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Edited Transcript of MTBC earnings conference call or presentation 8-May-19 12:30pm GMT

Q1 2019 MTBC Inc Earnings Call

SOMERSET May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of MTBC Inc earnings conference call or presentation Wednesday, May 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. Hadi Chaudhry

MTBC, Inc. - President & Director

* Bill Korn

MTBC, Inc. - CFO

* Mahmud U. Haq

MTBC, Inc. - Founder & Executive Chairman

* Shruti Patel

MTBC, Inc. - General Counsel & Corporate Secretary

* Stephen A. Snyder

MTBC, Inc. - CEO & Director

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Conference Call Participants

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* Brian W. Marckx

Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst

* Eugene Mark Mannheimer

Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare

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Presentation

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Operator [1]

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Good day, and welcome to the MTBC First Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Shruti Patel, General Counsel. Please go ahead.

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Shruti Patel, MTBC, Inc. - General Counsel & Corporate Secretary [2]

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Thank you. Good morning, everyone. Welcome to the MTBC 2019 First Quarter conference call. On today's call are Mahmud Haq, our Founder and Executive Chairman; Stephen Snyder, our Chief Executive Officer and a Director; A. Hadi Chaudhry, our President and a Director; and Bill Korn, our Chief Financial Officer.

Before we begin, I would like to remind you that certain statements made during this conference call are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

All statements other than statements of historical facts made during the conference call are forward-looking statements including, without limitation statements regarding our expectations and guidance for future financial and operational performance, expected growth, business outlook and potential organic growth and acquisitions. Forward-looking statements may sometimes be identified with words such as will, may, expect, plan, anticipate, upcoming, believe, estimate or similar terminology and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which would cause actual results to differ materially from those contemplated in these forward-looking statements. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events.

Please refer to our press release and our reports filed with the Securities and Exchange Commission, where you'll find a more comprehensive discussion of our performance and factors that could cause actual results to differ materially from these forward-looking statements.

For anyone who dialed into the call by telephone, you may want to download our first quarter 2019 earnings presentation. Please visit our Investor Relations site, ir.mtbc.com, click on Events and download the earnings presentation.

Finally, on today's call, we may refer to certain non-GAAP financial measures. Please refer to today's press release announcing our first year -- first quarter 2019 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

With that said, I'll now turn the call over to the Chief Executive Officer of MTBC, Stephen Snyder. Steve?

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Stephen A. Snyder, MTBC, Inc. - CEO & Director [3]

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Thank you, Shruti. And thank you, everyone, for joining us on our first quarter 2019 earnings call. We are pleased to report a strong start to 2019, including revenue of $15.1 million, an increase of 82% from Q1 of 2018 and a $606,000 increase in adjusted EBITDA to $1.6 million, which represents the highest quarterly EBITDA in our company's history.

Revenue and adjusted EBITDA were both consistent with our 2019 guidance, as we delivered our eighth consecutive quarter of positive adjusted EBITDA. During the 5 years since our IPO, we grew our revenue at a compound annual growth rate of 37%, from $10 million in 2013 to over $50 million in 2018. In addition to our top line growth, we're pleased to double our adjusted EBITDA year-over-year during 2018 while generating positive cash from operations.

In recognition of MTBC's track record, we are pleased that NASDAQ uplisted MTBC from the NASDAQ Capital Market to its exclusive NASDAQ Global Market during the first quarter after concluding that we satisfied its strict financial, liquidity and corporate governance standards. We're thankful to our enthusiastic team members and clients for enabling us to achieve this growth and qualify for inclusion in the NASDAQ Global Market.

While our early days were focused on providing manual medical billing and transcription to small practices, over the last 18 years, we've evolved into one of the nation's leading providers of cloud-based practice and revenue cycle management, proprietary health care IT solutions and integrated technology-driven services to health care practices.

As we've evolved, we've become known in the industry as MTBC rather than Medical Transcription Billing Clerk, so we were pleased to officially update our name to MTBC during the first quarter to better reflect our company mission and DNA.

Moreover, since our last earnings call, we also announced the closing of our small -- of a small tuck-in transaction. We acquired substantially all the assets of Etransmedia Technology, Inc. and its affiliated companies for less than 1/2x revenues. Similar to MediGain and Orion, the last 2 larger businesses that we acquired, Etransmedia recognize the opportunity to be a consolidator in our space. However, Etransmedia like those before it, lack 3 things that enable us to succeed where others have tried and failed: First, a leading-edge proprietary platform; second, a cost-efficient global team of experts; and third, we've unparalleled experience successfully integrating companies in our highly fragmented space. Etransmedia is emblematic of the type of tuck-in acquisitions that we are positioned to close and integrate, while we continue to work at identifying and selecting the most attractive, larger acquisition targets.

I'll now turn the floor over to our President, Hadi.

