Earnings Transcript for UPH - Q1 Fiscal Year 2022

Operator: Welcome to the UpHealth Inc. First Quarter 2022 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to your host, Shannon Devine, Investor Relations. Ms. Devine, you may begin.

Shannon Devine: Thank you, operator. During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings, including the company's annual report on Form 10-K and quarterly report on Form 10-Q to be filed for a summary of the forward-looking statements and the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. UpHealth cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaim any obligation to update or revise the statements to reflect new circumstances or unanticipated events that occur, except as required by law. Throughout today's call, we'll refer to pro forma revenues, pro forma gross margin and adjusted EBITDA. These metrics are not determined in accordance with GAAP, and therefore, are susceptible to varying calculations. Definitions, calculations and reconciliation to the financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of helps financial results provide useful information regarding certain financial and business trends and the results of our operations. I will now turn the call over to UpHealth CEO, Ramesh Balakrishnan. Ramesh, you may begin.

Ramesh Balakrishnan: Thank you, Shannon. Welcome, everyone, to UpHealth's First Quarter 2022 Earnings Conference Call. Please refer to our website to review the presentation that captures our discussion. Please join me now on Slide 5. I'll dive in our time with you today by saying that I hope you've seen this morning's announcement from UpHealth's Board of Directors stating that Samuel Meckey will be joining UpHealth as Chief Executive Officer in July. Sam has been a successful global leader in health care at publicly traded companies for almost 20 years. If you haven't seen the press release we issued earlier this morning, I urge you to read it for more details about Sam's background and career. He was most recently Executive Vice President and the Head of Healthcare at EXL Service. His experience and expertise span health care services and technology solutions, and he has consistently driven results with operational excellence. I am confident that Sam will lead up health into a new phase of dynamic growth and innovation, and I'm very pleased that he is joining the company. Until Sam comes on Board, I will continue to serve as CEO. Once he begins as CEO, I will work closely with him to ensure a smooth transition and begin a new role at UpHealth as the company's Chief Strategy Officer, with a focus on strategic initiatives and partnerships. The past few quarters for us as a public company have been a time of growth. We have completed the integration of our operations and continue to execute on strategic priorities for growth and profitability. Everything we do is led by our vision to reshape and transform the massive health care industry to take health care to a next level with better access, quality, cost and outcomes. And I'm once again incredibly proud of our team. The team is the engine behind our growth. So we also thank them for the hard work, creativity and dedication that has brought us this far. Slide 6 presents the framework for today's report. We will first take you through a brief business review and share some of our recent wins, then Martin Beck, our CFO, will walk you through the Q1 earnings. We will open the call to questions and answers at the end of our presentation. Before I hand the call over to Martin to go over the detailed financials, I would like to touch on some of the quarter's highlights and business wins, and we begin here with Slide 8. We'd like to start with our investment summary. The core reasons that make UpHealth a growth story with potential to build substantial value with solid profitability. We offer a unique and differentiated set of advanced technology products and services with substantial competitive advantage especially as many incumbents struggle with technology debt accumulated over decades. We have demonstrated solid performance across our 3 business lines, all of which operate in large markets with critical needs. We continue to show strong revenue growth $36 million in Q1 2022 compared to $33.9 million in Q4 2021, a sequential 6% increase and an 18% increase from pro forma Q1 2021 to Q1 2022, and this growth combined with margin expansion to 43% in Q1 of 2022. We continued shift of revenue mix towards higher-margin product lines that provide the foundation for increased profitability. Integrated Care Management generated $2.6 million with a gross margin of 63%. Virtual Care Infrastructure generated $15.6 million, 43% of total revenue with a gross margin of 47%. Services generated $17.7 million of revenue, 49% revenue with a gross margin of 35%. We have a solid cash and working capital position to meet our growth needs for the year. On Slide 9, you will see that we have had a good start for 2022. We performed well and hit our revenue targets of $36 million and also enhanced gross margins to 43%. Our Integrated Care Platform, SyntraNet went live at the largest health plan and the largest specialty mental health plan participating in CalAIM, California's ambitious initiative to innovate how we deliver services and care for the Medicaid population. Medicaid is the largest public health plan in the United States, providing benefits for almost 90 million individuals. The platform was also opened up to provider networks delivering enhanced care management and community support services, a critical element of the CalAIM initiative. Our virtual care platform, Martti won 4 large and long-term contracts for language integration with a total additional value of $15 million. In some of these wins, we also displaced leading competitors. Increasing consultation volumes on the Martti platform also drove higher revenue and an 11% increase in gross margin quarter-over-quarter because of operating leverage. We closed 3 new provider network contracts with health plans for our behavioral health services

