CareCloud - Q4 2023

Transcript

Operator (participant)

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the CareCloud Fourth Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the two. Thank you. I would now like to turn the conference over to Chantelle Melendez, Corporate Counsel. Please go ahead.

Chantelle Melendez (Corporate Counsel)

Good morning, everyone. Welcome to CareCloud's Fourth Quarter and Full Year 2023 conference call. On today's call are Mahmud Haq, our Founder and Executive Chairman; Hadi Chaudhry, our Chief Executive Officer, President, and the Director; and Norman Roth, our Interim 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 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 acquisition.

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 fourth quarter and full year 2023 earnings presentation. Please visit our investor relations site, ir.carecloud.com, click on News and Events, then click IR Calendar. Click on Full Year 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 fourth quarter and full year 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?

Hadi Chaudhry (CEO and President)

Thank you, Chantelle, and thanks to all of you for joining our fourth quarter and full year earnings call. I have several important updates to share from the quarter and for CareCloud's path forward. During 2023, we intensified our focus on operational efficiencies with the goal of improving profitability and free cash flow. While challenges to revenue persisted in 2023, we have been aligning our costs with our revenue goals and focusing on the highest return opportunities. This transitional period is expected to continue through 2024. Our primary objective remains centered on profitability and free cash flow, underpinned by an organization-wide commitment to operating leverage and improving our competitive position. We expect modest top-line growth as we lay the foundation for sustainable long-term expansion and pave a pathway to a more normalized growth rate in 2025.

We remain confident in our mission of empowering physicians to deliver exceptional patient care through our cloud-based technology while delivering returns for our shareholders. Our proprietary end-to-end platform is fully integrated and designed with the flexibility to be adapted across markets and to meet the needs of our physician partners. The complexity in healthcare administration evolves, we are seeing rising demand for our tech-enabled RCM, digital health, and Generative AI solutions. We remain prepared to deliver scalable outcomes to a global workforce and over 20 years of experience. Turning to our results for the full year, our revenue of $117 million and adjusted EBITDA of $15 million were in line with our expectations.

As to the year ahead, our primary objective during 2024 is to substantially increase positive free cash flow, reducing the balance on our credit line while pursuing the resumption of our preferred dividend. This goal will be achieved through a combination of top-line growth and a concerted effort to optimize our cost structure by leveraging the strengths of our global workforce and implementing vendor cost optimization layers. During the fourth quarter of 2023, we developed and began executing a strategic plan aimed at enhancing liquidity within our operations by streamlining payroll and operating expenses. Once the reductions are fully implemented this year, we anticipate an improvement of approximately $18 million in annualized free cash flow, of which approximately $13 million will be realized in 2024.

Moreover, ongoing efforts to optimize our cost structure will continue throughout the year, underscoring our commitment to increasing profitability and generating positive cash flow that exceeds our monthly dividends. Our suite of products continues to evolve as CareCloud stays ahead of the curve in innovating cutting-edge solutions. We recently announced the latest addition to our cirrusAI suite, called cirrusAI Notes, which can run ambiently during patients' visits, identifying and summarizing key parts of the visits and formatting them in a clinical note for the doctor's review. Once accepted, the note is securely saved in the patient's chart within the EHR. We are at the forefront of driving these innovative AI solutions forward, and we expect revenue that comes from these products to be incremental to our margin profile.

As these products support the generation of revenue, we can further improve our models by leveraging proprietary data collected over 20 years across the spectrum of small, medium-sized, and large health systems. These AI solutions will improve our competitive position in the market, ultimately helping us to improve our profit margins. As reflected in our 2024 top-line guidance, we anticipate our wellness segment to be key driver of the growth for the year ahead. Despite this business failing short of expectations in 2023, we concluded the year with strong momentum, which we expect will carry over into 2024 and further accelerate in 2025. There continues to be a strong uptake among providers and an increasing amount of interest from patients as healthcare undergoes a paradigm shift towards preventive medicine and value-based care.

During the fourth quarter, patient engagements more than doubled from the first quarter, 2023. Regarding the industry-wide impact caused by a cybersecurity breach in Change Healthcare, the benefit of our diversified clearinghouse partners and swift action of our team members has resulted in minimal exposure to CareCloud and our clients. Our actions taken not only ensured that virtually all claims submitted were cleared, but also that payments was remitted to our customers. The resulting liquidity benefit has been critical to our customers and further demonstrates our competitive differentiation in the marketplace. Expanding further on our diversification across our clearinghouse partners, most of CareCloud's government payer-related claims volumes were unaffected, as they are directly submitted to the payers and flow through our proprietary clearinghouse. The rest of our claims volume were diversified between Change Healthcare, our proprietary clearinghouse, and other clearinghouses.

