Organovo Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 12 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Consensus Q4 2023 Earnings Call. My name is Paul, and I will be the operator assisting you today. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. On this call from consensus will be Scott Turicchi, CEO Jim Malone, CFO Johnny Hecker, CRO and Executive Vice President of Operations and Adam Varon, Senior Vice President of Finance.

Operator

I will now turn the call over to Adam Varon, Senior Vice President of Finance at Consensus. Thank you. You may begin.

Speaker 1

Good afternoon, and welcome to the Consensus investor call to discuss our Q4 fiscal year end 2023 financial results, other key information and 2024 guidance. Joining me today are Scott Turicchi, CEO Johnny Hecker, CRO and EVP of Operations and Jim Malone, CFO. The earnings call will begin with Scott providing opening remarks. Johnny will give an update on our operational progress since our Q3 investor call, and then Jim will discuss our Q4 2023 and year end preliminary unaudited financial results and 2024 guidance. After we finish our prepared remarks, we will conduct a Q and A session.

Speaker 1

At that time, the operator will instruct you on the procedures for asking a question. Before we begin our prepared remarks, allow me to direct you to the Safe Harbor language on Slide 2. As you know, this call and the webcast will include forward looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to, the risk factors outlined on Slide 3 that we have disclosed in our 10 ks SEC filing as well as a summary of those risk factors that we have included as part of the slideshow for the webcast.

Speaker 1

We refer you to discussions in those documents regarding Safe Harbor language as well as forward looking statements. Now let me turn the call over to Scott.

Speaker 2

Thank you, Adam. As we discussed in our Q3 call, our focus has been on EBITDA and free cash flow generation. The market dynamics have not materially changed since our last call in November and we expect these trends to continue throughout 2024 in the healthcare sector. We've taken the past 3 months to do a rigorous examination of the business to see where costs can be As we noted in the Q3 call, we found some spend in our solo channel that gave us low LTV customers. As we look even deeper campaign by campaign, we found additional spend that was at best marginally profitable and most likely uneconomic.

Speaker 2

As a result, we have made some additional cuts against our Q4 forecast that had a slight negative impact on revenues in the quarter, but favorably affected EBITDA productivity and margin. On the corporate side, the revenues were impacted by the enhanced collections process that reduced our outstanding receivables, but also resulted in some account closures. This has an effect on the base coming into 2024 and will likely affect corporate revenue growth rate by approximately 1 percentage point. Johnny will provide you with more details in his part of the call. I am pleased that for the quarter we generated near our target EBITDA notwithstanding the headwinds on the top line.

Speaker 2

Our bottom line EPS while strong were negatively impacted by a severe rallying of the euro against the U. S. Dollar that resulted in a charge of $5,800,000 or $2,400,000 more than our forecast. I would note that these are inherently difficult to predict and are non cash in nature. We're working on a program to mitigate this volatility in 2024.

Speaker 2

The strong bottom line results combined with the finance team's collection efforts allowed us to be $10,000,000 better in free cash flow versus Q4 of 2022. For the full fiscal year, we produced $77,700,000 of free cash flow compared to $53,100,000 in 2022. This allowed us to repurchase $71,400,000 of our bonds through January at an average price across both tranches at 91% of par. We ended the year with a healthy $88,700,000 of cash and cash equivalents. As we look to 2024, the biggest change from our preview in November is how we are managing the SoHo channel.

Speaker 2

Given change in algorithms, increasing costs for advertising and an increasing amount of new sign ups that have limited use cases and as a result a short life, we are cutting almost 2 thirds of our marketing spend in 2024 relative to 2023. As a result, we will see a faster decline in revenue for SoHo in 2024 than previously articulated. However, the costs are declining by approximately the same amount as the revenues. As we continue to invest in our corporate channel, we have allocated a few $1,000,000 of additional marketing spend to support this effort. In addition, we have been seeing initial benefits from the go to market realignment that we implemented approximately 1 year ago.

Speaker 2

We remain positive on the opportunity within the healthcare sector for our core fax products and interoperability solutions. We expect an increased corporate contribution exiting 2024 as a result of the strategy and we'll continue to pursue it while we generate cash and retire our debt. At the midpoint of our range of guidance, we expect EBITDA to grow in 2024 and margins to expand by approximately 2.90 basis points. We're also pairing back our capital expenditures by approximately $7,000,000 from the 2023 level, while continuing to invest meaningfully above pre spin levels. Notwithstanding an expected higher tax rate than 2023, we still expect to generate approximately $80,000,000 in free cash flow.

Speaker 2

I will now turn the call over to Johnny.

Speaker 3

Thank you, Scott, and hello, everyone. Let me provide an update on our sales and operations starting with our corporate business. In the Q4 of 2023, our corporate revenue reached $49,400,000 reflecting a steady increase compared to the previous year's $47,800,000 We're excited to report the continued success of our Soho upsell strategy with approximately 12.50 accounts added in Q4 and a total of approximately 4,700 accounts that shifted from Soho throughout the year. Notably, advanced products accounted for 13% of our total new sales, a continued strategic focus for us and contributing to a 23% share for the full year. Additionally, our eFax Protect offering has yielded impressive results, garnering approximately 1,000 paid customer ads in the quarter, thanks to the Q3 introduction of a new e commerce channel specifically tailored to corporate clients.

