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spk04: Good afternoon, and welcome to the DOTCO Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Mike Cole, Head of Investor Relations. Thank you. Please go ahead, sir.
spk12: Thank you, Operator. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. All statements made in this conference call, other than statements of historical fact, are forward-looking statements. The words 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, results, or outcomes and may involve and are subject to certain risks and uncertainties and other factors that may affect DACA's business, financial condition, and other operating results. These include but are not limited to the risk factors and other qualifications contained in DACA's annual report on Form 10-K, quarterly reports filed 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 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, which is posted on our website, dot go dot com, as well as filed with the Securities and Exchange Commission. The information contained in this call is accurate as of only the date discussed. Investors should not assume that statements will remain relevant and operative at a later time. We undertake no obligation to update any information discussed in this call, whether as a result of new information, future events, or otherwise, unless required by law. At this time, it is now my pleasure to turn the call over to Mr. Anthony Capone, CEO of DOTCO. Anthony, please go ahead.
spk10: Thank you, Mike. And thank you all for joining us today. We had an excellent second quarter and momentum has accelerated substantially, setting us up for strong growth ahead. Not only did we set a record high for quarterly revenues, but even more importantly, we delivered increasingly positive patient outcomes to individuals with the greatest need. As a result of strong demand across the board, we are raising our full year 2023 revenue guidance from 500 to 510 million, to 540 to 550 million, and increasing our adjusted EBITDA guidance from 45 to 50 million to 48 to 53 million. The rapid acceleration of revenue growth is driven by multiple factors, including the continued rollout of our medical transportation contract with health and hospitals and the new mobile health contract with the Housing and Preservation Department to provide primary care, urgent care, behavioral health, social work, and other supporting services to migrant populations in New York. In addition, we were just recently awarded mobile health contracts for flu vaccination programs in South Carolina and a municipal employer health deal in Orange County. And while the associated revenues are minimal over the immediate term, they have the ability to grow substantially. These are the types of programs that we expect to help us establish a greater mobile health preference in relatively new geographies which we aim to build upon over time. The increasing guidance is prudent and reflects a combination of new contract wins and current run rate of existing contracts, not necessarily the full potential as they scale. All indications point to a substantial acceleration over the immediate term and as we gain additional visibility, we will update guidance, if applicable, over the balance of the year. At its current growth rate, we anticipate that it is possible for us to achieve the maximum value of the contract, less an estimated $120 million that is associated with subcontracting services, which will not flow through our financials. It's important to highlight that no other company we've ever encountered has the workforce technology, and experience to rapidly deploy mobile health programs at this scale in response to an unprecedented emergent crisis, not to mention the balance sheet to support the accelerated launch of such programs. Both our customer and employee satisfaction are at all-time highs. On a scale from negative 100 to 100, our on-demand customer MPS for Q2 was an 89. Additionally, over the trailing 12 months, our employee retention has improved by over 100%. This doubling of retention is further reinforced by more than 240 promotions we have made just this year, helping to support clinicians who operate today as individual providers to grow into meaningful management careers. With an industry-leading Glassdoor score of 4.2 and an Indeed score of 4.3, it's clear that our employees love working at DOTCO. At this time, I'm going to hand the call over to Lee Beanstock, our president and COO, to provide some operational details. Lee, please, go ahead.