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A. Hadi Chaudhry, MTBC, Inc. - President & Director [4]

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Thank you, Steve, and thank you, everyone, for joining us on our first quarter 2019 call. The first quarter marked another exciting chapter in our story of building one of the nation's leading cloud-based practice management, revenue cycle and health care IT platform. We had a great quarter and remain on track to grow our revenue by 25% or more, while striving to again nearly double our adjusted EBITDA year-over-year.

Here in quarter 1, we made additional strides in successfully integrating our Orion acquisition. This progress included not only cost reductions but forward momentum and integrating key operational components of Orion with our larger operations. These combined teams from client success to patient services, coding to credentialing and finance to HR have laid an even stronger foundation for our growth.

We are more capable of succeeding today as we onboard new accounts whether they are joining us through acquisitions or organic growth. While we only recently acquired Etransmedia, we have already made material progress at integrating this latest tuck-in transaction. We are also in the process of onboarding our first facility billing and HCIT hospital client, and we are hopeful that this new relationship will pave the way for our continued expansion into the hospital space. We've an exciting year ahead, and we look forward to providing updates as we progress.

I will now turn the floor over to our Chief Financial Officer, Bill Korn. Bill?

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Bill Korn, MTBC, Inc. - CFO [5]

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Thank you, Hadi. Revenue for the first quarter of 2019 was $15.1 million, which represents an increase of 82% compared to $8.3 million in first quarter of 2018. For the first quarter of 2019, our GAAP net loss was $296,000 compared to GAAP net income of $75,000 in first quarter 2018. The GAAP net loss in the most recent quarter, includes noncash amortization and depreciation expense of $757,000, including $262,000 resulting from the amortization of intangible assets from the acquisition of Orion during the second half of 2018. It also includes stock-based compensation expense of $758,000.

The increase in these 2 GAAP expenses, which are primarily noncash in nature more than accounts for the difference in our net income year-over-year. A sequential comparison may also be useful this quarter to illustrate the improvement in our GAAP net loss from the integration of our Orion acquisition, which occurred during third quarter 2018. Our GAAP net loss was $296,000 for first quarter 2019 compared to a GAAP net loss of $576,000 in fourth quarter of 2018. The 49% reduction in our net loss is due to our team quickly and effectively reducing costs associated with revenue cycle management business. Using our technology where possible, we're placing subcontractors with our own offshore employees, downsizing or closing offices and otherwise reducing costs.

In the 3 quarters since this acquisition, we were able to reduce the total operating expense of Orion's RCM business by 59% from their expenses during the quarter before the acquisition. Our GAAP net loss per share was $0.15, based on the net loss attributable to common shareholders, which takes into account the preferred stock dividends declared during the quarter.

Adjusted EBITDA for the first quarter of 2019 increased by 62% to $1.58 million as compared to $974,000 in Q1 2018. This was our eighth consecutive quarter of positive adjusted EBITDA and represents a new record for MTBC. As we continue to scale our business through both organic sales activities and strategic means such as the Orion acquisition, we're able to spread our fixed overhead over larger revenues. The difference of $1.9 million between adjusted EBITDA and the GAAP net loss reflects $757,000 of noncash amortization and depreciation expense, $758,000 of stock-based compensation, $205,000 of integration and transaction costs related to recent acquisitions, $17,000 of net interest expense, $244,000 of foreign exchange losses offset by a $64,000 change in contingent consideration and a $41,000 benefit for income taxes.

Non-GAAP adjusted net income for first quarter 2019 was $1.3 million, representing growth of 92% or $611,000 compared to Q1 2018. Again, since non-GAAP adjusted net income excludes noncash amortization of purchased intangible assets, stock-based compensation, integration, transaction and restructuring costs, management finds that it better reflects our overall operating performance. We have reported 6 consecutive quarters of positive adjusted net income. Non-GAAP adjusted net income was $0.11 per share and is calculated using the end-of-period common shares outstanding.

Our Q1 2019 GAAP operating loss was $238,000. Our non-GAAP adjusted operating income was $1.1 million or 8% of revenue, which represents an improvement of $408,000 or 55% from Q1 2018. During the first quarter of 2019, MTBC generated $938,000 in cash from operations, which was MTBC's sixth consecutive quarter with positive cash from operations. Management utilizes non-GAAP measures of profitability such as adjusted EBITDA, adjusted operating income and adjusted net income in part because they better approximate the cash impact of the company's operations.

We expect to continue generating positive cash from operations as we did during each of the 4 quarters of 2018, even though, we'd expect to report a GAAP net loss for the next few quarters, as we continue to amortize the intangible assets from our latest acquisitions.

