IntriCon Corporation

Q1 2021 Earnings Conference Call

5/10/2021

spk11: Ladies and gentlemen, thank you for standing by and welcome to the Intercons Corporation's first quarter 2021 earnings conference call. At this time, all participants' line are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Linkhalva. Thank you. Please go ahead.
spk02: Thank you. Thank you, operator. Before we begin, I would like to preface our remarks with the customary Safe Harbor Statement. Today's conference call contains certain forward-looking statements. These statements are based on the current estimates and assumptions of Intercons management and are subject to uncertainty and changes in circumstances. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual results may vary materially from the expectations contained in today's call. For a list and description of the risk and uncertainties associated with our business, please refer to the risk factor section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, with the SEC. With that, I would now like to introduce Intracon CEO, Scott Longbaugh, for a review of the company's first quarter performance. Ellen Skipta, the company's CFO, We'll then cover the financial results in more detail, and at that point, we'll open the call for your questions.
spk08: Thank you, Lee. Good afternoon, and thank you for joining our 2021 first quarter conference call today. We entered the year strong, building on the momentum of the second half of 2020. As we reflect on an impressive first quarter, I'd like to take a moment to thank our employees, partners, and suppliers for their unwavering support throughout the many challenges the past year has presented. I continue to be encouraged by the significant opportunity we have to drive growth in our key markets, specifically diabetes, surgical navigation, interventional catheters, and hearing health. Throughout the remainder of the year ahead, we are focused on securing opportunities to diversify our customer base, adding valuable partners, and expanding into new high-growth end markets that can best leverage our core competencies in micro-medical technology and drive both organic and inorganic growth. Turning to our first quarter results, we saw strong financial performance and continued operational improvements. Total revenues increased approximately 48% year-over-year to $31.8 million, and sequentially, revenues increased 5%. Although we experienced some headwinds pertaining to COVID-related labor challenges, the results exceeded our initial expectations. This outperformance was largely due to the strength we saw in our diabetes and hearing health business lines, with each business posting double-digit growth year over year. Drilling down to each of our end markets, starting with diabetes, sales to Medtronic's diabetes group represented 58% of our total revenue in the first quarter. We saw renewed strength in this sector out of our business during the fourth quarter of 2020, stemming from Medtronic Minimed's 780G launch in certain international markets and the Minimed 770G launch in the U.S. That momentum carried into the first quarter, resulting in an impressive 36 percent growth over the first quarter of 2020 and 4 percent sequentially. We are optimistic sales of these new systems and other forthcoming Medtronic products will deliver increasing growth in the second half of the year and beyond. Both surgical navigation and the interventional catheter markets have proven to be important and exciting new growth drivers for us, and we are bullish on the long-term opportunities these markets can provide in terms of both top-line contribution and customer expansion. Revenue from Emerald Medical Services, EMS, in the first quarter totaled $3.8 million and continued to exceed our expectations, totaling $11.2 million in revenues for the first 10 months since acquisition. During the first quarter, we saw international adoption of Medtronic's Chaka balloon catheter manufactured by EMS, delivering 14% quarter-over-quarter revenue growth. We expect this catheter and the EMS business to continue to be primary growth drivers for this year and well into the future. Longer term, we are confident that we can leverage EMS's strong reputation with Medtronic's cardiac and vascular group and Intracon's core technologies and financial stability to secure other business opportunities in this market. In the first quarter, as expected, our medical coil product line, considered within our surgical navigation business, experienced staffing constraints due to COVID and our ability to hire skilled labor. impacting our capacity. We continue to work through these challenges in the second quarter. Medical revenue in the first quarter was $1.1 million, sequentially flat with the 2024 quarter. Turning to our hearing health market, in the first quarter, we delivered growth of approximately 46% compared to the prior year period. Growth was driven by our indirect and consumer business related to volumes required to support an initial OTC pilot. Additionally, our legacy hearing health business continued to benefit from increased access to audiologists as COVID restrictions were lifted. As we noted in our last earnings call, we are commencing pilot programs this year with select partners to leverage our comprehensive hearing aid technology platform, including hardware, firmware, and software. These pilots are not expected to drive material revenue this year, but rather aim to gauge end market interest required post-sale engagement, and price considerations. As