spk07: Thank you, Anthony. Before I jump into those operational details, I am very pleased to report that we reached a significant milestone during the second quarter. We have surpassed the 300,000 patient interaction through our street health outreach and wellness program in partnership with New York Health and Hospitals. This is one of our flagship programs that brings healthcare and mental health services to the unsheltered homeless population, and we are extremely proud of this accomplishment. The $432 million mobile health contract with HPD that Anthony referred to earlier had a relatively small impact in the second quarter. but we believe it has tremendous potential over the remainder of the year and well beyond. This is a contract that was issued to DOTCO under an emergency authorization after DOTCO had already successfully worked with the city across numerous contracts spanning multiple years, building our track record and the city's trust. Due to DOTCO's innovative clinical delivery model, our technology, and highly sophisticated operational models, we are able to provide these services both cost efficiently and with high quality. During the quarter, we made substantial progress in further evolving our business model and launching care gap closure programs with four new major payers. Before I dive into those details, I think it's important to understand the evolution of our approach in the payer space. Initially, these relationships often started quite simply as an in-network provider of basic healthcare services, which were vulnerable to swings in demand. We viewed this as a way to help prove DACO's clinical ability to our payer partners, and these relationships are now evolving into specific care gap closure programs that aim to provide preventative care and treat at-risk and chronically ill patients. These new agreements come with a predetermined pay rate per visit and guaranteed minimums where DACO is assigned a list of at-risk and chronically ill patients for our National Operations Center in Tuscaloosa, Alabama to contact and schedule specific medical services. Simply put, patients are now assigned to us rather than DACO waiting for the patients to contact us. These services include bone density tests, diabetic retinal exams, and mobile EKGs, just to name a few. And collectively, we expect these four payers to assign us 73,000 patients needing care gap closure and primary care services. We believe preventative care saves lives, improves program quality measures, and helps keep patients out of the hospital. This is an area that we are extremely excited about. and we expect to report further traction with these high-profile partners in the near future. One reason we are seeing such strong demand in our mobile health segment is the highly compelling results coming out of our early partnerships. On our post-discharge program with LA Care, we saw that over 50% of patients had incorrect or missing discharge medications and orders, which is similar to the national average. The average wait time for these patients to get follow-up visits with their PCPs and specialists takes three weeks, whereas we deploy to address these issues much quicker and proactively. In another example, in the last 60 days, we've completed over 200 diabetic screenings, which includes diabetic eye exams, blood glucose, and blood pressure control screenings with a large Medicaid plan through a program we just launched. Over 20% of these patients had A1C levels over 9 when we saw them, indicating poor control of diabetes and a risk factor for complications, including potential renal failure, blindness, and neurologic damage. We were able to help these patients in collaboration with their PCPs or provide additional treatment or medication changes. This data and impact we are seeing is reinforcing our belief that DACO is uniquely positioned to drive improved patient outcomes while reducing costs to payers. We have also experienced exciting growth in our virtual care management program and currently partner with eight customer clinics to provide care for all phases of virtual care management, including remote physiologic monitoring and principal care management. And within the last six weeks, we have experienced a 300% increase in the number of patients monitored. We've now entered the contracting phase with six large nephrology practices, which were introduced through our strategic partnership with Fresenius Medical Care. These practices represent hundreds of nephrologists that monitor tens of thousands of patients. And over the second quarter, we boasted a greater than 90% patient compliance with our established clinics. far above the national, far above the industry average. On the medical transportation side, I am also pleased to report that in June, each of our geographic regions were both profitable and growing. We have taken great strides to eliminate unprofitable medical transportation business lines, and we intend to continue our efforts to transition the majority of this business to our innovative leased hour model by the end of the year. Not only were we able to significantly enhance profitability in this segment, we were able to do so while increasing revenues 105% compared to the prior year period. Medical transportation remains in strong demand, and we believe it presents us with an excellent opportunity to prove ourselves with healthcare systems and then potentially expand these relationships with our mobile health offerings. Our backlog. currently stands at $325 million over approximately three years, up from $205 million on May 8 of this year when we gave our last report. Both the increase in backlog and guidance are being driven entirely by growth in our mobile health segment. Before I hand it over to Norm, I want to take a minute and reiterate the fact that we have a large volume of new contracts and partnerships that are just recently signed or about to launch. and we are investing for tremendous opportunity ahead. We believe we have strategically positioned DOTCO to leverage cash flows from our core municipal contract to fund this growth internally, and we are seeing that strategic plan come together beautifully. I will now hand it over to Norm Rosenberg, our CFO, to review the financials. Norm?
