CA - CloudMD Software & Services Inc. (DOCRF) Q4 2022 Earnings Call Transcript

2023-04-25 12:07:06 ET

CloudMD Software & Services Inc. (DOCRF)

Q4 2022 Earnings Conference Call

April 25, 2023 09:30 AM ET

Company Participants

Mark Kuindersma - Head of Investor Relations

Karen Adams - Chief Executive Officer

John Plunkett - Chief Financial Officer

Conference Call Participants

Gabriel Leung - Beacon Securities

Mike Stevens - Echelon Wealth Partners

Presentation

Operator

Good day, and welcome to the CloudMD Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

It is now my pleasure to introduce Mark Kuindersma, Head of Investor Relations. Please, go ahead.

Mark Kuindersma

Thank you, Andrew, and good morning, everyone. Thank you for joining us on our fourth quarter 2022 conference call and webinar. We'll start the call with our CEO, Karen Adams; followed by CFO, John Plunkett, who will provide a recap of the company's Q4 2022 financial results before opening the call for question-and-answer period with our covering analysts.

I’ll remind you that today's discussion contains forward-looking information, which involve inherent risks and uncertainties and other factors that could cause actual results to differ materially from management's current expectations.

Forward-looking information should not be interpreted as assurances of future performance or results. The risks related to forward-looking information are described in the Company's MD&A, which is available on SEDAR. We encourage you to review our public disclosure in the context of all forward-looking information that you may hear today during this earnings call.

Investors are cautioned not to place undue reliance on such forward-looking information, and that such information is considered reasonable based on information available to management as of today. The Company disclaims any intention or obligation to update or review any forward-looking information as a result of new information, future events, or any other reason, except to the extent required by law.

With that, it is my pleasure to turn the call over to Karen Adams, CEO of CloudMD. Karen, the floor is yours.

Karen Adams

Thank you, Mark, and good morning everyone. Welcome to CloudMD's Q4 2022 Earnings Call. In the fourth quarter, we generated $25.9 million in revenue. This represents a good baseline of recurring or reoccurring revenues to grow from in 2023.

This comes after the divestment of our clinics and pharmacies, which we viewed as not a long-term fit for the company. These assets will require significant capital to grow and had low gross margins and EBITDA contribution.

For the company to grow, we must focus on services that can scale efficiently. This is in our healthcare navigation and integrated employer offering that in Canada alone, through employer group benefits, is a multibillion-dollar industry.

2022 was a difficult year for CloudMD, that was -- that overshadowed the positive momentum and forward-looking KPIs we saw across our business. In 2022, we dealt with issues related to the 15 acquisitions we completed over eight quarters.

In the first half of 2022, there were significant changes in leadership at the executive and board level. Beginning in Q3, as we assumed our new roles, John and I were able to take a deep dive into the financials and an in-depth review of the acquisitions, evaluating their financials and potential for growth.

In Q3, I spoke to you about the importance of strengthening the business and the balance sheet. We identified the strategic initiatives that we felt as a leadership team, were important to rightsizing the organization for sustainable growth that would provide shareholder value.

Those initiatives were to, one, generate high-quality organic growth; two, find operational improvements with integration and cost efficiency; and three, improved cash management. Our team is focused on cost reductions and is working collectively to reduce our quarterly losses on a path to profitability.

Generating positive cash flow is a top priority. The focus on moving from cash burn to free cash flow by the end of 2023 will be a combination of cost reductions, gross margin improvement and organic growth. This will ensure a sustainable, scalable business.

During Q4, the team worked on back-office workflow integration and achieved revenue growth in key services that required alignment with the organization. The improved organizational design is required to take advantage of our business model of one company with diversified services that needed to be interdependent on each other for scale and to achieve profitability. This work is in the execution phase with a lens on improving gross margin and cash flow. We are also seeing traction in our forward-looking growth KPIs.

