CareCloud, Inc. Q2 FY2024 Earnings Call

Ladies and gentlemen, welcome to the CareCloud Second Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to Kristyn. Thank you. You may begin.

Good morning, everyone. Welcome to CareCloud's second quarter 2024 conference call. On today's call are Mahmud Haq, our Founder and Executive Chairman; Hadi Chaudhry, our Chief Executive Officer and Director; Stephen Snyder, our President; and Norman Roth, our Interim Chief Financial Officer and Controller. 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 would 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 wish to download our second quarter 2024 earnings presentation. Please visit our Investor Relations site, ir.carecloud.com, click on News and Events, then click IR calendar, click on the second quarter 2024 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 second quarter 2024 results for a reconciliation of these non-GAAP performances measures to our GAAP financial results. With that said, I'll now turn the call over to our CEO, Hadi Chaudhry. Hadi?

Thank you, Kristyn, and thanks to all of you for joining our second quarter 2024 earnings call. I'm very pleased to announce that we're turning the corner in our pivot towards improved profitability as our net income, free cash flow and related metrics are all moving strongly in the right direction, even with lower nonrecurring professional services revenues, enabling us to pay down $7.5 million on our credit facility to date this year. You will hear more about this from Steve and Norm, but everyone is doing a great job generating cash each month instead of using cash as we were last year. Repaying our debt is a priority for us and is a key step to being able to restart the dividends on our preferred stock. High-level focus has been on reducing expenses and improving profitability for the first half of the year, and this will remain a focus in the second half. We are starting to turn some attention to growth, which I know investors have been waiting to hear about. On our last earnings call, I talked about the addition of a new generative AI product called CareCloud CirrusAI notes. Today, I'm pleased to provide an update on the progress of CareCloud CirrusAI notes, which has now been deployed at a small subset of our existing clients. Our pilot users have reported significant improvements in the efficiency and accuracy of clinical documentation. The innovative technology, embedded within CareCloud CirrusAI notes has proven effective at capturing and transcribing crucial dialogue during patient interactions, producing precise clinical notes in real time. As part of our rollout strategy, we offered a 30-day risk-free trial with these initial users, allowing them to fully explore the capabilities of CareCloud CirrusAI notes. The feedback has been overwhelmingly positive, with users highlighting the seamless integration with their existing workflows and the time-saving benefits of real-time transcription. After the completion of the trial period, CareCloud CirrusAI notes will be available at a competitive license fee of $199 per provider per month. This pricing structure reflects the value that CareCloud CirrusAI notes brings to enhancing provider efficiency and patient care. We're confident that this offering will continue to gain momentum as more practices recognize the tangible benefits of integrating AI into their daily operations. We have started to recognize revenues from this product in quarter three of 2024. Even though it's a very small number at the moment, we anticipate significant growth as adoption increases and more practices begin to see the value it brings to their operations. One of our early adopters, which has seven medical providers commented, 'I'm used to using dictation devices, but we are a very basic clinic. So I was trying to look for any way to make our workload easier. I found that CareCloud AI tools are very efficient when it comes to dictation. Instead of me trying to figure out where information should go in the chart, as I'm talking to the patient, this software automatically puts everything where it needs to be, and it's been amazing. It will add suggested codes based on the encounter. I'm still learning the nuances of this program, but so far, I'm enjoying it. We are saving a lot of time on the backend.' In conclusion, we remain committed to advancing health care technology through innovative AI solutions like CareCloud CirrusAI notes. As we expect CareCloud CirrusAI notes to reach a broader audience, we anticipate continued growth and adoption, driving value for both our clients and shareholders. Now let's turn our attention to our revenue growth. In this quarter, we have continued to capitalize on our diversified client base, which spans multiple market segments, including hospitals and medical practices of all sizes. This diversity not only stabilizes our revenue streams but also unlocks significant upsell and cross-sell opportunities. With our proprietary comprehensive suite of integrated products and services, we're uniquely positioned to offer tailored solutions that meet the evolving needs of our clients. This strategic approach allows us to deepen relationships, enhance client retention, and expand our footprint within each segment, driving both top-line growth and long-term value for our stakeholders. Revenue from cross-sell and upsell initiatives has doubled compared to the same period last year. We expect recognized revenue from these bookings to be approximately 50% higher in 2024 than last year. In Q2, our CareCloud Wellness program, including chronic care management and remote patient monitoring, saw a remarkable 154% year-over-year revenue increase, exceeding $1 million in recognized revenue for the first time in a quarter. Most of this revenue is derived from upselling within our existing client base. We see tremendous opportunity in this solution and are committed to further expanding this revenue stream. It has taken a long time for patients to recognize the value that our health care providers recognize immediately. And we think use of this program will improve patient health and simultaneously control health care costs by identifying issues earlier before they get more serious. This year marks a pivotal transition for us, during which we have already reached significant milestones in fortifying our financial position and establishing a strong foundation for the future. Our primary focus remains on growing our positive free cash flow, which is crucial, not only for covering operating expenses but also for paying down our credit line and eventually resuming preferred dividends. We have made considerable progress toward these goals and are fully committed to maintaining this positive trajectory. As we look ahead to 2025, our focus will shift back towards driving growth. Our goal is to deliver consistent year-over-year revenue increases while enhancing profitability. We are confident that this growth will be fueled by multiple channels, including new sales, cross-sell and upsell opportunities, the continued innovation of our fully integrated AI solutions, and the expansion of our CareCloud Wellness program. Additionally, we plan to leverage our strategic partnerships, enabling our industry players to utilize our white label technology solutions and our highly skilled global workforce. Finally, we aim to capitalize on our extensive high-quality health care data set to support life sciences companies, health care providers, and payers. We will share more details on our growth strategy during our next earnings call. I will now turn the floor over to Steve. Steve?