spk08: Thank you, Lee, and good afternoon, everyone. Total revenue for the second quarter of 2023 amounted to $125.5 million, the highest quarterly revenue total in DOTCO's history, representing an 11% increase from the first quarter and a 15% increase from the second quarter of 2022. Last year's second quarter included an estimated $28 million in mass COVID testing revenues. By contrast, mass COVID testing revenues represented a relatively insignificant portion of total revenues in 2023's second quarter. Removing these testing revenues from both periods and recurring revenues increased by more than 50% compared to the prior year period. Mobile health revenue for the second quarter of 2023 amounted to $80.1 million, up nearly 10% from the first quarter and 8% lower than last year's second quarter. However, once again, looking at recurring mobile health revenues by removing mass COVID testing revenues of less than $1 million for the second quarter of 2023, and $28 million for the second quarter of 2022, and mobile health revenues increased by 33% compared to the prior year period. Medical transportation revenue increased significantly to $45.4 million in Q2 of 2023, up 13% from the first quarter, and more than double the transport revenues we recorded in the second quarter of 2022. Nearly every core transportation market witnessed both year-over-year and sequential revenue growth continuing the momentum from the second half of last year. In the second quarter, mobile health revenues accounted for about 64% of total revenues and transport for the remaining 36%. Based upon the first five weeks of the third quarter, it appears that mobile health could account for over 70% of revenues in the third and fourth quarters of this year. We recorded net income of about $1.3 million in Q2 2023, compared with a net loss of $3.9 million in the first quarter and net income of $11.8 million in the second quarter of 2022. Last year's second quarter included approximately $4.4 million in non-recurring income relating to the re-measurement of warrant liabilities and finance lease obligations. Adjusted EBITDA for the second quarter of 2023 amounted to $9.1 million as compared to adjusted EBITDA of $5.6 million in the first quarter and $12.3 million in last year's second quarter. Total gross margin during the second quarter of 2023 was 33.4%, up more than 500 basis points from the 28.1% gross margin we recorded in Q1 of this year, and as compared to 35.9% in the second quarter of 2022. During the second quarter of 2023, gross margins from the mobile health segment were 34.9%, significantly better than the 27.7% gross margin that mobile health recorded in the first quarter of this year, and compared to 39.9% in the second quarter of 2022. In the transportation segment, gross margins continued to expand, increasing to 30.7% in Q2 2023, up from 28.9% in the first quarter, and from 20.2% in Q2 of 2022. As expected, gross margins were sequentially higher in the second quarter than in the first quarter. as we witnessed an easing of some of the margin headwinds we encountered in the early part of this year, particularly in relation to the startup costs on some mobile health projects. However, we did experience some project startup costs during Q2 as well, in both mobile health and the transportation segments. While we anticipate that gross margins will continue to improve sequentially as we move into the third and fourth quarter of this year, overall margins could be impacted by the timing and size of newly launched and ramped up projects. Now looking at operating costs, operating expenses as a percentage of total revenues amounted to 32.1% in the second quarter of 2023, compared with 34.2% in the first quarter and 29.1% in the second quarter of 2022. One of the drivers of operating expenses was an increase in stock-based compensation expense, the large majority of which was options, as opposed to restricted stock units, as we seek to refine our compensation structure in ways that create greater alignment between the interests of shareholders and employees at all levels of the company. Looking at the year-over-year comparison without depreciation in stock comp expenses and operating expenses as a percentage of total revenues amounted to 26.3% in the second quarter of 2023, up slightly from 25.4% in the second quarter of 2022. As we expect to see revenues increase in the second half of 2023 when compared to the first half of 2023, we expect to see operating expenses decline as a percentage of total revenues, leading to operating margin expansion in the second half of the year. In addition to these scale-related benefits, we are making progress across many of our business lines with our margin enhancement projects, as we have detailed over the past couple of quarters. Now turning to the balance sheet. As of June 30, 2023, our total cash and cash equivalents, including restricted cash, was $123.8 million as compared to $127.5 million as of the end of Q1. While our margins are improving, as I described earlier, we continue to experience working capital requirements as we build out our business with larger, more credit-worthy municipal customers, such as New York City, which has received a credit rating upgrade in 2023. These customers have longer payment terms and a longer payment cycle in the initial stages of a project. We expect to use our balance sheet to invest in the growth of our business. When investing in these growth initiatives, we aim to balance our desire to generate financial returns with our need to provide societal returns by positively impacting the lives of as many people as possible. Despite these working capital demands, which are likely to persist as we stay in rapid growth mode, we had the biggest collections month in our history in June, which allowed us to keep our overall cash balance at quarter end very close to the levels at the end of Q1. This also resulted in a 10% decline in accounts receivable when compared to the levels at the end of Q1. Coupled with the sequentially higher revenues in Q2, we saw a nearly 20-day drop in our day sales outstanding, our DSO, back to the levels to which we had grown accustomed. Looking a bit deeper at our accounts receivable portfolio, at June 30th, more than 50% of our total accounts receivable portfolio were current, defined as being less than 30 days old. That compares to only about 30% that was below 30 days as of the end of the first quarter. Our accounts receivable portfolio is growing more healthy every quarter. Now, turning to our outlook for the second half of 2023, we anticipate continued strong demand from our customers for both mobile health and transportation services segments. We are very encouraged by our performance so far in Q3, as we have carried over the revenue momentum from the latter stages of Q2 into July, which was, by a wide margin, our highest revenue month to date. As Anthony mentioned, given the current strong revenue momentum, coupled with enhanced visibility to the end of the year, we are raising our revenue guidance for the full year to a range of $540 to $550 million, compared with our most recent revenue guidance in the $500 million to $510 million range. The raised revenue guidance, range would represent year-over-year top-line growth of about 23% to 25% compared to 2022 full-year numbers on an as-reported basis. However, when removing the $75 million of mass COVID testing from our 2022 revenue baseline and considering that we're not expecting any material mass COVID testing revenues in 2023, we expect to be looking at top-line growth year-over-year of approximately 50%. We're also raising our guidance for adjusted EBITDA into a range of $48 million to $53 million, up from our original guidance of range of $45 million to $50 million. And we still expect to exit 2023 at a gross margin of approximately 37%, as our margins are expected to improve sequentially over the end of the year. The revenue and EBITDA guidance implies expanding EBITDA margins in the second half of the year compared to the first half. There are two elements to this forecast. Firstly, as we've been saying for a couple of quarters now, and as we witnessed in Q2, we expect sequentially higher gross margins as we continue to work on the factors that temporarily depress gross margins in the first quarter of this year. Secondly, we anticipate that the pace of growth in operating expenses will be well below the sequential revenue growth rate, particularly in the areas of compensation, both on a cash and a stock-based compensation basis, leading to the expected margin expansion as greater top-line scale is achieved. Now, I'd like to turn the call back over to Anthony.
