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Edited Transcript of SMED earnings conference call or presentation 23-Oct-19 3:00pm GMT

Q1 2020 Sharps Compliance Corp Earnings Call

HOUSTON Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Sharps Compliance Corp earnings conference call or presentation Wednesday, October 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David P. Tusa

Sharps Compliance Corp. - President, CEO & Director

* Diana Precht Diaz

Sharps Compliance Corp. - VP, CFO & Corporate Secretary

* John Nesbett

Institutional Marketing Services, Inc. - Founder and President

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Conference Call Participants

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* Brian Joseph Butler

Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

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Presentation

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Operator [1]

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Greetings and welcome to the Sharps Compliance First Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, John Nesbett, Sharps Compliance Investor Relations. Thank you, Mr. Nesbett. You may begin.

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John Nesbett, Institutional Marketing Services, Inc. - Founder and President [2]

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Good morning and welcome to the Sharps Compliance First Quarter Fiscal 2020 Earnings Call. On the call today, we have David Tusa, the company's President and Chief Executive Officer; and Diana Diaz, Vice President and Chief financial Officer. David will review the company's business performance, operations and growth strategies, while Diana will review the financials. Immediately following their formal remarks, we will take questions from our call participants.

As you're aware, we may make some forward-looking statements during the formal presentation and in the question-and-answer portion of this teleconference. These statements apply to future events which are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where we are today. These factors are outlined in our earnings release as well as in the documents filed by the company with the Securities and Exchange Commission. These can be found on our website or at sec.gov.

So with that, let me turn the call over to David to begin the review and discussion. Go ahead, David.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [3]

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Thanks, John. Good morning and welcome, everyone, to our first quarter fiscal year 2020 earnings conference call. Fiscal year 2020 is off to a very strong start, with first quarter results reflecting record quarterly revenue of $13.6 million and customer billings of $14.2 million; also enhanced gross margins and increased profitability. Importantly, both June and the September quarters saw growth across all of our service offerings, which we believe demonstrates our success in transforming our operating model from a mailback-only company to a comprehensive service provider to health care and the retail markets.

Our 2 portfolio expansion services, route-based pick-up and medication management, including MedSafe, are increasing at quarterly rates of 25% and 45%, respectively, and accounted for 37% of consolidated revenue in the first quarter. These 2 services greatly increase the recurring revenue and more predictable component of the revenue model.

So while we're very pleased with the strong growth we have seen over the past 2 quarters, we're very focused on driving longer-term sustainable growth, increasing recurring revenue, which we believe can be accomplished through further penetration of the $1 billion medical waste management market for small and medium quantity generators and through our continued leadership role in the United States providing solutions designed to facilitate the management of ultimate user unused medication, which we believe could also evolve into another $1 billion market opportunity.

So with that, let me provide a bit more details on the quarterly revenue growth by market. Our Retail segment achieved strong growth of 83% driven by strong flu-related business, which increased by $1.4 million for the quarter, and increased demand for unused medication solutions for both commercial and state prevention programs, which increased $400,000. In our Home Health Care segment, we achieved billings growth of 72%. This is largely due to the expansion of our relationship with a major health care distributor, which included additional orders as well as large stocking orders. The Home Health Care segment was the business that launched Sharps Compliance 20-plus years ago, so it's very gratifying to see significant growth in this sector as home health care services are playing a larger role in treating patients in a more effective manner in the country.

We saw solid growth of 13% in Professional market billings. This organic growth is driven by the company's ability to provide a combination of the cost-effective and easy-to-use Sharps Recovery System along with the company's route-based pick-up services to service customers from the small to medium quantity generator. This is made up of physician practices, clinics, dentists, surgery centers, veterinarians and other health care professionals.

A few years ago, we began expanding the medical waste management route-based presence to complement the mailback offering. Our goal was to establish more predictable and recurring consolidated revenue in addition to allowing us to address larger volume medical waste and related facilities. We've seen a great deal of traction with the strategy, and as of September 30, we service over 13,000 customer locations directly with our route-based service, operating in 24 states. This compares to about 11,000 customers located -- customer locations at the same time in the prior year, about an 18% increase over year-over-year. We believe there's a significant opportunity for continued growth in this segment, and we're focusing -- focused on increasing our route-based penetration in existing and new markets as we move through fiscal year 2020 and beyond.