Good morning, and thank you everyone for joining us on today's call. As a team, we are making great progress at accomplishing our objective of transforming our cost structure. With this transformation, we are achieving our goal of increasing our free cash flow, which will enable us this year to eliminate the entire balance on our credit line, which was $10 million at the start of the year, and move us closer to resuming dividends. Our revised cost structure will position us to further expand margins as we've been heavily involved in revenue growth during 2025 and beyond. Over the last three quarters, we have identified more than $26 million in annualized cost savings. Of this $26 million in savings, we expect to realize a reduction to our 2024 in-year expenses of approximately $20 million. We're achieving these savings through a three-pronged strategy. First, we strategically deploy our proprietary technology, enabling us to reduce costs while accomplishing day-to-day tasks in a more systematic, effective, and repeatable manner; second, we have continued to reduce our reliance on third-party contractors by leveraging our in-house expertise at a small fraction of the cost of the prior third-party contractor costs, while also increasing our control and reducing the natural risks that come with relying on third parties to handle critical business functions; and third, we have leaned further into our core strength of our global business model, strategically leveraging our most effective and cost-efficient resource for each discrete process, thereby enabling us to both increase our overall bandwidth while simultaneously reducing the associated costs. In summary, this cost transformation has been made possible through our use of CareCloud's proprietary technology, eliminating expensive third-party relationships, and embracing the strength of our global model. During the first half of 2024, we were pleased to realize significantly improved year-over-year free cash flow and a large increase in cash provided from operations. And we turned our GAAP net income from negative to positive for the first time in two years. Our team's decisive actions are beginning to yield fruit, and we're excited to see that our financial transformation is well underway. On a separate front, as we have communicated before, we distributed a special proxy to all Series A preferred shareholders recommending the approval of certain important changes to the terms of our Series A preferred stock. If approved, holders of Series A preferred stock will be placed on a more equal footing with Series B shareholders, having similar protections in the event of a change of control and equivalent dividend rights. Further, the company would have the right to exchange common stock for Series A preferred shares, as more fully described in the proxy materials that we filed with the SEC. The initial response of the Series A preferred shareholders has been overwhelming and unambiguous. More than 85% of proxies returned to date have been in favor of the amendments. The support has been shared by Glass Lewis, a leading proxy vote advisory firm that analyzed our proposal and recommended that shareholders vote for the changes. While the level of support has been strong, we still need the affirmative vote of at least two-thirds of all outstanding shares, a challenge for even a popular proposal like this one, given a fragmented retail ownership base. Therefore, we encourage Series A preferred shareholders to take the time to read the proxy materials and then let their voices be heard. I'll now turn the floor over to our Interim CFO, Norm Roth. Norm?