spk10: Thank you, Norm. Before we turn it over to Q&A, I very briefly wanted to mention the recent New York Times article that was critical of our partnership with New York City to provide health care and basic services to migrant populations in upstate New York. Understand the core ethos of DocGo is to provide high quality health care for those that need it the most. oftentimes performing seemingly impossible tasks for our customers through rapid deployments in response to unprecedented events. In the early days of this migrant work, we were launching projects on extremely short timelines. All of this was to avoid families and children from sleeping on the streets without access to healthcare and basic necessities. Every day, DocGo saves lives, treating and transporting thousands and thousands of patients. One of the many key facts left out of the New York Times article was the latest weekly polling of over 500 migrants in our care, which shows that more than 85% of them believe they're being supported and their needs are being met. And city officials are well aware of this program's success, as exemplified last week when Mayor Adams reiterated his confidence in our partnership during a press conference where he praised our work, describing it as a Herculean effort to help the city with this humanitarian crisis. I am tremendously proud of the work we are doing with the city and our partners upstate, especially all the amazing hard work being performed by local CBOs whom we work with daily. We are all working hard to preserve these migrants' basic human dignity and help change their lives for the better. To the thousands of DACO employees listening, over 2,000 of which are shareholders, the work you do matters. Every day, your efforts are helping some of the world's most vulnerable and helpless citizens find safety, support, and a better life.
spk05: You should be proud of the work you do. I certainly am. Hand it back over to the operator for questions. Thank you, sir.
spk04: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please note participants are restricted to one question and one follow-up question at a time. The first question that we have comes from Richard Pills from County Court Community. Please go ahead.
spk03: Yes, thanks for the questions. On the $325 million backlog, just to be clear, does that include any of the New York City asylum contract or is it just a partial part of that contract? Just to clarify that would be helpful.
spk08: Yeah, hey, Richard, this is Norm. Let me take a moment really to sort of walk you through how we look at our backlog and the way the backlog typically works. So what we will do is we'll start with, when we talk about starting with about $205 million from the last time, understand that a good amount of that $205 million came out of backlog and into backlog. and into actual revenue during the quarter. So the incremental increase is really more than from the 205 to 325. It does include a lot of that particular contract, but it includes probably a dozen different items that became backlogged during the period.
spk03: Okay, that's helpful. I was wondering on the care gap programs, you know, pleased to see that you're being, I guess, you know, assigned lives there rather than, you know, having to go out and generate lead flow and whatnot. Can you talk a little bit about, like, expected revenue contribution from those care gap programs either, you know, for 2023 or once you, like, fully ramp?
spk10: So the reimbursement for those averages around $250 per care gap closure. What is still to be seen and we'll disclose significantly more details in our subsequent earnings call is how many of the patients become compliant with our program in closing these care gaps. That's really going to be the determining factor. But we've announced it's about 73,000-ish lives that are being assigned to us, about $250 is the average per individual care gap closed. Some of them have multiple gaps that need to be closed, so multiple visits. The piece that we'll be proving out throughout this quarter is how many of them we're able to actually close. And there's nothing material, really, in our That's an important factor is that there's really no material amount in our increased guidance attributed to these care gap closure programs.
spk05: Thank you. The next question we have comes from Sarah James from Council Fitzgerald.
spk04: Please go ahead.
spk01: Thank you. I was hoping to get a little bit more
spk06: color on the revenue guidance boost. I know you guys mentioned in the release here that it was a prudent look at run rate and new. But for your contracts that you recently signed, like the New York HPD or some of the others that are more fee-for-service, how should we think about what's assumed in your 2023 guidance as far as a ramp in those?
