CareCloud, Inc. Q1 FY2022 Earnings Call

Greetings, and welcome to CareCloud Inc.'s First Quarter 2022 Results Conference Call. This conference is being recorded. I would now like to turn it over to your host, Kim Blanche, General Counsel. Thank you.

Good morning, everyone. Welcome to CareCloud's First Quarter 2022 Conference Call. On today's call are Mahmud Haq, our Founder and Executive Chairman; Hadi Chaudhry, our Chief Executive Officer, President and a Director; Bill Korn, our Chief Financial Officer; and Karl Johnson, President of CareCloud Force. 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 this 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, estimates 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 could 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 will 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 2022 earnings presentation, please visit our Investor Relations site, ir.carecloud.com; roll down to News and Events, click on First Quarter 2022 Results Conference Call 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 quarter 2022 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results. And with that said, I'll now turn the call over to our CEO, Hadi Chaudhry. Hadi?

Thank you, Kim. Welcome, and thank you for joining us today to review our first quarter earnings call. First, to review our first quarter 2022 financial highlights. Revenue of $35.3 million was a record for the first quarter, coming in slightly ahead of expectations and represented an increase of 19% year-over-year. Adjusted EBITDA of $4.7 million is tracking toward the full year guidance that we had presented in March when we offered our initial outlook. Adjusted net income was $3.5 million or $0.23 per share. On the call today, I would like to discuss a few key themes as we continue to advance CareCloud's mission of becoming the leading technology and solution supplier to healthcare providers. Namely, I'm going to discuss number one, innovation, specifically some of our new products that are forging new and adjacent markets; number two, cross-sell success via further white space penetration; number three, the health of our sales pipeline; and number four, partnering characteristics of our successful force initiative. To start us off, I want to highlight two more of our recently launched digital health solutions, CareCloud Remote and our chronic care management solution branded as CareCloud Wellness. Launched last month, CareCloud Remote gives us a mobile clinician management solution with location services, allowing better scheduling for both clinicians and patients. The product is targeted to the home health market and extends our footprint beyond the clinic to the last mile of healthcare, the home. The solution helps practice groups to streamline referral management, improve staff assignment for home case management, and gives administrators and clinicians visibility and control over operational metrics. Our target market for this offering is the larger practice. At this level of scale, the complexities around credentialing, coding and revenue cycle require a disciplined approach to referral generation and management for which CareCloud Remote is ideally suited. CareCloud Wellness was launched recently to address the needs of our core primary care providers by supporting the treatment and care of their chronically ill patients. The Center for Medicare and Medicaid Services, CMS, through its chronic care management program has increased reimbursement for chronic care, effectively incentivizing providers to improve connectivity with care coordination and treatment of their chronically ill patients. CareCloud Wellness is a software-enabled service that extends care to high-risk patients with multiple chronic conditions. Through their providers, patients enrolled in Wellness receive regular communication from a team of dedicated practitioners and care managers. Care managers work in partnership with the provider to coordinate care plans that consider a holistic approach to chronic care management, inclusive of nutrition, medication, and lifestyle management. We believe the solution has great appeal to the provider as there is no upfront investment to use the service. In fact, providers can drive revenue to their practice through the use of services such as e-prescribing and chart review. Our target market represents approximately 50% of the clients that are using our core solution. We believe that if half of our eligible practices use Wellness, we have the potential to generate millions of dollars of revenue long-term. I'm incredibly pleased that over 75 customers have already expressed interest in Wellness in just the first week since the launch. We believe both Wellness and Remote represent a thoughtful approach to the cutting-edge innovation that our customers have come to expect from CareCloud. Next, I would like to briefly touch on our Force partnership. As we have discussed in the past, relating to our Force program, the initiative is a powerful example of CareCloud striking mutually beneficial agreements