Additionally, we're focused on addressing the strong marketplace demand for our unused medication management solutions, including the MedSafe and the TakeAway Medication Recovery System Envelopes. We believe we are the leader in the patient-dispensed unused medication management business. And this part of our business now represents about 17% of our overall billings for the first quarter of 2020. We are targeting continued strong growth for this solution through fiscal year 2020 and beyond. At September 30, 2019, we've grown this business to an installed base of 4,100 collection receptacles in retail as well as hospital pharmacy, long-term care, drug treatment and licensed law enforcement facilities. We've processed over 38,000 inner liners. And as a reference point, installed collections were about 2,800 a year ago, with returned liners of about 20,000.

Experts say that solving the opioid crisis could be accomplished through education, drug treatment and prevention. Our unused medication management solutions fall into the third category, prevention. We're proud of our leadership role in providing a prevention solution to help solve the epidemic and prescription drug abuse and accidental poisonings in our country. We're also proud of our relationships supporting state programs such as North Dakota, Iowa, Missouri and Montana. We applaud these states in taking the initiative to address prevention through the use of our MedSafe system.

So let's dial forward just a bit. Let's talk about the December quarter. The 2019 flu-related business has been very strong: billings of about $4.7 million for the quarters ended June and September. And as many of you know, the flu business has June, September and December. And this $4.7 million compares to about $2.5 million in the corresponding prior year period, so an increase of a little over $2 million or 88%. So as we look forward, we're very excited about the growth prospects this year. There's a few factors that are important to understanding the upcoming December quarter.

Flu-related orders that we've received in the December quarter so far, meaning through yesterday, are about $1.2 million. Given the strength that we saw in the June and September quarters, it's likely that flu-related orders could moderate in the December 2019 quarter as compared to the $3.2 million achieved in the December 2018 quarter. Good news is that for the overall 2019 flu season, orders have been very strong.

And as I discussed earlier, quarterly growth in the Home Health Care segment of $1.4 million or 72% includes both new business and stocking orders from an expanded health care distributor relationship. We're excited about the prospect for growth in this market, but we're in the early stages of this new relationship. So it's difficult for us to predict future growth levels.

In spite of these 2 factors, the strength of our growing and more diversified non-flu business, including the route-based business growing at 25%, unused medication management business growing at 45% and expected orders for our new TakeAway Recycle System of about $500,000 in the December 2019 quarter, we should show results -- consolidated revenue results for the December quarter, we believe, at least the levels that we had in the December quarter of the prior year of $12.4 million.

So looking forward to the full year, we believe we're very, very well positioned with our diversified portfolio of solutions to drive organic revenue growth consistent with or hopefully better than last year's 10% revenue growth rate. We're also working close -- we're very working closely on several large MedSafe and TakeAway Recycle System deals that we think have the opportunity to provide us even greater growth or higher growth levels for 2020.

In recent developments, Linda Brock, our former VP of Sales, resigned recently for personal reasons. We have a search underway for her replacement and hope to fill it soon. We have a strong and experienced sales team in place and enthusiastic about the momentum they consistently generate. We thank Linda for her contributions and we wish her well.

Now before I turn the call over to Diana, I want to cover a few key points. I think it's really important, these key points, to understanding this story. We believe we are the leader in the ultimate user unused medication management business addressing the opioid crisis in this country. This crisis is something that we all read about every day. And while the 40-plus percent revenue growth generated with our MedSafe and Takeaway envelopes over the past few quarters is strong, we believe we're just getting started. As a matter of fact, we're working on a number of deals, if closed, could significantly increase our revenue growth rate for this sector. So we believe we are the company leading the country in developing this market, which we think could ultimately be valued at $1 billion.

The second point. We have successfully expanded our route-based business, growing 25% this quarter, 21% for the fiscal 2019, to more effectively address this greatly underserved small and medium quantity medical waste management market, primarily in the professional sector. We estimate that the professional market medical waste management opportunity is about an $800 million market. We believe we're well positioned to further penetrate this market as the industry continues to look for alternative providers.