spk10: It's really what we're doing today extrapolated out, you know, unless, of course, we have something which is guaranteed. And so we have a specific launch date in the future. So we do have contracts that have a scaling timeline where it says, okay, on this date, you will increase by this number of ambulances or increase by this number of mobile health units, in which case that will then go into an increased revenue guidance. But it's either a for sure launch date, or B, simply taking what we are doing today as of a couple days ago and drawing that out to the end of the year. When we have a higher confidence but not certainty in future revenue, that's when we'll add that to the backlog versus increasing the guidance.
spk01: Great. And then can you talk a little bit more about what
spk06: what the future could look like for the care gap closure program. So for these attributed lives, is there the potential to turn these into ones where you might have chronic care management on an ongoing basis or maybe one day look to underwrite the risk of any attributed primary care life? What does the future of that program look like?
spk10: Yeah, that's exactly right. So the contracts are written in such a way that majority of these individuals, not only do they have – or let me take a step back. The reason why they're being assigned to us, DOTCO's specific niche, is for individuals that have care gaps because they haven't seen their primary care provider in over a year. And so that means they're in need of care. And so when we go into the home, we provide that care, whether it's a diabetic retinal exam or diabetic foot exam or their annual A1C. We also then say, okay, well, you're usually polychronic. And then we will offer, if they meet the medical necessity, to have them monitored, RPM, and then managed through CCM, as well as potentially become their attributed PCP. And once you become their attributed PCP, there is the possibility of potentially taking on increasing opportunities with that payer as you normally would as a PCP. And that's obviously something that we'll evaluate in the future. It's not something that we're doing right now. Our goal right now is to just simply close as many gaps as possible and then to enlist patients that will have the greatest need into our monitoring and management services.
spk05: Thank you, sir.
spk04: The next question we have comes from Ryan McDonald from Needham & Co. Please go ahead.
spk02: Hey, this is Matt Shea on for Ryan. Thanks for taking the questions and congrats on a nice quarter here. Wanted to follow up on some of the commentary throughout the call, Anthony. It almost sounds like with some of these newer deals, they're different than deals of the past where you might start smaller and scale over time in a more regimented way with these set dates that you would scale up. And curious if that's a conscious decision that you guys have been making in your new contracts, meaning that you don't have to have such high upfront starting costs in the event that it is. How is that changing some of your expectations on what kind of hits to the margin line these new and larger deals could have? Could we see in the future where some of these deals are more gross margin neutral to start rather than negative from day one?
spk10: I don't think the actual contracts and their ramp schedule have changed substantially from the past to now. I think what has changed is we're seeing the benefits of our rapid normalization initiative, which we put into place in Q1 and kind of worked out through Q2, and now we're really getting to the end of phase one of our rapid normalization initiative. We're really seeing the benefits of those because those are longstanding contractual changes in the way that we work with subcontractors as well as things with our fleet, and I've iterated through all of those points before. But when we look at some of the new projects that we launched in Q2, they already started to reap the benefits of that rapid normalization project because those improvements, they span the entirety of the company. They weren't just one-time fixes. We didn't put some Band-Aids on some marginal issues, we fundamentally changed the way that we operate. So now we can launch at the same speed, but without the same margin pressures. That doesn't mean there's no startup cost. We still have a phase two of the rapid normalization initiative, which will begin on, you know, probably in later Q3. but we've mitigated them fairly significantly. When you look at the marginal improvement from Q1 to Q2, the almost 500 basis points, the majority of that is attributed to the success of the rapid normalization project.
spk02: Got it. Makes sense. Just wanted to check on that. Touching on another wind that maybe didn't get covered as much, the DARA transport network. We'd love to hear a little bit more about that, what it would take for you guys to kind of see the supply and demand sides of that network. And then as it grows, what kind of either revenue or margin expectations you might have for that?
spk10: Yeah, good question. So the DARA transport network, it's really something we launched with our existing customers. So we don't have plans right now to just turn that into a whole new separate product line, which is offered. What it does is it truly differentiates us when we go into health systems because we have the ability to not only be a provider, but we can work with their existing providers, which makes the sell significantly easier and also gives them more reliance because they don't have to go .co all or nothing. You can say, okay, we're going to give .co 70% of the work, but we want to keep these other two vendors or three vendors. And we say, that's fine. We're not greedy. We'll work with them. They can come on. You'll have the same level of transparency, ease of ordering. know long-term reporting we can all hold each other accountable and so when we go into a new customer that's one of the flagships that we launch with and then we go out as well if they say we'd like to you know and we'll bring other providers on on the platform and we do so in a way that really tries to make it fully integrated with these other providers systems so that we can you know there's a The reality is that in the transportation section, there is significantly more demand than there is supply. So there's no reason that we cannot all work together, still in a competitive environment, to service patients in hospitals. And to do so, we need to all be in one system under one roof, really what the DARA transport network is.
