UpHealth, Inc. (NYSE:UPH) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Greetings, and welcome to UpHealth’s First Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shannon Devine, Investor Relations. Please go ahead.

Shannon Devine : Thank you, operator. During today’s call, management will be making forward-looking statements. Please refer to the company’s SEC filings, including the quarterly report to be filed on Form 10-Q, for a summary of the forward-looking statements, the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. UpHealth cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise these statements to reflect new circumstances or unanticipated events that occur, except as required by law. Throughout the call today, we’ll refer to pro forma revenues, pro forma gross margins and adjusted EBITDA.

These metrics are not determined in accordance with GAAP and, therefore, are susceptible to varying calculations. Definitions, calculations and reconciliations for the financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of UpHealth’s financial results provide useful information regarding certain financial and business trends and the results of our operations. I will now turn the call over to Sam Meckey, UpHealth’s Chief Executive Officer. Sam?

Sam Meckey: Thank you, Shannon, and good afternoon, everyone. Thank you all for joining us today. Martin and I are very excited to discuss our first quarter performance with you. When we last spoke in March, we shared our plans to recalibrate our business in 2023 and to implement our three-year plan to rightsize the business, providing the necessary foundation to achieve our growth ambitions. We view this work as critical to achieving our mission, which is to enable high-quality, affordable and accessible health care for everyone. Executing our plan will enable us to create solutions that combine technology and services to improve access to care, which is needed now more than ever, as society emerges from the pandemic and deals with the unprecedented challenges moving forward.

Since our conversation in March, we have focused on executing our plan. You will see from our first quarter results that we made the changes necessary to launch our recalibration year. We acknowledged the macroeconomic realities of the market, and we responded accordingly. We shifted our focus to a few of our objectives. We reduced our cash burn and improved our operating discipline. We stabilized our core businesses and are accelerating the growth of those businesses. We told you that we would check on any initiatives and businesses that were not working and did just that, ending our managed care in sovereign nations pursuits and closing our provider practice in Missouri. Today, we closed on our deal to divest Innovations Group, Inc., or IGI, our pharmacy compounding business, to Belmar Pharma Solutions.

We have reduced head count by 12% since August, and we continued to decrease contractor and external vendor spend. Our team’s commitment to aligning our expenses to our current revenue is best illustrated by the reduction in our operating expenses. As a percentage of revenue, total sales and marketing, R&D and general and administrative expenses decreased from 46% in the first quarter of 2022 to 40% in the first quarter of 2023. I would like to take a moment to discuss in further detail the progress we have made on execution, starting with the recently completed sale of IGI. Today’s closing is a significant milestone toward rightsizing our business and further defining our key focus on the strategic directions for growth. With the sale of IGI, we solidify our balance sheet with $56 million in gross proceeds, providing the company with the necessary financial footing to execute on our current initiatives and future growth plans and to solidify our three-year plan, with 2023 serving as our recalibration year.

While most of our actions in the first quarter were focused on reducing head count, cutting costs and recalibrating the business, we also took steps to pivot to growth. In our U.S. Telehealth business, we signed contracts with 29 new clients that will generate incremental revenues over the next 12 months. Additionally, we saw a minute growth of 58% in the first quarter, which contributed to the business achieving $17.5 million of revenue. Our Services segment revenues were $20.8 million, representing an increase of 17% compared to revenues for the first quarter of 2022, primarily due to higher census and improved payer mix at UpHealth Behavioral and an increase in the volume and sales price of prescriptions in the pharmacy business. Integrated care management revenues of $3.9 million, representing an increase of 48% compared to the revenues of the first quarter of 2022 were primarily due to growth in professional services revenue from existing customers as we focused on customer retention and relationship expansion.

Additionally, we significantly refined our go-to-market strategy for the integrated care management business and we engaged an industry veteran to help us improve our positioning in the market. In February, we launched the UpHealth Innovation Lab to focus on incorporating data and analytics and artificial intelligence to our technology and technology-enabled services. We are in the process of developing use cases and reviewing them with some of our strategic clients to validate our hypothesis with the market. All of these efforts have had a very positive impact on our sales pipeline, which increased by 25% over the fourth quarter. Turning specifically to our first-quarter results. At a high level, our first quarter was notable. Revenues in the first quarter of 2023 were $42.1 million, representing an increase of 17% compared to the revenues for the first quarter of 2022 of $36 million.