Thanks, Steve, and thank you all for joining our call today. I would like to start by talking about our positive GAAP net income and cash flow, which I am sure are welcome news for investors. The second quarter of 2024 was our first quarter with positive GAAP net income since 2022. During the six months ended June 30, 2024, we generated $8.3 million of cash from operations and $4.9 million of free cash flow. We were able to use the profits and cash flows we generated to repay 75% of the balance on our Silicon Valley Bank line of credit as of today. As of June 30, 2024, we had repaid $5 million of the January 1 balance on our line of credit. Since June 30, we repaid an additional $2.5 million, bringing the balance from $10 million on January 1 of this year to $2.5 million today. This means we have much more financial flexibility. In the second quarter, we reported revenues of $28.1 million. While down $1.3 million year-over-year, $1 million of the decline was due to medSR, which is a project-based professional services business that tends to fluctuate. MedSR had softness since the second half of last year, which is continuing, but we are hopeful that we will see some growth in the second half of 2024. However, CareCloud Wellness generated over $1 million in revenue for the first time this quarter and is up by $1.1 million for the first six months of this year compared to 2023. Our direct operating costs continued to decline, and they are down by nearly $2.2 million from Q2 2023. Our operating expenses, including G&A, R&D and sales and marketing expenses, decreased by $2.9 million. On an annual run rate basis, these operating expenses are already down over $20 million since Q1 2023. In the second quarter, we reported positive GAAP operating income of $2.3 million and GAAP net income of $1.7 million, both the highest amount since Q2 2022. This compares to a GAAP operating loss of $1.3 million and a GAAP net loss of $1.8 million during Q2 2023. The GAAP net loss per share was $0.14 based on the net loss attributable to common shareholders, which takes into account the preferred stock dividends earned whether or not they were declared or paid during the quarter. This requires a little explanation. Even though by definition, GAAP net income has always shown before dividends and only dividends that have been declared by our Board of Directors are recorded on the balance sheet, the GAAP net loss per common share calculation reflects the dividends that accumulate monthly, whether or not these dividends were declared or paid. Non-GAAP adjusted net income for the second quarter 2024 was $3 million or $0.18 per share, calculated using the end-of-period common shares outstanding. We reported adjusted EBITDA of $6.4 million in the second quarter compared to $3.8 million in the same period last year. This is our highest adjusted EBITDA since the second quarter of 2022. Revenue for the first six months of 2024 was $54.1 million compared to $59.4 million in the first six months of 2023. Of the $5.3 million decline, $3.3 million was attributable to medSR. For the first six months of 2024, the company's GAAP net income was $1.4 million compared to a GAAP net loss of $2.2 million in the first six months of 2023. This equates to a loss of $0.24 per share after subtracting the preferred stock dividends earned but not declared or paid. Non-GAAP adjusted net income for the first half of 2024 was $3.2 million or $0.20 per share. Year-to-date, adjusted EBITDA was $10.1 million, an increase of $2 million from $8.1 million in the same period last year. As of June 30, 2024, the company had approximately $2.6 million of cash. Net working capital was $674,000 and we had $5 million drawn on our line of credit. As previously stated, since June 30, we repaid an additional $2.5 million on the line, bringing the balance to $2.5 million today. Now that we're not dependent on our SVB line of credit, the company is considering reducing the total size of the line of credit from $25 million to $10 million. This would save us fees on the unused portions of the line while still providing the company with ample liquidity in the event that there is a cash need. The second quarter results put us on a good footing for the year ahead. We're happy to have returned to profitability and look forward to updating you later in the year.

Thank you, Norm. We are very pleased with the great improvement in profitability that we have achieved. Our primary focus is on creating long-term value for our shareholders. I would like to thank our employees, our customers, and shareholders for their continuous support in furthering CareCloud's mission. Operator, please open the floor for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. The first question is from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead with your question.

Good morning. This is Stephanie on for Jeff. I just had a few quick questions. Maybe I'll start with your comments around contractors versus in-house. And I'm wondering what percentage now of your operations is through contractors? And what percentage is now in-house?