The third point. Our revenue profile now includes a much greater portion of solutions generating recurring and more predictable revenue. This is very important to a growing company as it develops critical mass, improves visibility and gains further confidence to invest in more sales and marketing and related initiatives.

Finally, the fourth point. We are a much different company than we were just a few years ago. We are now a comprehensive solution provider to health care and retail, not just a mailback company. We believe we are the leader in the ultimate user medication management business and the #2 player in the country providing medical waste management services to the small and medium quantity generator sector. As such, we plan to take advantage of our leadership positions and continue the momentum of strong revenue growth.

So one last thing before we turn it over to Diana. It's important to thank the management team and the employees for all their efforts. It's been really busy. There's not many companies that are growing at 30% growth levels. So we appreciate all the commitments of our employees and the dedication.

So with that, Diana, to -- why don't you give it a shot at the -- covering the financial side.

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [4]

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Okay. Thank you, David. First quarter fiscal 2020 revenue increased 32% to $13.6 million as compared to $10.3 million in the first quarter of fiscal 2019 and increased by 12% sequentially compared to the fourth quarter of fiscal 2019.

Our route-based pick-up billings for the first quarter of fiscal year 2020 of $2.7 million are up 25% compared to $2.1 million in the prior year quarter and contributed 19% of total billings for the quarter. Our unused medication billings of $2.4 million are up 45% compared to $1.6 million in the prior year quarter and contributed 17% of total billings to the quarter. Our mailback billings of $7.7 million are up 38% compared to $5.6 million in the prior year quarter and contributed 54% of total billings for the quarter.

Gross margin improved to 33% in the first quarter as compared to 32.6% gross margin in the first quarter of fiscal 2019.

SG&A expense increased 16% to $3.5 million but decreased to 26% of revenue for the first quarter of fiscal 2020 compared to SG&A of $3 million or 29% of revenue in the same prior year quarter. The increase in SG&A compared to the prior year quarter is related to our continued investments in sales and marketing and some increases in professional fees. SG&A for the December 2019 quarter is expected to be around $3.2 million.

The company reported operating income of about $800,000 in the first quarter of 2020 compared to operating income of $125,000 in the first quarter of 2019.

We recorded net income of $700,000 or $0.04 per basic and diluted share this quarter compared to net income of about $70,000 or breakeven earnings per share in the first quarter of 2019.

We recorded EBITDA of $1.2 million in the first quarter of fiscal 2020 as compared to EBITDA of $500,000 in the same period of last year.

Now looking at the key billing comparisons for the first quarter of fiscal year 2020. Professional market billings increased 13% to $4.1 million. Retail billings grew 83% to $4.1 million as compared with the prior year. Home Health Care billings increased 72% to $3.3 million. Government billings increased 28% to $800,000. Pharmaceutical manufacturer billings increased 16% to $900,000 primarily related to inventory builds for several current and one new patient support program.

For the first quarter of fiscal 2020, our mailback solutions represented 54% of customer billings and increased 38% over the prior year. And for the same period, our route-based pick-up was 19% of customer billings and grew 25% over the prior year, while our unused medications represented 17% of customer billings and grew 45% compared to the prior year period. The growth in our unused medication segment is primarily due to higher billings for MedSafe, included -- including billings related to the continuing launch of a major unused medication program. The rollout of this specific program began in 2018, and as we continue with the build, we will install a greater number of units in calendar 2019 than in 2018.

The inside and online sales channel achieved a 9% increase in billings in the first quarter of fiscal 2020 compared to the prior year.

Our balance sheet remains solid with $4.9 million of cash at September 30, 2019, and working capital of $9.9 million.