We ended the first quarter of 2019 with over $12.5 million in cash and an untapped $10 million line of credit from Silicon Valley Bank. Our line of credit is available to help finance growth initiatives, including potential future acquisitions with the bank's approval. Our working capital computed as current assets less current liabilities was approximately $14.5 million on March 31.

In addition to common stock, MTBC has nonconvertible Series A Preferred Stock, which is perpetual, trades on the NASDAQ Global Market under the ticker MTBCP. It has monthly cash dividends at the rate of 11% per year and can be redeemed at the company's option at $25 per share starting in November 2020.

I'd like to close by reaffirming our 2019 guidance. For those looking at the webcast or those who downloaded our earnings presentation, please look at the slides, which tell the picture much better than I can. If you're listening by phone instead of by webinar, I suggest you download our first quarter 2019 earnings presentation. Go to our Investor Relations website, ir.mtbc.com., click on Events and download the first quarter 2019 earnings presentation at the top of the Page.

We continue to anticipate full year 2019 revenue of approximately $63 million to $65 million, which represents growth of 24% to 29% over 2018 revenue.

Revenue guidance is based on our expectations regarding revenues from existing clients and new clients acquired through organic growth and to our tuck-in deals like Etransmedia but excludes the effect of any additional material acquisitions.

This will continue our trend of steadily increasing revenues from $10 million in 2013, the year before of our IPO, to more than $50 million in 2018. We continue to anticipate that adjusted EBITDA will be $8 million to $10 million for full year 2019, representing growth of 67% to 108% over 2018 adjusted EBITDA, as we continue to scale our business.

MTBC's financial position is its strongest ever. Our 2018 adjusted EBITDA was double 2017's adjusted EBITDA, and we anticipate a roughly similar increase in 2019. This gives us the freedom to pursue multiple paths for continued growth, including organic growth, partnership opportunities and the potential for material accretive acquisitions. Since we can't predict the timing and magnitude of significant acquisitions, our forward-looking guidance does not take these into account.

I'll now turn the floor over to our Chairman, Mahmud for his concluding comments.

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Mahmud U. Haq, MTBC, Inc. - Founder & Executive Chairman [6]

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Thank you, Bill. We had a strong start to 2019, which promises to be another year of record-breaking growth and increased profitability. We thank our investors, customers, employees for their continued support.

We will now open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Gene Mannheimer with Dougherty & Company.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [2]

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I wanted to ask you about -- a little bit about Etransmedia little bit more. It sounds like the contribution or revenue was, call it, $3.5 million based on the multiple, the revenue that you paid and I understand that's already factored into your guidance for the year. So I guess the question is, how much revenue from tuck-ins is contemplated in your outlook? In other words, if you were to close another one like this, I mean, would that necessitate a revision to your full year guidance? And when will the transaction be accretive?

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Bill Korn, MTBC, Inc. - CFO [3]

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Thanks, Gene. And it's -- I want to say, it's great having you covering us. I think we're -- we feel honored to having an analyst who covers Allscripts and you covered Athena through their growth to $1 billion covering us. I would say, it's great to have you.

As far as Etransmedia, as you noted, we paid $1.6 million, and while we haven't given sort of official guidance as to how much revenue to expect, we anticipate that just like Orion, we'll get at least twice the continuing revenue to the value that we paid. So yes, that'll be in the $3.5 million annualized range. Yes, we recognized that Etransmedia had gone through some hard times before, and so our model takes into account the fact that there are some clients who probably looked at other alternatives and at the same time, worked as hard as possible to keep them with us. And in terms of what we baked into our model, I guess, I'd say, there are 2 small paths to growth and 1 big path to growth. As we continue to sign new organic clients, such as for example, The Heights Hospital, those can add pretty significant chunks of revenue, and we've got other new clients that we've been signing. So in some respects, whether we did another Etransmedia deal or did another hospital or large practices, those are sort of a wash as to which one is in there. So I wouldn't specifically say whether we have 1 or not, I think we're going to continue to, as we look for bigger, very accretive deals, we're going to continue to look for organic opportunities that make sense. And when we see tuck-ins like Etransmedia, that can get done without breaking a sweat, then we'll continue to do those.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [4]

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And my follow-up question would be on the Orion acquisition. Now you cited 59% reduction in OpEx, I think, since closing the transaction. Is that -- how does that compare with your expectations going into it, and is there still more to go with that one?

