Earnings Call Transcript - CCLD Q3 2022

Operator, Operator

Welcome to the CareCloud, Inc. Third Quarter 2022 Results Conference Call. I will now hand the call over to your host, Nathalie Garcia. Ms. Garcia, you may proceed.

Nathalie Garcia, Host

Good morning, everyone. Welcome to the CareCloud Third 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; and Bill Korn, our Chief Financial Officer. 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 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 to 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 2022 earnings presentation. Please visit our Investor Relations site, ir.carecloud.com, click on News and Events, then click IR calendar, click on Third 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 third quarter 2022 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?

Hadi Chaudhry, CEO

Thank you, Nathalie, and thanks to all of you for joining us today for our third quarter earnings call. First, to review some high-level financial highlights, we are very pleased to announce our second consecutive quarter of record bookings, driven by a strong initial reception to our Wellness offerings, namely chronic care management and remote patient monitoring. We see an enormous opportunity to expand our total addressable market and generate meaningful growth through these product introductions, and we'll go into more detail on that shortly. Our third quarter revenue and EBITDA of $33.7 million and $4.8 million, respectively, compared to $38 million and $6.7 million in the prior year quarter, which was expected and built into our projections. On today's call, I would like to discuss a deeper dive into CareCloud's record bookings that continue to grow due to our newly launched products and heightened focus on organic growth, our innovation and next generation of digital health, including the recent launch of remote patient monitoring, results from the recent class survey, which really put CareCloud on the map with respect to multiple digital health categories and finally, an update on our sales pipeline. First, with respect to bookings, we are pleased to report that the third quarter represented our highest-ever bookings quarter in the history of the company, which we believe was directly correlated with the early strength of our suite of digital health solutions under our Wellness umbrella. Recurring bookings for the third quarter were $7.1 million, up 3x that of a year ago and up 25% sequentially atop the prior record we set last quarter. CareCloud Wellness bookings represented close to 50% of total recurring bookings for the quarter. This metric tells us that there is an absolute market need for this category of products and gives us the confidence in our R&D strategy and the investments we are making in our solution set. Wellness, which launched a little over 6 months ago, is an effective and practical way for our practices to support the treatment and well-being of patients with chronic conditions. It is critical that the pathways to care for these patients are as seamless as possible for both physicians and patients as nearly half or 45% of Americans live with some type of chronic condition according to the data from NIH. Additionally, it is a great source of incremental revenue for the provider with little to no upfront cost for them. Wellness' bookings momentum since our launch in April demonstrate that its value is clearly resonating with our physician base. Similar to the last couple of quarters, but not the norm to get too granular around our bookings metrics, we think it's important to share this information with you as it ties directly to the conversion of the robust pipeline activity that we provided a lot of details around the last couple of quarters. Importantly, it demonstrates that our increased investment in product innovation and sales and marketing spend are paying dividends. Importantly, for modeling purposes, we want to call out what is typically a longer than usual tail for bookings conversion to revenue in our Wellness business. We note that $1 of Wellness bookings does not translate to $1 of revenue 1 or 2 quarters later. Rather, once the bookings are confirmed, we work with customers to sign up their patients, and only once the patients are enrolled and the actual chronic care management visits or remote patient monitoring begin. The onboarding of both physicians and patients typically takes 9 to 12 months to fully ramp up. After this initial period, we do not realize the entirety of bookings as revenue; rather, it is a gradual process to build up to that steady state on an annualized basis. As we mentioned last quarter, given the sensitivity around bookings and general quarterly volatility, please note that investors should not expect us to provide bookings metrics every quarter. CareCloud Wellness, which was launched last quarter, continues to generate a strong marketplace response. In later September, we announced the launch of our remote patient monitoring solution. While we detailed this solution on our earnings call last quarter, as a refresher, the RPM solution gives health care providers the ability to monitor elements of their patients' health outside the clinical setting, allowing more proactive and improved care delivery. Through collaborations with leading device makers, this program enables providers to get real-time information on their patients' health status and make proactive clinical decisions, rather than waiting for a scheduled follow-up visit. We have generated RPM bookings of $0.6 million in just the last 30 days since its launch. We are very excited about the enormous potential to leverage our existing client base and drive meaningful growth in our Wellness segment. As mentioned last quarter, we believe we can generate up to $50 million annually from our existing customer base alone. We are honored that CareCloud was recently recognized in the 2022 Best in KLAS survey in the category of small practice ambulatory EMR/PM for offering integrated software and services to practices with 10 physicians or less. Aligning with our mission to drive innovation that creates better financial and operational outcomes for physicians and practices, we are proud that our EMR and PM solutions are being recognized by the medical providers that provide direct feedback to KLAS. For those of you not familiar, the KLAS recognition is the most reputable market research organization specific to the health care IT market, and is compared to consumer reports of health care. In addition to KLAS, further respected publishers have recognized CareCloud's products and services under EHR and RCM categories just over the last few months. This includes Business.com for best medical software and best medical billing services; Forbes Advisor for our comprehensive health care technology solution; TechRadar for the best electronic health record software and various others. A more detailed list is available in the presentation along with web links. We are also in the running for other award categories of best-in-class for which results are yet to be announced. Similarly, we are currently under review by Inc. 5000 for best in business for health services and products; and Fast Company for most innovative company for our digital health suite. These accolades give us confidence that we are innovating in the right direction and are succeeding in our goals of alleviating burnout experienced by practice physicians, streamlining their back-office processes while driving superior collections. We are pursuing this recognition as part of our business strategy to focus more aggressively on brand awareness and organic sales. We are proud that our clients and objective third parties have given us these awards and certifications. We are pleased that our pipeline of new customers at the end of Q3 was $28 million, a 40% increase above the $20 million we had in the third quarter of 2021. This amount does not include CareCloud Wellness, which represents an entirely different set of potential customers and opportunities cross-selling to our existing customer base. All told, we are thrilled with the early reception to both our wellness offerings, chronic care management, and remote patient monitoring, evidenced by our bookings to date. To summarize, we are thrilled to deliver our second consecutive quarter of record bookings in Q3. Our sales and marketing efforts continue to ramp, and early results are encouraging as evidenced by CareCloud's booking and an all-time high in customer reception to our products. We are harnessing the power of increased brand awareness to help drive organic growth, and we look forward to reporting our progress as we close out the remainder of 2022. Now I will turn the call over to Bill for a closer look at our third quarter and year-to-date results. Bill?

