DocGo Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 9 speakers on the call.

Operator

note this call may be recorded. I'll be standing by if you should need any assistance.

Operator

It is my pleasure to turn the program over to Mike Cole, Vice President of Investor Relations.

Speaker 1

Thank you, operator. Before turning the call over to management, I would like to make the following remarks concerning forward statements. All statements made in this conference call other than statements of historical fact are forward looking statements. The words may, will, plan, potential, could, goal, outlook, design, anticipate, aim, believe, estimate, expect, intend, guidance, confidence, target, project and other similar expressions may be used to identify such forward looking statements. These forward looking statements are not guarantees of future performance, and we cannot assure you that we will achieve or realize our plans, intentions, outcomes, results or expectations.

Speaker 1

Forward looking statements are inherently subject to substantial risks, uncertainties and assumptions, many of which are beyond our control and which may cause our actual results or outcomes or the timing of results or outcomes to differ materially from those contained in our forward looking statements. These risks, uncertainties and assumptions include, but are not limited to, those discussed in our Risk Factors and elsewhere in DOTCO's Annual Report on Form 10 ks, quarterly reports on Form 10 Q and other reports and statements filed by DACA with the SEC to which your attention is directed. Actual outcomes and results or the timing of results or outcomes may differ materially from what is expressed or implied by these forward looking statements. In addition, today's call contains references to non GAAP financial measures. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures are provided directly as part of this call or included in our earnings release or on the current report on Form 8 ks that includes our earnings release, which is posted on our website, dotco.com as well as filed with the SEC.

Speaker 1

The information contained in this call is accurate as of only the date discussed. Investors should not assume that statements will remain relative and operative at a later time. We undertake no obligation to update any information discussed in this call to reflect events or circumstances after the date of this call or to reflect new information or the occurrence of unanticipated events, except as to the extent required by law. At this time, it is now my pleasure to turn the call over to Mr. Lee Bienstock, CEO of Dotco.

Speaker 1

Lee, please go ahead.

Speaker 2

Thank you, Mike, and thank you all for joining us today. We had an excellent performance in the 2nd quarter, recording $164,900,000 in revenue and $17,200,000 in adjusted EBITDA, driven by strong operational execution, while also making substantial progress with new business development and cash collections. We are seeing a lot of momentum working through the sales pipeline. Early this year, we launched an initiative to specifically pursue dialogue with prospective partners across our 3 customer verticals as well as partnership opportunities with virtual only providers who want to utilize our in person capability to complement their offerings. There is no doubt that the healthcare industry is increasingly looking for mobile delivery solutions to create greater access to care while lowering costs.

Speaker 2

Telemedicine has a number of advantages, but on a standalone basis, it also has significant limitations. The dialogue that we're having with these potential strategic partners revolves around Daco's unique ability to deliver last mile physical care. We are seeing strong results from this effort with several new relationships in the contracting phase and others working their way through the sales pipeline. I'm really excited to share those opportunities with you as they mature. I'm also very proud of our operational execution in Q2.

Speaker 2

It was a significant undertaking to wind down the downstate migrant related locations under contract with HPD, but we did so seamlessly and we concurrently began the process of rightsizing our cost structure accordingly. I think we did an exceptional job managing this process and we expect to see margin improvement going forward as those rightsizing initiatives take hold. We also made significant progress during the quarter with our cash collections. Our cash flow from operations exceeded $35,000,000 in Q2 of 2024, driving up our cash balance by more than $25,000,000 relative to the end of Q1. I think it's important to note that the cash balance also reflects the fact that we repurchased approximately $5,000,000 worth of Daco shares during the period and nearly $10,000,000 since the start of 2024.

Speaker 2

We continue to work with our large municipal customers to try and normalize the payment process and expect continued strong cash flow from operations over the coming quarters. We expect this to give us the resources to further strengthen our balance sheet, support potential additional stock repurchases and of course continue to support the strong growth we project ahead. As a result, we are increasing our cash flow from operations guidance from $70,000,000 to $80,000,000 to an updated range of $80,000,000 to $90,000,000 for 20.24. We also announced the establishment of a world class medical advisory board, includes a prominent group of physicians and specialists from leading national institutions. The advisory board will offer counsel and expertise on our clinical offerings and publish medical research on the impact of the company's programs on patient outcomes.

Speaker 2

We are excited to leverage their expertise to continue developing innovative healthcare solutions for those that need it most. As I usually do, I would now like to spend some time covering our 3 key customer verticals: payers and providers, hospital systems and municipal population health. In our payer and provider customer vertical, we have had a flurry of recent contract wins with several of those opportunities having considerable room for expansion over time. One key leading indicator for this vertical is the number of patients Daco has been assigned for Care Gap Closure Services and we have more than doubled that number on a sequential basis in Q2 over Q1. We are seeing strong results from these programs and the customer ROI is becoming increasingly apparent.