expected, in early April, our first pilot with HEREX launched. This pilot offers Intercon firmware and hardware within the HEREX OTC products available in Walgreens stores in select states and online. We look forward to providing more insights on this pilot as it progresses throughout the year. Additionally, to support OTC and other hearing health products, we launch our self-fitting software clinical trial in April and expect completion of the trial by the end of the year, slightly behind our original schedule due to COVID-related slower than expected enrollment. That said, we do not anticipate this delay to impact our business. Turning to the pending OTC regulation, there remains widespread bipartisan support for providing lower cost solutions to a growing number of hearing impaired individuals in the U.S. However, the timeframe of draft guidance and eventually final regulation remains uncertain. There will undoubtedly be many participants in this market with a variety of profiles and contributions. As such, we continue to collaborate with potential partners as we await draft regulation. While we work through the lingering impacts of our business from COVID-19, most specifically staffing challenges, coupled with supply, input supply constraints, primarily associated with the February Texas storms, we continue to manage our business in a cost effective way. I'm confident with our constant focus on execution, we will overcome these short term challenges and deliver solid year over year growth. I'm excited about the meaningful progress we are making in the expansion of our business in the existing markets we serve, while at the same time making headway in entering new markets that can further support our long-term growth, as well as diversify our customer base. With that, I will now turn the call over to Ellen to provide more detail on our financial results for the first quarter of 2021. Ellen?
spk03: Thank you, Scott. Now turning to our financial results. You may notice in our release and on this call, we have adopted the use of non-GAAP reporting to provide a clearer picture of our growth and transformation. Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release we issued today. For the first quarter of 2021, we reported net revenue of $31.8 million, an increase of 48% over the prior year period. The increase was primarily due to our medical and hearing health legacy OEM product line. GAAP net income for the quarter was $714,000 or $0.07 per diluted share versus a net loss of $2 million or $0.22 per diluted share in the prior year period. Non-GAAP adjusted net income was $2.5 million or $0.26 per diluted share in the first quarter of 2021 versus a net loss of $682,000 or $0.08 per diluted share for the prior year period. Core business revenues in our medical market for the quarter were $25.1 million, a 54% increase year-over-year, and represented 79% of the total revenue, which is slightly more than the prior year due to our EMS acquisition. EMS contributed $3.8 million to the first quarter, growing 12% for $400,000 quarter-over-quarter. In our hearing health business, total revenue in the first quarter was $5.7 million, up 46% over the prior year first quarter and 11% quarter over quarter. We did see upside due in part to renewed access to audiologists and contributions from our initial OTC pilot with HearX. First quarter growth margins were 25.8% compared to 21.3% in the prior year comparable period. The higher margin was primarily due to higher volumes and props mix. Operating expenses for the first quarter was $7.4 million compared to $6.6 million in the prior year period. The increase was due to $900,000 of expenses associated with higher wages, salaries, incentives, and stock-based compensation expense, $600,000 in EMS operating expenses, and $400,000 of additional amortization expense of certain intangible assets. partially offset by $1.1 million reduction in Hearing Health Express operating expenses due to the Q2 2020 restructuring. In the first quarter, we classified amortization of $198,000 associated with our technology access agreements in sales and marketing, and will continue to do so throughout 2021. For comparability purposes, this amortization was classified as R&D throughout 2020. As of March 31, 2021, the company had $38.3 million of cash in investments compared to $35.3 million as of December 31, 2020. The increase in cash flow was driven by our strong Q1 results, as well as a $3.5 million quarter-over-quarter increase in our payables. We are addressing this issue and expecting to return to normalized AP balances by the end of Q2. Turning to our outlook for the full year, we want to reiterate that the COVID-19 pandemic, staffing challenges, and near-term input supply constraints pose a risk of uncertainties on our operating results. We expect 2021 revenues to range between $119 million and $123 million, representing year-over-year growth of 16% to 20%. We do not anticipate providing regular quarterly guidance, however, we foresee Our second quarter revenue could slightly lag our first quarter results due to COVID-19-related pent-up demand recognized in the first quarter of 2021 and present challenges regarding staffing and input supply constraints. In the meantime, we continue to manage our operations in line with the appropriate pandemic guidelines and with non-production support remaining off-site and all mandatory protocols in place onsite to protect our employees. With that, Scott and I would now like to open the call for questions. Operator?