Speaker 3

Moving on to SoHo. As we had anticipated and regularly communicated, there was an expected decrease in revenue during Q4 of 2023 with $38,300,000 compared to the previous year's $42,200,000 As we discussed in Q3, we cut some unproductive advertising spend. As we did a deeper analysis, we made additional advertising cuts in Q4, which will continue into our 2024 budget. Our goal is to optimize our SEM spend with a focus on targeting the most profitable customers. As a result of this decreased intake, we did see our total account base decrease from 859,000 to 831,000.

Speaker 3

However, it is important to note that our churn rate improved from 3.49% in the previous quarter to 3.34% in line with what we would expect to see given our more selective customer acquisition strategy. Now let's move to some key updates that have shaped our operations. Firstly, the VA rollout has begun its acceleration. All parties involved have worked in close alignment to adopt a new method of rollout. Evolving in that new format, we're ensuring a smooth and efficient implementation.

Speaker 3

As a result, we anticipate to reach a 7 digit contribution in 2024 with a promising runway beyond that. In terms of our easy facts offering for the federal government, other government agencies progress has been steady albeit slow. The pipeline remains robust with prospects remaining cautious of the ongoing federal government spending cap being a regular contentious issue. We're closely monitoring developments as we await the federal budget resolution. It's worth noting that our commercial offering, eFax Corporate, has proven to be a viable alternative for smaller government agencies with less demanding requirements.

Speaker 3

Furthermore, I'm pleased to share some notable wins, including our success with MRO, a customer in the healthcare IT space and expert for the exchange of clinical data and the initiation of a partnership with Lexmark, a leading provider of printing and imaging products, software solutions and services. Our go to market realignment strategy has yielded positive outcomes, particularly with the earlier noted success of eFaxProtect, our corporate e commerce offering. We have strategically redirected our focus towards our existing customer base maintaining the healthcare industry as a gold standard for new business and product strategy. In line with this, we are actively cultivating partnerships with electronic health record and healthcare IT vendors. I'm happy to report that the go to market realignment efforts have resulted in increased operational efficiency, steady booking results, a stable sales pipeline and data driven adjustments to our strategies.

Speaker 3

Now let's briefly discuss our product updates beginning with our AI driven solution, clariti. We continue to build a solid pipeline for Clarity CD for clinical documentation and Clarity PA for prior authorizations. And we are excited to announce that we have already booked our first Clarity CD customers. New prospects and existing customers have shown great interest adoptable AI and a real world solution yielding them immediate savings. Additionally, our 1st generation Harmony offering is now in production, marking a significant milestone in our product roadmap.

Speaker 3

With this specific application of Harmony, the sender transmits a fax document via eFax and Harmony delivers it as a direct secure message, a broadly used electronic delivery protocol for healthcare. We're excited to announce that we're partnering closely with 1 of the leading cloud based EHR and practice management solution providers for small and medium sized medical practices on this project. As we look ahead to 2024 on the next slide, it's important to note that while we recognize the positive changes within our organization, we are maintaining a conservative outlook on our growth prospects. By optimizing our marketing efforts with a focus on increased profitability, we have deliberately put an emphasis on margin and retention. While in the near term top line growth will be moderate, our primary focus remains on cash generation and achieving operating profits.

Speaker 3

For our SoHo business, we have implemented several strategic measures as part of our go to market realignment. By merging the marketing departments for SoHo and corporate, we aim to leverage deeper insights from a propensity analysis indicating that a portion of our SoHo base possesses corporate attributes. Furthermore, we finalized the eFax price increases in early 2023, allowing us to concentrate our efforts on a more engaged user base. In 2023, we encountered some challenges related to significant changes implemented by our primary digital advertising partners. The changes were aimed at stabilizing their businesses, but they resulted in a significant increase in our customer acquisition cost, yielding less profitable customers.

Speaker 3

To navigate these challenges, we have undertaken a thorough analysis of our campaigns to identify those that yield high quality customers. As reported in our last earnings call, consequently, we narrowed spending on campaigns targeting high profit customers starting in Q3 of 2023 and are continuously evaluating the effectiveness of our campaigns. Our focus on the smarter ad spend project involves analyzing our subscriber base to optimize digital advertising spending. We are closely monitoring ad costs and will strategically reenter campaigns when the LTV to CAC ratio meets our defined level of return. The narrowed spending in Soho allows us to shift a portion of that advertising spend to the corporate business while reducing Soho spend.