Martin Beck: Thanks very much, Ramesh. We appreciate everyone joining us today. Before I begin my review of our first quarter results, I want to first comment on the presentation as it pertains to the results and comparison periods. Recall that we completed the merger transactions on June 9, 2021, and so it was only from that date forward, but we have consolidated results that we can report on a GAAP basis. In addition, due to timing factors related to the various business combination transactions as well as the global scope of our operations. It was not possible to provide consolidated results on a GAAP or pro forma basis for Q1 2021. This is the first full year that UpHealth's financial statements will include all the businesses combined in the June 9 transactions. Turning to Slide 26. You'll see that revenue for the first quarter of 2022 was $36 million, which was in line with our expectations. This represents an 18% growth over Q1 2021 numbers, which we reported on a non-GAAP combined basis and represents a 6% growth rate over Q4 2021 revenues. The gross margin was 43%, and the adjusted EBITDA was negative $1.3 million. On Slide 27 now, looking at revenue breakdown by segment on a GAAP basis, services, which again includes our digital pharmacy and behavioral health businesses, with the largest contributor with $17.7 million or 49% of the first quarter's total revenues. Virtual Care Infrastructure was next with $15.6 million of revenue or 43% of the total. Integrated Care Management had GAAP revenue of $2.6 million or 7% of the first quarter total. We expect that our revenue from Integrated Care Management will increase significantly during the remaining 3 quarters of the year as new contracts are added. Moving along to Slide 28. The company's revenue mix continues to shift towards the higher-margin Virtual Care Infrastructure and Integrated Care Management segments, which increased from 48% of Q4 2021 total revenues to 51% of Q1 2022 revenues. We expect the revenue contribution from Integrated Care Management and Virtual Care Infrastructure to return to levels that we reported in Q2 and Q3 of 2021 as revenue and Integrated Care Management ramps up over the course of 2022. Together, we expect those higher-margin businesses will account for an increasing percentage of total revenues going forward. On a geographic basis, 90% of first quarter revenues came from the United States, and 10% came from India. The company's gross margin on a GAAP basis was 43% in the first quarter, up from Q4's gross margin of 22%, which was adversely affected by the expense recognition issues at Integrated Care Management, which we discussed on our last call. First quarter margins by segment were as follows

Operator: [Operator Instructions] And our first question comes from Mike Wiederhorn.

Michael Wiederhorn : Congrats on the quarter. You touched quickly on the revenue collection. Maybe you can talk a little bit more about the moving parts this quarter. and last quarter and whether you have confidence around collecting the revenues that are in flux over the next few quarters. Let's start with that.

Martin Beck: Mike, it's Martin Beck speaking. How are you?

Michael Wiederhorn : Good, good. How are you?

Martin Beck: Good, thanks. So yes, as you know, we wrote off $15.6 million of receivables that were booked in Q2 and Q3 of 2021, we did not recognize any revenue in Q4 or Q1 from that customer. And we have been aggressively pursuing collection of that outstanding receivable balance -- we are in daily, weekly contact with the customer, and we feel that we're making progress there. I can't put a date on collection. But as I said in my prepared remarks, Mike, we're confident that we're going to collect that full amount.

Michael Wiederhorn : Great. You put out a release earlier this week around digital dispensary consultations and some great numbers around that in terms of growth. Can you talk a little bit more what is driving that and where you expect that to go based on the recent redeployment from [Congo] also financial implications of that as well?

Ramesh Balakrishnan : So what we are seeing, as you know, we have a 505 active digital clinics in India now. And what's driving the growth in terms of consultation is really the ramping up of the utilization of these services by the population we serve. We've also had ramp-up in the utilization at the legacy hospitals, but the primary driver of growth is the now second same of the new digital clinics that we've deployed, where we're now increasing the service volumes at these clinics [indiscernible]. Now I'm presuming that's the -- in addition, we've had substantial growth in the Virtual Care Infrastructure around the Martti platform. But I'm assuming, Mike, your question was around the digital clinic we've deployed in India, is that correct? Yes. Okay.