spk05: Thank you, Sam.
spk04: Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have comes from Michael Latimore from Northland Capital Markets. Please go ahead.
spk13: Yeah, great. Thanks. Yeah, great results and outlook here. I guess, can you provide a little more clarity on the society care deal, what percent of the maximum amount of that deal has gone into backlog? If you can share that.
spk08: Mike, I think the first thing that you've got to do is, you know, and the number that everybody's looking at, which is out there is about $430 billion. I think the first thing that you need to do is to modify that number by or put it into categories of the amounts that are going to be spent that represent actual recorded revenue. So there's revenue recognition. Some of that is flow-through. We estimate that the revenue to be captured is somewhere in the area of about $300 million. And I would say that maybe two-thirds of that is baked into our backlog. And the rest of that becomes a little bit of a modifier on that $300 million. And then there's a little bit that obviously has already been realized and we would expect to realize in Q3 and Q4. It's a little bit tricky, and Anthony started to explain this earlier, but it's a little bit tricky to figure out how to put something in backlog versus putting something in the revenue guidance. Essentially, revenue guidance is a forecast. It's our best educated guess as to what we think revenues will be from different projects and then in the aggregate from now to the end of the year or over the full year, whereas backlog represents everything that is considered to be achievable that might not yet have been have been launched so with this as with many other projects you're going to have different phases of the project so there are phases that are going on now and different sites that are being serviced so we can start to extrapolate that out make that part of the revenue guidance and then we have other sites that haven't launched yet those would typically fit into fit into the backlog it's not exactly you know it's not 100 that way but but conceptually that's what it is it's looking at how the existing work is going to expand on the one hand, that becomes part of revenue guidance, and then looking at other things that we expect to be launched at some point, which would go into backlog. So the bulk of that number is backlog.
spk13: Yeah. All right, perfect. And then, you know, this is a large deal or large potential deal. If you win another deal of a similar size, you know, border control or whatever, how do you think about just handling that incremental demand and growth. I mean, do you feel like you can find enough supply, you know, labor, you know, are there unique challenges here? Like, how would you prepare for something if you win another deal about this size?
spk07: Yeah, it would be a myriad of different factors. Hey, Mike, it's Lee. I think it would be a myriad of different factors. Obviously, geography plays a big factor in that. Obviously, if we're going and scaling in a new geography with a new pool of clinicians and staff, obviously that affords us an opportunity to tap into additional staff and additional resources and new geography. So that would be the first piece as an example. The example you gave is the Border Patrol. That's obviously outside of New York, so that would be scaling in a new area for us with a new set of staff. So that's the first piece. The second piece is I think we've really built out our management team to this point, and Norm touched on it with our SG&A investments. We really feel like we have a very strong management team that can scale the projects we have and the new projects that we can bring on. So we've really bolstered our management team. We've really bolstered our directors across the country in all of our geographies. And those directors are very strong. Our management team is very strong. And we feel like there's additional leverage there. There's additional scale there that that investment in that management ranks can really go and take and scale from here.
spk10: I'll just add on what Lee said. On the staffing side specifically, the model that we came up with for staffing and growth is quite scalable because the agencies that we have on, they represent many hundreds of thousands of total clinicians and providers around the United States. And so being able to tap into that network, but doing so through our new contractual relationships that allows us to take only an increased startup cost for a short period of time, is why we're highly confident that if awarded a large contract like that, we can handle it.
spk05: Thanks a lot. Best of luck. Thanks.
spk04: Thank you. The next question we have comes from David Grossman from Stifle. Please go ahead.
spk11: Thank you. Good afternoon. I know you've had a lot of questions on the backlog and everything, so I don't want to beat this thing to death. But just to be clear, when you look at the 325, do you want us to think about the revenue conversion to be fairly linear? Or just how do you want us to think about how that converts to revenue?
spk10: David, this is Anthony. Just for clarification, you mean convert as far as like a timeline? Like what do you think the chronology is of the 325? Yeah, exactly.
spk11: Right, exactly.