We are at a pivot point as we see momentum in cross-selling and upselling. Multi-product sales represented 33% of new sales this quarter, a 30% increase over the previous quarter. We added 374 new contracts in Q4, representing various industries and geographies. Our top seven contracts averaged over $100,000 in ARR.

For the full year, we signed $12.2 million in new contracts in our pipeline entering 2023 and expanded to over $55 million, which is balanced across all services from both operating divisions.

I would now like to address the growth of customers in 2022. In 2022, organic growth was overshadowed by three factors we have discussed before. The first being the unwinding of our COVID response business with an occupational health and mental health capability. The second being the stabilization of VisionPro, our Vision Care offering.

The third was the divestment of our clinics and pharmacies that were in BC and Ontario. Outside of these, we were able to grow our mental and physical health services significantly in 2022. This growth was achieved because of our proven service deliveries and our ability to become the provider of choice for those companies that have chosen Cloud MD for their physical and mental health services.

Our ability to offer virtual in-person and on-site services augmented by industry-leading provider network contributed to this growth. The spend on mental and physical health by employers continues to gain momentum with the unprecedented focus on the needs for health risk management and their need to see a return on investment.

In Q1 2022, we added the MindBeacon acquisition to expand our reach for mental health support while improving gross margin. The MindBeacon acquisition was also intended to diversify our offering in Canada and the US through the iCBT platform.

Clinical interventions must be proven when you add them to your service offering. This platform has been clinically proven to be able to improve mental health. We believe this was an important consideration in being able to offer this service to users with confidence in achieving health outcomes. The benefits of this acquisition were slower than anticipated, specifically related to gross margin. This platform is used with our other physical health navigation services to improve well-being.

In Q4, we launched the Spanish version of MindBeacon platform, while also integrating the offering into our employee family assistance program. In our Mental Health and Services division, the pace of new business has not been able to offset the impact of the COVID-related revenue resulting in a decline quarter-over-quarter. However, the clients with those one-time mandates are still existing clients using other services. It is important that during a major health pandemic, these clients turn to CloudMD to support the risk management of their employees.

Our iCBT is now available province-wide as a service offering through the Ontario structured psychotherapy program following a competitive process through Ontario Health funded by the government of Ontario. This comes on the heels of CloudMD's iCBT work also funded by the government area, which helps support the mental health needs of some -- with some of the 65,000 people in the province during the pandemic. with health equity benefits broader and more timely access to care and reduce this Sigma.

Both of these initiatives provide innovative made-in-Canada virtual services that can serve as an effective and cost-effective model for the rest of the country. They can also continue to help address burn out, better use of the healthcare system and economic recovery.

There is momentum in forward-looking KPIs and client adoption of our full suite of services. We are seeing increased cross-sell, strong new customer wins and a growing pipeline. After the quarter end, we won a few noteworthy contracts, including a new vendor of a record agreement with Mohawk Medbuy, which included a first hospital customer to provide EFAP, iCBT mental health cost and Nurse Navigation Services. Mohawk Medbuy supports hundreds of its Canadian hospitals, and this agreement gives its members access to a broad array of CloudMD Services to support the growing needs of healthcare workers and their family.

In addition, we expanded our partnership with Benefits Alliance, a national group benefits consulting firm that manages over 8,000 employee benefit plans across Canada. Both partnerships are for the full suite of key services, including employee and healthcare family assistance program, mental health, physical health navigation, occupational health assessment and absence management, all accessed via 24/7 phone line or our fully integrated digital platform.

Benefits Alliance is a good example of how we are supplementing our direct sales team with high-quality sales partners that lower fixed cost and overall customer acquisition costs, while expanding our addressable markets. We expect the impact of this new partnership to be felt gradually over the course of the year. In our absence management services, revenue growth saw a slower return in our on-site occupational health services and assessment services.

In fiscal 2023, we expect to see continued momentum in this market as customers are looking for alternatives to solving their individual health issues and better return on their investment of Group Benefits spend. We continue to see high adoption rates given our ability to address the preferences of the treatment where our provider network offers in-person, virtual and on-site. As mentioned, for employers, this is a multibillion-dollar industry that expected proven solutions that will accelerate the return on investment.