It is important to keep in mind that first quarter included revenues of $8.8 million from IGI and going forward we will have 12 months of an unfavorable comparison after IGI closes. Gross margin continued to expand to 54% from 39% in the first quarter of 2022 as a result of improvements across the business and favorable payer mix. Adjusted EBITDA for the first quarter of 2023 improved by $7.9 million to $6.6 million compared to adjusted EBITDA for the first quarter of 2022 of negative $1.3 million. While we are pleased with our first quarter results and are encouraged by the direction of the company, the path ahead still has its challenges. It is imperative that we leverage our cash position wisely and that we invest in initiatives that will drive growth as we continue our work to turn the company around.

Our early indicators are positive and we continue to drive consistently against our commitments, a repeatable revenue, which is growing appropriately; and converting earnings to positive free cash flow. Most importantly, our turnaround efforts enable us to focus on achieving our vision of driving the digital transformation of healthcare to create a world in which everyone everywhere can enjoy the best health. Before I turn the call over to Martin, I want to thank you for continuing with us on this journey. As evident in our first-quarter results and our recently completed sale of IGI, we are making progress on our recalibration and we look forward to continuing to deliver on our strategic plans and priorities and most importantly in delivering for our shareholders.

I’ll now turn the call over to Martin to discuss our financial results in detail before we open up the call for questions. Martin?

Martin Beck: Thanks very much Sam. We appreciate everyone joining us today. Before I begin my review of our first-quarter results, I want to first comment on the presentation in the earnings release as it pertains to the results and comparison periods. Recall that we deconsolidated our Indian telehealth subsidiary, Glocal, from our financial reporting effective July 1st, 2022. So, Q1 and Q2 of 2022 include the financial results of both the Indian and US telehealth businesses in our virtual care infrastructure group, while this quarter’s results include only the US telehealth business. The company completed the first quarter of 2023 with revenues of $42.1 million, representing year-over -year growth of 29% over Q1 2022 on a pro forma basis and 4% growth over Q4 2022’s $40.5 million in revenue.

Gross margin for the quarter was 54% compared to 41% in pro forma Q1 2022 and 45% in Q4 2022. In Q1 2023, UpHealth recorded adjusted EBITDA of $6.6 million compared to 2022’s pro forma adjusted EBITDA of negative $1.6 million and $1.9 million of adjusted EBITDA in Q4 of 2022. The company’s sequential and year-over-year growth in quarterly revenue, gross margin and adjusted EBITDA represent strong progress towards our goals. But as Sam mentioned, we have additional work to do to reach our goal of achieving positive operating free cash flow. Looking at revenue breakdown by segment. Services, which again includes our pharmacy and behavioral health businesses was the largest contributor to the company’s Q1 2023 revenue, with $20.8 million or 49% of the total revenue.

Services revenue grew 17% in Q1 2023 over Q1 2022 and 9% from Q4 2022. IGI contributed approximately $8.8 million to UpHealth’s Q1 2023 revenues and we expect to recognize approximately 40% to 45% of that amount in Q2 2023. The sale of IGI will result in a drop in revenue starting in the second quarter, which we will endeavor to recover through growth in our other businesses over the course of the year. Virtual Care Infrastructure, which for Q1 included only the US telehealth business and not the Indian business was next with $17.5 million worth of revenue or 41% of the company’s total Q1 2023 revenues. US telehealth revenue grew approximately 42% from pro forma Q1 2022. The company’s revenue mix in Q1 2023 continued to shift toward the higher-margin US Telehealth business, and we expect that trend to continue throughout 2023.

Integrated care management or ICM, had revenues of $3.9 million in Q1 2023, which represented slightly more than 9% of the company’s total revenues. ICM revenue grew 2.5% from $3.8 million in the fourth quarter of 2022, and grew approximately 48% from $2.6 million in Q1 2022. The company’s gross margin for the first quarter of 2023 was 53.8%, and gross margins by segment for the quarter were as follows: integrated care management 66.7%, virtual care infrastructure 58.3% and services 47.6%. We view gross margin as a key metric for UpHealth and is being useful for industry comparison purposes. Accordingly, let me also provide some additional color on our gross margins, from a trend perspective, as well as framing them within the context of our overall financial model.