Michael Wiederhorn: Perfect. Yes. One last question. In terms of -- when we look at the revenue and obviously your guidance kind of what's your comfort level around there and around the predictability about that? And in terms of recurring revenue, how should we think about that going into next year as well versus the onetime contracts?

Martin Beck: Mike, it's Martin. I'll take that one. So if you look at our pipeline, we've got pretty good visibility into the next 3 quarters, given the contractual nature of the Integrated Care Management business and the Virtual Care Infrastructure business. And as you saw in 2021, our revenues during that year ramped sequentially quarter-over-quarter. So we feel confident that we will be able to post our numbers. In terms of recurring revenues, as you know, there's no GAAP definition of recurring revenues. We look at recurring revenues really along the lines of our 2 sort of B2B businesses. That is Integrated Care Management and Virtual Care Infrastructure. So essentially, all of the revenue in Integrated Care Management is under contract and the bulk of the Virtual Care Infrastructure revenues under contract. So it's fair to say that as you look at our total revenue mix, those 2 groups make up about 51% of the revenue, and the vast majority of that is recurring in nature.

Michael Wiederhorn : Perfect. And I guess the last one, I think you -- on the release, you talked about becoming an operating cash flow positive in the third quarter. Kind of what's your confidence around that? And kind of your capital needs over the next 12 months, how should we be thinking about that in terms of -- obviously, if you need to go to the market is very expensive kind of can you give us color on those issues.

Ramesh Balakrishnan : Yes. So if you look at the performance of the businesses in the first quarter, it shows progress at each of the businesses towards that objective of being operating free cash flow positive sometime in the third quarter, and we fully expect to be able to realize that objective. With that, I did mention that we're looking at bringing on some rupee-denominated debt at a lower coupon than the debt we repaid in the fourth quarter, and we're confident that and the really cash flow characteristics of the businesses going forward, give us sufficient liquidity to be able to realize our projections without having to go back to the markets for any capital.

Operator: [technical difficulty] Mr. Takkinen, you can begin.

Frank Takkinen: Sorry, it was quite out there for a little bit. Can you guys hear me now?

Martin Beck: Yes. Is that Frank?

Frank Takkinen: Yes, this is Frank. Perfect. So I just wanted to ask on the revenue ramp. It's a pretty nice ramp through the back end of the year, you get to see the quarter come in where it did. But it sounds like Integrated Care is going to be a strong contributor to driving that ramp to the back half. So maybe just provide any color you're comfortable with on how we should think about the quarterly cadence of revenues throughout 2022?

Martin Beck: Yes. Well, as we discussed on the last call, Frank, we have a significant project in West Africa that we didn't recognize in the first or the fourth quarter. We would expect that to be coming online in Q2 or Q3, along with a couple of other material contracts that will, as Ramesh said in his remarks, provide a pretty significant ramp in the Integrated Care Management set of revenues. And we continue to expect strong performance across the other businesses throughout the end of the year.

Frank Takkinen: Okay. That's helpful. And then -- and I know there's been a fair amount of commentary on it, but I think it's worth circling back to just to make sure we're all fully on the same page the different moving pieces. Can you just give us a pro forma balance sheet before the rupee-denominated debt is refinanced back into debt from cash? Just trying to get a very clear understanding after the forward share purchase agreement was paid back where cash and different debt levels currently stand?

Martin Beck: Yes. So obviously, you'll see all that detail when we file the Q. But as I said, we have $52 million of unrestricted cash and $22 million of short-term liabilities. For the forward share purchase agreement that we repaid on April 9 was repaid out of restricted cash. So recall that we had a little bit north of $18 million of restricted cash on our balance sheet at 12/31. We used that to repay the forward share purchase agreement. So our unrestricted cash balance remains north of $50 million. Is that helpful?

Frank Takkinen: Yes. That's perfect. Okay. And then just the last one for me. In the Virtual Care Infrastructure business, you could see the growth there. Can you maybe tease out the growth from HelloLyf versus Martti, because like both are growing nicely, but maybe a little bit more color on the growth profile of each would be helpful.