Those impacted by the breach are being rerouted expeditiously to other industry players. The minimal exposure to CareCloud that we do anticipate is timing-related, but overall net neutral on a revenue basis. Payments from some customers-related processed claims will likely be recognized later than anticipated. There could also be some disruption to secondary actions, such as collections on patients' coinsurance. However, the overall impact to the business would be de minimis. I will now turn it over to Norman Roth. Norm will be serving as CareCloud's Interim CFO while we search for a full-time CFO. Norman has been with CareCloud for 10 years as Corporate Controller, and his technical know-how has been invaluable to the company. His leadership will be instrumental in navigating the company through this transitional period. Norm?

Norman Roth (Interim CFO)

Thank you, Hadi. I'm excited in my role as the interim CFO of CareCloud, which started in January of this year. As we navigate through this year of transition, my focus is on enhancing our financial discipline and pulling the appropriate levers to increase our operating leverage within the business. On October 2nd, 2023, the company announced that it was committed to effectively aligning its resources with business priorities and to improving profitability. Cost reduction measures were implemented during the fourth quarter of 2023 to optimize efficiency, streamline operations, and enhance financial performance. Once these cost initiatives are complete, we expect to achieve approximately $18 million in annualized cost savings, of which approximately $13 million will be realized in 2024. In December 2023, we suspended the preferred stock dividend, resulting in cash savings of $1.3 million per month.

This was a difficult decision, but one that we consider necessary. Again, our goal this year is to reduce costs, return the company to profitability, and generate positive free cash flow. Once sufficient cash flow is generated, our initial goal is to reduce the borrowings on the line of credit. Once our monthly free cash flow exceeds the dividend requirement for a few months, management will recommend to the company's board of directors to reinstate the preferred stock dividend. The GAAP net loss for 2023 includes a $42 million goodwill impairment charge, which is a non-cash charge. As a result of suspending the preferred stock dividend, there was a decrease in the company's market capitalization, which caused what is known as a triggering event, requiring the company to review the carrying value of its goodwill balance.

The goodwill balance on our balance sheet has now been reduced by $42 million from the prior year. In the fourth quarter of 2023, we reported revenue of $28 million, a GAAP net loss of $44 million, and an adjusted EBITDA for the fourth quarter of $4 million, representing an adjusted EBITDA margin of 14%. The GAAP net loss that I just referred to includes the goodwill impairment charge that I mentioned above. Additionally, our adjusted net income was $835,000, or $0.05 per share. For the full year, we recorded revenue of $117 million, which was in line with our guidance, a GAAP net loss of $49 million, and adjusted EBITDA of $15 million, representing a 13% adjusted EBITDA margin.

We also reported an adjusted net income of $4.8 million, or $0.30 per share. Turning to the balance sheet, we ended the year with $3.3 million of cash. We generated $15 million in cash flow from operations for the full year 2023, $3.7 million of which was from the fourth quarter. We are focused on growing free cash flow with the goal of reinstating the preferred stock payment. For 2024, we expect revenue to be between $118 million and $120 million, and adjusted EBITDA to be between $21 million and $23 million. Our top-line guidance contemplates organic growth, including expansion of the wellness segment, which will partially offset the lost revenue associated with the loss of two customers from a prior acquisition.

As previously mentioned, in 2023, our revenue from technology-enabled business solutions was adversely affected by two significant accounts. These accounts were in the process of winding down at the time of our acquisition in 2020 and represented revenue of $3.1 million in 2023. As we deliver on our strategic initiatives, we expect to offset this loss in 2024. We expect the combination of operational efficiencies and returns from our investments to drive adjusted EBITDA. From a seasonal standpoint, Q1 will include the normal revenue decline the industry typically sees due to the impact of patient deductibles, and as always, since we are processing the same level of claims, this does not reduce our cost.

We do not expect an impact from the events affecting Change Healthcare, but do anticipate that a small portion of what would otherwise be Q1 revenue will be recognized in Q2. Our guidance collectively reflects a mix of challenges and opportunities that ultimately puts us in a stronger position to grow sustainably. With that, I'll now turn the call over to Mahmud for his closing remarks. Mahmud?