Turning to our health and productivity tools segment, revenues declined this year due to the previously discussed issues at VisionPro. Volumes had the lower vision care due to distribution issues, as well as a purposeful decreased spend on customer acquisition costs as we focus on cash flow.

The commercial team is looking for alternative ways to leverage our client base to increase volumes without the acquisition costs. The launch of online prescription renewals is part of the steps we are taking to improve customer lifetime value and the operating margins in vision care.

In our technology services operating segment, the pace of revenue has been delayed by signed government contracts. These delays are a result of work tasks outlined in the contract. However, in order to reduce dependency on government, we are diversifying our revenue from government contracts with consulting services to our newly launched digital life and health platform that creates interoperability between health services in the United States. This platform evolved from the key platform and developed as a digital front door for our US customers. The pipeline for this product is growing rapidly, and we anticipate accelerated growth in 2023 in this very attractive market space. Finally, remote patient monitoring pipeline continues to grow as we work to monetize our technologies to solve a variety of health and wellness needs.

We will continue to focus on operational improvement. I'm proud of the team's focus on the need to realign the cost structure of the company and the results we have been able to achieve. Every single member of this company is laser-focused on profitability and reaching cash flow positive.

Since the start of 2022, we have auction cost reductions of $16 million and made significant reductions to our cost base. To date, we have accomplished these savings primarily through reductions in multiple areas, including duplicate roles, deployment of technology and real estate. We still have a little more savings to come from the integration. I believe there is a significant opportunity and improved efficiency across the business. This signifies our strategy in action as we begin to execute on the plan for organic growth and cost savings. I'm proud of the team for being able to identify these cost savings in 2022 and then as we migrate to more back-end office consolidation, we've identified a further $5 million for 2023. We are focused on path to free cash flow and EBITDA positive.

Now I will turn the call to John Plunkett to discuss our financial performance, cash flow, balance sheet and our guidance outlook for fiscal 2023.

John Plunkett

Thank you, Karen, and good morning, everyone. Our near-term focus is on reaching profitability and we believe that demonstrating our ability to self-fund and grow the business on an ongoing basis is the biggest near-term catalyst for our investors.

In the fourth quarter, we identified and actioned $5 million in annualized cost reductions and have achieved an additional $1 million annualized in the first quarter of 2023. In addition to those savings, we've identified and have started actioning an additional $4 million in annualized cost savings starting in Q2 2023.

We expect to identify further savings throughout the year as we close the gap to adjusted EBITDA and cash flow positivity. Between the combined approximately $2.5 million in quarterly cost savings already identified since the start of the fourth quarter of 2022 and very reasonable growth expectations in the low double digits based on newly contracted revenue, our historical win rate and current pipeline, we expect to be adjusted EBITDA positive in the fourth quarter of this year.

Turning to the financial performance in Q4. We generated total revenue of $25.9 million compared to $27.5 million in Q3 2022. As we discussed last quarter, Q3 contained 1.5 months of revenue from the legacy Ontario Health contract contributing $1.5 million.

Enterprise Health Solutions contributed revenues of $20.4 million, compared to $21.8 million in Q3 with the negative impact of $1.5 million from the Ontario Health contract, some seasonality in our assessment business, and some churn in our occupational health business, offset by the contribution of new sales. With all revenue related to the Ontario Health contract and COVID testing contracts now out of the run rate, we view Q4 as a decent baseline that we expect to grow from throughout 2023.

Looking at 2023, we are forecasting low double-digit growth for the full year of the Q4 exit rate. Digital Health Solutions generated revenue of $5.4 million in the quarter compared to $5.7 million in Q3. The slight decline was due to the timing of services for some contracts in our IDYA4 business and VisionPros as we manage our ad spend in that business.

Gross profit in the quarter was 34.8%, 30 basis points higher than Q3 2022. Looking ahead at 2023, we expect 100 to 200 basis points improvement in gross margin as we improve our cost of delivery around various health services, continued integration of our provider networks and consolidation of our back-end operating systems are key enablers of this.