Gross margins in Virtual Care Infrastructure increased to 58.3% in the first quarter, from 47% in pro forma Q1 2022 and 51% in Q4 2022, as we continue to see operating leverage and increasing utilization of video telehealth services, contribute to improving gross margins in the US telehealth business. Gross margins in the services segment increased to 47.6% from 33% in Q1 2022 and 36% in Q4 2022 as a result of continued strong performance, in part of our behavioral health and compounding pharmacy operations. Strong pharmacy volumes and normal seasonal increases in capacity utilization, combined with a favorable payer mix in our Florida behavioral health businesses, more than offset weakness in our medical group performance in Missouri, as we close down and integrate those operations into our Florida behavioral health business.

Gross margins at integrated care management increased to 66.6%, in the first quarter from 62.7% in Q1 2022 and from 61% in Q4 2022, as a result of a higher mix of professional services. The ICM group’s gross margins are at levels consistent, with the expectations that we’ve discussed on previous calls. UpHealth’s first-quarter adjusted EBITDA was $6.6 million, up from $1.9 million in Q4 2022. Adjustments were made for certain nonrecurring expenses including legal and restructuring expenses. We expect expenses for legal and restructuring costs to continue, as we deal with various shareholder litigation matters including with the former owners, of our Indian subsidiary and as we consolidate corporate operations, to drive efficiencies and lower costs.

As a reminder, adjusted EBITDA is a non-GAAP measure and we have included a reconciliation of GAAP operating loss to adjusted EBITDA in the press release. Now, I’d like to provide more detail on the company’s liquidity position. As of March 31 2023, the company had an unrestricted cash balance of $13.3 million, including cash at IGI, which will be swept to the corporate balance sheet as part of the transaction and will be reflected in the second quarter cash position. In addition, this does not include approximately $7 million held in an account in India that has been effectively frozen by the emergency arbitrator in our action against the former Glocal shareholders. Additionally, we completed an issue of 1.65 million common shares and 1.35 million prefunded warrants raising gross proceeds of $4.5 million on March 13, 2023.

Interest payments and payments for various professional fees, including legal and consulting expenses, impacted our cash balance, while our business segments continued to post strong revenues and EBITDA growth. As Sam mentioned in his remarks, we closed the sale of the IGI pharmacy business earlier today. The gross proceeds of the transaction was $56 million before adjustments to changes in working capital escrow funding and various transaction expenses. In accordance with the terms of the indenture with our secured noteholders, the company will offer to repurchase an amount of secured notes equaling 20% of the net proceeds of the IGI sale about $15 million. The actions that we’ve taken to bolster our cash position combined with the financial performance of the business, which continues to trend towards being operating cash flow positive in the next several months when adjusted for extraordinary expenses such as legal fees provides the company with sufficient liquidity to execute on our growth plans for the foreseeable future.

We continue to expect 2023 revenues to be in the range of $127 million to $135 million. This represents growth of 5% to 12% over pro forma 2022 revenue of $121 million. For comparison purposes both 2023 estimated revenue and 2022 pro forma revenue, include approximately five months of operations for IGI and exclude the Indian operations. In 2023, we expect gross margins to be in the range of 43% to 45% and adjusted EBITDA to be in the range of $7 million to $10 million. That concludes our prepared remarks. Operator, we’re now ready to take questions.

Q&A Session

Operator: Thank you. And our first question is from the line of Mike Latimore Northland Capital Markets. Please go ahead.

Mike Latimore: Yes. Thanks. Congrats on the progress this year so far. Looks good. Martin I think you gave the telehealth growth rate number on a pro forma basis. Is that 42%, or what was the number?

Martin Beck: Telehealth on a pro forma basis, Mike?

Mike Latimore: I thought you gave that number, yes.

Martin Beck: I did yes. Hang on one second let me just grab it.

Mike Latimore: Sure.

Martin Beck: Yes. You heard it right 42%. So just to be clear that’s pro forma ex-Glocal in Q1 2022.

Mike Latimore: Right. So I mean that’s a pretty healthy growth rate. I guess can you talk a little bit about just the drivers of that business the differentiation? We hear so much about kind of macroeconomic headwinds but 42% is a really healthy number. So I guess maybe talk a little bit about that business and why it’s doing so well.