Speaker 2

For example, one of our customers has observed a 50% reduction in all cause readmissions for complex patients that receive our care post discharge. In addition, our quality measure and care gap closure programs enable payers to maintain or improve quality ratings, which can further impact payer financials in a material way. During the Q2, we added a top 10 payer in Southern California and plans are in place to expand with that same customer in New York. Our work with hospital systems continues to perform well. We had a new medical transport we had new medical transport wins in New York and Delaware with key extensions in New Jersey and the UK.

Speaker 2

Overall, we saw 13% revenue growth to date in 2024 compared to the first half of twenty twenty three, and we still expect medical transportation to grow in the neighborhood of 15% or more annually over the near term. We're in the final stages of contracting with 1 of the largest hospital networks in New Jersey for a mobile health programs to provide physicals and wellness checks to their enterprise customers located across the state and we're seeing increased interest from major health systems for our transitional care management mobile health offering, remote patient monitoring, virtual care management and readmission reductions and more, all of which are designed to help keep patients out of the hospital and healthy in their homes. In our municipal population health vertical, we recently launched our first mobile X-ray program for the City of New York and are planning seasonal vaccination programs for clients in Texas, New York and Washington DC. In addition, we won a project from the state of New Mexico to provide nursing care and mobile vaccination clinics, nursing call centers across the state and behavioral health services for the New Mexico Behavioral Health Institute. Separately, we won a contract to provide X-ray technicians at multiple sites for a new customer in Arizona.

Speaker 2

And lastly, we're proud of the deep clinical expertise and mobile healthcare services we've provided as part of the humanitarian response in New York. In Q2 alone, our clinicians have facilitated over nearly 200,000 patient interactions on these programs, including 150,000 behavioral health encounters and nearly 50,000 medical encounters, including over 42,000 for intake and triage, 8,000 vaccination and 2,600 QuantiFERON blood tests. This is all in keeping with our historical municipal work bringing care to vulnerable patients across various public health initiatives for many populations, including uninsured individuals, the LGBTQ plus community, both sheltered and unsheltered homeless populations and newly arrived asylum seekers outside of traditional medical settings. Collectively, we are performing in line with the guidance announced as part of last quarter's earnings release and reaffirming our 202024 guidance of $600,000,000 to $650,000,000 in revenue and $65,000,000 to $75,000,000 in adjusted EBITDA, while raising our cash flow from operations expectation to $80,000,000 to $90,000,000 up from $70,000,000 to $80,000,000 Additionally, we continue to expect revenues from our base to show strong sequential growth in the second half of twenty twenty four and be approximately $400,000,000 in 2025. I want to reiterate that the 2025 revenue expectation in our base business is not overall revenue guidance for 25 given we expect some migrant related revenues next year.

Speaker 2

I think one of the most important takeaways from the quarter would be the quality and quantity of new opportunities entering the pipeline. As we work with New York City to coordinate a tapered down of micro related work, it has freed up considerable bandwidth to pursue other opportunities. As I mentioned, some of these opportunities are maturing to the contracting phase and I expect multiple new programs to roll out in the second half 2024. This will directly complement our traditional RFP channel and provide another conduit for growth. At the end of the day, we have the technology, logistical infrastructure and balance sheet to offer large scale last mile deployments with national healthcare providers, payers, hospitals and municipalities.

Speaker 2

Combine that with a very broad scope of clinical services that Daco offers and we feel we are in an excellent strategic position going forward. I will now hand over the call to Norm to cover the financials. Norm, please go ahead.

Speaker 3

Thank you, Lee, and good afternoon. Total revenue for the Q2 of 2024 was $164,900,000 a 31% increase from the Q2 of 2023. Mobile Health revenue for the Q2 of 2024 was $116,700,000 up 46% from the Q2 of 2023. We experienced growth across several projects, business lines and geographies. However, the bulk of the year over year revenue gains related to the migrant related projects we operated in New York for both HPD and H and H.

Speaker 3

As we projected on our last earnings call, these migrant related revenues declined sequentially in Q2, reflecting the wind down of some sites in New York City, which began in mid May. These migrant related revenues are expected to continue to decline sequentially as we go through the rest of 2024. Transportation services revenue increased to $48,200,000 in Q2 of 2024, which was 6% higher than the transport revenues we recorded in the Q2 of 2023. The largest gains occurred in our 3 biggest markets, New York, Pennsylvania and the U. K.

Speaker 3

In the Q2, Mobile Health revenues accounted for about 71% of total revenues and Transport for the remaining 29%. Net income was $5,900,000 in Q2 of 2024 compared with net income of $1,300,000 in the Q2 of 2023. The higher net income reflects higher revenues and wider margins. Adjusted EBITDA for the Q2 of 20 24 was $17,200,000 up from $9,100,000 in last year's Q2. The adjusted EBITDA margin was 10.4% in Q2, up from 7.3% in the Q2 of 2023.