And with that, I'll turn the call back over to David.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [5]

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Right. Thanks, Diana. Operator, I think we're ready to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Gerry Sweeney with Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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Just a couple of questions. I'll start on the route-based side. Obviously, very good growth there. I'm assuming it's a function of just your combined services plus increased resources: sales, marketing, et cetera. Is this -- as we look forward, is growth directly related to just increased investment in sales, et cetera? Just want to get a tone and tenor of sort of what the market is looking for and the opportunity on a go-forward basis.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [3]

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Good question, Gerry. I think it's a couple of things. It's obviously more sales and marketing. I think the other thing is we're starting to develop really a good brand in the marketplace for the route-based services as we do for the mailback. So as we create more and more awareness of our offering in the marketplace, I think it really helps and positions us, and I think that's a component of the revenue growth as well.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Got it. And obviously, very nice growth on the MedSafe side. Any way you could update us on your partnerships with some of the retail pharmacies and potential rollout? Any visibility into maybe calendar 2020 on that front?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [5]

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Well, I think, as Diana mentioned, this year we'll see more units installed versus the prior year. We've got a great relationship with the retail pharmacies. And it's really difficult to see them not continuing the programs and potentially even increasing the volume going forward. So it's going well, and we're hopeful that we're going to continue at current and hopefully even higher levels of installs.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Got it. And final question. You sort of touched upon this in your opening remarks. I get the flu side, you sort of bracketed that out. Any way you could give us a little bit more detail on maybe some of the stocking orders, some of the impact that had on the quarter? Obviously, route-based mailback growing, much more consistency. But just wanted to see if we can bracket out some of the stocking orders so we can just get a maybe better baseline or bench level-type revenue for the quarter.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [7]

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So are you talking about the stocking orders of the Home Health Care business?

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Yes. Yes.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [9]

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So we're really pleased with the fact that we've expanded a major distributor relationship. It's really exciting. And so we had significant orders in the quarter. We've always done about -- what is it, Diana? I'm looking at the last quarter, like $1.9 million a quarter, roughly -- in the Home Health Care business.

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [10]

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Right.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [11]

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So we think we have a real opportunity to increase that level of Home Health Care. I don't know if it will be $3.3 million every quarter because it did have some stocking orders, but we think this is a real opportunity to increase the quarterly growth. Typically, it's been flat on Home Health Care, so we think we can start to increase at much more significant levels on a going-forward basis.

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Operator [12]

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Our next question comes from the line of Kevin Steinke with Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [13]

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So just following up on that last discussion about the home health care market. Obviously, nice to see the nice billings there and the significant expansion in the distributor relationship. And you just mentioned that you think you have the opportunity to grow that market faster. So I guess that indicates that there might be a little more sales resources or sales effort being applied to that market. I mean I think I've traditionally thought of that market as little or no growth and maybe not a whole lot of emphasis put on it internally in terms of growth. But is there something changing on that front that we should be aware of?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [14]

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Sure. I think there's 2 things. One, I think that the distributors -- this one in particular, the large home health care distributor -- are starting to see the value of the mailback to their customers. And we've always done business with distributors in the home health care, but I think they're seeing a bit more value and an opportunity for them to improve their relationship with the customer.

The other thing that I see as happening, there have been some consolidation in the marketplace in home health care, and we're hopeful that that's also going to benefit us as well since we're also the largest provider in the home health care sector. So putting both of those together, we're hopeful we're going to start to see some growth rates. Again, next quarter it won't be $3.3 million, but we think that we'll start to see some growth rates over that quarterly revenue of $1.9 million or $2 million. We should start to see that growth.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [15]

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Okay. And circling back on the route business -- route-based business. Obviously, continued nice growth there. What's the opportunity within your existing markets to continue to increase route density? I would think there's still a fair amount of room there, and related to that, improved profitability and margins in the route-based business overall with increasing route density.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [16]

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Absolutely. You're spot on. And that's the way to improve the profitability in that business. And that's what we're doing every day is selling more and more and more without adding more trucks and drivers. That's how you improve the route density. So I think we have a real opportunity there to increase the route density. We're very pleased with what we've done so far. We hope to see continued growth and then help to improve profitability as we do increase that route density.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [17]

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Okay. Good. And you also mentioned in your prepared remarks, I believe, related to the route-based business, that you'd like to serve new markets. With that, would you view that as mostly pursuing acquisitions, or is there opportunity to kind of expand into adjacent geographic markets that are adjacent to your existing markets just through growth and serve new markets that way? Or is it kind of a combination of those 2 things that you see?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [18]