Core operating expenses, which include G&A, Sales and marketing and R&D were $11.8 million, down $1.1 million, or 9% sequentially from Q3 as a result of our cost optimization efforts. Adjusted EBITDA in the quarter was negative $2.6 million, an improvement of $0.5 million compared to Q3. The improvement is directly related to our work on cost optimization and control.

As we forecast organic growth over the coming year and continued cost savings, we expect adjusted EBITDA to improve.

During the quarter, one-time costs were primarily related to severance and acquisition integration, we expect these one-time costs to be lower in the first and second quarter of 2023. We started the quarter with $27.5 million in cash and ended the quarter with $24.1 million in cash.

During the quarter, we closed the sale of our clinics and pharmacies division, which netted approximately $6.5 million before customary holdbacks and fees. During the quarter, we paid down an incremental $4.3 million in long-term debt in part due to the sale of the pharmacy assets, which had debt tied to the assets.

We had a normalized use of cash during the quarter of $4.6 million adjusted for changes in non-cash working capital and one-time costs. Looking ahead, we expect cash usage to improve throughout 2023, as the impact of our cost savings and growth flow through our financial statements, achieving cash flow breakeven is a key focus for us

With that, I'll pass the call back over to Karen.

Karen Adams

Thank you, John. So in conclusion, we are coming off a difficult year. We are on track to continue to deliver on the cost reduction while delivering on organic growth. I want to thank our employees and healthcare providers for their dedication and commitment to empowering healthier lives.

I would like to thank our customers and partners who are entrusting us to manage the health risks of individuals. I want to thank our shareholders for their patience and support over the last 12 months. We recognize that the path to change has not been quick. However, we have delivered on the cost cuts and new client acquisitions. Our commitment is to continue that momentum.

And with that, we will open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] One moment, please. And our first question comes from the line of Gabriel Leung with Beacon Securities.

Gabriel Leung

Good morning. Thanks for taking my questions. I've got a couple of things around the financial first. John, are you able to provide your expectations around what cash restructuring charges might be related to this year's restructuring initiatives, what that number might come out to?

John Plunkett

Yes. So Gabriel, let me give you a directional view. My expectation is for the first quarter to be in the neighborhood of $1 million to $1.5 million, the second quarter to be slightly lower than that. And obviously, we're going to see it tail off as we move through 2023.

Gabriel Leung

Got you. Second, just on gross margins, John, I missed your point about your expectations around how you think gross margins will trend this coming year directionally?

John Plunkett

Yes. So from a directional standpoint, we're expecting gross margin to expand over the course of the year about 100 to 200 basis points. Right now, we're engaging in several activities to drive gross margins higher. We're looking at our operational systems. We're looking at our network integration. We're looking at utilization of clinically appropriate modalities that are lower cost in delivery.

Gabriel Leung

Got you. And also just, when do you expect to hear the results of the – the arbitration hearing related to the litigation [Technical Difficulty]?

John Plunkett

Yes. The feedback there. The -- in terms of the outcome of that, timing is going to be late in Q2, so in the next two months or so.

Gabriel Leung

Got you. And just on -- sorry, the bookings and new business you've been [Technical Difficulty]

Karen Adams

Sorry, Gabriel, can you start again? All right.

Gabriel Leung

Sorry, the $12.2 million in bookings, Karen, that you talked about, I just want to clarify, is that value -- is that the multiyear value of the contract, or is that the expected annual contributions from the contract is signed $12.2 million?

Karen Adams

Great question. Annual contribution. These contracts are roughly three to five year contracts.

Gabriel Leung

Got you. So the total value would be a bigger number than 12 months ago, got you. Okay. And then just as it relates to that booking number itself, does that include any business in the US? And maybe you can just talk about the pace of new bookings and spendings in the pipeline within the US businesses idea for the benchmark?