Sam Meckey: I can take that Martin. Thank you, Mike for the question. So there’s two things that are really driving the growth of that business. First, we’ve seen an increase in the number of devices that we have distributed. So as we’ve talked about we’re into over 2,800 facilities at this time. We just had several new sales in the first quarter. The second is we’ve been working very closely with our customers about driving the proper utilization of the devices and making sure that the teams know how they’re doing it. So you saw we talked about the growth in the minutes for that business that we saw of about 58% in the first quarter. So it’s a really good product. We’ve got good NPS scores with our customers and we’ve been really focused on adding new customers and new devices out into the market and then making sure that our customers are using them properly to drive increased same-store growth if you will.

Martin Beck: Yeah. I would just add a couple of things there. What we’ve seen and we mentioned this in the remarks Mike is a transition of the mix towards video and away from audio so that drives revenues and margins.

Mike Latimore: Is that just a process change or a technology change?

Martin Beck: A little bit of both. We certainly made a lot of advancements on the core platform and its efficiency and ability to handle many, many calls at the same time and also a reflection of the fact that the video is a superior product.

Mike Latimore: Right. Got it. And then you also touched on I think just pipeline. I think you said it grew 25% sequentially. Is that largely kind of in the telehealth category, or is that growth across the board?

Sam Meckey: Yes. Thanks Mike. The pipeline growth is across the board. So we’ve added a couple of new sales leaders to our team. We’ve been focused on improving the pipeline for the integrated care management business and then also aggressively growing the pipeline for the telehealth business. And then, it’s a slightly different approach for our behavioral health business but we’ve added resources there that are helping to drive patient volume. So across all three businesses we’ve seen improvements in our pipeline.

Mike Latimore: Got it. And then if you back out the IGI business is there a natural seasonality in the rest of the businesses throughout the year? Is there like an inherent sort of build throughout the year, or is there no seasonality in the non-IGI business?

Sam Meckey: I’m sorry, you’re broken up on my line. I apologize, Mike. Could you repeat that question?

Mike Latimore: Yeah. If you take out the IGI business the business that’s left is there a natural seasonality in it meaning one quarter is actually the lowest of the year and the other quarters are actually the highest?

Sam Meckey: There’s a little bit of a natural seasonality in terms of utilization. You see some utilization come down a little bit during the summer months then build back towards the end of the year, but it’s still fairly consistent with what you’ve seen historically.

Martin Beck: Yeah. And I would just add on behavioral health. Mike in the behavioral health business there is an element of seasonality. Typically the first and the second quarters are the strongest in that business and the fourth quarter is the weakest. And we talked a little bit about that in terms of capacity utilization on the last call.

Mike Latimore: Got it. And then just very last one is just again a clarification. Martin did you say you expect to be operating cash flow positive within a few months? Is that what you said?

Martin Beck: Yes.

Mike Latimore: Great. Thank so much.

Martin Beck: Thanks, Mike.

Operator: And our next question is from the line of Bill Sutherland with The Benchmark Company. Please proceed with your question.

Bill Sutherland: Thanks. Good work guys in all respects. Obviously, looking at the very nice EBITDA in the quarter, it’s almost at the low end of your annual range. I just want to ask how we should think about the rest of the year as far as the cadence of EBITDA from here?

Sam Meckey: Thank you, Bill. Really, really good question. I would say we’re off to a great start for the year. We just closed on the sale of IGI so that’s going to take down some of our revenue and some of our EBITDA. So we can’t quite annualize or extrapolate that yet fully from Q1 but we’re really pleased with the results in Q1 and we’re going to continue to drive to improve that number throughout the course of the year.

Bill Sutherland: My sense was, I think from comments in the past that IGI’s contribution to EBITDA was not a big percentage of the total. So again, what kind of falls off going forward in the continuing ops from a margin perspective?

Sam Meckey: Martin, do you want to handle that one, or would you like me to?

Martin Beck: Sure. Hey Bill. So IGI contributes about $500,000 a month maybe a smidge more at this point in EBITDA and that pretty much all drops to cash flow. So it’s not an insignificant amount that we do have to replace going forward. We did have a very strong first quarter. We expect the rest of the year to continue to be robust maybe not quite at that level. As Sam mentioned, we’ve got to replace the sales and the margin from IGI. And if we feel that the forecasts are no longer reflecting the run rate and potential and results of the business then we’ll revise the guidance accordingly.