spk11: Thank you, ma'am. Your first question is from Andrew De Silva of Be Your Island Securities. Andrew, your line is open.
spk09: Hey, good afternoon. Thanks for taking my questions. Just a couple of quick ones for me. I was curious, as it relates to the strength in the diabetes business, could you give a little bit of color if that was coming out of the mini med 670, 770, or 780G? I'm really just curious because I don't believe the disease sensor has been approved yet, so I want to understand the dynamics there and maybe where growth is now and where it could be coming out of later.
spk08: Yeah, good question, Andy. Thanks for calling in. So the growth from the diabetes business, really the momentum that was carried forward that we saw in Q4 largely due to The 780 launched internationally in the adoption here of the 770 in the U.S. market. And we talked about some of those growth catalysts for the back half of the year that we're eyeing, more specifically the 780 here in the U.S. and then also the Zeus platform. We think those can be two catalysts for growth in the back half of the year and well into 2022. We haven't seen those obviously come through, and I can't comment on specific timing of Medtronic. I'll leave that up to them. But, again, the strength in that first quarter was really momentum carried forward off of what we saw in the fourth quarter.
spk09: Okay. Great. Thank you for that. And then I'm a little surprised at how strong the OEM hearing sales have been. I mean, this quarter obviously saw over 70% growth year over year. I would have thought that the value-based hearing, just from a market standpoint, would have seen a lot faster adoption just given the pandemic and elective procedure protocols and so on. But can you give us a little bit of color on some of the dynamics there? Is this kind of a short-term bolus that's taking place in the quarter, or is it more durable, and should we expect OEM hearing aid sales to be a significant contributor for the year?
spk08: We look at that OEM legacy where we've seen the pop over the last couple of quarters is more pent-up demand. When we took the pause in that late first quarter, second quarter, third quarter, when COVID hit in 2020, it really shut down the legacy business and access to audiologists. That's opened up a little bit. There's been some pent-up demand, and that's really flown through, and you've seen that in our legacy business So longer term, I think that business will normalize to levels where we were back in late 2019. And the growth drivers is where we've talked about for the last several calls, which is in the value hearing health space and the indirect to end consumer. We're starting to see that business begin to make some strides with the pilot that was conducted here. in the late part of the first quarter into the second quarter. And then we'll see even greater momentum as we get draft guidance out there, Andy, and eventually when we get that final regulation in place.
spk09: Okay. Great. And the last question for me is just related to the guidance. Should we kind of expect the first quarter, just looking at, you know, if you take your guidance and you kind of separate it into four quarters, it would just appear that the first quarter might be the high watermark relative to any other quarter. Is that a fair assessment, or should we have a little bit more seasonality in the second and third quarter and figure a very strong fourth quarter? Thanks for taking my questions.
spk08: Yes. Thanks, Andy. As we talked about, we're anticipating seeing maybe a slight pullback in the second quarter from where we are, in the first quarter and then a progression of growth through the remainder of the year where Q4, in all likelihood, will be above what we saw in the first quarter. So I think that nice natural progression for the rest of the year beginning in the second quarter.
spk09: Okay, perfect. Thank you very much. Best of luck going forward. Thank you, Andy.
spk11: Your next question is from John Block of Stifle. John, your line is open.
spk04: Thanks, and good afternoon. Scott, I'll just start on sort of the revenue gross margin dynamics. So another very nice revenue beat relative to our estimates, and ahead of us in gross margins, but a lot more modestly. So if you could just comment sort of that, you know, if mixed shift is still weighing on gross margins a bit, and when we think out longer term, is it still really that – revenue and revenue increase driving the gross margins longer term, and even if you're willing to maybe put on an out-year gross margin number for us to think about?