with potential partners instead of acquiring them. One example is that we are working with a large national provider of revenue cycle and EHR services, augmenting their workforce and performing a series of back-office tasks, leveraging both our onshore and offshore capabilities. This relationship started small and has increased in size and scope as a result of the quality and results we have been able to demonstrate. Since launching Force two years ago, the program still contributes only a small amount of revenue at this time but has enormous potential. As we are just scratching the surface here, our Force pipeline has increased exponentially, as I will explain shortly, consistent with our three-pronged strategy of organic growth, acquire, and partner, we continue to evaluate additional partnerships on an ongoing basis that would either be a strategic fit with our core business or have the potential to explore new markets. As you know, we acquired medSR last year, in part to augment our capabilities in consulting and project management while creating meaningful opportunities to cross-sell our technology and RCM services. One example of our cross-sell success since acquiring medSR that I would like to share is the work we are doing for a multi-location behavioral health system in the Mid-Atlantic. medSR was initially contracted to provide consulting services for a new EMR implementation. They didn't hire us to work down the legacy accounts receivables remaining from the old system. Given our results there, the client hired us for full outsourcing of their entire billing system. So what started as a six-month consulting assignment evolved into a 100% RCM services engagement, leveraging multiple services. We are pleased with the early results of medSR and look forward to talking more about future successes. The final topic I would like to cover is the health of our sales pipeline. As we discussed in our fourth-quarter earnings call, we are excited about the many solutions in our portfolio, which we have amassed both through acquisition and internal development that can move the needle for our customers. Things like telemedicine and automated tools to support the check-in process and improve patient experience to name just a few. We stated last quarter that we intend to increase sales and marketing spend by 20% to 25% to execute on the growth opportunity that our platforms present. As such, I'm pleased to report that for the first quarter, our incremental sales pipeline is up nearly 50% year-over-year to $22 million and that level of interest in our products is exceeding pre-pandemic levels. Our total pipeline stood at approximately $40 million at quarter end. Taking a more granular look, not only was our pipeline up meaningfully year-over-year, it accelerated as the quarter progressed. Namely, we increased the pipeline by $4.6 million in January and by $11.2 million in March, an increase of 142%. I'm pleased that these positive dynamics have followed through in the second quarter as well, accentuated by our new product releases. A closer look into the composition of our pipeline reveals that enterprise accounts, which we define as 25 or more providers, represented 36% of the pipeline improvement in Q1 of 2021 and increased to 50% as of the latest quarter. Conversely, small groups, which we define as one to five providers, was about 35% of the pipeline creation in the year-ago quarter and declined to 28% in Q1 2022. This shift is deliberate and represents a pivot towards larger enterprise deals. Full-service technology-enabled solutions remain the largest component of the pipeline increase, increasing from 30% in Q1 of 2021 to 55% this quarter. And a little more color around Force. Force represented just 2% of the pipeline growth in the year-ago quarter and accelerated to 10% this quarter, representing a fivefold increase year-over-year. We realized that the pipeline is just that, a probability-weighted set of opportunities in various stages, and that there is work to do to bring these deals to completion. But given the exponential increase in deal activity and positive early read-through the first quarter, we have confidence in achieving our 2022 targets and a high degree of optimism regarding our emerging organic growth opportunities. To conclude my prepared remarks, we are pleased to report a solid start to the year by exceeding our revenue expectations and tracking toward our full-year outlook for both revenue and EBITDA. We released two new digital health solutions to the market to improve practice efficiency and drive revenue that is getting a strong reception from our customers. Our sales and marketing efforts are ramping up as planned, demonstrated by the improvement in our pipeline and nearly evident of cross-sell success. On the acquisition front, we continue to execute against a robust pipeline of both small and large potential acquisitions. We look forward to keeping you posted on our progress throughout the year. At this time, I will turn the call over to Bill for a closer look at our first quarter results. Bill?