Speaker 3

Our strategy centers around prioritizing high LTV customers, which will positively influence the profitability of newly acquired SOHO customers. Encouragingly, we are already observing positive indicators with a decrease in CAC resulting from an increase in organic sign ups and reduced overall spending. In total, we are planning for approximately $139,000,000 in sellout revenue at the midpoint for 2024. Through active management, we expect this targeted reduction in revenue to allow us to maintain and possibly improve cash generation in comparison to previous periods. Now let me address the corporate business and direct you first to our balance sheet.

Speaker 3

You'll notice a significant decrease in our accounts receivables from Q3 to Q4 of 2023. We've expanded our collections team in a short period, allowing us to focus on rigorous collections management in those quarters. Jim will go into more detail in his prepared remarks. While this effort has improved cash generation, it has also resulted in an increase in customer terminations impacting both our 2023 revenues and run rate entering the New Year. Regarding other impacts on our baseline, the fax box migration in Europe resulted in the discontinuation of that platform retaining less than half of its base.

Speaker 3

Also, this may seem significant from a top line perspective, it remains justified from a technical platform retirement and cost standpoint. Additionally, the Summit acquisition strategically conducted for its great talent and technology continues to generate baseline revenues, but it declined in 2023 and will not contribute to growth in 2024. As we have previously discussed, slow decision making in the previous years of 2022 throughout 2023 did not generate the addition of new business as initially anticipated in our 2023 post pandemic plan. Consequently, we have adopted a more conservative approach to our baseline. We see some but little change to that behavior, thus keeping our new revenue ambitions roughly flattish as well.

Speaker 3

Despite the challenges we are encountering, we are budgeting corporate revenue to $206,000,000 at the midpoint for 2024, representing a 3.1% growth compared to 2023, in line with our recent quarterly growth rates. So looking ahead, we are maintaining stability in new business and anticipating initial returns from the Japanese corporate launch. In response to market conditions, we have kicked off focused sales initiatives in 2024 and reallocated resources to enhance customer retention and cross and upsell opportunities in our large baseline. These initiatives position us for accelerated corporate growth in 2025, while we remain committed to cash generation. And with that, let me hand the call over to our CFO, Jim Malone, who will provide a bit more color on our Q4 2023 and full year 2023 financial results as well as our 2024 guidance.

Speaker 3

Jim?

Speaker 4

Thank you, Johnny, and good afternoon, everyone. In our press release and on this earnings call today, we are discussing preliminary unaudited 2023 results and 2024 guidance. Our fiscal 2023 audit is still underway and will result in audited financial results filed with our 2023 10 ks scheduled to be filed late next week. Let's start with our corporate business results. Q4 2023 revenue was 49,400,000 dollars an increase of $1,600,000 or 3.3 percent over the prior comparable period.

Speaker 4

Q4 2023 year over year corporate revenue growth increased by 30 basis points versus Q3 2023 year over year. As Johnny mentioned, Q4 year over year revenue was impacted negatively by the cleanup initiated related to the Q4 collection efforts, migration of FaxBox to legacy platform and Summit. In the second half of the year, an increased focus was put on cash collections. This effort improved collections by 9% from slow paying customers and however did result in terminations of non paying customers. Corporate ARPU of approximately $306 was down $16 or 4.9 percent from the prior year, driven by the mix of paid ads at the lower ARPA, including SoHo accounts moving to corporate and the new eFax ProTech initiative that Johnny mentioned in his remarks.

Speaker 4

Monthly churn of 1.82 percent increased 33 basis points, delivering the trailing 12 month revenue retention of 99%. The churn increase was primarily due to terminations of non paying customers. 2023 full year corporate revenue was $199,600,000 a $7,400,000 or 3.9 increase over 2022 results. Year over revenue was also affected by the cleanup initiative related to Q4 collection efforts, migration of faxbox and Summit. Moving to Soho results, Q4 2023 revenue of $38,300,000 a decrease of $4,100,000 or 9.6 percent over the prior comparable period.

Speaker 4

The year over year decrease was within expectations given the impact of price increases in prior year and lower optimized advertising spend. This approach delivered a net base reduction due to fewer paid ads, but potentially higher value customers, partially offset by an increase in ARPA. ARPA of $15.12 increased by $0.41 year over year, benefiting from last year's price increase. Churn declined 48 basis points to 3.34% compared to the prior period and are now at pre pandemic churn levels. Full year 2023 SOHO revenue was $162,900,000 or 7,300,000 dollars or 4.3 percent decline over 2022 results and essentially in line with our full year SOHO guidance range of negative 4% to negative 2%.

Speaker 4

Moving to Q4 consolidated results, revenue of $87,800,000 is a decrease of $2,500,000 or 2.7 percent over Q4 2022. Adjusted EBITDA of 47,200,000 dollars 53.8 percent margin was a decrease of $1,800,000 or 3.7 percent over Q4 2022. The main drivers of the revenue flow through mentioned above, planned employee related expenses, partially offset by effective cost management. EBITDA margin of 53.8 percent is within our guidance range of 50% to 55%. Adjusted non GAAP net income of $21,300,000 decrease of $1,300,000 or 5.6 percent, driven by lower revenues, a higher tax rate, offset by interest income of 1,500,000 dollars and non cash foreign exchange reevaluation of intercompany accounts of 500,000 Trusted non GAAP EPS of $1.11 was lower than the prior comparable period by 1.8% or 0 point 0 $2 In Q4 2023, non GAAP tax rate and share count was 21.8 percent 19,200,000 shares.