spk08: Yeah, thanks, John. So thinking about the gross margin, some of the challenges that we've outlined, clearly direct labor has been a challenge in this environment. It's driven some inefficiencies in the cost of sales line. The amount of overtime that we ran in the first quarter was significant. is the demands up and frankly some of the churn that we've had within our direct labor has increased really towards the end of 2020 and into 2021. So we're putting in and taking measures to remedy that and early indications would suggest that we'll be able to resolve that in about half of the year. But that has caused some constraint on the gross margin line. We'll continue to see that, John, in the second quarter, some of those challenges. But as we kind of get our handle around some of the reducing the overtime and getting more people on board and less churn, I think you'll begin to be able to correlate our revenue growth more succinctly with the growth that we'll see on the gross margin line.
spk04: Okay, very helpful. And, you know, sort of a follow-up to that is on previous calls, you gave some details, Scott, around, you know, additional responsibilities, if you would, with one of your biggest partners on the medical side, and that's specific to the packaging and labeling that you were going to bring on. I thought that was a 2H21 event. Is it still a 2H21 event? And what about some of these, you know, labor supply constraints that you're talking about? Do we have to think about that as you take on more responsibilities as an organization? Sorry, one more just as an offshoot to that same question. What's the like-for-like ASP increase? In other words, if you were doing similar volumes for that same said partner with the packaging and labeling, what does it do from sort of an ASP perspective? Thanks.
spk08: Yeah. So within the packaging labeling on those products, it's not all products. It's certain products going to certain geographies. So we'll see ASPs increase roughly 10 to 12% on those products going into certain geographies. We've started to recognize some of that revenue here early in 2021. We think that's going to ramp more quickly in the back half of the year as some of these new products get potentially and hopefully approved. But in terms of labor, look, this is one of the things that we're focused on is making sure that we can get the qualified labor in place to meet that demand. And so that's one of the challenges that we've outlined. And I can tell you it's one of the highest priorities that we have going on and This is not a problem unique to Intracon. But I think with some of the measures we're taking and ways to attract and retain employees, that as we move into the back half of the year, we will be in a strong position and these labor constraints won't have the type of impact that we're seeing now.
spk04: Okay, and last one or two from me. Just first of all, on the IDTEC, Any additional call you're willing to share? Maybe just when we think about the model longer term, how does the margin structure work out in that regard? In other words, DTC was always a much higher gross margin relative to corporate. With what you're experiencing from these pilots and the way that the structure is working out and the support you're giving, do we think about the IDTEC? as accretive to corporate gross margin, and sorry, last one, to walk back to 10% to 12% higher ASP that you mentioned because of the packaging and labeling, how do we put that in the construct of the overall guidance this year, right, which might imply, I don't know, around $60 million in 1H and $60 million in 2H, give or take, but yet the higher ASP, do we just view that as maybe a sense of conservatism? Thanks, Scott.
spk08: Yeah. Very good question. So on that last point in terms of how we think about the back half of the first half, remember it's just on select products that are going to this customer. And because we aren't positive or sure of the timing of when some of these launches will be, we didn't want to bake much into the back half of the year on that front end.
spk04: Okay, thanks. And I'm sorry, I rambled for a while, but just the margin structure on the IDTEC long-term, Scott?
spk07: Yes, thank you.
spk08: So, John, within the IDTEC, and we think about the OTC market, I envision there's going to be several channels and several ways that Intracon participates. But I will say within the pilots that we have and the opportunities that we have in front of us, we're going to see a margin structure and a financial makeup similar to our corporate averages, where gross margins should be in the low 30s, operating expenses in the 20s, and ultimately giving us profitability in the 10% range. Now, obviously, there's a lot of work that needs to be done to get to those volumes that will support those margins. But long-term, that's how I see we'll be participating in the OTC market, which to your point was a departure from the DTC effort that we were doing down at HHE.
spk06: Thanks for the time, guys. Thanks, John.
spk11: Your next question is from Kyle Bowser of Collier Securities. Kyle, your line is open.