spk10: Yes, so a large portion of the increase that you have there is going to be related to the HPD contract and that, you know, that HPD contract is through, you know, May of next year. And so that's where it comes from. Now, the previously amount of backlog that we did have, that was like close to a three-year ramp and that was, to your point, mostly linear. But the increase in backlog, not all of it, but the majority of it is related to the HPD contract. And that contract is from, it was from May of 2023 to May of 2024.
spk08: Yeah, but even with David's norms, even within that, there are going to be things that are going to get in the way of the linear function. So for an example, one of the big elements of our backlog going back a couple of quarters is was the New York City Health and Hospitals Transport contract, which we knew was a certain amount of money over a three-year period. We did realize some revenue from that particular contract in the quarter, but it was mostly towards the back half of the quarter. So when we look at Q3, we're going to get more revenue out of that project in Q3 because we have a full quarter's worth than we did in Q2. Then it starts to become linear. So the thing that's going to get in the way of that being completely smooth and it's going to make it a little bit lumpy is that as these projects ramp in a mid-quarter quarter, point of time, then you're going to get some lumpiness in there where you have that first quarter or second quarter out as it converts from backlog into revenue, where you can have a relatively small number, but then it's really going to accelerate.
spk11: So, you know, I'm not really asking to provide guidance for next year, but I think we all think about, you know, what the comparisons look like, you know, particularly with this, you know, a site lead contract that could be so large, you know, over the first 12 months. And I know there's a renewal term, but You know, how do you want us to think about, you know, what happens after May of 2024 with that contract?
spk10: I would think about it from a human perspective. You know, without going into contractual relationship, the vast majority, I think 85, 86% of the individuals that are in our care are families with children. And so, you know, the thought that these families with children will be just put out on the street without care, that the services, for social work and for case management are no longer going to be needed seems extremely unlikely. Now, I do think there may be a shift, and you may see that single adults maybe no longer have the same services provided to them, but I think it is extremely unlikely that the families with children, which again is over 85% of the individuals coming into New York, are going to be left without these services at any point.
spk05: And when do they qualify? Go ahead. I'm sorry. Go ahead, Dave.
spk08: No, I'm just saying that the current contract runs through May, so that's already going to get us part of 2024. Go ahead.
spk11: Right, right. And when do they actually qualify? Is Medicaid qualifications, is that a political dynamic, or is there some kind of path for them to being treated under Medicaid?
spk10: Okay. There is, yep. So once they've submitted their asylum application in New York, you know, through various circumstances, they can become eligible for New York State Medicaid as just normal Medicaid recipients. And it covers, you know, all the Medicaid benefits, primary care, urgent care, and the like. If before they submit their asylum application, they enter into a hospital, then they're enrolled in what's called emergency Medicaid. And that's really just covering kind of emergency situations. But what we are working on with these groups is to continue to be their care provider long past this program. So when they come in, you know, we're working to make sure that they get access to health plans relative to what their eligibility is. And then once that happens, we can become their attributed PCP and continue to care for these people so long as they need that care.
spk11: Got it. And then just one other question was, you know, you talked about margin improvement in the back half of the year, and I think I understand those dynamics, but is it reasonable to think that the exit rate in 2023 is a reasonable predictor of what the margin starting point should be for 2024, or are there seasonal and contractual dynamics that maybe that's not the right way to think about it?
spk08: No, David, I think your assumption is a good assumption, if only because when we think about that exit rate, we're not thinking of it in terms of certain non-recurring or seasonal items that are going to happen in the fourth quarter or in December. It's really simply a matter of looking out over the horizon, trying to figure out when we get to, to use that term again, a more normalized margin. So if we were there as an exit rate for 2023, that does become, at least from a model standpoint, that does become the starting point for 2024.
spk11: And is phase two of the changes that you're making in your model for the normalization project, do those benefits get realized in 4.2, or should we think of that as being a tailwind in 2024?
spk10: No, I think you'll see the benefits of those in the first half of 2024.
spk05: Great. All right, guys.
spk11: Thanks very much. Thanks, David.
spk04: Thank you. The next question we have comes from from Deutsche Bank. Please go ahead.
spk09: Hi there, guys. You've got Kieran Ryan here for PDO. Thanks for taking the question. Just wanted to hit on the transportation side first. Is there any reason that the step up in Segment margins there shouldn't be viewed as, like, a new run rate going forward with potential to, you know, move even higher just as the leased hour mix continues to rise?
spk07: Yeah, that's certainly the driver of the margin on the medical transportation side. We're converting new – well, every new contract sign is a leased hour, and even old contracts, we're going back and converting those to leased hour, which obviously is improving margins. So we expect it to – to stay where it is and increase as we better the mix on the transportation side. Then it's really improving.