Okay, Stephanie, good morning. Thank you for the question. Just a little clarification and then I will turn it over to Steve. So when we talk about contractors, there were one or two very specific contractors on the IT side, which were being used by the CareCloud acquisition that we did, the CareCloud that's part of us now. It's not at any operational, the RCM side of things. There were some very specific niche areas on the technology development side for which we were using the contractors, which took us a little more time than usual to transition to our workforce. So in terms of the percent, I'm not sure if Steve or Norm have any specific numbers for that presence, but Steve, by any chance, do you have any specific number for that contractor presence?

Not a specific number, but the overwhelming majority of the work being performed is carried out by our employees. There's a really small portion that's being performed by contractors. As Hadi said, the contractors that we spoke about were a variety of different subcontractors, some in India, some in Central America and South America that were helping us from an R&D perspective. They were really a holdover from two prior acquisitions. So as we move forward and analyze that particular spend, we came to the conclusion that we would be much better off long term reducing that overall expense, by moving to our in-house experts, we can reduce that expense by about 80% to 85% and also have greater control over the work being performed. So it's really a positive all the way around.

Okay. Got it. Yes, that makes sense. And then I'd kind of like to move to your commentary around industry partners, especially moving into 2025. Is the interest largely inbound? Or are there also efforts kind of outbound as well, finding potential partners that way?

Great question, Stephanie. It's both. We already have multiple channel partners who we work with. They are either acting as resellers for us or, let's say, for our CareCloud Force as an example. So there are a number of these partners who leverage our employees. There is inbound interest for expansion based on the different marketing campaigns, and then we'll be spending more time doing some additional investment towards outreach for finding additional partners.

Okay. Got it. And then I think, historically, if I remember correctly, you've given us kind of a number on the value of your pipeline. Are you able to provide those numbers?

Yes. Stephanie, what we've tried to do going forward is to focus more on recognized revenue, the actual revenue that we can generate out of those bookings. But if you just think about the pipeline, right now, the number is about $16 million plus in the pipeline, but this number continuously keeps evolving. It keeps adding and being removed. If you zoom out and think about the possible ways we are thinking about growing, the $16 million does not include the cross-sell and upsell opportunities. This is all from the new logos perspective. There exists a tremendous opportunity in our existing client base. As I mentioned, this year's year-to-date booking numbers are almost doubled from cross-sell and upsell compared to the same time last year. Even on a recognized revenue basis, it's 50%. We expect this year to be from the first half of the year bookings. The recognized revenue to be 50% higher than last year's same time. So I wouldn't count too much on that pipeline number. We should focus on the revenue growth perspective and recognized revenue perspective.

Okay. Got it. And then when you talk about CirrusAI and the initial users. What are the size of those users? And based on your learnings and early adopter feedback, what would be some of the areas you would deploy AI next?

Sure. As I mentioned, we pushed it to a couple of hundred existing users, with initial interest from a couple dozen at the moment who have signed up for our 30-day risk-free trial. We still have to work on convincing clients of the real value of the AI and drive adoption. We launched two products from the front end perspective. One is the CirrusAI Guide, which recommends procedures and diagnoses, and the other was CirrusAI Notes, which listens to the dialogue between patients and doctors and converts that into a chart. The next product we are working on, which we recently rolled out to at least one of the providers, will provide the best of both worlds. This product will listen to conversations; that conversation gets converted into the recommended cohort. We just tried to merge the two applications together to provide true value. Picture a patient and doctor talking to each other. It extracts the information and then, based on prior social history and historical care plans, it recommends and converts their dialogue not only into the chart, but also into suggested diagnoses and procedure codes. This is the next product we already started rolling out for our first provider on a test basis, and the same user base that signed up for our CareCloud Notes will be our first clients to be updated with this new version.

Okay. All right. Got it. And then one last one, I promise. How does M&A fit into your growth strategy in 2025? It sounds like most of the growth is going to be organic. But is there any part of that strategy that is dedicated to M&A?

