cycle as well as operations and finance will be an invaluable asset as we continue to grow Electromed's business. Finally, on the topic of innovation, I am pleased to note that we are tracking as planned on our deployment of SmartVest Connect, our new wireless connectivity and patient monitoring solution. This month, we will commence shipping of SmartVest Connect to targeted, strategic adult pulmonology clinics in the United States, based on the positive feedback from patients and clinicians in the pediatric and cystic fibrosis markets. Initially, we are targeting larger pulmonology clinics and academic centers, which are staffed to provide greater patient training and follow-up and are often thought leaders in the respiratory care niche. We expect the number of adult clinics involved to grow steadily as clinicians recognize the value of using wireless monitoring together with SmartVest to improve therapy adherence and quality of life for those patients with compromised pulmonary function. As we proceed through the new fiscal year, our organic growth strategy remains largely unchanged. We will be expanding our sales force, building on our preeminent reimbursement platform in customer care group, investing in innovative device features and services and launching additional marketing initiatives to increase physician and patient awareness to drive a higher number of quality referrals. On another note, last month, Electromed celebrated its 25th anniversary and while our company has evolved significantly over the years, our priority focus from Day One remains unchanged, serving our patients, clinicians and payers to the best of our ability. And I am very proud of our staff for making life's important moments possible one breath at a time for a growing number of individuals with compromised pulmonary function. I will now turn it over to Jeremy for a detailed discussion of our financial results. Jeremy?

Thank you, Kathleen, and good morning, everyone. Our net revenue in Q1 of fiscal 2018 increased 15.1% to $6.4 million from $5.5 million in Q1 of fiscal 2017, driven by strong growth in Home Care sales. Home Care sales increased 16.5% to $6 million, primarily due to an increase in approvals and referrals, driven by a higher number of field sales employees. Institutional revenue was $301,000, down 13% compared to $346,000 in the prior year quarter. In international revenue, which is not a strategic growth area for Electromed, totaled approximately $101,000 compared to $67,000 in the prior year period. Although quarter-to-quarter sales variability can be expected due to the nature of our business, we anticipate stronger revenue growth in the back half of fiscal 2018, as the impact of our increased level of investment and sales initiatives begin to take hold. Gross profit rose 14.1% to $4.9 million, or 77.4% of net revenue in Q1 of fiscal 2018, from $4.3 million or 78% of net revenues in the first quarter of fiscal 2017. The increase in gross profit primarily resulted from an increase in Home Care revenue, which more than offset the slightly higher manufacturing costs and costs of goods sold for the SmartVest SQL with SmartVest Connect wireless technology as compared to the SQL in the prior fiscal year quarter. We believe that gross margins will range in the mid to upper 70s in fiscal 2018, in part reflecting several new contracts that we signed in the previous year and planned for at lower average ASPs. These new payer contracts will broaden our ability to grow revenue and gross profit dollars and improve the utilization of our resources as individuals who are out-of-network become in-network. Operating expenses, which include SG&A as well as R&D expenses, totaled $4.8 million or 74.8% of net revenue in Q1 of fiscal 2018, compared to $4 million or 72.8% of net revenues in the same period of the prior year. SG&A expenses increased 27.5% to $4.7 million in the first quarter of fiscal 2018, compared to $3.7 million in Q1 of fiscal 2017, primarily due to higher payroll and compensation-related expenses, higher professional fees, increased recruiting fees driven by the expansion of our sales employees and increased travel, meals and entertainment expenses. We view these investments in the business as a key part of our strategy to improve our top line growth rate. R&D expenses totaled $71,000 in the first quarter of fiscal 2018, compared to $351,000 in the first quarter of fiscal 2017. The prior year quarter did include costs for the development of SmartVest Connect. Operating income in the first quarter of fiscal 2018 decreased to $162,000 from $289,000 in the first quarter of fiscal 2017, primarily due to the higher investment in SG&A to support our revenue growth initiatives. Net income before income tax expense totaled $158,000 in the first quarter of fiscal 2018, compared to $272,000 in the prior year quarter. And in the first quarter of fiscal 2018, income tax expense totaled $37,000 compared to $81,000 in the same period of the prior year. And our effective tax rate in the first quarter of 2018 was 23% compared to -- or 30% in the prior year period. Our net income in Q1 of fiscal 2018 totaled $121,000 or $0.01 per diluted share compared to a $191,000 or $0.02 per diluted share in Q1 of fiscal 2017. And now moving on to the balance sheet and operating cash flow. Our balance sheet at September 30, 2017, included cash and cash equivalents of $5.8 million, long-term debt including current maturities of $1.1 million, operating capital -- or working capital of $15.9 million and stockholders' equity of $19.4 million. Cash flow from operations in the first quarter of fiscal 2018 totaled $328,000 compared to cash used in operations of $1.2 million in the first quarter of fiscal 2017. Overall, we remain excited about the direction of our business. And this concludes my remarks. Operator, can we now start the Q&A portion of the call, please?

[Operator Instructions] Our first question is from [Ryan Crackle] [ph], private investor.

Good morning.

Good morning, Ryan.

Thank you for taking that question. I was just curious if you guys could comment on your expectations for the growth rate and operating expenses over the next couple of quarters and when we might expect that growth rate to flatten up.

Thanks for the question, Ryan. We really are focused, as we said, on accelerating our growth and we're not specifically talking about what that ranges as much as the last three years, we've seen a compounded annual growth rate of about 18%. And at a minimum that's what we're striving for as we move forward with greater investment to make that happen. And that's really all about needing to expand and develop this market around physician and patient awareness of that disease and condition called bronchiectasis. And from an expense standpoint, I'll let Jeremy talk a little bit about that.

From an operating expense standpoint over the next several quarters, we will continue to grow those expenses as we continue to invest in the initiatives as we talked about. So, from that standpoint, I think you'll see that continued investment over the next several quarters.

Thank you.

[Operator Instructions]

All right. Sounds like there's no further questions. David?

There are no more questions at this time, Ms. Skarvan.

Okay. Thank you. Well, we want to thank everyone for participating on our call this morning. We look forward to reporting back to you in February, when we will release our second quarter fiscal 2018 financial results. Have a good day.

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.