Speaker 4

Moving to 2023 full year consolidated results. Consolidated revenue of $362,600,000 is essentially flat versus the prior year. Adjusted EBITDA of $186,600,000 was a decrease of approximately $10,000,000 or 5.1 percent compared to the prior comparable period delivering a 51.5 margin percent within our 50% to 55% guidance expectations. The main year over year EBITDA driver and the flat revenue is planned employee related expenses. Adjusted non GAAP net income of $99,800,000 decreased $6,800,000 or 6.4 percent driven by lower operating income, offset in part by interest income, expense benefit by $4,200,000 and lower tax expense by 2,700,000 Adjusted non GAAP EPS of $5.09 was lower than the prior comparable period by 4.5% or $0.24 The 2023 non GAAP tax rate and share count was 19.7 percent 19,600,000 shares.

Speaker 4

As mentioned in our Q3 2023 earnings call, we announced a $300,000,000 bond repurchase program approved by the Board of Directors. In Q4 2023 and the 1st week of January 2024, we repurchased $62,600,000 $8,700,000 in face value across both tranches for $57,100,000 $7,900,000 cash, respectively. We repurchased 349,001,000,000 shares in Q4 2023, respectfully for a cash outlay of $8,500,000 $23,500,000 We ended 2023 with $88,700,000 in cash and cash equivalents, which is sufficient to fund our operations and repurchases of debt and equity. Our normalized twelvethirty onetwenty 3 cash balance would have been flat versus ninethirty $23,000,000 $156,000,000 excluding the $65,500,000 in bond and equity repurchases. 2023 full year free cash flow was $77,700,000 For additional assistance with the quarterly spread of our guidance, we will be providing additional guidance for the current quarter.

Speaker 4

For the year 2024 guidance is as follows: revenues between 338000000 dollars 353,000,000 with 345,000,000 at midpoint adjusted non GAAP EBITDA between $182,000,000 $194,000,000 with $188,000,000 at midpoint Adjusted non GAAP EPS at 5.08 dollars to $5.31 with $5.20 at midpoint. For Q1 2024, revenues are expected to be between $85,000,000 $89,000,000 with $87,000,000 at midpoint. Adjusted non GAAP EBITDA between $45,000,000 $48,000,000 with $46,000,000 at midpoint adjusted non GAAP EPS at $1.27 to $1.33 with $1.30 at midpoint Estimated share count and income tax rate are 19,400,000 shares and 20.5 percent to 22.5%. This concludes my formal remarks. Now I'd like to turn the call back to the operator for Q and A.

Speaker 4

Thank you to 22.5%. This concludes

Speaker 5

And the first question today is coming from Jon Tanwanteng from CJS Securities. Jon, your line is live.

Speaker 6

Hi, good afternoon. Thank you for taking my questions. I guess my first one to Scott or Johnny, when do you think the decision making labor issues impacting your corporate business will begin to resolve or begin to inflect? Is there any light at the end of the tunnel or should we expect this to continue for the foreseeable future?

Speaker 7

Hi, John. This is Johnny. Yes, thanks for that question. I think it's I wish we knew, right? I think what we're experiencing is we're seeing a little bit of more decisiveness here and there, but it's not at a trend that we would say, hey, we're seeing like we're seeing this ending anytime soon.

Speaker 7

So for our 2024 budget, we have anticipated to not see a whole lot of improvement throughout the year.

Speaker 6

Okay, got it. And that 3% growth and change with the VA contributing a little over something within a 7 digit range. Does that mean corporate isn't growing without the VA or are there other components to that?

Speaker 7

No, corporate will grow without the VA for sure.

Speaker 2

Yes, it's a

Speaker 7

I mean it's VA is not

Speaker 2

a huge contributor, but it's part of the 3%. Yes.

Speaker 6

Got it. Okay. Do you still see fax volumes growing across the same customers year on year?

Speaker 7

Absolutely. Yes. We see customers I mean, we have a very broad spectrum of corporate customers, right? But especially on the upper end, on the larger customers, we see tremendous growth within individual customers, yes,

Speaker 2

absolutely. Okay.

Speaker 7

And this is driven by 2 markets, right? On the one hand, you see M and A happening within large companies, right? So they acquire they acquire additional volumes. Secondly, you see a lot of that traffic is still on prem. Depending on what customers are talking about, it could be on servers, it could be on machines.

Speaker 7

And they're still migrating a lot of these things into the cloud. So we still see a tremendous momentum within our existing customers. And then maybe one more thing, I talked about it in my remarks, a lot of our larger customers are in the healthcare IT and PHR space. And as they grow and acquire new customers, we bring on those volumes and grow within those customers as well.

