Q4 2023 Electromed Inc Earnings Call
Participants
Brad Nagel; CFO; Electromed, Inc.
James L. Cunniff; President & CEO; Electromed, Inc.
Brooks Gregory O'Neil; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Mike Cavanaugh; MD of Boston office; Westwicke Partners, LLC
Presentation
Operator
Greetings, and welcome to Electromed's Fourth Quarter Fiscal year 2023 Earnings Call.
(Operator Instructions)
As a reminder, this conference is being recorded. It is now my pleasure to introduce Mike Cavanaugh, Investor Relations. Thank you. You may begin.
Mike Cavanaugh
Good afternoon, and thank you for joining the Electromed earnings call. Earlier today, Electromed Incorporated released financial results for the first year and fourth fiscal quarter of 2023, the quarter ended June 30, '23. The release is currently available on the company's website at www.smartvest.com.
Before we get started, I would like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place any undue reliance on those forward-looking statements. And the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter.
I would like to take a minute to introduce you to a new name on today's call, Jim Cunniff. Jim will be joining Brad Nagel, Electromed's Chief Financial Officer, to provide the Q4 fiscal year 2023 corporate update. Jim joined Electromed as President and Chief Executive Officer on July 1, 2023. He brings over 30 years of executive leadership in the med tech and broader health care industry with demonstrated success in general management, sales and marketing, finance, manufacturing, distribution, mergers and acquisitions.
Previously, Jim was the President, Chief Executive Officer and Board Director of Provista, A Vizient Company, where he consistently grew revenue, executed 2 acquisitions and shape the strategic plan for the company. Prior to that, Jim was the President, Chief Executive Officer and Board Director for Lighters, the Senior Vice President of Americas for Kinetics Concepts and the President of Emerging Markets for Stryker Corporation. I am delighted to introduce him to the participants on this call.
With that, I will now turn the call over to Jim. Jim, please take it.
James L. Cunniff
Thanks, Mike. It's a pleasure to be here today. My first earnings call as the CEO of Electromed, and I'm grateful for everyone joining the call. I look forward to presenting a business update on our fiscal year 2023 4th quarter and full year results. Moreover, I'm thrilled to being with such a dynamic team with the mission of improving the quality-of-life for millions of patients. I'd be remiss not to mention my deep gratitude for Kathleen Skarvan, the former President and Chief Executive Officer of Electromed and current Board chair. Thanks to her exceptional leadership for over a decade, the company is in a strong position to continue to deliver against our strategic initiatives, and I look forward to building upon the business' strong foundation.
I am pleased to report another strong quarter as we achieved record quarterly revenue of $13.6 million, a robust year-over-year growth rate of 21%. Total revenues for fiscal year 2023 were $48.1 million, a 15% increase from fiscal year 2022. In the key home care segment, the results were even more impressive, generating $43.9 million in home care revenue, which represents a 16% increase year-over-year versus fiscal 2022. Brad will discuss the financial results in more detail but I wanted to underscore that these results clearly demonstrate that our strategic growth investments are yielding the results we anticipated.
Our commercial team delivered sales growth. We hired key talent, expanded our direct-to-consumer marketing and navigated the impact of the CMS waiver expiration. And that last point, I want to remind everyone about CMS Waiver, which was implemented during and tied to the public health emergency for COVID-19. As we discussed in our last business update, the CMS waiver for respiratory devices expired in May 2023. The waiver allowed indications and documentation typically required for HFCWO to be bypassed allowing for an easier and faster approval for patients on Medicare.
It is also worth noting that commercial plans, by and large, never waive the documentation requirements meaning that the waiver benefited only a subset of our referrals and approvals. All that being said, our sales and reimbursement teams did a great job focusing on provider education regarding patient eligibility requirements to mitigate the impact of the waiver expiration on our fourth quarter results.
Turning to an update on our strategic growth initiatives. It's gratifying to see the progress across all our growth -- strategic growth plans, key among them being the continued expansion of the sales force, which includes 46 direct reps in the field as of the end of fiscal year 2023. Our sales force experienced high referral flow and the productivity of the team continues to be impressive. We ended the year on the high end of our previously disclosed productivity target of $850,000 to $950,000, coming in at $945,000 in revenue per rep full year. We continue to make strategic investments in our commercial team expansion as they consistently deliver excellent top line growth.
In fiscal year 2024, we are budgeting for 54 direct sales reps, which will enable us to support a larger pool of physician prescribers. We anticipate having all our open positions filled by the end of Q1. I want to take a moment to turn to the SmartVest Clearway launch, a strategic milestone for Electromed, which was first offered into the key home care segment.