spk10: Great, thanks. Good evening. Thanks for all the updates here. So maybe I'll start with EMS. It's come in well above expectations, and you already anticipated at the time of the acquisition of it being very accretive. Can you talk again about the growth profile? I think you mentioned 15% quarter-over-quarter growth, but I'm not sure if that applied just to the EMS line or if that was more Medtronic-related stat, but just kind of trying to understand how we might model this over the coming quarters, so any sort of growth profile expectations would be great.
spk08: Yeah, so within EMS, the quarter-over-quarter growth in their total business was 12%, and again, doing a fantastic job as they're meeting demand coming in from Medtronic, but also other customers alike. Our goal there is to continue, obviously, to serve Medtronic and be the best partner we can be. But as I highlighted, it's important for us to figure out how do we take the Emerald technology, the Emerald abilities and confidence they built with Medtronic and be able to take Intercom's financial stability and go out and sell those competencies with other customers in other regions of the world. And so that's one of the things that we're focusing in right now is building those partnerships over in Asia that can leverage some of the capabilities that we have at Emerald. And I think those will be important growth drivers for us as we look out a year, two, three years.
spk10: Got it. Thanks. And maybe switching to OTC guidelines and us continuing to wait, for the FDA, just kind of curious, how would you characterize the willingness of potential partners in this space to move forward with at least just maybe discussions, given the ongoing pilot programs and your success today? Just kind of wondering if those conversations have continued to develop or if we're still kind of in a holding pattern here.
spk08: Yeah, and I'll answer that on two fronts. So I think with the OTC, what we saw in 2020, we saw the conversations simmer a little bit, and I think most of the large entrants or people that were looking at that market, they kind of took a deep breath and started looking internally in the business that they were already engaged in. Now that we're starting to see the COVID cloud lift, we are seeing more potential partners engage. Obviously, we announced the pilot with Hurex here in the first half of the year, and there's others that we're in collaboration with and discussion with. So I would say today there's more activity, Kyle, than I've seen over the last couple of years in terms of discussion and collaboration.
spk10: Great, appreciate that. And just lastly, so you talked a little bit about the hiring constraints, supply constraints. I'm just curious, what is the latest head count and how many positions do you have open or would you ideally fill over the next, it's called, three to six months?
spk08: Yeah, so that's a pretty broad question. We have roughly 850 employees now. A number of those are international employees. and where we're seeing the greatest constraints is here in the U.S. market, and specifically our three manufacturing facilities in Minnesota. So we have over 200 direct labor here in Minnesota, closer to about 280, and we would like to add anywhere from 10 to 20 percent over the course of the next quarter. That's quite a bit in terms of trying to find skilled labor, but again, we've adopted some new techniques, and what we're seeing from early returns, I think we'll be in a good position in the back half of the year.
spk10: That's great. Hey, thanks so much. I'll jump back in queue.
spk06: Thanks, Kyle. Have a good day.
spk11: At this time, I would like to turn the conference back to... I would like to turn the conference back to Mr. Scott Longwell for any further comments.
spk08: Great. Thank you, everybody, for joining on the call today. I appreciate your time. We look forward to giving you updates as we move through on the year. Stay healthy. Have a good night.
spk11: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. you Thank you. Thank you. Bye. you Ladies and gentlemen, thank you for standing by and welcome to the Intercons Corporation's first quarter 2021 earnings conference call. At this time, all participants' line are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Linkhalva. Thank you. Please go ahead.
spk02: Thank you. Thank you, operator. Before we begin, I would like to preface our remarks with the customary Safe Harbor Statement. Today's conference call contains certain forward-looking statements. These statements are based on the current estimates and assumptions of Intracons management and are subject to uncertainty and changes in circumstances. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual results may vary materially from the expectations contained in today's call. For a list and description of the risk and uncertainties associated with our business, please refer to the risk factor section of our most recent annual and quarterly reports on Form 10-K and Form 10-Q, respectively, with the SEC. With that, I would now like to introduce Intracon CEO, Scott Longbaugh, for a review of the company's first quarter performance. Ellen Skipta, the company's CFO, We'll then cover the financial results in more detail, and at that point, we'll open the call for your questions.