spk08: Yeah, I mean, there's a lot of good things that are taking place sort of behind the scenes that are driving that number. A lot of what you can see in our 10Qs and other reporting. So our average price per trip is going up, and it's not just the general inflation. It's because we're taking We're taking more ALS trips or CCT trips as compared to BLS trips. We're taking higher acuity trips. I call it portfolio management, both in terms of what the portfolio of trips looks like and what the portfolio of different markets look like. So as we've talked about, we shut down the California transport market. That alone gets our margin higher. Lee alluded to this in his prepared comments a few minutes ago, that we're looking at all of our transport markets and determining which ones have the scale that we need to continue with it. and that have the margin profile that continue with it. So when you go through that kind of pruning process, it's sort of almost a self-fulfilling thing where the margins go higher. But in summary, to answer your question, yeah, we look at the number that we're seeing today as something that's a launching pad for a better number going forward, and it's really the result of a lot of different margin enhancement projects that have taken place over the last 12 to 18 months.
spk09: Great. Thank you. And then just on the RPM side, I was just wondering if you had any thoughts on just kind of your early efforts there, what kind of traction you're seeing with customers and just kind of how big part of the discussions that service line is in some of these new deals that you're negotiating. Thanks.
spk07: Yeah. Oh, absolutely, Karen. Yeah. RPM continues to be a part of all of the new deals on the mobile health side. particularly with the care gap closure programs and our payer partnerships, because ultimately what it's there for is to lower the cost of care, provide proactive care, keep patients out of the hospital. So as we go and do care gap closure that we talked about, all the care gap closure services that we provide, if we do see candidates, if we do visit with patients that are good candidates for our RPM platform, that's the time that we would enroll them. We're already in their home. We would enroll them in the program, and then obviously we would begin monitoring them from there. So it's absolutely symbiotic with our CareGap closure programs, with a lot of our mobile health deployments, and it continues to be a big driver for us for the future. We're excited about it.
spk05: Thanks, guys. Thank you. Thank you. The next question is a follow-up from Richard Close.
spk04: Please go ahead.
spk03: Yeah, thanks for the follow-up. Norm, is there any way you could give us the transport volumes and the pricing that will be in the queue?
spk08: I don't know it off the top of my head, but we'll put the queue in there. It'll be in the queue within 24 hours. Just to give you an idea, the volumes were up double digits if I looked at Q2 versus Q2. I think maybe even over... Yeah, maybe even over 20%, but definitely double digits. And the year-over-year average price also went up. I just don't want to quote the wrong number to you, but I can tell you directionally where it is. And that'll be out there tomorrow.
spk03: Okay. And then with respect to free cash flow, I appreciate the comments on the collections in the second quarter and DSOs and whatnot. So how are you thinking about free cash flow, maybe conversion of adjusted EBITDA to free cash flow for the year?
spk08: So first let's look at where we are at the halfway point and we did include the cash flow statement as we typically do in the earnings release. So what I like to do, given the way working capital has had such an impact on our results, on our operating cash flow, I like to take the operating cash flow piece and split it into two pieces. So you have the net income or net loss, as it were, and adding back the non-cash items. That's one piece. And then you have the changes in the working capital categories. And that gives you a little bit of an idea. The working capital stuff is going to continue to be a drain. If you look at the first half of the year, all of the negative on the operating cash flow side and then some came from the working capital categories. So we had a $14, $15 million increase in AR versus the end of the year. We had a $14, $15 million decrease in accounts payable. So we really had a big negative cash cycle there. On the other hand, when you look at the cash flow that was generated from operations, what I like to call the P&L cash flow, I think it worked out to roughly $16 million in the first half of the year, which is kind of what we had been running at when we think of being able to generate $30 to $40 million of operating cash flow. So if we were at a point where we could get the working capital to be a net zero effect, that's kind of the cash flow generation that you're looking at. So I would compare the 14.7 million, I think it was, of adjusted EBITDA that we generated in the first six months of the year with about 16 million of P&L cash flow, right, absent the impact of the working capital categories over that same period of time. So it lines up pretty well.
spk05: Okay, thank you. Thank you.
spk04: There are no further questions at this time. I would like to turn the floor back over to Anthony Capone for closing comments. Please go ahead, sir.
spk10: Thank you all for attending our earnings call. We appreciate you. For those investors that are on who have follow-up questions, please reach out to my call and schedule one-on-one meetings. Thank you.
spk05: Thank you, sir. Ladies and gentlemen, that then concludes today's conference.
spk04: Thank you for joining us. You may now disconnect your lines.
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