Mahmud Haq (Founder and Executive Chairman)

Thank you, Norm. As discussed, our entire team is focused on increasing profitability and free cash flow while supporting our sustainable growth. I would like to thank our employees, customers, and shareholders for their continued support. Operator, please open the floor for questions.

Operator (participant)

Thank you, ladies and gentlemen. We will now begin the question-and-answer session for industry analysts who cover CareCloud. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. Please limit to two questions and then rejoin the queue if you have any other questions. Your first question comes from Allen Klee with Maxim Group. Please go ahead.

Allen Klee (Managing Director and Equity Research Analyst)

Hello. Hi, just wanted to go over your guidance for 2024, and where you have the revenue increasing. Could you go into that a little more? And your, what's your assumption for medSR, which just in general has been somewhat challenged. So, kind of just kind of give us how you think about how conservative the guidance is and what could cause it to end up lower than that. Thank you.

Hadi Chaudhry (CEO and President)

Hey there. Good morning, Allen, and thank you for your question. So I think if you first of all, before getting to specifically towards your answer, I'll try to reiterate the fact that if you think about for 2024, we are strategically directing our focus towards enhancing the bottom line profitability. While we do maintain a balanced approach that recognize the significance of top line growth at the same time, but as that remains the key priority for us, but we believe that sharpening our focus on profitability is essential for long-term sustainability and value creation for our shareholders.

So that's why if you think, if you look at it in our guidance, our EBITDA guidance is, you can see a significant increase over the last year since we are trying to focus on the liquidity and the profitability. From the medSR standpoint, we are in the process of stabilizing and restrengthening our relationship with the key industry health system players such as Epic, Meditech, and the like. We have had some successes, and it looks like that we probably will have more success as we get into the year.

So for this year, for 2024, we think, we believe, that the revenue for medSR would at least be stabilized at the same level as it is in 2023, or be some small top-line growth. Having said that, if we are able to pull off some of these relationships, whether it's Epic or Meditech and the like, which are the top players, we may see some more growth, but we are not accounting that for as part of the guidance. From the top-line perspective, that's a combination of our regular sales, our Chronic Care Management, and the Remote Patient Monitoring.

And so we have accounted for that, and that's why we are not trying to put up too optimistic growth targets on the top line, but the focus will continue to be throughout the year towards the profitability, and that's where you will and the shareholders will find the, find the true value.

Allen Klee (Managing Director and Equity Research Analyst)

Thank you. And my follow-up question is on, I don't remember what the name of it was, but a product that uses AI to create notes. Where is that? Could you talk about that a little more and where, how you're targeting and what the benefits are to the doctors?

Hadi Chaudhry (CEO and President)

Sure. And similar to many other current in our competition, everyone has started to introduce these products. And in our space, I think the way we are looking at it, it's going to more value towards improving the workflow of the medical practices, how they can serve their patients better. So far, there was one product we launched last year, and then there is a recent one we demonstrated even at HIMSS. The first one was where we are guiding the provider. We are trying to guide the provider in terms of these could be the potential next medicines or the test that can be prescribed to the patients.

This other one, which we recently demonstrated, is where the AI can ambiently listen to the patient-doctor conversation and then convert that into a note. And once the doctor reviews it and can click it and save it into the chart. So it's going to improve the time. It's going to help the provider serve the patients better. If you think about it, for the first one, we are still going through optimizing the results as AI, even no matter which AI model that you use, over the time, it's continuously being trained, and the responses with the prompts are being improved. So we are going through that optimization. We have over 100 subscription, as you would say, without any.

We haven't yet started charging the per license fee, and we will keep on evaluating the right time when we should introduce a fee for this, for this product. But we have started to see the progress made into this product and how it's adding the value to the day-to-day workflow of the medical practices.

Allen Klee (Managing Director and Equity Research Analyst)

Thank you.

Hadi Chaudhry (CEO and President)

Thank you, Allen.

Operator (participant)

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. There are no further questions at this time. Please proceed.

Mahmud Haq (Founder and Executive Chairman)

Okay, well, if there's no more questions, then thank you, everyone, for joining our call. Please enjoy the rest of your day. Thank you.

Hadi Chaudhry (CEO and President)

Thank you.

Mahmud Haq (Founder and Executive Chairman)

Thanks a lot.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.