Bill Sutherland: Well, let me come at it a little different way just to see, if I can understand it a little bit better. Did you say Martin that the gross margins that you achieved in the first quarter for the three segments ex-IGI are sustainable?

Martin Beck: I didn’t comment on the gross margins at all Bill. I just said that the EBITDA margin of the IGI business was — the EBITDA contribution was about $0.5 million a month. In terms of gross margins they were very strong. In the first quarter, we were happy with them. I think there were some very positive mix issues that contributed to those margins which may or may not continue. As we’ve guided our longer-term guidance with respect to gross margins is in the 45% to 50% range. And so we would think of those as kind of the normal course and steady state gross margins. Maybe they’re shifting up a little bit. But at the moment we’re comfortable with what we’ve guided. And if the perspective changes we’ll make an announcement to that effect.

Bill Sutherland: Okay. Perfect. I was curious you mentioned that the go-to-market strategy for ICM is being refined. Can you give us a little color on what’s changing and kind of maybe what that means for the sales cycle or the potential of that business to get back in growth mode?

Sam Meckey: Yeah. Happy to talk about that so for our Integrated Care Management business we’ve looked at a couple of things, so first and foremost, we’ve got a lot of great data and we think there’s some analytics capabilities that we can really add into our business to pair with the SyntraNet platform to really help our customers clearly identify the next best actions for example that they would be taking with some of the members that they’re serving on the platform. We’ve developed some very, very good use cases beyond the HIE market when you look at the PBM market for example, where we’ve got customers that are leveraging the platform and having great results from that. And then, the experience that we’ve gotten with our customers in California we’re starting in other states start to build upon the digitization of the healthcare system in California and to add some of those requirements into some of the things that they require from their counties and their plans.

And so we think that there’s going to be an opportunity to really package together both the technology and the technology-enabled service approach to how we serve our payer customers in that market.

Bill Sutherland: You’re alluding to the Medi-Cal contract, I think?

Sam Meckey: Yes.

Bill Sutherland: So it feels like it will take time. That sounds like a pretty big lift to get the engine — those are long sales cycles, I would imagine right with other sort of governance?

Sam Meckey: Sorry Bill, I didn’t mean to cut you off. Go ahead and finish it up.

Bill Sutherland: No. No. Go ahead. I was going too slow there. The other similar systems that I assume you’re going after like Medi-Cal.

Sam Meckey: Yes. So there’s a couple of proposals that are on for other counties in California, so we’ve been pursuing some of those. In the first quarter, we really focused on the account retention and that has been going quite well for us. So we’re very happy with the progress there. And so really, it is a long sales cycle. You are correct. But the focus on additional markets and upsells to our existing clients with new sales to other clients is well underway. And so we’re basically seeing some really good data for us in terms of how we can leverage our Medicaid data and analytics in particular, for community-based and exchange work that’s underway in some other states. So we’ve submitted a couple of RFP responses already this year.

We’re working on that. You are correct that it’s a little bit longer sales cycle. But we think that the work that we’re doing to transform our business model, our architecture and the engineering to really support a full SaaS cloud model and incorporate some of those new initiatives around data and analytics is going to make us much more attractive for the customers that we’re bidding on.

Bill Sutherland: Okay. Sounds promising. I appreciate the color. Thanks guys.

Sam Meckey: Yes. Thanks, Bill.

Operator: And we have no further questions in the queue at this time. I will now turn it back for closing remarks.

Sam Meckey: Thank you, operator. And once again, Martin and I, both want to thank everybody for joining us today. This was a very good day, a very good quarter for us. We’re very excited about the direction that the company is taking getting the IGI sale closed. And really restructuring our balance sheet is something we’re very excited about, and it’s allowing us to pivot to growth and continue to focus on the work that we need to do to recalibrate the business. Again, we’re very happy with our first-quarter results. We think that it’s a very strong start to the year. And it’s our goal and objective to continue that performance throughout the course of the year. So once again, thank you for continuing with us on this journey. We appreciate it and we look forward to talking to you again and share our results after the second quarter.

Operator: That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.