Karen Adams

Sure. So I would say, I think, John, if I'm correct about $9 million of that is in Canada and the balance is in the US.

John Plunkett

Correct.

Karen Adams

So we are seeing accelerated pipeline growth now, and you're going to hear us talk a lot more about our health and productivity tools, which is how we've started to talk about the US and the assets we have there. There is the pipeline for remote patient monitoring and our digital front door up that was created through Idea 4 that has been marketed traditionally to government, has now got a strong pipeline growing in the US, and we'll be in a position to give a better update on that specific pipeline in Q1. But you've seen extremely accelerated growth in that marketplace. And the salespeople there now are -- there's two very seasoned, let's say, industry people now who are selling these products in the US and we're seeing the growth.

Gabriel Leung

Got you. And I know you made the commentary in the MD&A around the macro environment impact too. But I'm just curious, what are you seeing and what are you hearing from your enterprise customers as it relates to their priorities in terms of their spending just given what's going on the -- just given the volatility in the marketplace right now, the priority is still on, I guess, improving the healthcare services to the to the employees?

Karen Adams

Great question. So I will say there are two things in these types of economic time, it is the one benefit that is never cut back on. So interesting, it has never been in the time that I've been in this industry where companies cut up. What I will say though, however, is that when I refer to it being a multibillion-dollar industry that is what employers are paying for people to access healthcare through both their extended healthcare benefits and through programs like employee assistance program.

What we are seeing from employers is an ask for starting to monitor return on investment and starting to have conversations around the health outcome data that we're providing back is now proving to be more important to them and being able to document and differentiate our offering with the proven outcomes.

And I think they are being asked to justify the spend to their CFO that they can actually see a return on either from a disability perspective, return to work by shortening the duration of absence using appropriate treatment plans or perhaps for people who are at work and their ability to manage proactively through an assessment or through a treatment plan, the person not going on disability.

So we're working with some very progressive clients where we're being able to formulate those help outcomes into a standard reporting that we'll be able to roll out to all our customers that will give validation to the spend vis-a-vis the outcomes that they're spending.

Gabriel Leung

That's great. Thanks for the feedback and good luck on the coming year.

Karen Adams

Thank you. Thank you very much, Gabriel.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of Mike Stevens with Echelon Wealth Partners.

Mike Stevens

Hi, good morning guys and thanks for taking the time to answer a couple of questions here. I just want to dig in a little bit more to the pipeline. I think you mentioned in the comments, $55 million, is that an annualized figure or is that a TTV? And if I -- yes, go ahead.

Karen Adams

No, no, go ahead. Sorry, Mike. I cut you.

Mike Stevens

Okay. Yes. So, in relating to that, I think the MD&A mentioned that you converted 8.5% year-to-date. So, just looking for any kind of targets maybe you guys are looking to close this year. Obviously, it seems like you're in line to surpass that 12.2% from last year. But -- and also maybe any color on where these pipeline companies, what space is they're in?

Karen Adams

Sure. So, the $55 million is an annual reoccurring revenue number. What we have done in our pipeline is -- that would be our pipeline of business that would -- I would argue is predominantly within our employer, health and wellness solutions, our assessment business, our occupational health are disability, and our mental, physical health navigation.

We also have a very strong pipeline for the US and Canada with some very large opportunities in it that we have chosen not to put into that $55 million as we work through those opportunities. There's two reasons for that. One is procurement processes around those specific initiatives into the length of the sales cycle is longer. So, we are working on those proactively.

In regards to your question about going above and beyond the 12.2%, I would say that with the -- our business works two way, we sell contracts now and those contracts will revenue at some point in the future. So, they wait for their current providers agreement to run out. So, somebody's agreement could be running out in June, and we'll get the mandate in Q4.

So, we track our revenue through contracts sold and recognized in your revenue. We anticipate through the pipeline is large enough to support growth beyond the -- what we have seen this year. I don't know, John, would you add anything specific around--

John Plunkett

Yes, I think the only additional point I would add in is obviously, cross-sell into book of business has been a key focus for us and multiproduct sales has been another key focus for us. I think the increase in the number of multiproduct sales has been notable for the last quarter or two and obviously, that's going to be a focus for us as we progress through 2023.