Thank you, Hadi. And thank you everyone for joining the call today and for your interest in the CareCloud story. I believe that we are off to a great start for 2022 and our first-quarter results demonstrate that our solution set is meeting the needs of the market today. On today's call, I'm going to review our first quarter financial results and reiterate our 2022 outlook. For the first quarter, we generated revenue of $35.3 million, which increased 19% compared to a year ago. Taking a closer look, revenue from our technology-enabled solutions represented 85% of total revenue and consisted of 48% from clients using our core technology suite of electronic health records or practice management solutions, 15% from clients using one or more components of our technology, like our business intelligence software and 22% from clients where we are providing IT services, utilizing our technology processes and know-how. Our remaining revenue is derived from 4% from clients using just revenue cycle management services, 9% from managing several clients' entire medical practices, and the other 2% from other services. All of these breakouts can be found in our 10-Q. Revenue growth in the quarter was driven by strong results from medSR, the company we purchased in mid-2021 to give us a larger presence in the hospital space. medSR achieved record revenue during Q1 and signed more business than the revenue they recognized, increasing their backlog and positioning themselves for additional revenue growth during Q2. GAAP net income of $1.1 million compared very favorably to a net loss of $2 million last year, despite a $500,000 increase in sales and marketing expenses. We have now reported at least $1 million of GAAP net income for three quarters in a row. Non-GAAP adjusted net income of $3.5 million represented a 20% year-over-year increase. Adjusted net income was $0.23 per share. Adjusted EBITDA of $4.7 million increased 28% compared to $3.7 million last year. Our adjusted EBITDA growth was driven primarily by our increasing revenue and reduced expenses as a percent of revenue. Our adjusted EBITDA margin increased to 13.4% compared to 12.4% a year ago. The 100 basis point year-over-year improvement was a result of a decrease in our G&A and R&D expenses as a percent of sales, offset by a small increase in our sales and marketing as a percent of sales. Now turning to the balance sheet and cash flow. We ended the first quarter with $10.1 million in cash, including restricted cash and $6 million drawn on our SVB line of credit. We generated $3.1 million in cash flow from operations during the quarter and net working capital of $8.7 million. Finally, for guidance, we are reiterating our outlook at this point in the year. We continue to expect revenue to be in a range of $152 million to $155 million, which represents 10% growth at the midpoint and adjusted EBITDA to be between $24 million and $26 million, reflecting an adjusted EBITDA margin of 16.3% at the midpoint. During the quarter, we issued $26.6 million of Series B Preferred Stock and redeemed $20 million of Series A, swapping an 11% coupon for 8.75%. Our goal is to continue lowering our cost of capital, so you can expect to see further redemptions of Series A Preferred Stock in the future. Our Series A preferred is redeemable at $25 per share anytime going forward. We continue to evaluate creative approaches to retiring our Series A with a keen eye on minimizing dilution to our existing common shareholders. To wrap up, our strong first quarter results give me good confidence that we will achieve our full-year goals. Additionally, we are making progress on all of our growth initiatives, setting the foundation for sustainable above-market growth.

Thank you, Bill. I am thrilled that our year is off to such a great start, setting us up for another strong year. I would like to thank our customers, shareholders, and all our associates for their trust, loyalty, and support of CareCloud's mission. We will now open the call to questions. Operator?

The first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

So a few questions from our end. Firstly, could you talk about the size of the commercial team domestically here and any efficiencies that you're seeing there now and potentially throughout the balance of the year?

Thank you. As we mentioned in our last call, we have been focused on enhancing our sales and marketing team to continue seeing success and growth in both our pipeline and deal closures. We are noticing an uptick in performance. Currently, we have approximately 32 resources on the U.S. side, along with about 22 digital marketing and offshore resources that are supporting our U.S. operations. Additionally, we are actively hiring for around five senior positions, as we have observed significant improvements in demand generation and our sales pipeline.

Okay. Got it. That's helpful. And could you talk about some of the growth drivers that you anticipate from the CareCloud Force going forward? And talk about that funnel and the predictability of your estimates and those revenues from the Force program?

