CareCloud, Inc. Q3 FY2023 Earnings Call

Good morning everyone. Welcome to CareCloud's third quarter 2023 conference call. On today's call, Mahmud Haq, our Founder and Executive Chairman; Hadi Chaudhry, our Chief Executive Officer President and the Director; and Larry Steenvoorden, our Chief Financial Officer will join us. 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 fact made during this conference are forward-looking statements, including without limitation statements regarding our expectations and guidance for future financial and operational performance, expected growth, business outlook, and potential organic growth and acquisitions. Forward-looking statements may sometimes be identified with words such as will, may, expect, plan, anticipate, upcoming, believe, estimate, or similar terminology and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which 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 third quarter 2023 earnings presentation. Please visit our Investor Relations site, ir.carecloud.com, click on News & Events, then click IR calendar, click on Third Quarter 2023 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 third quarter 2023 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results. With that said, I'll now turn the call over to our CEO, Hadi Chaudhry. Hadi?

Thank you, Nathalie, and thanks to all of you for joining our third quarter 2023 earnings call. I have several meaningful updates to provide from the quarter, but first, we will start with a quick review of the quarterly results. In the third quarter, revenue came in at $29.3 million and adjusted EBITDA came in at $3.2 million. Larry will dive deeper into these numbers later in the call. Overall, our recent progress on several fronts gives us confidence that the fundamentals of our business are intact and CareCloud remains on track to return to growth next year. As an example, we are pleased to report that after the close of the quarter, we signed a credentialing contract with an existing force customer that we believe has the potential to be quite significant. Implementation of this is already underway, so we can expect to recognize a portion of that revenue before year-end. This quarter, we continued to make meaningful progress on several ongoing projects and goals, including the launch of our generative AI solution; the stabilization of medSR, our project-based professional service businesses; and the decisive action we took to align our cost infrastructure for our highest value business opportunities. Digging deeper into our progress in the third quarter, I will start with an update on generative AI. We recently launched our CirrusAI solution, which incorporates generative AI technology. Just two weeks ago, we had the opportunity to demonstrate this solution at a Google-sponsored conference that brings together top leaders across the healthcare industry. To kick off our go-to-market strategy for this solution, we will be offering it to our client base free of charge until the end of the year. This trial period will allow them time to better understand the benefits and how they can leverage it in their specific practice. They will then have the opportunity to purchase competitively priced solutions starting in 2024. In total, we have launched three AI solutions, two for EHR and one for RCM, and this is just the tip of the iceberg for us. We believe that our ability to stay ahead of the curve with the latest technology will give us a competitive edge in the market by improving the commercialization of our solutions and we are actively working on additional features. Over the past few months, we have taken effective steps towards stabilizing our MEDSR professional services business. We have continued to strengthen our relationship with Meditech, one of the dominant EHR providers. Over the past two years, MEDSR has evolved from a consultancy firm that mainly relied on short-term staffing projects for a single vendor to a more diversified and sustainable revenue model. Our RCM practice has grown by almost 300% since 2021, and we are also seeing strength in our technology transformation practice. We are optimistic for 2024, as we see a significant shift in our professional services MEDSR pipeline mix towards RCM and tech transformation, alongside a strong demand for these solutions. In addition, today we have $30 million in active pipeline opportunities versus $12 million entering 2023. We are confident that because of the pipeline size and mix, we can leverage our expertise and reputation to capture opportunities and deliver value to our clients and shareholders. As we announced in an 8-K in early October, we are actively working on improving profitability and positive free cash flow by aligning costs with the highest return opportunities. We expect most of the positive impact will be realized in 2024. Larry will discuss this in more detail in a few minutes. All of these factors just discussed give us increased confidence that we can return to profitable growth next year. Now, turning to an update on our business opportunities. As discussed earlier this year, we revamped our website to enhance the user experience and highlight all of our solutions. Our next-generation end-to-end therapy solution is live on our upgraded website and we recently launched a marketing campaign to highlight this offering. We are confident that this campaign, along with the new website, will go a long way in raising awareness of this solution in the physical therapy market. Next, I will provide an update on our opportunity in the Middle East. We are pleased to announce that we are making meaningful progress on our global expansion efforts in that region. We have been strengthening our business development and establishing a permanent presence in Dubai, UAE, near the innovation and technology hub of Dubai Internet City. Our product teams have been ensuring our systems adhere to the UAE Health Data Law, which requires that health data is stored within the country. At the same time, we are diligently working to integrate our system with the national database, which operates similarly to our health information exchange. We are also excited to present our solutions and services at the upcoming health conference in Dubai in Q1 of 2024. Arab Health is one of the largest healthcare conferences, with over 100,000 expected attendees from 180 countries. We look forward to providing you an update on our earnings call next year. In terms of upcoming milestones, CareCloud is preparing to launch CareCloud Prime, a state-of-the-art cloud-based Electronic Health Record platform, designed to meet modern physicians' demands. Formerly known as CareCloud Go, this project was a significant goal following CareCloud's acquisition a few years ago. CareCloud Prime offers advanced features such as cloud accessibility, seamless interoperability, user-friendly design, improved patient engagement, and AI-powered clinical decision support. It includes tools like Cirrus chat for staff interactions, global search for navigation, and unified patient records for efficient data exchange, emphasizing efficiency. It also provides healthcare providers with customizable templates and supports value-based care model tools such as proactive care management, remote patient monitoring, and seamless telehealth integration. CareCloud Prime is more than just another product in our portfolio; it represents our commitment to continually improve and innovate to better serve our clients' evolving needs. In some ways, although we face some headwinds this year, we entered the fourth quarter feeling confident after the steps we took to stabilize the business and re-prioritize the cost structures. Because of these strategic actions, we believe we have made it past our low point and are on an upswing. The steps we have taken and the progress made this quarter give me confidence in reiterating our full-year guidance and our ability to return to growth in 2024. Now, I will turn the call over to Larry to give you a closer look at the numbers.