spk08: Thank you, Lee. Good afternoon, and thank you for joining our 2021 first quarter conference call today. We entered the year strong, building on the momentum of the second half of 2020. As we reflect on an impressive first quarter, I'd like to take a moment to thank our employees, partners, and suppliers for their unwavering support throughout the many challenges the past year has presented. I continue to be encouraged by the significant opportunity we have to drive growth in our key markets, specifically diabetes, surgical navigation, interventional catheters, and hearing health. Throughout the remainder of the year ahead, we are focused on securing opportunities to diversify our customer base, adding valuable partners, and expanding into new high-growth end markets that can best leverage our core competencies in micro-medical technology and drive both organic and inorganic growth. Turning to our first quarter results, we saw strong financial performance and continued operational improvements. Total revenues increased approximately 48% year-over-year to $31.8 million, and sequentially, revenues increased 5%. Although we experienced some headwinds pertaining to COVID-related labor challenges, the results exceeded our initial expectations. This outperformance was largely due to the strength we saw in our diabetes and hearing health business lines, with each business posting double-digit growth year over year. Drilling down to each of our end markets, starting with diabetes, Sales Symmetronics Diabetes Group represented 58% of our total revenue in the first quarter. We saw renewed strength in this sector out of our business during the fourth quarter of 2020, stemming from Medtronic Minimed's 780G launch in certain international markets and the Minimed 770G launch in the US. That momentum carried into the first quarter, resulting in an impressive 36% growth over the first quarter of 2020 and 4% sequentially. We are optimistic sales of these new systems and other forthcoming Medtronic products will deliver increasing growth in the second half of the year and beyond. Both surgical navigation and the interventional catheter markets have proven to be important and exciting new growth drivers for us, and we are bullish on the long-term opportunities markets can provide in terms of both top-line contribution and customer expansion. Revenue from Emerald Medical Services, EMS, in the first quarter totaled $3.8 million and continued to exceed our expectations, totaling $11.2 million in revenues for the first 10 months since acquisition. During the first quarter, we saw international adoption of Medtronic's chocolate balloon catheter manufactured by EMS, delivering 14% quarter-over-quarter revenue growth. We expect this catheter and the EMS business to continue to be primary growth drivers for this year and well into the future. Longer term, we are confident that we can leverage EMS's strong reputation with Medtronic's cardiac and vascular group and Intracon's core technologies and financial stability to secure other business opportunities in this market. In the first quarter, as expected, our medical coil product line, considered within our surgical navigation business, experienced staffing constraints due to COVID and our ability to hire skilled labor. impacting our capacity. We continue to work through these challenges in the second quarter. Medical revenue in the first quarter was $1.1 million, sequentially flat with the 2024 quarter. Turning to our hearing health market, in the first quarter, we delivered growth of approximately 46% compared to the prior year period. Growth was driven by our indirect and consumer business related to volumes required to support an initial OTC pilot. Additionally, our legacy hearing health business continued to benefit from increased access to audiologists as COVID restrictions were lifted. As we noted in our last earnings call, we are commencing pilot programs this year with select partners to leverage our comprehensive hearing aid technology platform, including hardware, firmware, and software. These pilots are not expected to drive material revenue this year, but rather aim to gauge end market interest required post-sale engagement, and price considerations. As expected, in early April, our first pilot with HEREX launched. This pilot offers Intercon firmware and hardware within the HEREX OTC products available in Walgreens stores in select states and online. We look forward to providing more insights on this pilot as it progresses throughout the year. Additionally, to support OTC and other hearing health products, we launched our self-fitting software clinical trial in April and expect completion of the trial by the end of the year, slightly behind our original schedule due to COVID-related slower than expected enrollment. That said, we do not anticipate this delay to impact our business. Turning to the pending OTC regulation, there remains widespread bipartisan support for providing lower cost solutions to a growing number of hearing impaired individuals in the U.S. However, the timeframe of draft guidance and eventually final regulation remains uncertain. There will undoubtedly be many participants in this market with a variety of profiles and contributions. As such, we continue to collaborate with potential partners as we await draft regulation. While we work through the lingering impacts of our business from COVID-19, most specifically staffing challenges, coupled with supply, input supply constraints, primarily associated with the February Texas storms, we continue to manage our business in a cost effective way. I'm confident with our constant focus on execution, we will overcome these short term challenges and deliver solid year over year growth. I'm excited about the meaningful progress we are making in the expansion of our business in the existing markets we serve, while at the same time making headway in entering new markets that can further support our long-term growth, as well as diversify our customer base. With that, I will now turn the call over to Ellen to provide more detail on our financial results for the first quarter of 2021. Ellen?