Sure. I’ll begin by providing an overview, and then I’ll turn it over to Karl for more details. As I mentioned during our call, we are seeing a significant increase from the pipeline perspective, with a fivefold growth compared to last year regarding Force opportunities we have generated. Additionally, our bookings for the first quarter have increased proportionately in percentage terms for the Force deals. While we are working on several large anticipated opportunities, none have materialized as of yet, but we are near the final stages of the decision-making process.

Good morning, everyone. Yes, as Hadi mentioned earlier, the initial concept of Force was to provide certain potential M&A targets where they weren't a good fit for us, but yet we could offer them something that could make their businesses healthier and provide us excellent margins. Since then, we've really evolved to become a staff augmentation solution for larger groups and hospitals and especially interestingly, moving into other companies that are providing electronic health records and services to physician practices. So that's where we've seen a big shift. I think on top of that, we have seen a very close working relationship with the medSR team. And as they're into facilities with consulting and support services, a natural flow of that has been on to providing back-end services for Force either on a project basis and frequently then moving into an ongoing basis. I hope that's helpful.

Yes. And then lastly, from our end. Bill, if you could provide any commentary on the sequential pace and cadence of your anticipated top line for the years? Are we correct in assuming that it looks like sequential quarter-over-quarter for Q2 and Q3 and a softer Q4 as you read out in prior years?

Yes. Thanks, Jeff. So yes, you're correct. As you know, and I'm sure everybody knows, we always go through a period as did most of the industry in Q1, people see the doctors, but they have deductibles. And when our revenue is a percent of what the doctor collects, the revenue goes down sequentially. So Q1 is following that normal cadence. Starting with Q2, you'll see just normal visits. And by the way, last year and the year before, there had been some impacts from COVID. I'd say by now, we're really not seeing a major difference between the level of visits and what you would have seen in 2019, '18 and previous years. So that means you'll see sort of the normal cadence. Q2 will be a little more activity. Q3 will be our seasonal peak. It always is our seasonal peak, especially with lots of back-to-school visits and people getting flu shots. And then in Q4, you find people when they can avoid it. They don't schedule visits with their internists during the week between Christmas and New Year's. So you sort of get one less week in the year, and I would expect to see that in 2022 as well.

The next question comes from the line of Allen Klee with Maxim Group.

Could you talk a little more about CareCloud Wellness in terms of how you're positioning this product competitively? And you mentioned you've had a lot of interest in the beginning, kind of what's the feedback you're getting for why that is?

Thank you for the question, Allen. To provide some context, chronic care management was initiated by CMS around 2015, but its expansion has been limited in recent years. This year, with a shift towards greater digitization, CMS has increased reimbursement rates by about 50% for some chronic care management procedures. For our clients already utilizing our core technology components, which represents over 70% of our client base, the process is straightforward—they simply need to confirm their agreement and sign a contract, after which we manage everything. Their current operational expenses will remain unchanged, as we will supply all necessary care managers and practitioners to develop their plans. Our technology will ensure that we assess patient eligibility for chronic care management procedures. Our chronic care management team will conduct outreach, and the necessary documentation and communication will be handled through telehealth. Then, our technology will submit and track claims to ensure appropriate payment. Our unique advantage is this integrated offering of technology and services. Unlike typical companies that provide chronic care management services, we do not depend on external technology for claim submissions or reimbursement tracking. We recently launched this product and have received positive feedback from clients who are eager to try it, assuring them that there will be no increase in expenses and that we can create additional revenue, from which we would take a fee. Essentially, this presents a risk-free model for our current clients. Currently, about 50% of our client base using our core technology is eligible for chronic care management services. If we are able to successfully sell this service to half of that eligible base, it could potentially generate several million dollars in additional annual recurring revenue, which excites us greatly.

That's great. And then I was just looking at Page 10 of your investor presentation. I'm just curious from that, can we back into what medSR's revenue was for the quarter?

I'm not sure you can obtain the medSR revenue directly from that source. If you check the 10-Q, you'll find more details in the footnotes. However, medSR performed exceptionally well in Q1. Their performance in Q3 and Q4 should be quite similar to Q1.