Speaker 3

This was the 3rd consecutive quarter of double digit adjusted EBITDA margins. As you've seen in our earnings release, beginning with the Q2, we are now presenting both GAAP gross margin and adjusted gross margin. GAAP gross margin includes depreciation charges and the cost of goods sold, while adjusted gross margin does not factor in depreciation charges. For the purpose of comparing our historically reported numbers, please note that what we have historically referred to as gross margin is now and will henceforth be referred to as adjusted gross margin. We have included a reconciliation table in our earnings release to clarify this and to allow for clean year over year comparisons.

Speaker 3

Total GAAP gross margin percentage during the Q2 of 2024 was 31.3%, up from 30.3% in the Q2 of 2023. The adjusted gross margin was 33.9% compared to 33.4% in the Q2 of 2023. During 2024 to date, we've seen solid improvements in both overtime rates and subcontractor costs in the mobile health area. During the Q2 of 2024, subcontracted labor accounted for 24% of total labor costs as compared to 21% in the Q2 of 2023. The year over year increase was driven primarily by the migrant related projects, which tend to feature more subcontracted labor than do our core mobile health projects.

Speaker 3

However, subcontracted labor has declined sequentially since peaking in the Q4 of last year at over 30% of total labor costs. And we expect this decline to continue over the remainder of 2024. Overtime accounted for 6.7% of total hours worked in the Q2 of 2024 compared to 9% in the Q2 of 2023. Overtime hours have declined as a percentage of total hours in each of the last four quarters. While there's still some room for further improvement, we're getting very close to our target of 5% of total hours worked.

Speaker 3

During the Q2 of 2024, adjusted gross margin from the Mobile Health segment was 35.9% compared to 34.9% in the Q2 of 2023. Adjusted gross margins for the Mobile Health segment have now improved for 3 consecutive quarters since the Q3 of 2023, which had been impacted by significant project launch and ramp up related costs relating to the Miban programs. In the Transportation segment, adjusted gross margins were 29.1 percent in Q2, down from 30.7% in Q2 of 2023. Transportation margins in Q2 were impacted by increased subcontractor costs in one of our markets as we were not able to hire quickly enough to align with the timing of an increase in volumes from certain customers. Looking ahead, however, we expect that transportation gross margins will improve in the current level in Q3 and beyond despite some anticipated wage pressures in certain geographies as the market for EMTs remains tight and they should be back above 30% as they have been for the past 4 quarters prior to Q2.

Speaker 3

Looking at operating costs, SG and A as a percentage of total revenues was 27.7% in the Q2 of 2024, much lower than the 32.1% seen in the Q2 of 2023. We executed a targeted reduction in force during Q1, which resulted in some cost savings that were realized in Q2. We took a big step forward in the Q2 toward our goal of fortifying our balance sheet. As of June 30, 2024, our total cash and cash equivalents, including restricted cash, was $85,800,000 as compared to $58,900,000 as of the end of the Q1 of 2024 and also higher than the $72,200,000 we had on our balance sheet as of the end of 2023. The increase in cash was driven by strong collections during the Q2, which also resulted in a decline in our accounts receivable compared to both those at the end of the Q1 and the levels at the end of 2023.

Speaker 3

Specifically, looking at our project with New York City's Department of Housing Preservation and Development, HPD, as of today, we have collected more than 99% of the year end 2023 accounts receivable for this project. And we've received assurances from our partners at the city that we will be paid for the services provided under the terms of the contract. At quarter end, we had approximately $185,000,000 in our accounts receivable from the various migrant programs, presented about 72% of our total company AR. That compares to $210,000,000 in accounts receivable from these various migrant programs as of the end of Q1, which represented about 75% of total AR. Our days sales outstanding or DSO, which we calculate based on trailing 12 month revenues came out to 127 days at the end of Q2, which was down from 147 days at the end of Q1, but still higher than the 96 day sales outstanding at this point last year, which was of course before the migrant related programs ramped up.

Speaker 3

As these migrant related programs continue to wind down over the second half of twenty twenty four, our balance sheet is expected to benefit substantially as we collect this AR and bring our DSO more closely in line with their historical levels leading to an improvement in cash flow from operations. In addition to working capital uses, during Q2, we used our cash balances to execute our stock buyback program. During the quarter, we repurchased about 1,400,000 shares for an aggregate amount of approximately $4,900,000 We spent approximately $10,000,000 so far on our repurchases this year, and we recently authorized a new repurchase program through the end of the year of up to $26,000,000 which was the approximate amount remaining under the prior authorization that had expired on July 30, 2024. As we mentioned on last quarter's earnings call, we expect sequentially lower migrant related revenue over the remainder of the year due to the ongoing wind down of certain migrant projects. However, we expect the collection of receivables mentioned above to lead to a continued improvement in our working capital.

Speaker 3

As we collect older larger invoices and as our cash outflows decrease in line with the lower migrant project expenditures, we expect to see a continued increase in our cash balance over although specific timing of these large cash inflows remains unpredictable. While it's difficult to predict our cash inflows and cash balances on a month to month or even on a quarter to quarter basis, we do now expect to generate cash flow from operations of $80,000,000 to $90,000,000 in 2024, which represents a $10,000,000 increase in the range that we gave last quarter. Given that we have generated $26,000,000 in cash flow from operations in the first half of twenty 24, we're looking at an additional $54,000,000 to $64,000,000 of cash flow from operations in the back half of the year, which will be driven in large part by collections of our large municipal invoices. At this point, I'd like to turn the call back to the operator for our Q and A session. Operator, please go ahead.