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It's really a combination of both of those. And you've seen the schedule from the investor presentations. We're very heavy in the Northeast, Southeast and South. We have a lot of business obviously in the Midwest, which bumps up to the Northeast. And we see a real opportunity there to move in that area in a direct service way. And that could be organically, it could be through acquisition, but it's a real opportunity for us to grow that. And then we also look at acquisitions or potential tuck-ins in areas that we're already servicing to help improve the route density. So probably a combination of both, but it's something that we are focused on.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [19]

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Okay. Great. And then lastly for me, I think you mentioned TakeAway Recycle billings of about $500,000 expected in the December quarter. You had, I think, flagged that on your previous call as well. But just any more update on what's going on with that service and that market opportunity?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [20]

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Sure. It's -- in some of the previous calls, I've said that we would be able to figure out by the end of the calendar year that this was going to be a real market for us. So it is looking very positive. We've got a tremendous amount of interest in the TakeAway Recycle, the recycling of single-use devices. And the $500,000 is an order from a major device manufacturer that we've secured for the December quarter. But we think we have an opportunity for more orders in the calendar year 2020. So we're in some later-stage discussions with a number of customers as well as some health care systems, and it's looking positive that this could be a real market and an additional revenue stream for us.

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Operator [21]

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Our next question comes from the line of Brian Butler with Stifel.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [22]

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Just on the -- first, so revenue growth was tremendous, I mean, up -- the 32%. I would have expected more margin expansion. I mean gross profit, I think, was less than that and EBITDA was up something like 8.5%. Is -- has the economics changed on the operating leverage now that you have more route-based services? I mean, before, we were looking at somewhere between 40% and 50% of every dollar of revenue falling through. Has that changed to some new number? And how should we think about that operating leverage kind of going forward?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [23]

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No. It pretty much came in right at. When you look at the increase in the revenue year-over-year or even sequentially, you take the incremental revenue, we use 45% as the incremental margin. And it comes in really close to that. I think for the quarter, maybe over the prior year, it may have been off $100,000 to $200,000 for some infrastructure expenditures we've made. But we're -- it's the same model and it looks very close to that. Right, Diana?

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Diana Precht Diaz, Sharps Compliance Corp. - VP, CFO & Corporate Secretary [24]

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Yes. Brian, if you look back at the last few quarters, you can see that we did have some increases in our fixed costs related to some expansion into new areas. So I think the costs were a bit lower in the first quarter of last year, but our margins are very consistent with the 3 preceding quarters.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [25]

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Okay. And then I guess we'll go to the next one. Just on the M&A environment, you'd mentioned about tuck-ins. You've done some in the past. The service industry, at least the route-based service industries that we follow, seems like there's a lot of M&A activity. Can you give a little color on the M&A environment that you guys are seeing and where you stand there? And is it just not deals, or are you guys just having a hard time coming to terms on deals that are out there?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [26]

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Well, we're focused on certain geographic areas. And we know the players in those geographic areas, and we continue to talk with them. Yes, there are opportunities out there. But what I've found out over the last few years -- or realized over the last few years, Brian, there really needs to be a triggering event. There needs to be an event or there needs to be a real motivation for that seller to want to become part of a larger organization. And we are in discussions with some. But it takes a little bit more than just having conversations with some of these haulers. So we're focused on it. We're looking at it and hopeful to be able to get some of these deals done.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [27]

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Okay. And then maybe one last one. Just -- can you give a little color on the route-based pricing trends that you're seeing out there? Just how is that going? I mean, obviously, you're having a lot of expansion, a lot of volume growth. But what are you seeing on the pricing side?

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [28]

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Actually, we've seen it improve a little bit. We've seen it improve a little bit over the last couple of quarters. We don't see pressure, but what we've seen is opportunities for a bit higher prices.

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Operator [29]

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There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

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David P. Tusa, Sharps Compliance Corp. - President, CEO & Director [30]

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Great. Thank you very much. We appreciate everyone's participation in the call. We look forward to talking with you next quarter. Thank you for your support.

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Operator [31]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.