As Kathleen mentioned in our third quarter business update, the SmartVest Clearway Therapy device has received rave reviews from clinicians and patients, highlighting Clearway's ease-of-use, state-of-the-art touchscreen user interface and its lightweight, sleek and sophisticated design. This is the first new HFCWO device offered to the market in years. We have targeted approximately 1,000 of the top prescribers of HFCWO therapy in the U.S. for initial launch of Clearway. However, historically, not all these physicians had an Electromed prescribers. The new device is a door opener for existing prescribers of HFCWO and a commercial opportunity to expand adoption of the device to new customers.
In a related vein, I'm excited to announce that we are currently underway with the launch of Clearway for hospital customers. We launched the product in the first quarter of fiscal year 2024 and are looking forward to leveraging our new state-of-the-art product to gain share in the hospital market. As we have said in the past, our primary goal is to enhance the patient therapy experience. With the new Clearway Hospital device, Electromed has made significant advances in HFCWO technology that we believe gives us a tangible advantage over the competition. The Clearway device is an accelerant for our sales team to continue our growth and momentum. I look forward to updating you on the progress of the Clearway product for hospitals in our first quarter fiscal 2024 business update.
Turning to operating income. Operating income for the fourth quarter was $1.5 million, a 204% increase versus prior year, a result of operating leverage derived from the investments we have made in people, systems and our innovative new Clearway device. I've already touched on the expanded sales force, which despite having a ramp time for new personnel is achieving productivity at the high end of our targeted range. And another example of the investments we have made, Electromed implemented a new enterprise resource planning or ERP system in the quarter to help improve efficiency in our supply fulfillment and financial processes. The integration went very well. We've already -- we are already yielding benefits from the new ERP system and improved operational rigor and data insights into the business. Another key component of the election Med business model is fulfillment. This is the team that converts referrals into approvals and devices shipped to patients.
We continue to focus and refine our client servicing as we handle larger referral volumes and mitigate the impact of the CMS waiver expiration. Next, I wanted to take a minute to update you on another strategic goal of Electromed's growing the body of evidence in support of HFCWO. We have multiple published clinical outcome studies demonstrating a significant improvement in quality of life and reduction in exacerbation rates, hospitalizations, emergency department visits and antibiotic prescriptions in bronchiectasis patients using the SmartVest system.
As a reminder, we designed and ran a quality of life study for COPD patients using SmartVest, which we shared at the 2023 American Thoracic Society International Conference and published in the American Journal of Respiratory and Critical Care Medicine. The study's results demonstrated statistically significant favorable response to HFCWO as add-on therapy for patients with a primary diagnosis of COPD. We've also shared data from our bronchiectasis quality of life trial at the 2023, World Bronchiectasis and NTM conference highlighting the effects of HFCWO on clinical symptoms of patients with bronchiectasis. We will continue to generate additional clinical evidence to support the SmartVest system as a preferred treatment from bronchiectasis patients, and we will promote our new sponsored continuing medical education cores, aimed squarely at prescribers of the HFCWO therapy.
The purpose of the CME program is twofold. First, to focus on early identification of bronchiectasis and HFCWO treatment to pulmonologists; and secondly, to make it easier for pulmonologists to obtain necessary CME credits. These credits are important to physicians because some states require a specified number of credits annually to maintain medical licenses and because most hospitals require a specified number of credits for their physicians to remain credential to see patients.
Lastly, before I hand the call over to Brad, another key growth initiative for 2024 will again be direct-to-consumer and physician marketing, intended to raise awareness of the SmartVest Clearway, HFCWO therapy and drive demand.
With that, I'd like to hand the call over to Brad for a review of our financials. Brad?
Brad Nagel
Thank you, Jim. Net revenue for our fourth quarter grew 20.8% over Q4 of last year to $13.6 million, bringing net revenue for our full fiscal 2023 to $48.1 million or 15.4% annual revenue growth over fiscal year 2022. Revenue in our direct home care segment, which represented 91% of our overall revenue in FY '23 increased year-over-year by $5.9 million or 15.6% to $43.9 million. The growth was primarily due to an increase in direct sales representatives. Our sales teams, refining their selling process and clinic targeting methodology and the positive market momentum from the introduction of our newest generation SmartVest Clearway in Q3 of this fiscal year.
Institutional or hospital revenue increased year-over-year by $0.4 million or 25.3% to $2.1 million. The revenue increase was due to increased capital purchases and stronger consumable volumes compared to fiscal 2022. Home care distributor revenue increased year-over-year by $0.1 million or 9.8% to $1.6 million. The revenue increase in fiscal 2023 was due to increased demand for our primary home care distribution partner. International revenue decreased year-over-year by $0.1 million or 18.6% to $0.4 million. We continue to support and maintain our current distributors in the international markets. However, growing our international business is currently not a primary focus for us.