Speaker 6

Understood. Thank you. And I was wondering when do you expect the impact of the lower spend in the SOHO business to level off from a, I guess, sequential decline perspective? Will that take most of the year? What does the slope look like?

Speaker 2

The level of the spend or the revenue component associated with it? I'm not sure I understand.

Speaker 6

The revenue and user component of the that's associated with the decline in spend.

Speaker 2

No, that will continue that will continue at the current level of budgeted spend that will continue throughout the year and could even continue into next year. One of the issues that we will be monitoring is where exactly is that sweet spot around the budgeted number. It could be $2,000,000 or $3,000,000 higher, it could be a couple of $1,000,000 lower. So as we look at the various campaigns and we monitor them and we look at their lifetime value expectation, how they behave against other cohorts that will influence the level of spend which will then give greater clarity to the answer to your question as we enter 'twenty five. But I think clearly in 'twenty four you should expect for each of the 4 quarters a decline in the base from the predecessor quarter.

Speaker 6

Got it. And is there any point where you have enough remaining high quality customers and high quality acquisitions that business can eventually grow at some point or stabilize to flat or is it going to be your expectation that that just could decline at a slower pace once you've

Speaker 2

No, I actually think when you swap off the, what I call the renter customer. With those customers that essentially have signed up within the last 12 to 15 months and have and the portion of them have a short life, they may ring themselves out of the system. While it is true you'll have a lower revenue than 23, it will also be much easier to stabilize that number on a go forward basis. I would still though would not look for the SoHo channel the way we are managing it to be a growth vehicle. But I do think there is a point and it's not entirely clear win, but it is not issued to be clear that there will be stability or can't be stability in that channel

Speaker 7

of revenue.

Speaker 6

Got it. Thank you. I'll jump back in queue.

Speaker 5

Thank you. The next question is coming from David Larsen from BTIG. David, your line is live.

Speaker 8

Hi. Can you talk a little bit about Clarity, J Sign, HITRUST and Harmony? Maybe if you could please comment on pricing, revenue contribution and just broadly speaking, what these products do and how they will benefit your hospital clients longer term? Thanks very much.

Speaker 7

Yes. Sure. Thanks, David. So let me start with Clarity. Clarity is our AI and NLP based solution that helps to extract data from unstructured documents and images like facts and including data that is handwritten or difficult to be read by the human eye and turn it into structured data.

Speaker 7

So it can be easily processed or better be faster be processed within other systems like electronic health record systems. It's really a technology platform that we have filled out that we're now developing individuals, applications for specific use cases on top. So the Clarity CD platform for clinical documentation helps extract certain demographic data. So a document that is being ingested can be processed quicker and filed within the EHR system and delivered to where it really matters in a lot faster manner than the way it is traditionally done, which is by manual labor, someone looking at the document and then with a mouse click filing it. So we're accelerating that process and no data has to be keyed into the system manually anymore.

Speaker 7

On the prior authorization application on CLARITY, we do a similar process, but specifically the system is trained on prior authorization documents. So we can accelerate that process. And with the recent developments with the rules from the CMS that will definitely not only help providers, but primarily payers to accelerate the turnaround of prior authorizations, which will say will be required to do within certain time limits in the future. The J Sign application is a healthcare specific or directed but not exclusive application for electronic signature. So basically comparable to a technology like you would find from DocuSign.

Speaker 7

And we know there is a lot of the documents that we process for our customers now by fax do require some kind of digital or some kind of signature process and before they are being returned. So that's why we view the J sign application as a natural extension of our current offering for just transporting documents, but then going more into the workflow piece. Thirdly, on the Harmony product or platform, this is really where we see those technologies come together at on a platform level where customers then can pick and choose technologies and

Speaker 2

transportation protocols as they wish

Speaker 7

and need. And the first product that we have out there is like I said in my remarks where we are receiving documents by fax for our customer and then we're extracting certain data and we're forwarding it as direct secure message. So the recipient doesn't really receive a fax anymore but a secure message. And there will be other protocols like FHIR, HL7, we will bring in the Clarity technology and it will all come together in that Harmony platform.

Speaker 2

Okay.

Speaker 8

That's great. What is the revenue contribution from these products? And what is like the current, we'll call it like penetration rate? What is the upsell potential? Just pricing, any color there?

Speaker 8

What kind of lift can we expect to see from these products?

Speaker 7

Yes. So from a revenue perspective, I mean, it's very clear that the majority of our revenue is still coming from the fax platform, right? But we're looking to extend and we're finding adoption on the new technologies. They are priced depending on the technology, but similarly to how customers are used to pay for the faxing technology, which is mostly on a per document or a per page level. Depending on the protocol, it can be a per transaction cost, but there's we're going to continue with our subscription and then usage based pricing models for all of these technologies.