Operator

Certainly. Fitzgerald.

Speaker 4

Hi, this is Gabby Ingolia on for Sarah. I had a quick question, if you could expand on what's driving, I think the term you used was a flurry of recent contract wins and if what you've seen behind that has to do with the end market or more so internal company strategies?

Speaker 2

Sure. Hi, Gabby. It's actually both. So first off, we are seeing more and more adoption from the marketplace for in home care, for driving care to where patients need it, for addressing patients who don't have access to good care or drifters. And so we've seen strong interest from hospital systems, from insurance partners of ours to bring care to those members, to those patients.

Speaker 2

So we're absolutely seeing that. At the same time, we're also seeing the ROI of our programs, of our pilots that we run with our insurance partners, where we have been successful in reducing hospital readmissions, ER readmissions. And as we shared with one of our longest standing partners, we were able to reduce those hospital readmissions by 50%, which is very significant, right? So if we're able to keep patients out of the hospital, that saves the health plans money, saves the hospital systems money because they get penalized for quality and for other metrics when patients are bouncing back to the hospitals after they've discharged them. And of course, most importantly, patients don't want to be in the hospitals.

Speaker 2

They want to be happy at home. And so we've really seen the strong market adoption, but also our programs are working. We're expanding our programs. We're adding more and more clinical offerings to those programs. We're adding more geographies.

Speaker 2

And that's helping us sign additional contracts.

Speaker 4

Okay, awesome. Thank you, guys.

Operator

We'll take our next question from Mike Latimore of Northland Capital Markets.

Speaker 5

Great. Yes, thanks very much. I guess, did the did your core business grow 30% plus in the quarter year over year?

Speaker 2

So the core business didn't grow 30% quarter over quarter. The core business was relatively flat quarter over quarter. We do anticipate very strongly the core business to grow as the year progresses in the back half of the year as all those new contracts and new programs start to come into full bloom and start to expand. And so the core business maintained relatively stable quarter over quarter. And we have programs ramping in the core business now and in the back half of the year.

Speaker 5

When you say quarter over quarter, you meaning sequentially or year over year?

Speaker 2

Sequentially from Q1 to Q2.

Speaker 5

Right. Okay. So I think the goal is to grow the business 30% year over year next year. And I think you talked about mobile transport growing 15% year over year. So you're expecting mobile transport to accelerate to 30% plus negative?

Speaker 2

The mobile transport, we expect to grow in that 15% to 20% range, specifically on transport. Right now, as we shared, so far transport for the year, year to date for 2024 has grown 13 percent. So in line and we have a number of expansions happening in the back half of the year on the transport side. And then of course those will continue to expand into next year as we win more and more business on the transport side, which we recently announced actually we won multiple new transport wins in Dover, Delaware, in New Jersey and other geographies for us. So we expect that medical transportation to continue to grow in that 15%, perhaps even up to 20% range into next year.

Speaker 2

On the mobile health business, that's where we're seeing even larger growth, particularly as we're focusing our efforts and expanding our initial customers in the insurance and provider space as well as in the hospital system space for the transitional care, social determinants of health and other in home care gap closure metrics. Next year as well, we do anticipate significant growth in our primary care offering and our remote patient monitoring offering as well. So all of those contracts that we're signing, we have signed, we're expanding right now and into the back half of this year, we'll obviously catalyze the growth into 2025 as well.

Speaker 5

And it does seem like obviously your business will diversify quite a bit. Any sense of how many customers maybe sort of 10% plus

Speaker 2

if we had to project out probably less than 5 customers, it would be more than 10% of total revenue, probably in that range. But we do and as you're saying, that is a big focus of ours. We want to diversify our customer base. We want to bring on more and more customers that have the opportunity to grow into very significant customers. And as they're growing to significant customers, no one or 2 customers represent significant concentration for us.

Speaker 2

That is absolutely part of our strategy.

Speaker 5

Yes. Very good. Thanks very much.

Speaker 2

Absolutely.

Operator

We'll take our next question from David Larsen of BTIG.

Speaker 4

Can you please talk a little bit more about fiscal 2025 revenue expectations, I guess the $400,000,000 It sounds to me like what you said was it could actually come in higher than 400,000,000 dollars if there's some New York City migrant revenue in there. And then I guess within the mobile health portion of that $400,000,000 I think we talked about that being maybe $175,000,000 with $50,000,000 of that coming from payers. Can you maybe just talk a little bit more about that payer component like what will that $50,000,000 how does that compare to like what you would expect for fiscal 2024 and what are the different pieces of it? So thanks very much. Appreciate it.