Bill Korn, CFO

Thank you, Hadi, and thanks, everyone, for joining us on the call today to discuss our third quarter results. The third quarter was broadly in line with our expectations, noting the reduction in revenue from two clients that we discussed last quarter. On today's call, I'll review the quarterly results and discuss our year-to-date performance in greater detail. Taking a look at our results for the first 9 months of 2022, revenue year-to-date was $106.3 million, an increase of 4% compared to $102.1 million in the first 9 months of 2021, with 84% of our revenue generated from our technology-enabled solutions. Year-to-date, our GAAP net income was $4.9 million compared to a GAAP net loss of $686,000 in the first 9 months of 2021. This equates to a loss of $0.45 per share after subtracting the preferred share dividends. Our non-GAAP adjusted net income for the first 9 months of 2022 was $12.4 million, or $0.81 per share. During the first 9 months of 2022, our adjusted EBITDA was $16.6 million, an increase of $546,000, or 3% from $16 million in the same period last year. Our adjusted EBITDA margin year-to-date of 16% is consistent year-over-year. Our third quarter revenue was $33.7 million, representing a decrease of $4.6 million, or 12% year-over-year. The year-over-year decline was due to two factors. The primary factor was a reduction in recurring revenues from the two large customers we mentioned last quarter. These customers, who came to us as part of a prior acquisition, are in the process of merging their operations with other health systems, which utilize a different EHR platform. We continue to see an impact from their wind down of revenue. Since they were high-margin accounts, this impacted our third quarter profitability as well. A secondary factor was a decline in our nonrecurring professional services revenue from the second quarter. This revenue, primarily from our Med SR business, is running at approximately a $30 million annual run rate. Due to completion of a large project during the second quarter of 2022, this revenue was a bit higher during the second quarter and levels off in the third quarter. This was anticipated and is part of a normal fluctuation in that business based on the timing of project starts and completions. This normal fluctuation does not impact the annual revenue run rate of that business. Our GAAP net income of $1.1 million was down from $1.5 million in the third quarter of 2021, a decrease of 30%. Our GAAP net loss was $0.18 per share based on the net loss attributable to common shareholders, which takes into account the preferred stock dividends declared during the quarter. Our non-GAAP adjusted net income was $3.3 million, or $0.21 per share. Adjusted EBITDA of $4.8 million decreased 28% from last year, and our adjusted EBITDA margin was 14%. Now I'll turn to the balance sheet and cash flow. We ended the third quarter with $4.9 million of cash and equivalents and nothing drawn on our $20 million line of credit with SVB. Net working capital was $5.1 million and we generated $7 million of cash from operations during the quarter and $15.1 million year-to-date. We are reiterating our 2022 guidance with revenue to be in the range of $140 million to $143 million and adjusted EBITDA to be in the range of $22 million to $24 million. As I mentioned last quarter, we are continuously looking for game-changing deals and look forward to updating you when appropriate on that front. We are also very excited to announce that we will be hosting our first Analyst and Investor Day on Monday, December 12. This will be a virtual event to showcase our company at a depth and breadth that will be entirely new to the investor and analyst community. The purpose is to reacquaint investors with our story and go into detail on how CareCloud has evolved from a consolidator of billing companies to a leading-edge indispensable partner to physicians and hospitals as they navigate the next generation of health care technology. There will be opportunities to hear from and ask questions of members of our leadership team in sales and operations. We'll provide additional information about the new CareCloud products and our long-term strategy to harness innovation and growth to drive new business. Please look for a formal invitation to this event shortly after the Thanksgiving holiday. We are proud of our progress in 2022, and it is clear that our new product solutions are resonating. We have carved out two distinct pathways to organic growth, through new business development as well as leveraging our relationships with existing customers and creating value-add products to complement their existing CareCloud platforms. Our organic growth continues to increase, and we look forward to providing more details during our Analyst and Investor Day. With that, I'll turn the call over to Mahmud for his closing remarks.