Karen Adams

And then to answer your question specifically, Mike, on product, I will tell you the revocation of monitoring and life and health products are -- we're seeing large increases in our pipeline, now that because the pipeline was very big before. So, that has been a welcomed addition to our pipeline.

And then I would say we're seeing a lot of -- now that we've added the physical health navigation services to the mental health that we're doing virtual care for both the physical and mental health. We're seeing a large opportunity to consolidate programs in the market space. So, that's -- we're seeing it. I would say those are the two predominant areas.

And then the last one would be occupational health. As people return back to work, the on-site nurse nurses and doctors now, that pipeline is beginning to grow as people are looking for ways to manage the health risks of individuals in the workplace once they get them back to work.

Mike Stevens

Okay, great. Awesome. That's a fantastic insight. And then maybe to kind of continue on that theme, with your cost cuts coming up $5 million, I think, in the first half annualized, I think you'd mentioned sort of back office type of -- sort of cost cuts, but it seems like that wouldn't really affect some of the scaling of these offerings in your EHS, not really concerned there. It looks like you kind of put in the R&D upfront and that's sort of something that you can generate leverage from going forward?

Karen Adam

Correct. So, I would say two things on that. So first of all, I'll give you a great example of where we've done back office integration. We've used them admin automation in our assessment business, where we were able to produce a better quality administrative function to support the our health care network providers, and that resulted in a reduction of a significant number of admin people in the assessment business, but an increase in our ability to both improve the OpEx, but also be able to improve the satisfaction with the people, who were dependent on those advance for what they did as a better quality product.

I think the other place we're seeing, some of the ability to reduce the cost savings is, you will note that in our -- we press released in Q4. We did hire a new Head of Enterprise Health Solutions. So Bram is very focused on restructuring workflows to be able to scale the organization and so duplicate roles or people that were not at full capacity, now being able to take on the additional capacity.

And then finally, I'd say the last place that we're seeing the ability to reduce cost is finally getting away for Bram and really starting to talk about capabilities. So we're having individual. We have one integrated call center now across all of the HR [ph]. And so that has been very helpful in creating scale. And as the business has grown in that 12.2%, you can imagine, it's been rewarding for us, focused on cash flow, to be able to reduce the number of people, but still be able to deliver the service better than we were before.

Mike Stevens

Great. And maybe one last one, possibly for John. In terms of the turning EBITDA positive and then free cash flow positive thereafter, as you get closer to that, given the cash that you do have currently, I know, obviously, you have some debt to pay down, but how do you kind of look at the capital allocation strategy? Is that something that you would start looking at tuck-ins, or how may you -- is that something that you're focused on already in deploying capital that way? And also, is there any kind of noncore businesses that you would continue to look to for divesting opportunities at all?

John Plunkett

Yes. Thanks for the question, Mike. So I guess a couple of comments to make. In terms of capital deployment this year, I would say that certainly, M&A is not on the radar for us this year. We did make a debt repayment in the fourth quarter of approximately $4.4 million, part of which was tied to the sale of our pharmacies. However, I'm not expecting any incremental debt repayments over and above, what is sort of standard quarterly payments required under our debt facility. From a divestiture standpoint, obviously, we completed a few transactions in the fourth quarter. We continue to assess our business to make sure that the assets in our portfolio are driving a good return for us and that they continue to be a good fit with our overall strategy. So, that's what I would add on that last point.

Mike Stevens

Okay. Great. Thank you, both for the insight and all the best. Cheers.

Karen Adam

Thank you, Mike.

John Plunkett

Thank you.

Operator

Thank you. And I'm showing no further questions. So with that, this concludes today's conference call. Thank you for participating, and you may now disconnect.

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CloudMD Software & Services Inc. (DOCRF) Q4 2022 Earnings Call Transcript