Gross profit increased to $36.5 million in fiscal 2023 or 76% of net revenues from $31.4 million or 75.5% of net revenues in fiscal 2022. The increase in gross profit was primarily related to increases in domestic home care revenue, including the Medicare allowable rate increase that took effect in January 2023. Selling, general and administrative or SG&A expenses were $31.6 million in fiscal 2023, representing an increase of $4.5 million or 16.5% from $27.1 million in fiscal 2022. The increase was primarily due to additional headcount and associated costs in our sales and reimbursement departments, representing our investments in growth.
R&D expenses decreased by $0.5 million or 32.4% to $0.9 million in fiscal 2023 compared to $1.4 million in fiscal 2022. The decrease in the current year was primarily due to reduced professional consulting costs associated with our Clearway development activities. Net income for fiscal 2023 was $3.2 million or $0.36 per diluted share compared to net income of $2.3 million or $0.26 per diluted share in fiscal 2022. The increase of 37.4% in current year net income over fiscal 2022 was primarily due to stronger home care revenue growth. As of June 30, 2023, Electromed had $7.4 million in cash, $24 million in accounts receivable and no debt, achieving a working capital of $30 million and total shareholders' equity of $38 million.
With that, we'd like to move to the Q&A portion of our call. Operator, please open the call to questions.
Question and Answer Session
Operator
(Operator Instructions)
Our first question comes from the line of Brooks O'Neil with Lake Street.
Brooks Gregory O'Neil
Congratulations on the strong finish to the year. Let me just ask you, obviously, Kathleen has left the company in a tremendously strong position and your results reflect that. So as you come into the company and think about the kind of impact you hope to have on the business. Could you highlight 1 or 2 things that really stand out to you as untapped potential or strategic priorities for the company over the next year or 2?
James L. Cunniff
We appreciate you being on the call, and thanks for the question. I'm really excited to be here. Just some context, I think, would be helpful. I came to Electromed as I was seeking to lead a small and dynamic company to help take it to its next phase of growth. And Kathleen, obviously has done a phenomenal job of setting a really strong foundation for the company. I'm relatively new to the company. So this is, I think, week 6 that I've been here and have been really successful thus far. However, we will be weighing adjustments to our long-term goals and strategies in the not-too-distant future. But there are a couple of things that really stand out to me.
We obviously have a brand-new product that is being very well received in the marketplace. And it's -- there's no other competitive VARs that can say that. So it's opening doors for us, and we really want to lean into that. The other piece is, obviously, the investments we're making in our sales team are paying dividends. We want to continue to thoughtfully grow that because it's not just the sales team, but we need to put infrastructure behind them to grow predominantly within our reimbursement team.
But Brooks, in answer to your question on maybe some areas where there's untapped potential, I think there's a lot still here in the United States. But we also need to look at are there some things that we may be able to do even internationally that are not a distraction to our business to help grow that fledgling piece of our business today. But those are some of my initial thoughts as I've gotten to know the business better over the last 6 weeks.
Brooks Gregory O'Neil
Great. I appreciate that, Jim. And then I was just curious for Brad, obviously, I probably did a poor job bottling the tax impact this quarter. But can you help me to think about what's the likely tax rate for the coming fiscal year?
Brad Nagel
Yes. Thanks for the question, Brooks. As you look at our last couple of years here in the mid-20s as a tax rate. I think that, that's a fair expectation that we expect to be able to continue. Obviously, we are always looking at our tax planning and strategy to be able to drive improvement and make sure that we're leveraging most of the opportunities that we have out there. But I think what you saw this year, even the slight improvement over last year, just below 25% is a good starting point.
Operator
That is all the time we have for questions. I'd like to hand it back to Jim Cunniff for closing remarks.
James L. Cunniff
Well, thank you for participating today and your continued support of Electromed, everyone that's on the call. I'd like to mention that Electromed will be hosting an investor meetings in person and virtually in early September. And if you'd like more information or you'd like to participate, please contact our Investor Relations contact at ICR Westwick. Additionally, I'm also excited to be at the helm of this growing company and look forward to continuing to execute against our strategic growth plans and scale Electromed's business. Our expanding sales team continues to operate at a high level, and we expect our new Clearway SmartVest to be a catalyst to growth as we offer a highly effective therapy for bronchiectasis sufferers in a smaller, lighter and easier-to-use package.
We're committed to improving operational efficiency and are proactively working to blunt any potential effects from the expiration of the CMS waiver. And finally, we will continue to generate awareness by continuing to build on our library of clinical data supporting HFCWO as an effective therapy for bronchiectasis in fiscal 2024. Electromed delivered a strong year in fiscal 2023, and we're well positioned to deliver another in fiscal year 2024. Thank you again for your time today. Much appreciate it.
Operator
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.