Mahmud Haq, Founder and Executive Chairman

Thank you, Bill. We are very proud of our accomplishments to date and even more with respect to what the future holds for CareCloud. 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?

Operator, Operator

Our first question comes from Jeff Cohen from Ladenburg Thalmann.

Destiny Alexandra, Analyst

This is Destiny on for Jeff. Congratulations on so many accolades in the last couple of months. I think that's really wonderful. I guess quickly, I'd like to start around your commentary with the Wellness platform and the cycle that you're talking about. I know that wellness is relatively new and remote patient monitoring is even newer. So I'm wondering, is there an opportunity to make that 9 to 12 months a bit faster as you gain learnings from your physicians and whatnot? Or is that going to be the cycle you're expecting for the remainder?

Hadi Chaudhry, CEO

Thank you for your question. As you noted, we launched our chronic management program under the Wellness umbrella in the second quarter. We are still gathering data, and currently, we have around two quarters of data for chronic care management. For remote patient monitoring, which we just started about 30 days ago, we've signed a few contracts but lack sufficient data to predict final numbers. Based on industry averages and our data from the past two quarters, we expect the full ramp-up to take between 9 to 12 months. Patient adaptability will also play a significant role, as this is a new offering for the industry and for patients. We hope to see increased adaptability over the next year, but that remains to be seen. Thus, we are currently anticipating a full ramp-up within 9 to 12 months.

Destiny Alexandra, Analyst

Okay. That's really helpful. And then I'm wondering if you could just talk a bit more about that pipeline you discussed kind of outside of Wellness. I think you said it was about $28 million, if I'm not mistaken. Can you just talk about the composition of that pipeline a bit?

Hadi Chaudhry, CEO

Great question, Destiny. As I mentioned, this pipeline does not include Wellness. In the third quarter bookings, about 50% are derived from Wellness. When considering the $28 million pipeline, it is essential to note that it excludes Wellness. For the remainder, approximately 50% comes from enterprise clients, while about 20% to 30% is from midsized businesses, and the rest is from smaller practices. We're seeing significant interest from enterprise clients, which we define as practices with 25 or more providers. Wellness, along with chronic care management and remote patient monitoring, presents a different scenario. We're not sharing specific pipeline dollar figures at this stage because our initial focus is on our existing client base. We estimate that these combined services could generate up to $50 million in annualized revenue from our top clients within the next 1 to 2 years. We recognize the opportunity here and plan to announce more details in the second phase regarding the overall marketplace and new client acquisition, using these services as key drivers for growth. We will share more information around our Investors Day in December.

Destiny Alexandra, Analyst

Okay. That makes sense. And I guess that kind of leads into my next question, which is how are you leveraging some of these cross-selling opportunities as we're now in one of the busiest quarters typically from a seasonality standpoint?