Good question. As we think about growth as we pivot into full growth mode in 2025, we believe that the majority of that overall growth will come from expanding the existing wallet share of our current customers and then through partnerships, which you mentioned before. We have about 25 partnerships, reseller relationships, primarily with medical billing companies, but we have the opportunity to expand into those existing partnerships, selling things like CareCloud Force, which helps them augment their course and other solutions like Chronic Care Management and the like. To your question regarding acquisitions, we really see that within this partnership, there is an opportunity to engage not in traditional acquisitions but to engage in quasi acquisitions, allowing us to provide our software to leverage our team and revolutionize their current business models. This way, we obtain the benefits of acquisition from a revenue perspective and from a cash flow perspective without actually making a traditional purchase of stock. We will see as the year unfolds. We are committed to continuing to expand free cash flow.

Okay. Got it. Thank you for all that information. I'm going to go ahead and get back in queue now. Thanks.

Thanks so much.

Thank you.

Thank you. The next question is from Allen Klee with Maxim Group. Please go ahead.

Yes. Good morning. Great execution. Can we start on medSR? You mentioned continued softness. Some hope for growth in the second half. What's the state of the market there? Is it the competitive environment that some parties are not allowed to use you? Or where do you see the potential to maybe turn things around? Thanks.

Thank you, Allen. Good morning. So you're right. The health system industry continues to be dominated by at least one major stakeholder, with the rest of the market shares divided among the next two or three other vendors. We continue to work and expand our relationship with these second and third players in the industry. When it comes to the primary competitor, we can only execute a small piece of the overall services that we could have offered for smaller market share vendors. We have started to try to earn that business since it had been completely barred for us for the last two years. Realistically, getting back on track will take some time because the projects are already signed and in progress. Therefore, someone looking to get a new project started, by the time we even sign up and start to recognize the revenue, it will take us a couple of months before we can earn that. Overall, in the bigger picture for medSR, we plan to leverage our technology-enabled RCM solutions and some of our AI-based tools or BI solutions, to cross-sell and upsell into that medSR space. We will continue to push towards that while expanding our relationship with the second and third players after the primary market leader.

Thank you. And then you had positive commentary on remote patient monitoring wellness overall. How is that growing as it just takes longer with existing customers to get set up where they're get patients compliant and billing? Or is it also from expanding the number of customers? Thanks.

Great. It is actually a combination of both. As we have evolved over the last roughly one and a half to two years into chronic care management and remote patient monitoring, we have now launched our next-generation platform for remote patient monitoring and chronic care management. Recently, we started to leverage our services to engage patients not only through phone calls but also through text messages, emails, and by sending them training videos and different types of text messages. This way, whenever the patient has time, they can click on it and fill out forms, allowing our care managers to get involved. We have overall improved our approach to engage patients, which will increase existing patient adoption from current clients. Additionally, we are expanding our existing client base by implementing chronic care management. We do try to pitch these to external clients as well, but that is secondary for us. Our best strategy is to sign up customers for our comprehensive end-to-end services, where chronic care management and remote patient monitoring become integral components.

Thank you. Last question on CareCloud CirrusAI. How do you and could you talk a little about how you're thinking about going from a relatively small number of customers to expanding it wider? Do you feel you have the sales infrastructure to do that? Or how would you approach that? And how do you feel about the competitive market affecting decision makers? Thank you.

Yes. Until the last 30 to 60 days, our first challenge, similar to other AI companies, was refining their results and focus. We tried to use our own data, leveraging partnerships with major players like Google, to enhance our AI applications. We kept refining our applications and were finally able to push it out over the past 30 to 45 days with our existing client base. Our best opportunity lies within the existing client base, where we work with over 2,600 practices and 40,000 providers, including BI solution clients. We see tremendous potential to expand within this existing client base. I think AI is becoming a top-line direct revenue driver, but it also improves existing workflows, saving clients time, allowing them to operate more efficiently. When using AI solutions, the same tasks can be completed much faster. While there exists a competitive market for pure AI solutions out there, our AI offering will improve services such as transcription. Our existing clients can take this service and integrate it directly into their existing workflows. We believe that this is one of the key differentiators when you compare us to our competitors, who might require a separate solution running independently instead of being fully integrated into their existing platform.

That's great. Thank you so much.

Thank you.

Thank you. As there are no further questions, I would now like to hand the conference over to Norman Roth for closing remarks.

Thank you, everyone, for attending our conference today. Have a great day.

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