Speaker 2

Absolutely, Dave. Great to hear from you. So as you mentioned, for 2025, we expect the base business to be 400,000,000 dollars And we don't expect some of the wraparound migrant revenues to continue into next year, things like the security and some of the wraparound services that we were providing as an emergency basis. What we do think will possibly into next year on the migraines side, which would be additionally, additional revenue is particularly the clinical services and the population health services and the infectious disease control and the screening and the behavioral healthcare and the depression screening and all those medical expertise that could potentially continue on into next year. And that's really what we're planning for.

Speaker 2

But the $400,000,000 in the base business is really comprised of the revenues we expect in the hospital systems, in the both hospital systems, both transitions of care and medical transportation for the hospital systems, municipal programs, population health programs, with municipalities and with our payer vertical. As you mentioned, the payer vertical, we're projecting to be 50,000,000 dollars of that revenue in next year. That's going to come from 3 revenue streams. The first revenue stream is going to be the Care Gap closures that we're conducting in the home. For every Care Gap close, we collect a rate that's negotiated with the payers.

Speaker 2

And so we're ramping that up considerably. We shared we doubled the number of patients at the top of the funnel quarter over quarter. So from Q1 to Q2 of this year, we've doubled the number of patients that our health plan partners have assigned to us. So that is a really good harbinger for the opportunity that we have in front of us as we go throughout this year and into next. And we have a number of opportunities also in the pipeline that are going to come to fruition in the back half of this year and into next year.

Speaker 2

So one of those revenue streams with the payers is going to be the care gap closures. We also have the opportunity with those patients that are being assigned to us to become their primary care provider and create a capitated rate for us as part of their primary care provider for the patients. And so that will be the 2nd revenue stream. And then the 3rd with the payer vertical will be the patients that we monitor. And we shared last quarter that we have 50,000 patients that we're currently monitoring and we expect that to grow to 70,000 patients next year.

Speaker 2

And all of those three revenue streams will be comprised in that $50,000,000 that we're projecting for next year.

Speaker 4

That's very helpful. It sounds to me like you're delivering to America kind of exactly what this country needs. All of the health plans this quarter seem to be talking a lot about higher medical cost ratios, higher Medicare Advantage utilization, higher Medicaid utilization, pressure on their Medicare cost ratios. How does that impact Daco, if at all? Is that a good thing or a bad thing and why?

Speaker 2

So we think it's we think we fit nicely into that environment because ultimately what our goal is, is we are trying to provide more proactive care, right? So we're going into the home and doing a colon cancer screening or a bone density scan or a depression screen. We're doing social determinants of health work. And so we're going into the home and we're going to serve those members, all with the goal of catching chronic conditions or helping manage chronic conditions before they become more acute, catastrophic and more costly. So that really is our value prop and that fits in nicely in the environment that you're describing, which is rising costs and all that being driven perhaps from patients that were not getting the care they needed perhaps during the pandemic, perhaps they didn't have good access to care and obviously the plans are seeing that.

Speaker 2

So we fit very nicely into that. That's what our value prop is. We think the investment they're making with us actually saves them money and obviously improves patient outcomes, which again is what the whole system wants. So we feel like we're really of the moment, of the time. We feel like we have the right solution for the right need in the marketplace today.

Speaker 2

And we feel like we're able to save the health plans money. We're able to save patients' heartache and help manage their care. And then as you go through the continuum that really we're looking to participate in, right, we go from Care Gap, which again is meant to be proactive care to us becoming a primary care provider for those patients. Now we're increasing the care that's available to those drifter patients, those unattached patients, those patients that don't have good primary care. Primary care is a very good indicator of whether or not a patient is getting the care they need, the proactive care they need and the longitudinal care they need.

Speaker 2

And so we play again very well into that model. And then eventually, the contracts we're signing do have the ability for us to participate in the value arrangements that you're describing those Medicare Advantage arrangements that you're describing. Once we feel comfortable with that and once we feel like we truly are able to impact that patient's total cost of care and health outcomes, which again is where our Medical Advisory Board comes, we're going to be publishing research to that effect. So we have long term plans in this space. We have very good early indicators of the value proposition, the impact we're having on patients.

Speaker 2

And we really feel like in a world where perhaps the pendulum swung to virtual only, digital, we think that has a role to play, but we feel very strongly that we add the in person component. And so as more and more AI tools come to market, as more and more digital offerings come to market, market, as more and more digital offerings come to market, we can be the partner that helps bring those directly to patients in their home. And so we can be that last mile that helps mobilize and home. And so we can be that last mile that helps mobilize and commercialize technology that we're building and then also technology that we can partner on with other partners in the space. So I'll just say we're really excited about our plans.

Speaker 2

We really like where we fit in the healthcare ecosystem and we really feel like we have a lot to bring to the space, both for our payer partners, our hospital systems and municipalities, but actually even more importantly for the patients because as the patients are healthier and healthier and getting the proactive care they need, ultimately, they cost the system less money, which again is what everything is aligned to do today.

Speaker 4

Great. Thanks very much. I'll hop back in the queue.

Speaker 2

Thanks, Dave.

Operator

We'll move next to Pito Chickering of Deutsche Bank.