Speaker 2

Yes, I think that's yes, I think you also asked about HITRUST. So the core efax service and more recently J Sign have been HITRUST certified. At this point, although it is in queue for this year, Clarity is not yet and Harmony is really at its very early infancy stages. So if you take all of them together, Harmony is not contributing any revenue in 2023 and not expect to contribute much in 2024. There's low single $1,000,000 of revenue for the Clarity and J Sign.

Speaker 9

That's very helpful.

Speaker 8

Thank you. And then can you maybe just talk a little bit more about the EMRs like Epic and Cerner and Meditech in particular? Are you working with those EMR vendors? Are you the eFax platform within any of those? Or do they have their own?

Speaker 8

And are you competing with them? Thanks very much.

Speaker 7

So there are some EHR vendors, EMR vendors that we are the default CloudMax platform for. But we integrate basically with all of them. Through our API technology, you can connect any EMR to our cloud platform. And we have customers on all of the technologies that you have mentioned.

Speaker 8

Okay. And just one last quick one for me. You had mentioned a 65 hospital health system win, I think, last quarter with 107 skilled nursing facilities and 25 urgent care centers. Was that the VA or is that a different hospital system? And what kind of revenue contribution can we see from that client and when would that start to roll on the books?

Speaker 7

So that was not the VA, that was a I don't know, I think it was a non profit even. That size customer, you can probably expect definitely a 7 digit contribution. It started to ramp. We're in the rollout. But if you can expect with that many facilities, we're very much dependent on the efficiency of their IT teams and their partners.

Speaker 7

Usually these companies have IT partners or have outsourced their IT and we work closely with them for that rollout. But we expect that rollout to be a lot faster than the VA. The VA has, I believe, over 2,002 100 facilities. So it's a lot larger.

Speaker 5

You. The next question is coming from Ann Samuels from JPMorgan. Ann, your line is live.

Speaker 10

Hi. Thanks for taking the question. I was hoping maybe you could speak to what your conversations have been like with your hospital customers right now around demand. I mean, so we've heard some mixed commentary from others in the space that there have been some green shoots just given improving margins, but labor still remains a real pressure point, but you do help alleviate some of that pressure. So are the conversation more along the lines of not now or is it more of a longer term home spending?

Speaker 7

Yes. Thank you, Ann. I think, so I would get in line with the great shoots, right? We're seeing hospitals coming around and saying, yes, it's time to tackle these projects. We do see some that are still under economic pressure, others that see improvements in cash flow.

Speaker 7

But what we do not see is like that being hugely successful in hiring IT talent, right? I think that is still a very, very tight labor market and that's what we depend on. We can definitely help with our products to take some pressure off of their nursing staff and their administrative staff. So they're interested in talking about these things. But you still have to get on the priority list, right?

Speaker 7

And we're successful here and there, but it's not at the rate that we would like to see it obviously, always being impatient from the sales side. But I agree there are some great shoots and we were able to close deals here and there. Now is the healthcare space a super fast moving space? No, they're not. They're slowing decision making by nature and it's almost like the government.

Speaker 7

But slowly but surely, we're penetrating this space more and more.

Speaker 10

That's really helpful color. Thank you. And then just maybe one on the margins, you're doing a really nice job holding the margins despite the revenue shortfall. I was hoping you could speak to maybe where you see the biggest opportunities to be lean? Is it just advertising or are there areas that you can take a look at?

Speaker 10

And how much of that cost containment is long term versus just related to the near term revenue shortfall?

Speaker 2

I would say actually Ann, most of it would be in the area of advertising and marketing. As I mentioned to the previous questioner to John, he led off. There will be some flex in that based on how various programs perform and maybe we can add a little bit to it. But the philosophy in terms of the solo channel revenue is a strategy. So it's not a 1 year event and then we expect that we'll spend double next year.

Speaker 2

No, this is a permanent shift in the thinking of how to treat that stream of revenue and in fact take some of the historic marketing dollars that went to Soho and shift them over to the corporate side. It always had an element of marketing, but that's going to be roughly a little bit less than double this year. And I would expect that will grow even again next year in 2025. So that has been the primary bulk of it. Now as I mentioned, we go through all the lines of the P and L.

Speaker 2

So there's little savings in our telco There's a lot of nickels and dimes that also add up, but the vast majority of it certainly as we look at 2024 would be in the marketing budget. Now if you rolled it 25 which I still long way away, there probably won't be as much delta if any to the marketing costs. And we'll continue to fine tune some of the other areas that would be say in our COGS. So but that's many months away.

Speaker 10

That's helpful. Thank you. And then just one final one for me. As we think about your revenue guidance for next year, what level of churn are you embedding within that?

Speaker 2

So, I mean, when you say next year, you mean 24, right? Presume, right?

Speaker 10

Yes, exactly.

Speaker 2

So on the sell through as we have less spend and less sign ups that have a higher churn rate because you recall going back not that long ago we used to put it in there just for informational purposes that you'd lose 2 thirds of the customer within the 1st year of those that you marketed, those that have signed up. So what happens is the cohorts get better and better as the percentage of the base is increasingly larger than the new sign ups. So it will you've already started to see it tick down from the middle of last year into Q3 into Q4. That trend will continue. I don't have to give you more specificity in terms of the actual numbers, but I think we're going to see it at some point tick through 3% next year.