spk03: Thank you, Scott. Now turning to our financial results. You may notice in our release and on this call, we have adopted the use of non-GAAP reporting to provide a clearer picture of our growth and transformation. Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release we issued today. For the first quarter of 2021, we reported net revenue of $31.8 million, an increase of 48% over the prior year period. The increase was primarily due to our medical and hearing health legacy OEM product line. GAAP net income for the quarter was $714,000 or $0.07 per diluted share versus a net loss of $2 million or $0.22 per diluted share in the prior year period. Non-GAAP adjusted net income was $2.5 million or $0.26 per diluted share in the first quarter of 2021 versus a net loss of $682,000 or $0.08 per diluted share for the prior year period. Core business revenues in our medical market for the quarter were $25.1 million, a 54% increase year-over-year, and represented 79% of the total revenue, which is slightly more than the prior year due to our EMS acquisition. EMS contributed $3.8 million to the first quarter, growing 12% for $400,000 quarter-over-quarter. In our hearing health business, total revenue in the first quarter was $5.7 million, up 46% over the prior year first quarter and 11% quarter over quarter. We did see upside due in part to renewed access to audiologists and contributions from our initial OTC pilot with HearX. First quarter growth margins were 25.8% compared to 21.3% in the prior year comparable period. The higher margin was primarily due to higher volumes and props mix. Operating expenses for the first quarter was $7.4 million compared to $6.6 million in the prior year period. The increase was due to $900,000 of expenses associated with higher wages, salaries, incentives, and stock-based compensation expense, $600,000 in EMS operating expenses, and $400,000 of additional amortization expense of certain intangible assets. partially offset by $1.1 million reduction in Hearing Health Express operating expenses due to the Q2 2020 restructuring. In the first quarter, we classified amortization of $198,000 associated with our technology access agreements in sales and marketing and will continue to do so throughout 2021. For comparability purposes, this amortization was classified in R&D throughout 2020. As of March 31st, 2021, the company had $38.3 million of cash in investments compared to $35.3 million as of December 31st, 2020. The increase in cash flow was driven by our strong Q1 results, as well as a $3.5 million quarter-over-quarter increase in our payables. We are addressing this issue and expecting to return to normalized AP balances by the end of Q2. Turning to our outlook for the full year, we want to reiterate that the COVID-19 pandemic, staffing challenges, and near-term input supply constraints pose a risk of uncertainties on our operating results. We expect 2021 revenues to range between $119 million and $123 million, representing year-over-year growth of 16 to 20%. We do not anticipate providing regular quarterly guidance. However, we foresee Our second quarter revenue could slightly lag our first quarter results due to COVID-19-related pent-up demand recognized in the first quarter of 2021 and present challenges regarding staffing and input supply constraints. In the meantime, we continue to manage our operations in line with the appropriate pandemic guidelines and with non-production support remaining off-site and all mandatory protocols in place onsite to protect our employees. With that, Scott and I would now like to open the call for questions. Operators?
spk11: Thank you, ma'am. Your first question is from Andrew De Silva of B-Reilly Securities. Andrew, your line is open.
spk09: Hey, good afternoon. Thanks for taking my questions. Just a couple of quick ones for me. I was curious, as it relates to the strength in the diabetes business, could you give a little bit of color if that was coming out of the MiniMed 670, 770, or 780G? I'm really just curious because I don't believe the disease sensor has been approved yet, so I want to understand the dynamics there and maybe where growth is now and where it could be coming out of later.