Hadi Chaudhry, CEO

Destiny, you may need to explain the question a bit further. Whether it's the third or the fourth quarter, Wellness is currently where our main focus is, although we are still tracking it as a separate line item for better accuracy. This also represents an upsell opportunity for us. Excluding Wellness, our upsell numbers for the last quarter showed that approximately 5% to 10% of new bookings were generated from these upsell activities year-to-date.

Destiny Alexandra, Analyst

Okay. Got it. Yes, that was exactly my question. And then I guess last one for me and then I'll jump back in queue here. I didn't hear much about Force. So I'm just wondering if that's still a focus and if you're still seeing interest there or if that's kind of gone more towards the back burner as you focus on organic developments and the like.

Hadi Chaudhry, CEO

Destiny, I'll start the answer, and then we happen to have Karl who is our Division Head for Force, CareCloud Force, and he can give some more color. Now we absolutely continue to focus on Force as well. Year-to-date, if we still look at it, about 20% of our bookings are coming from the Force. Along with the help of the Med SR division, as we have started to work more leveraging the existing health-based relationships, we are seeing more and more opportunity towards that. And Karl, would you like to jump in, please?

Karl Johnson, Division Head for Force

Absolutely. Thank you, Hadi, and an excellent question. I always enjoy talking about Force. Certainly, what we saw in Q3 was four substantial hospital clients, which is kind of new territory for us, that have come through the relationships at Med SR, which serves as continued proof of concept. In addition to that, the pipeline being full for our routine organic growth has been exceptionally robust for Force. In fact, we have some opportunities out there with household names that you all know. It's too early to announce that yet, but I'm super excited about where that's going and our ability to kind of leapfrog from the hospital deals into the big larger companies where we can provide those workforce extension opportunities. So it's been going extremely well. Thank you, Hadi.

Hadi Chaudhry, CEO

Thank you, Destiny.

Operator, Operator

And our next question comes from Allen Klee from Maxim Group.

Allen Klee, Analyst

Yes. For your two large hospital customers that churned, can you give us a sense of what the quarterly revenue is associated with them? And is it fully churned off? Or is there like a little more that's to come?

Hadi Chaudhry, CEO

Thank you, Allen, for your question. I'll begin the response and then pass it over to Bill for insights on the numbers and the impact from a quarter FX perspective. First, from a high-level view, these two customers were relatively unknown during the due diligence process. We assessed a certain level of risk, especially as they were being acquired by larger groups and involved different implementations of health systems. This consideration played a role in determining the valuation of those acquisitions. We ended up retaining them, even more than we initially expected. There is a very small portion of revenue we might expect from one of those two clients in the upcoming year. However, in the broader context, that amount is negligible. Therefore, I won't let that significantly influence our outlook for 2023 based on these two customers. Bill, would you like to provide any additional comments?

Bill Korn, CFO

Sure. Allen, these two clients made up a significant portion of our revenue. Most of the decline happened in the third quarter, but I anticipate a slight additional decrease. This is typical when a large hospital system undergoes a multi-year implementation of an EHR like Epic, as the process is lengthy and not rolled out to all units simultaneously. While they have been transitioning to Epic, they weren't using our EHR, and they had plans to shift the ERCM business. Therefore, you should expect some headwinds in the fourth quarter. One of these clients will continue with us next year, but they will no longer be a top client; they will be categorized as a small client. We are fortunate that we were able to generate substantial revenue and profit from them during the time we worked together.

Allen Klee, Analyst

And my last question is, so tell us a little about how you're thinking about the M&A environment with valuations pulling back. Could that be creating maybe more potential opportunities?

Bill Korn, CFO

Sure, Allen. So we are always looking for good M&A deals. And sometimes, people will say, Bill, it's been 15 months since you guys bought something; what are you doing? The answer is, every week, we're looking at one or more deals. Now as you know, we've got certain criteria. We look at an investment and say, we want to get a return on that investment in 3 or 4 years. So even though public market valuations have declined a lot over the last 12 months, unfortunately, there are a lot of private companies who haven't raised money for a while, and they turned down raising money because they didn't like the terms. If you ask them, they'll say, well, gee, last time I raised money, it was at 5x revenue. I'm hoping to have my first year of profits next year, so I think I'm worth 5x revenue. And we'll look at that and say, if you are 5x revenue and you have no profit, how long does it take me to get a payback on that investment? It doesn't even make sense. So we're always looking. We're always hopeful. We're fortunate that we have many available sources of capital, so we're not letting that be a constraint in terms of doing deals. But we're also not willing to do a deal on terms that we don't think are going to be accretive to shareholders. So there's nothing to talk about today. Hopefully, when we have conversations down the road, we'll have some exciting things to tell you about. But rest assured, we're always looking for things. And if you know if somebody who you think would be a good fit, please feel free to give us their name.