Speaker 7

Yes, it will get down into that 3%. Right. It will probably go down between 40 80 basis points throughout the remainder.

Speaker 2

Now the corporate, the what Vi talked about and what Johnny talked about in terms of the Jim is the

Speaker 7

bad guy, the aggressive account

Speaker 2

receivables, collection, yes, there were some cancellations. That basically was the whole increase in the cancel rate in corporate from Q3 to Q4. And so it's been at a fairly consistent and stable level in sort of the 1.25% to 1 point 5% range and we think that is sustainable for 2024. I would note that our underlying economic assumption is that there will not be a recession in 2024 that call it a soft landing whatever you want to call it that we'll continue to experience the various elements of the economy that we've seen in the last 2 to 3 quarters. Obviously, there's some volatility with the expectation of when the Fed will cut, how much they'll cut.

Speaker 2

But in terms of GDP growth, we expect it to remain positive throughout the year. So we're not faking anything draconian in. And obviously if that were to occur, we would have to rethink that assumption.

Speaker 10

Very helpful. Thank you so much for all the color.

Speaker 5

Thank you. The next question is coming from Fatima Boolani from Citi. Fatima, your line is live.

Speaker 9

Hey, good afternoon, guys. This is Mark on for Fatima. Thanks for taking our questions. Maybe just a clarification on the timing of the VA contribution. Can you give us a sense of when we should start to see that contribution?

Speaker 9

Is there any contributions in the Q1 or is this more of a second half event? And should we sort of expect the ramp through the year to get there?

Speaker 2

Yes, it actually already started. There's a little small contribution in Q4 and yes it will ramp in each successive quarter through 'twenty four and likely through 'twenty five. So as Johnny mentioned, there's been significant work done from the big August meeting we talked about a couple of earnings calls ago when we had finished the pilot phase. And then there was a continuation of the rollout more under the same methodology that the preliminary rollout had gone through. And then I would say towards old middle ish, maybe early to middle ish 4th quarter, there was beginning to be an acceleration of the rollout and also a change in the philosophy of how it rolls out.

Speaker 2

And so that will be continuing. There's still some details to be worked out, but it's continuing in terms of the current rollout and that is accelerating pretty much each month. So we'll see as a result, we've seen the traffic build each month that will continue to build and so it will ramp through all 12 months of this year.

Speaker 9

Okay, great. That's very helpful. And then any sense of when we should be reaching our run rate level? Is this guess, a 25 event or a 26 event? Any color there would be appreciated.

Speaker 2

All of that is dependent upon you know the VA actually has certain goal and objectives, which we like because it's bringing on more traffic at a substantially faster pace than has occurred in 2023. How much of that is realizable? And by the way, we think in calendar years, they think in their fiscal year, which is in September 30th, those are 1 quarter offset. But I would say it's clearly not we will not achieve the full ramp in 2024. I think it is unlikely even in 2025.

Speaker 2

Depending on this pace of acceleration, maybe 26 or 27.

Speaker 9

Okay, perfect. Then just last follow-up, just on the cash flow generation this quarter, you guys essentially reaffirmed cash gener, you guys provided early reads in last quarter, which calls for a low 80s for cash flow in 2024. Why should we see more upside from here given the lower CapEx, better collection efforts and really the cost of percent really showing up in the EBITDA line? Thanks.

Speaker 7

Can you repeat that, Mark?

Speaker 9

Yes, sure. I was just following on the cash generation. You guys essentially reaffirmed $24,000,000 cash generation to the low 80s. I wanted to get something, why shouldn't we see more upside from here given the lower CapEx this year, better collection efforts and the cost efforts that are showing up on the EBITDA side? Thanks.

Speaker 2

Remember, we have higher taxes in 2024 than 2023. Our tax rate is going up and those will be cash taxes. So that will be a mitigating factor against it. And I think pretty much everything else flows through. I mean the EBITDA is going up a little bit year over year.

Speaker 2

EBITDA is essentially cash. Yes, you're correct. We picked up $7,000,000 roughly in the CapEx, but when you give a couple of million back in taxes and we're at $77,000,000 you add a few million, you're going to be $81,000,000 $82,000,000 So I think it flips.

Speaker 9

Okay, great. Thank you guys so much.

Speaker 2

Before we go to the next question, we did have a question that came in via email that is related to the free cash flow, which is in the press release we noted that the free cash flow would be dedicated to a combination of share repurchases, bond repurchases and possibly M and A. So the question is what's the perceived allocation amongst the various potentiality? Look, the ones that are the most certain are clearly related to our own capital structure. So we can go into the market, we can buy bonds, we can buy equity. So I think it's likely to assume those will consume the majority of either the free cash flow and or the cash balances.