Speaker 6

Good afternoon, guys. One more bridge question for you in 2025 margins. I think previously, I think you talked about transport in the 33% range and base mobile health in the high 30s, SG and A in the 23% range. So these are blended altogether. So you still be thinking about 10% margins for next year on the $40,000,000 of revenue?

Speaker 3

Hey, it's Norm. Yes, that's exactly how we're laying it out. Nothing has changed for us in the last 3 months or so in terms of how that common size analysis works. We would think about 10% would be our target for the EBITDA margin. Obviously, we would go up from there.

Speaker 3

So we'd like to see we ideally like to model it out at 12%, 12.5% or higher. But we sort of put the floor in there at about 10%.

Speaker 6

Okay. So versus a commentary from last quarter, we sort of talked about 12.5%. Did anything change from last quarter to this quarter? Or is this the base of 10% and target of 12.5

Speaker 3

percent? Exactly. It's exactly the same.

Speaker 6

Okay. Got it. Second question, would you expect the cash flow conversions to be on that $40,000,000 EBITDA next year ignoring the catch up of the DSOs and migrant programs?

Speaker 3

Sure. And it's kind of hard to ignore the catch up on DSOs. It's such a big factor in 2024. But the thinking is that most of that will be done by the end of this year. Although I will say I do think there's going to be some catch up in the Q1 of next year as we get our DSOs more in line.

Speaker 3

But let's put that aside. So on that $40,000,000 of EBITDA, I would say we typically would be able to pull out maybe $30,000,000 in cash flow, right? You've got you're paying some tax. You have some other maybe some interest expense in there as well. So I would say that it should convert pretty well.

Speaker 6

Okay. And then last question. Like have you lost any mobile health customers this year? And as you look at the customer base from 2021 and 2022, what percent of those have increased your scope with you? Thanks so much.

Speaker 2

Absolutely. So we actually announced we did launch some we launched multiple new payers this year. We also shared that we won multiple new contracts. We just won a contract with the State of New Mexico. We're providing mobile vaccination clinics, nursing at virtual call centers and other behavioral healthcare work for the New Mexico Behavioral Health Institute.

Speaker 2

So we're launching that. We also announced that we won a partnership with 1 of the largest outpatient physician radiology groups in Arizona that has the opportunity also to expand to Texas and other states in the coming weeks. So we won those new contracts. Those are mobilizing and launching as we speak. In addition to those municipal contracts, we've also won multiple payer contracts that are expanding.

Speaker 2

Almost every single one of our payer contracts that we're mobilized right now has expanded over the course of this year. And a huge portion a large portion of our hospital system contracts are also expanding with us as well through the year. So we continue to expand the customers we have. I think you see us also signing new customers and placing a lot of focus there as we are freeing up resources from the migrant related projects that obviously consumed a lot of resources over the course of the last year. Now those resources are freeing up to launch with newly signed contracts.

Speaker 2

And that's exactly what we're doing.

Speaker 6

Great. Thanks so much.

Operator

We'll take our next question from David Grossman of Stifel.

Speaker 7

Good afternoon. Thank you. So just two quick questions to start off for you, Norma. Sorry, I'm traveling in the airport. Sorry if this is disclosed in the filing.

Speaker 7

But it looks like the transport margins were relatively low at EBITDA line, maybe even breakeven ish. Am I seeing that correctly? And if so, other than subcontractor costs, you mentioned anything else going on in the margins?

Speaker 3

Yes, let's talk about that. And it really was all contained within the margin piece, but that was a pretty big delta. The margins, as we mentioned, for the quarter were 29.1% for transport, which is about 4 or 5 points lower than what we've seen lately. So there are a couple of factors. With the subcontractors in that one particular market that we mentioned, That will remain a factor, but a much, much smaller factor in Q3 and then towards the back end of Q3 that will disappear as a factor.

Speaker 3

The other thing was we had an adjustment of workers' comp premiums going back to 2021, which dates back to when we were on the New York State Insurance Fund here in New York. We're now self insured. And for one reason or the other, they didn't complete their work on our 2021 planned year until in the last few weeks here. The overall adjustment in premium from that period 3 years ago was about $2,000,000 If I look at how it breaks down and some of it is mobile health and some of it is transport, but that cost transport probably 2 points of margin. So if I take those two factors, the non recurring old insurance adjustment and then I add to that the subcontractors, I would say that cost us somewhere between 4 and 4.5 points of gross margin.

Speaker 3

So between the 2, you're talking about 4 points that you're talking about well over $1,000,000 impact on the business because of that.

Speaker 7

Got it. And then just quickly on the free cash flow. So I was just going through the mental math on kind of the disclosures with the share repurchase and you probably had some other things in there. But did the core business generate cash flow excluding working capital in the quarter?

Speaker 3

Yes, it did. Yes. And we published the cash flow statement here. So you'll yes, you would have seen a positive number from what we call the P and L cash flow as well. But obviously, we were aided in the period from the other stuff that comes in from the business itself.