Thank you, Hadi and good morning, everyone. Before I review the third quarter results, I want to share a little more detail on our recent cost realignment initiative. The third quarter was my first full quarter as CareCloud CFO. I took a fresh look at our cost infrastructure and along with Hadi and the Board, we made some tough but necessary decisions to pare back in certain areas of the business. As you know, transformation decisions are difficult, but the goal was to ensure the company continues to invest in growth while also establishing a sustainable foundation for improvement and positive free cash flow and profitability. Most of the actual changes are scheduled to take place in the fourth quarter, but we anticipate some will carry over into 2024. We expect these changes in our expense profile to result in approximately $10 million of annualized free cash flow improvement. Approximately $5 million related to operational expense and savings and the other half includes the completion of R&D investments, specifically our next-generation CareCloud Prime platform that Hadi just discussed. This has a twofold benefit for us. First, we will see a notable reduction in our capitalized software going forward. Second, we now anticipate realizing the ROI for these investments. Now, turning to the third quarter results, revenue of $29.3 million was level sequentially and compared to $33.7 million year-over-year. The primary reason for the year-over-year decline was a loss of two customers due to health systems mergers. Our wellness offering continues to gain traction and shows growth in the monthly sequential number of patients. Adjusted EBITDA for the quarter of $3.2 million reflects a margin of 11%, compared to an adjusted EBITDA of $4.8 million a year ago. The decline in quarterly EBITDA was a combination of lower revenue and related margins, partially offset by lower selling, marketing, general, and administrative costs in the current period. Turning to the balance sheet and cash flow, at the end of the third quarter, we had $6.4 million in cash and net working capital of $5.5 million. Cash provided by operations was $4.3 million and there was $3.2 million in net cash used in investing activities. Finally, we are reiterating our 2023 guidance for revenue between $120 and $122 million and adjusted EBITDA of between $15 and $17 million. The combination of factors including the credentialing contract, MEDSR's meaningful contract ramping, and continued solid execution in our core revenue cycle business provides the pathway to achieving our full-year expectations. In conclusion, we have taken tough but necessary actions to realign for growth and study improvements in our financial performance. I believe we will not only enter next year from a position of strength but be better positioned going into 2024. With that, I'll now turn the call over to Mahmud for his closing remarks.

Thank you, Larry. As I expressed earlier, we feel that our solutions are very well positioned in the marketplace. The team is ready and fully engaged to drive future success and shareholder value. I would like to thank our employees, customers, and shareholders for all they do to support CareCloud's mission. Let's open the call to questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Hello. Good morning and thank you very much for taking the questions. Just a couple from our end, I guess firstly for Larry. Could you maybe clarify the guidance and the adjusted EBITDA to free cash flow or cash production or net income?

We would have to put that out separately. Jeffrey, actually we can do that as a follow-up.

Okay. Perfect. And then, could you talk a little bit about the Cirrus AI arrangement with Google and which offering specifically that's going to pertain to and if that also ties over to the prior platform that you plan to introduce?

Hey. Good morning. Jeff, thank you for the questions. Generative AI is one of the biggest and most discussed topics nowadays in any industry. For us, as we mentioned earlier in the year, we started focusing on how we can leverage generative AI technology into our platform to help the healthcare market segment. We are working on a number of different features to be incorporated and we will keep announcing as those features are integrated. But we started focusing primarily on the back-end improvement by leveraging generative AI to enhance the revenue cycle management work by our employees, which will later also be available in the SaaS model. One of the complex procedures is the appeals process, where you need to appeal certain decisions of the insurance companies, especially regarding out-of-network space or worker compensation. So, with the help of generative AI, our system can systematically generate appeals and, based on internal testing, the results seem to be very promising. We believe that our payment processing cycle, as well as the collection of those appeals, should see improvement with this solution. On the front end, which is crucial, we focused on clinical decision-making. When a patient arrives, a physician must consider various factors such as medication history, prior lab results, diagnoses, and so on. Our generative AI will assist in suggesting potential diagnoses or procedures that should be considered, along with lab tests the provider should order. This tool will significantly aid in diagnosing or treating rare diseases much earlier than previously possible. We need to ensure that physicians and users understand the importance of such features, which is why we are currently offering it free of charge during the trial period. Next year, we will begin pricing it on a license basis, and we will announce the prices once they are finalized. Additionally, marketing positioning is crucial for product marketability. Our competitors are also developing solutions in this space.