Speaker 2

I would say that depending on where the stock settles that may be an attractive alternative. We clearly stated now for several calls running a desire to deleverage. If we can continue to get the bond at a discount that is an attractive investment. And on the acquisition side, there's I think a narrow set that would be of interest to us, But I think it's a narrow set, not a broad set. Valuations continue to be generally challenging.

Speaker 2

So I would say it's not probably a high probability that we would do acquisitions, but certainly it is within our field of view. And I think we're more interested in doing an acquisition that would have a more meaningful impact than a small tuck in. So if that were to be the case, we would reprioritize the allocation away from shrinking our internal capital structure towards the M and A transaction and that would be the cash balances we have were a substantial portion, the free cash flow. And then I'll also remind everybody, we do have a modest line of credit that can be expanded up to $50,000,000 So we can do something that is triple digits in terms of acquisition purchase price. As I said, I'm not sure that that is a high probability, but it's certainly within the field of view.

Speaker 2

Next question. We'll go back to the line of questions.

Speaker 5

The next question is a follow-up coming from Jon Tanwanteng from CJS Securities. Jon, your line is live. And the next question is from Arun Seshadri from BNP. Arun, your line is

Speaker 11

Just wanted to understand, is there within the within Soho, is there a set of accounts or a proportion of the total customers that you think is a very stable account base and then most of the attrition is coming from a portion of that account base. Is there any way to segment that customer base for us so we can get a sense for when that attrition is coming towards an end?

Speaker 2

Well, I think it was back to the earlier question that I answered. So there's been for a couple of years now this phenomenon that you get a fair amount through the marketing programs and what I call the renters, people who have limited use cases and as a result they churn generally within a 12 month period. Then let's say we reported before about 2 thirds of the sign ups that will churn out within a year. So as you decrease the marketing spend, as you decrease the gross sign ups, the net adds, then as you march out over time 12 to 18 months, you start to get to that what I'll call more core base of SOHO customers. Now I'm not it's a little unclear where that point is as I mentioned earlier because a portion of it will be a function of what are the marketing programs in 2025 and 2026 and also studying the more near term cohort behaviors versus the ones that we've got to go back as far as 10 years.

Speaker 2

But there absolutely is a stable core base within there and I think it's not a reasonable belief that sometime within that 2 to 3 year window you probably find stability. But there's a lot of variables that go into it. So it's not something that can be definitively answered right now.

Speaker 11

Got it. So it's hard to say of your total customer base this number or like half the number is staying stable over time? It's a changing cohort.

Speaker 2

There's changing cohorts with each depending on how you want to look at it, certainly each year, each set of sinus has its own core hoopy, cohort behavior pattern ages a certain way and then you accumulate it all. So I'm not going to say anything more. I think that's kind of the math behind it and then you look at the behavior of the new sign ups and how they mirror previous cohorts. And then part of it is where you draw the line. You're talking about customers that will be around for 5 years or more, 3 years or more, 10 years or more.

Speaker 2

That would also give you a different answer of where in the current $831,000

Speaker 5

is that cut off.

Speaker 11

Got it. Understood. And then secondly, on the corporate side, the new customers that you're adding appear to be at a lower ARPA. Does that is that ARPA trend line, the or sort of like ads and where you're adding them that just continues at similar levels is the expectation?

Speaker 7

Yes. So there's a couple of reasons. First of all, I think we've reported on that we're converting several customers into corporate and we're really mining that base and we're attracting customers that are more trending towards corporate. So it's really converting a low end customer into that upper market base. I think that's the main driver.

Speaker 7

I think last year we saw with the fax box migration that we talked about some churn or some customers actually were positive for our ARPA lease, so that gave us some additional pressure. But with adding from the Soho base, it's creating a little bit of ARPA pressure on the corporate. But ARPA is a difficult KPI for the corporate field, right? We have customers across the spectrum from $50 a month all the way up to 100 of 1,000 of dollars a month, right?

Speaker 2

So it's yes. Yes. If you tell you it makes it somewhat like the VA and they ramp

Speaker 7

or you land with a customer, they're going

Speaker 1

to buy us the ARPA up

Speaker 7

and that's what we face with the customer continuum.

Speaker 11

Got it. Understood. Thank you very much.

Speaker 5

Thank you. And that concludes today's Q and A session. I would now like to hand the call back to Scott Jericchi for closing remarks.

Speaker 2

Great. Well, thanks everyone for joining us on the Q4 call and to give insight in terms of our 2024 outlook. We will put out releases when there are upcoming conferences. In terms of reporting, the 1st fiscal quarter that will be in the early part of May. I don't have the calendar in front of me, but 7, 8, 9 roughly in that timeframe.

Speaker 2

And obviously, if you have any questions between now and then, reach out to us, Laura Henson for IR,

Speaker 7

and we'll get your questions answered.

Speaker 2

So thank you very much and we'll talk to you soon.

Speaker 5

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

Remove Ads
Powered by Quartr
Earnings Conference Call
Organovo Q4 2023
00:00 / 00:00
Remove Ads