Operator, Operator

And our next question comes from Marc Wiesenberger from B. Riley Securities.

Marc Wiesenberger, Analyst

Drilling down a little bit more on the bookings and pipeline. Of the $7 million in new bookings, what percentage was from new customers versus upsells to existing customers? And of the pipeline, what percent does Med SR represent in there?

Hadi Chaudhry, CEO

Thank you, Marc. To break it down, out of the $7.1 million in annualized recurring bookings we secured in the third quarter, approximately 50% came from Wellness, primarily through successful sales to our existing customer base. Additionally, around 22% was attributed to new bookings. For upsells, excluding Wellness, we saw about a 2% to 3% increase for the quarter. It’s important to note that there is significant excitement and opportunity in the industry, particularly regarding services like chronic care and remote patient monitoring. We are eager to see the results of remote patient monitoring. We continue to grow our presence beyond Wellness through new clients and upsells or service expansions within our existing base. This $7.1 million does not account for any Med SR revenue, as that is classified as one-time project-based revenue.

Marc Wiesenberger, Analyst

Understood. So is Med SR not included in that $28 million pipeline as well?

Hadi Chaudhry, CEO

Yes, that is not included in the $28 million pipeline. This $28 million pipeline is just for our recurring business that we anticipate trying to sign. Med SR is a separate pipeline.

Marc Wiesenberger, Analyst

Understood. And then year-to-date, it looks like sales and marketing spend is up about 13% over last year. I thought maybe the company was kind of targeting closer to 20% based on some of the returns you are seeing? So is it possible that bookings could have potentially grown faster if you spent more? And have your thoughts on kind of allocation to those expenses changed at all?

Hadi Chaudhry, CEO

Great question, Marc. If you think about it from the headcount perspective, the headcount has significantly increased. But the sales and marketing spend, as you were saying, has not increased as much as we were initially forecasting or budgeting. We were able to much more effectively ramp up the sales and marketing team offshore in addition to onshore. So that's helping us up to a certain extent in managing this expense base better and in a more effective way. Today, roughly between sales and marketing together, now we had about 50% headcount offshore and the rest of the 50% onshore. So that's contributing up to a certain extent in that initial number forecast that we presented. We still are running on the CAC basis, close to somewhere between the same $0.40 to conversion into a dollar revenue, between $0.40 to $0.50. So I think we are on track from the CAC perspective, we are on track in terms of the ramping of the sales and marketing team and we already have started to see the results. If you look at the last two consecutive quarters in terms of the final booking, 5.2, 5.3 in the second quarter, record booking quarter, third quarter even further up to 7.1. We are anticipating similar results for the fourth quarter as well in terms of the bookings.

Marc Wiesenberger, Analyst

Very helpful. And then just a final one for me. As you scale the Wellness offering, I guess, and maybe specifically related to the CCM, what does your capacity to scale look like? Is that something that has more of a linear trajectory? Or can it materially accelerate if the appropriate resources are in place? And what do those resources look like?

Hadi Chaudhry, CEO

Thank you, Marc. Regarding the increase, I may not fully grasp the question. We've taken a conservative approach by assessing the patients who are currently eligible for our chronic care management practice, estimating an adoption rate of about 40% to 50%. You're correct that this can be improved. However, given that this is a relatively new competitive field, there is a similar level of patient adaptability to consider. For instance, if a patient is contacted for the first time and asked if they would be willing to spend 20 to 40 minutes each month on a call to enhance their health, it might take some effort to persuade them. We believe that over time, this will get better as the same patients may get calls from other payers, which will increase awareness. Nonetheless, we need to observe how things develop over the next 12 months. While there is potential, it's challenging to predict exactly how it will evolve in that timeframe.

Bill Korn, CFO

And Marc, I'd say right now, it's really driven more by the demand from the patients. It's not necessarily supply constrained because initially, as we started providing this in addition to having people of our own, we're using a third party. We have the capability to continue to ramp up supply and demand as it grows. So right now, I wouldn't forecast any constraints on our ability to serve these customers. I look at it as how fast the new market will take off.

Operator, Operator

And at this time, there appear to be no further questions.

Nathalie Garcia, Host

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

Hadi Chaudhry, CEO

Thank you.

Operator, Operator

This concludes today's conference call. Thank you for attending.