Thank you, Hadi. That's helpful. Lastly, could you give us a sense of your ongoing business opportunities now and provide some anticipation for future growth or aggregate revenue for those opportunities?

Okay. So, you're probably referring to our Middle East opportunity. We are making continuous progress. As I mentioned in the last call, our goal is to sign several contracts and recognize some revenue next year. We’ll incorporate this when we issue guidance for the next year. In terms of progress on the UAE side, we have completed the incorporation of the entity, obtained licenses to conduct business in various categories, and we are now in the process of onboarding management employees and certifying them to transact business in the UAE. We are also actively working on at least three major opportunities there, and we need to ensure our product is certified to local requirements, including keeping data within the UAE. Once we secure a client, we will also work with authorities to get the EHR and other platform items certified. I hope that answers your question.

Hi. Good morning and thanks for taking our questions. I was wondering if you could elaborate on any seasonality you may have seen in Q3 and what kind of sequential ramp you expect until Q4, reaffirming the full-year guidance and if there were any impacts from MEDSR projects shifting from Q3 to Q4?

Yeah, Neil, thanks for the question. As we look at Q3 to Q4, Q3 seems quite similar to Q3 of last year, with a significant impact year-over-year due to the two large health system mergers. In terms of professional services, MEDSR has had great developments on some of the recent contract wins, especially regarding our press release about the credentialing and the revenue we’re going to recognize in Q4. This gives us confidence in our full-year guidance.

Great. Just one follow-up on that. In terms of the MEDSR business, could you provide insight into what’s driving the traction you're observing?

I think we have Dwight Garvin, who heads the MEDSR business, here, and I can start, and then he can finish. If you think about it, the largest players in the health system market hold about 40-50% market share. That’s the relationship we lost, but we started working on the next players, and Meditech is among the top three. Over the past year, we have been able to re-establish strong relationships with Meditech. Additionally, our marketing strategy has focused on finding more opportunities within Meditech. The second factor is in RCM; when we acquired MEDSR, their RCM revenue was only about $1 million out of approximately $30 million that they were doing, which has exponentially improved now.

Thank you, Hadi. What we're seeing in our RCM space is a shift from advisory models to managed services. We're converting short-term advisory engagements into long-term recurring revenue managed services models, leveraging established relationships through other practices. We’re also expanding within Meditech by making significant hires on the business development side this year. This has allowed us to strengthen our partnership with Meditech.

Good morning. Regarding the upcoming CareCloud Prime offering, could you detail how it compares to what you currently offer and your strategy for upselling to existing clientele versus new customers? Will there be a price differential?

Thanks, Allen. Good morning. There are a couple of aspects to consider. If you look back to our first system back in 2004-2005, it represented our first generation. We continuously brought new solutions every few years due to compliance requirements, market expectations for new features, and technological platform advancements. This new platform will utilize back-end technology with enhanced features oriented towards value-based care and preventive health. So, in terms of technology, this will be our flagship product. We have another active platform, talkEHR, and both platforms will remain operational. Clients can transition at their convenience without additional costs, and we foresee many clients migrating to this new, advanced platform over time. Regarding the credentialing contract, we believe credentialing is foundational to effective revenue cycle management. If credentialing is inadequate, revenue generation suffers. We are strengthening our capability to track applications and ensure timely follow-up. With AI, many applications can be completed without human intervention, enhancing efficiency and accuracy. We believe we can market this credentialing capability more effectively now that we have signed our first significant contract. We anticipate, based on a conservative estimate of just 5% penetration of a tens of thousands of providers, we could generate over $1 million in annualized revenue. This will serve as a valuable case study for selling to larger opportunities.

The relationship with the customer is vital to ensure their clients are credentialed effectively so they get paid for services rendered. We’ve been able to negotiate an attractive price point due to our existing trained resources. The delegated credentialing piece is significant, as we’ve leveraged our offshore capabilities, which has opened doors for additional discussions with other large companies needing this service on the backend. This presents an untapped market for us, and our integrated approach provides one-stop shopping for RCM services and software.

This concludes the question-and-answer session. I would like to turn the conference back over to Nathalie Garcia for any closing remarks.

On behalf of the company, I'd like to thank everyone who has joined us on today's call. We appreciate your participation and your interest in us as a company, and we look forward to speaking with you again. Thank you everyone and have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.