The next question comes from the line of Marc Wiesenberger with B. Riley.

Just following up on that last question regarding kind of Page 10 in the slide deck. If we back into it, it looks like that 22% of professional IT services is about $7.8 million in sales, and that's pretty strong growth, but kind of the 65% coming from the remaining technology-driven solutions was maybe $22 million and that actually would be a decline year-over-year. So Bill, if you could talk to those dynamics with regards to what really was driving medSR and then the technology potential year-over-year decline?

So in terms of medSR, there's been a good response from clients. I think the fact that they're now part of CareCloud, and we've got a lot of capabilities and they're part of a large public company means that clients are interested in working with us. So that business is growing really nicely. This is the third full quarter that they've been part of us, and I would say that deal has worked out very well. In terms of the remaining core business, I'd say that it is roughly flat from where it was last year. I wouldn't say there's major increases or decreases, I wouldn't read too much into that.

Got it. Okay. And I guess based on medSR's 1Q results and maybe your expectations for the remainder of the year, does that impact your thoughts on their ability to hit any of the earn-outs?

It's difficult to predict the final outcomes of the earn-outs, but we do reassess on a quarterly basis what we might owe in terms of the earn-out, in accordance with GAAP and our auditors, Grant Thornton. The way we handle earn-outs often results in minor changes in the income statement, showing an expense if we anticipate paying more than we initially expected or a credit if we believe the payout will be slightly less. The revenue has been very strong, and the earn-out criteria we established were quite stringent, requiring the achievement of various metrics beyond just revenue, particularly focusing on profitability. While I'm uncertain about any potential payouts, I can confidently say that the business is performing well and surpassing our expectations. If we don't see a significant payout as previously thought, we'll view that as a result of effective negotiation of the earn-out terms, which helped to generate enthusiasm for selling while safeguarding liquidity. We feel we've structured that successfully.

Very helpful. Appreciate all that color. And nice to see some more university system wins. I think UNMC was your sixth RCM win in the oral pathology space. The one you put out this morning with the University of Tennessee was the seventh. I'm wondering how any of the prior wins led to broader adoption of the CareCloud platform across those health systems, and maybe why oral pathology has been an area where you're getting traction relative to others?

Thank you, Marc, for your question. One reason for our success is the effectiveness of our technology-enabled RCM services and other technological components. The initial win is often the hardest to achieve. When we demonstrate to clients that we can enhance their value, profitability, and revenue, it naturally leads to referrals for future projects. Many of our recent successes have come from recommendations by previous clients in the same industry. As you noted in our press release this morning, we recently completed a rigorous RFP process that thoroughly assessed us from all angles, including a comprehensive evaluation of our numbers against those of competitors. Our earlier wins have already opened up new opportunities within a week of finalizing deals. We are gaining significant traction and visibility for CareCloud's products and services, especially in this sector.

Helpful. Appreciate it. And then just a final one for me. With regards to CareCloud Wellness and Remote, are these incremental revenue-generating offerings or are they bundled with the current pricing? And how should we think about those going forward?

So for CareCloud Wellness, there will be different and additional pricing on top of existing contracts. If you think about it, there won't be any additional expenses for existing clients. To perform these services, we need care managers, providers, possibly nurses or nurse practitioners. Therefore, the additional staffing inherently requires higher expenses compared to regular RCM services and similar. It does come with additional expense for the additional fee to the revenue they will receive. But again, this will be tied to added revenue that they obtain. So in terms of the additional expense on their existing books, there won't be further increases there. For Remote, we typically package services similarly to the rest of our offerings. It can be integrated as part of an entire package or, in some cases, one or two products can be priced separately based on client needs. For example, in some instances, we set pricing for credentialing separately due to its demand in specific setups. So just to summarize, Wellness will have separate pricing attached to revenue, whereas Remote is part of our regular technology-enabled RCM services.