Speaker 7

Great. And then just lastly for you, Lee, you talked about doubling the assigned lives sequentially. Can you just give us a sense of how we can think about how that converts to revenue over the next several months and how to interpret that statistics from a P and L standpoint?

Speaker 2

Sure. So that doubling of the lives being assigned to us, that's the top of the funnel. That's the metric that we're very focused on to start. And what will happen is those assigned lives to us will move towards move through the funnel. We'll go and visit those patients in their home.

Speaker 2

We'll close their care gaps. In some cases, we'll close multiple care gaps. And that will start generating revenue there for those care gaps closed. And all the while, we also are going to continue to add to the top of the funnel. But as those patients move through the funnel, we'll close those care gaps.

Speaker 2

A portion of those lists will result in visits from us. A portion of those patients will remain unengaged no matter how much or how convenient our services are. But we've been very successful so far engaging unengaged, unattached patients. And so a percentage of the list, it's too early right now for us to publish and post what the conversion rate is on the top of the funnel into CareGap closure. But right now, our partners are very happy with what we've been able to achieve on the conversion rate.

Speaker 2

But the revenue will be generated and is being generated off of the care gaps that are closed. And that will happen it's happening now. It will happen more in Q3. It will happen more in Q4 is our plan. And then once we are able to close those care gaps, then we're able to convert some of those patients, again another percentage of those patients, into primary care patients for our PCP practice.

Speaker 2

And then we'll be able to bill fee for service and then eventually a capitated rate for those patients. That will happen later on in the year and more so into 2025. But the initial metric after the top of the funnel is the number of patients we're able to close care gaps for. And then again later on in the year and into next year, they'll convert over into PCP patients for again another revenue stream. We won't risk share or value based arrangements with these partners, even though they are included, the ability to do so is included in the contract.

Speaker 2

That won't happen until next year. And that's sort of the further down the funnel.

Speaker 3

Yes. And Dave, just circling back to your prior question, just to put a real number on it. And we provided the cash flow statement obviously for the 6 months, but we also broke out the 3 months of the Q2 number. We generated about $37,000,000 in operating cash flow in Q2. I'd say about a third of that came from the business itself.

Speaker 3

In other words, the net income and adding back all the non cash expenses. And then the changes in the working capital categories were about 2 thirds of that. So that's 24 of that versus 12, which combined to $36,000,000 $37,000,000 for the quarter.

Speaker 7

Okay. Got it. All right, guys. Thanks very much.

Speaker 2

Thanks, Dave.

Operator

We'll take our next question from Ryan MacDonald of Needham.

Speaker 5

Yes. Hey, this is Matt Hsieh on for Ryan. Thanks for taking the questions. Wanted to double click on CareGap closure. So nice to see that doubling, but curious how much of that was driven by new payer relationships versus expansions with existing?

Speaker 5

And as you look to the back half of the year, as payers are stressed about star ratings and medical costs, is there an opportunity that your existing payers give you incremental list of patients to target beyond those initial lists? And if so, is that contemplated in the current guidance?

Speaker 2

Yes and yes. So to answer your first question, Matt, great to hear from you. On the Care Gap closure side, the doubling from Q1 to Q2, it came from both. It came from expansion with the partners we already had, but we did sign a new partner And the list they provided alone represented a doubling with that new very large partner that we've been working on and we signed and now are mobilizing with right now as we speak. So we did get additional expansion from our current customers and we did get essentially a doubling from a new very large payer that we brought on.

Speaker 2

And then on the back half of the year, we do see momentum in the back half of the year as plans are trying to close out care gaps, as they're looking for their partners to increase velocity, as they're trying to get to as many patients as they can before the year end, we do see that momentum. We do see that catalyze the business, in the back half of the year. And so we are planning for that. We're increasing capacity for that right now, in all the markets we serve. And we do think that will be a tailwind in the back half of the year, absolutely.

Speaker 5

Awesome. Good to hear.

Speaker 1

And then I

Speaker 5

think last quarter and now this quarter too, it sounds like health system partners are adding mobile health on the transport contracts or at least adding more mobile health programs. Curious how much white space there is for you to go after with mobile health for health systems, any way to think about penetration rate or opportunity there? And are you replacing existing vendors or are these more greenfield opportunities?

Speaker 2

So we're just scratching the surface right now in our mobile health with our hospital systems. We're in a great place because we already have been working deeply with hospital systems for years on medical transportation. We've become a trusted We have close relationships. And so we are leveraging those relationships for other parts of the hospital to do patient monitoring for the hospital systems on the cardiac side and then also to do transitions of care. On the cardiac monitoring side, it's typically displacing current service providers that are already used.

Speaker 2

Cardiac monitoring has been in place. We have a very unique value proposition that our adherence is usually in the 90% range. We've shown that we can have patient adherence rates at 90% when the competitive set is typically in the 60% range. So we've been able to sell through that and we've been leveraging the hospital system customers and relationships that we have to introduce our cardiac monitoring offering and we're going to invest a lot more there throughout the year and into next year and we've been doing that. Then on the transitions of care space, I think there are existing providers that serve that space today.