Ramesh Balakrishnan : Sure. So Frank, what we are seeing in the Martti's platform growth is a combination of increased utilization in existing facilities as well as new contracts that are adding to the footprint we have. And as we've mentioned, some of those new contracts are also displacing incumbents. So the increase in total minutes of consolidation through a combination of those factors is what's driving growth in the marquee business. In the HelloLyf product line, what we're really looking at is a second phase of the deployments of the clinics that we implemented earlier in Madhya Pradesh, which are now ramping up in terms of the number of consultations that we're delivering, substantial increased ForEx last year, 29%, I think, from last quarter. And what we are continuing to do there is address what remains a very substantial demand for this model for health care in India to address the needs of a very, very large population, and we'll continue to see that demand increasing and our capacity to deliver as well.

Martin Beck: And just to add a little bit to that, Frank. We were very encouraged to see really the operating leverage in the Virtual Care Infrastructure reflected in the increased gross margin. Our U.S. telehealth business was up 10 full percentage points in terms of gross margin tied to better pricing at higher volumes. So we continue to look forward to see that.

Operator: [Technical Difficulty] And I'll turn the call back over to the moderators.

Ramesh Balakrishnan : Paul, I'm pretty sure that none of us can hear you speaking. I don't know if your phone is on mute, but we can't hear anything that you're saying.

Operator: This is the conference operator. You can hear me speaking?

Ramesh Balakrishnan : Now we can. Do we have any other questions?

Operator: I apologize. I was saying that we had no further questions in queue, but let me pull the audience one more time. [Operator Instructions] And we do have a question from Randy Raisman. I'm sorry, this is Matt Ripperger.

Matthew Ripperger: Yes, close enough. Ripperger. Can you hear me? I just -- yes. Just a couple of questions. I can, yes. So the Integrated Care Management of $2.3 million, you said that there was some revenue that was deferred or not recognized in the fourth or the first quarter. Do you mind helping quantify sort of how much that was? And do you anticipate recognizing that in the second or third quarter?

Martin Beck: Yes. So Matt, it's Martin speaking. As we discussed on the last call, we did not recognize $8.3 million worth of revenue associated with the project in West Central Africa. We didn't recognize that in Q1 either, but we would expect to recognize it in Q2 or Q3 going forward.

Matthew Ripperger: And that's $8.3 million per quarter or annual?

Martin Beck: Annual.

Matthew Ripperger: Okay. And so I recall that the last quarter, the commentary was you were redirecting assets from West Africa to India to meet demand. Are you still doing that? Or are you reversing and renewing the contract in North Africa?

Ramesh Balakrishnan : That is not related to integrated care, Matt. You're talking about the digital clinics, is that correct?

Matthew Ripperger: Yes. Yes.

Ramesh Balakrishnan : So we are -- as you recall, those clinics were not ever shipped to Central Africa. And we are, as we mentioned on our last call, deploying those in India in a model where they are initially deployed at satellite clinics around our hospitals, where they were able to deliver both outpatient care and refer a portion of the patient population to the adjacent hospitals in-patient care, and that is proceeding as we speak.

Matthew Ripperger: Okay. Great. And then just a second question, if I could. On the Medicaid waiver program in California and the 8 million lives, how much of that revenue is reflected in the $2.3 million of integrated carrier revenues in this quarter? Or is the nature of the contract such that the revenue contribution to you build as the year progresses?

Ramesh Balakrishnan : As we mentioned, there are 2 levels of revenues associated with the population and the revenue increases as an increasing percentage of that population is enrolled in programs.

Matthew Ripperger: Got it. But I guess, is that program expected to be a meaningful contributor to revenues in the Integrated Care business this year in '22.

Ramesh Balakrishnan : We expect a significant pipeline that is also built up that to be a contributor to the revenue this year.

Matthew Ripperger: Okay. In Alameda County, you said that was extended through win?

Ramesh Balakrishnan : That contract has been extended through for another 15 months.

Martin Beck: Thanks Matt. Thanks to your questions.

Ramesh Balakrishnan : I think we're having some technical difficulties with the operator, but this brings our call to an end. I appreciate everybody taking the time and we'll look forward to communicating again on our next call. Thanks very much everybody.