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Bill Korn, MTBC, Inc. - CFO [5]

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Yes. So the 59% on Orion is from the quarter before we closed the transaction. So we looked at what was their expense in second quarter of last year. We bought them on July 1. So you won't see the whole 59% in our numbers because we didn't take on some costs even when we started. But I'd say, it's very consistent with what we expected. When we purchased MediGain, looking out at a total of 4 quarters, there was a 62% decrease in expenses from the quarter before we bought them. So now 3 quarters into Orion, we're at 59%. As we look at the current second quarter, there are still reductions that happened in the middle of first quarter, where you got partial quarter effect, and so you'll see a little bit more. So I think this will be very similar. And again, our team is focused primarily on the cost reductions in Orion's revenue cycle management business. Orion has 2 other lines that were actually both positively contributing to profits before we bought them. There is a group purchasing organization, which generates a little over $1 million a year in revenue and the GPO has essentially very little cost with because physicians are buying vaccines from Merck and Sanofi, we're getting a quarterly rebate check, so there's no cost. So there's really not much you could you do to reduce the cost there. And finally, Orion was managing 3 physician practices, so we got 100 employees across 5 offices in the Midwest who are nurses and other caregivers and again, there's no real plans to change that model. It's nicely profitable. It's a core stream of revenue that we don't have to do much about, but we wouldn't really look at doing things in that particular business because not really the same kind of synergies or opportunities to change the cost structure there.

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Operator [6]

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(Operator Instructions) And our next question comes from Brian Marckx with Zacks Investment Research.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [7]

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Congrats on the quarter. Bill, wonder if you can give us the break down of the 3 business segments in terms of revenue.

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Bill Korn, MTBC, Inc. - CFO [8]

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So thanks, Brian. So I guess, when you say the 3 business segments, I think if you look in the 10-K, and you'll find the same thing as we go into this 10-Q. We actually divide ourself in 2 business segments. Health care IT and practice management. And the practice management business, last year, for the half of the year was roughly $6 million of revenue. It's roughly accounting business. So it's roughly about $12 million of revenue per year. The remainder of the revenue is in our health care IT business, and that includes about $1 million annually of GPO revenue. It includes traditional revenue cycle management. It includes some printing and mailing and other ancillary services. We actually give a little bit more of a detail of revenue in 1 of the notes but in terms of providing segments and a full P&L, we break it to into 2 segments. And in large measure, the practice management business is separated again because the cost structure, the economics are very different. So we feel it's useful to separate that out and that will have different margin and growth expectations going forward.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [9]

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Okay. So the itemization in the Q will be the same as itemization was in the K, is that right?

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Bill Korn, MTBC, Inc. - CFO [10]

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That's right. There'll be a note that I believe is called disaggregation of revenue that might have, I'll say, 7 categories in it that gives you a little more granular detail on revenue. And again, a lot of the same people are doing the same things, so it's really hard to separate out the costs.

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Brian W. Marckx, Zacks Investment Research, Inc. - Director of Research and Senior Medical Technology, Medical Device & Diagnostics Analyst [11]

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Yes, Okay. I understand, yes. In terms of G&A expense, in Q1, it was about $700,000 less than what we were anticipating. Was the G&A expense where you thought it would shake out? Or was it may be lower than where you anticipated? And can you give us a little bit help with where you think it goes into Q2?

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Bill Korn, MTBC, Inc. - CFO [12]

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Sure. So I would say, G&A was pretty much on track with what we were planning for and managing for. As you know when we buy companies, we've always got to look at what was it that caused -- if we're buying companies and we're paying a lower price, you know that they weren't doing everything right. What were they doing that we could change that wouldn't negatively impact customers. And the simplest thing is, those big offices that you don't need, find the back-office as expense that doesn't really impact the customer and find ways to do it more cost effectively. I think when we put together our plan, we had -- even at the time that we closed Orion, we had specific steps in mind and specific time lines. So I think we're actually executing on that pretty well against plan. We also recognize that when portraying out to The Street, we don't necessarily want to tip our hands completely and tell everybody everything that we possibly could do. We like to have a little bit of room because things happen that are unforeseen. And so if I then think about the G&A going forward, and I think about profitability for the rest of the year. On April 1, we acquired Etransmedia, now again, before we acquired Etransmedia, their business was losing money. And we've already taken lots of steps, but I'd say, if I think about the full year 2019, the overall expense, the overall profitability will be exactly what we expected. If I look at Q2, yes, it will -- the Etransmedia will probably have a little bit of a drag on Q2 that will neutralize and maybe be a little positive in Q3, and then will be really accretive in Q4. So again, it's hard. If we bought a company that was generating 30% profit margins, the amount we'd have to pay would be a lot more. If you want to be able to buy these things at a real discount, you got to assume that the day you close the transaction, you look at it in their case, for example, 3 big offices where there's opportunity to sublease out a lot of unused space or maybe get out of things. So there's a lot of that's happening even in the 35 days since we completed that transaction.

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Operator [13]

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And this will conclude our question-and-answer session. I'd like to turn the conference back over to Shruti Patel for any closing remarks.

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Shruti Patel, MTBC, Inc. - General Counsel & Corporate Secretary [14]

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Thank you. Thank you, everyone for joining our call. We hope that you all have a great day, and we'll speak to you soon. Thank you.

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Operator [15]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.