Speaker 2

And so we are competing with some of those providers. But at the same time, it's still pretty white space. I think hospital systems are starting to realize that there are mobile health programs they can utilize for lower acuity care in the home post discharge to try and ameliorate patient readmission. And there are a lot of services and prevention that can be done in the home post discharge where you don't have to have the patient come back to the hospital system or perhaps go unvisited and they do end up bouncing back. And so that's the value prop.

Speaker 2

I think there is white space there. There is competition that's in the space. And I think we are placing more and more resources to that to be able to try and fill as much of that white space here and as it's becoming more and more of momentum with the hospital systems.

Speaker 5

Thanks. Appreciate the color.

Operator

We'll take a question from Richard Close of Canaccord Genuity.

Speaker 8

Hi, John Penney on for Richard Klose. Thanks for the question. So just a quick question here. Are you still expecting for the base business $280,000,000 to $300,000,000 is that still on the high end roughly $105,000,000 mobile health and $195,000,000 transportation?

Speaker 2

Yes, that's still the projection for this year, dollars 280,000,000 to $300,000,000 in the base business for this year.

Speaker 3

And your breakdown is pretty close.

Speaker 8

Okay, great. And then I guess last quarter you discussed like targets of like 2025 targets of 10 ks PCP patients, 65 ks care gap closures, 70 ks remote patient monitoring. Can you give any commentary of where you expect to be tracking to in 2024 with those metrics?

Speaker 2

Those metrics as you're sharing, we shared last quarter that we are projecting to do 65,000 care gaps closed, 10,000 PCP patients, as I mentioned, working through the funnel from care gaps to PCP and then 70,000 patients monitored. We shared last quarter, we have 50,000 patients monitored to date. We shared that last quarter and we'll continue to share that number periodically as we're making more and more progress to that probably as we end 2024 into 2025. But we're tracking to those metrics for next year. We are putting the partnerships in place, either we've signed them and are launching them now or we have many of those partnerships in the pipeline to be signed and launched at the end of this year into next.

Speaker 2

And so when we look at the bottoms up projection of those numbers, we have either the customers today to scale with and we're going to be adding new customers to help us reach those numbers next year.

Speaker 8

Okay, great. Thanks. And I guess one last question here. You mentioned like the Medical Advisory Board is helping with part of the value add there is getting clinical studies up and going. Is that been something that has potentially been a hindrance for additional payer partnerships?

Speaker 8

And do you have any like studies that you can comment on the call and what would potentially help going forward? Thanks.

Speaker 2

Absolutely. So we're very excited about the Medical Advisory Board. You can check out who's on that Medical Advisory Board on our website. We're very, very proud of the physicians we're adding. And really the guiding light on the Medical Advisory Board is as we're getting more and more into primary care and specialty care, right, we have programs cardiology, nephrology, endocrinology.

Speaker 2

We want to make sure that we have world class leading physicians that are developing the clinical programs in those specialties to go along with the primary care that we're providing because many of the patients that we're going to have in our primary care practice have 1 or more chronic conditions relating to heart health, end stage renal disease, diabetes and so on. And so we have those physicians now as part of our company really guiding the clinical programs that we're going to be providing and delivering for our primary care patients. So we're very excited about the Medical Advisory Board. One of the main goals in addition to helping us develop those the clinical outcomes of those mobile health programs that we're delivering to really show the impact that we're having. But in general, what increasing access via mobile healthcare can do in general for the broader industry.

Speaker 2

And we are leading the charge there. And so we are going to be targeting publishing research in leading medical journals as well as publishing white papers as well. And it hasn't been a hindrance, but I strongly believe that with that clinical research with those medical outcomes, we can really utilize that to supercharge our pipeline and our sales efforts because that will really show the efficacy of the mobile health programs. We do use it today. We do share, as I did, the programs that we're running today is having a material impact on ED readmission avoidance and closing care gaps and increasing HEDIS star measures for the health plans.

Speaker 2

And so we do utilize those metrics and data driven sales and data driven business development today. We just think it's going to take it to the next level when it is published in clinical research and is a very structured clinical study. And so we use it's not a hindrance today. We use data to sell today and to show the efficacy of our programs. I think there's an opportunity for us to take that to the next level in a very structured clinical format.

Speaker 2

And I'm really excited for the Medical Advisory Board to undertake that. We actually had our first meeting with the Medical Advisory Board in person just last week And it's very exciting to see the people that we have now as part of our company. It's probably the leading Medical Advisory Board that you'll find for a company like ours in the space.

Speaker 8

Great. Thanks guys.

Operator

And this concludes our question and answer session for today. I'd be happy to return the call to Lee for closing comments.

Speaker 2

Thank you so much. I want to thank everybody for joining us and hope to speak to you soon. Be well.

Operator

This does conclude the DotCo 2nd quarter 2024 earnings conference call. You may now disconnect your lines. And everyone, have a great day.

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Earnings Conference Call
DocGo Q2 2024
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