The next question comes from Richard Baldry with ROTH Capital Partners.

Given the volatility in the tech sector recently, I'm curious if you've seen any impact on the M&A pipeline or what people are looking for? Or has it stalled out anyone's willingness to transact in this market or waiting out for a better market down the road, or maybe the pressures to put more people into the pipeline? Just any discussion about changes that you're seeing in that part of your business?

Good question, Rich. We continue to have great opportunities for M&A. Like we have since before we went public, we have a strong pipeline, and I believe the potential deals we may pursue are probably stronger than ever. However, we maintain high standards. At this point, we don’t have another acquisition to announce, but we are always in discussions with others, so stay tuned.

You talked about the front of the sales funnel growing pretty quickly of late. Can you talk about maybe looking deeper into the funnel; have you seen any changes in sales cycles at all? Or would the makeup of the front of the pipeline argue for any changes, either lengthening of durations or win rates given the end markets that are sort of filling into the front of the pipeline? So we can gauge how we think that increase in the front will impact your ongoing growth rate?

Thanks, Rich, for the question. One factor mentioned was a deliberate transition, which we see as a higher percentage toward the enterprise pipeline versus smaller wins. That brings advantages and some short-term disadvantages because enterprise deals typically take a longer time to close and then even to go live compared to smaller practices, where the closing cycles are usually shorter. For enterprise deals, while the initial close and go-live timing may be extended, they tend to be more stable and yield better margins. Collectively, we see better growth opportunities in upcoming quarters. The closing cycles currently average about six months for enterprise deals and one to three months for smaller practices.

Two quick ones. The R&D line has been oscillating a bit lately. Could we talk about what a good run rate would be? And then what will pace the exchange process for the preferred, both seem to be trading at premiums. So it seems like demand and for the new series, demand is good. So how quickly do you think you'll run through that process, and what is the real determiner behind that?

Two good questions. The R&D expense reflects products, as we develop new offerings; the expenditure that relates to projects not yet in production gets capitalized, and you can see that in the cash flow statement. When products are actually in use, they show up in operating expenses. Total dollars have been about the same. As we complete more products, we may not be adding as many new personnel, leading to a slight slowing of growth in expenses over time. I would expect total dollars to remain relatively constant throughout the year, but there might be small declines quarter-over-quarter. The amount hitting the income statement last year reflected some fluctuations. I think you can see Q1 as the right run rate for the rest of the year. Regarding redemptions of Series A and B preferred, we are exploring how and when to redeem Series A stock since we have already swapped for a lower cost of capital Series B.

And on today's announcement, you have Tennessee, you've touched on it, but was that a competitive win? Is it something that's meaningful in size? Just some sort of broad base there. It doesn't seem like there's some momentum in that university segment.

Great question. Yes, it's a competitive win. When it comes to revenue, typically we do not discuss specific client revenue figures. I would say it's absolutely in the ARR basis; on the annualized revenue basis, it's a few hundred thousand dollars. But this is just another win for us in the oral pathology realm. We are gaining more momentum just because of these consecutive wins in the space.

My questions have been largely answered. I was thinking, Hadi, about some of the product introductions you were talking about last time of the conductor suite primarily. Maybe update us on where those stand because I think there were going to be some additional modules and whatever traction that you're seeing with those?

Thank you, Bill, for the question. In terms of adding more products to the suite, yes, we will be doing over the next quarters. Each quarter we are anticipating at least launching something, and as we get close to that, we will make an announcement. We are on track with those plans. In terms of traction, again, it's part of the pipeline; there's a limitation: deals take longer to mature and require both parties to agree on specifications and ensure that initial integrations are planned. We are making progress in pipeline opportunities. We do not have any wins yet, but we remain optimistic and will share updates as we gain traction.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Kim Blanche for closing remarks.

Thank you to everyone who joined us today. We appreciate your participation and your interest in us as a company. We look forward to speaking with you again next quarter. Thank you all, and have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.