spk08: Yeah, good question, Andy. Thanks for calling in. So the growth from the diabetes business, really the momentum that was carried forward that we saw in Q4 largely due to The 780 launched internationally in the adoption here of the 770 in the U.S. market. And we talked about some of those growth catalysts for the back half of the year that we're eyeing, more specifically the 780 here in the U.S. and then also the Zeus platform. We think those can be two catalysts for growth in the back half of the year and well into 2022. We haven't seen those obviously come through, and I can't comment on specific timing of Medtronic, I'll leave that up to them. But again, the strength in that first quarter was really momentum carried forward off of what we saw in the fourth quarter.
spk09: Okay, thank you for that. And then I'm a little surprised at how strong the OEM hearing sales have been. I mean, this quarter obviously saw over 70% growth year over year. I would have thought that the value-based hearing Just from a market standpoint, we would have seen a lot faster adoption just given the pandemic and elective procedure protocols and so on. But can you give us a little bit of color on some of the dynamics there? Is this kind of a short-term bolus that's taking place in the quarter, or is it more durable, and should we expect OEM hearing aid sales to be a significant contributor for the year?
spk08: We look at that OEM legacy where we've seen the pop over the last couple of quarters is more pent-up demand. When we took the pause in that late first quarter, second quarter, third quarter, when COVID hit in 2020, it really shut down the legacy business and access to audiologists. That's opened up a little bit. There's been some pent-up demand, and that's really flown through, and you've seen that in our legacy business So longer term, I think that business will normalize to levels where we were back in late 2019. And the growth drivers is where we've talked about for the last several calls, which is in the value hearing health space and the indirect to end consumer. We're starting to see that business begin to make some strides with the pilot that was conducted here in the late part of the first quarter into the second quarter. And then we'll see even greater momentum as we get draft guidance out there, Andy, and eventually when we get that final regulation in place.
spk09: Okay. Great. And last question for me, just related to the guidance. Should we kind of expect the first quarter, just looking at, you know, if you take your guidance and you kind of separate it into four quarters, It would just appear that the first quarter might be the high watermark relative to any other quarter. Is that a fair assessment, or should we have a little bit more seasonality in the second and third quarter and figure a very strong fourth quarter? Thanks for taking my questions.
spk08: Yes. Thanks, Andy. As we talked about, we're anticipating seeing maybe a slight pullback in the second quarter from where we are. in the first quarter and then a progression of growth through the remainder of the year where Q4, in all likelihood, will be above what we saw in the first quarter. So I think that nice natural progression for the rest of the year beginning in the second quarter.
spk09: Okay, perfect. Thank you very much. Best of luck going forward. Thank you, Andy.
spk11: Your next question is from John Block of Stifle. John, your line is open.
spk04: Thanks, and good afternoon. Scott, I'll just start on sort of the revenue gross margin dynamics. So, another very nice revenue beat relative to our estimates and ahead of us on gross margins, but a lot more modestly. So, if you could just comment sort of that, you know, if mixed shift is still weighing on gross margins a bit, and when we think out longer term, is it still really that revenue and revenue increase driving the gross margins longer term, and even if you're willing to maybe put on an out-year gross margin number for us to think about?
spk08: Yeah, thanks, John. So thinking about the gross margins and the challenges that we've outlined, clearly direct labor has been a challenge in this environment. It's driven some inefficiencies in the cost of sales line. The amount of overtime that we ran in the first quarter was significant. is the demands up and frankly some of the churn that we've had within our direct labor has increased really towards the end of 2020 and into 2021. So we're putting in and taking measures to remedy that and early indications would suggest that we'll be able to resolve that in about half of the year. But that has caused some constraint on the gross margin line. We'll continue to see that, John, in the second quarter, some of those challenges. But as we kind of get our handle around some of the reducing the overtime and getting more people on board and less churn, I think you'll begin to be able to correlate our revenue growth more succinctly with the growth that we'll see on the gross margin line.
spk04: Okay, very helpful. And, you know, sort of a follow-up to that is on previous calls, you gave some details, Scott, around, you know, additional responsibilities, if you would, with one of your biggest partners on the medical side. that's specific to the packaging and labeling that you were going to bring on. I thought that was a 2H21 event. Is it still a 2H21 event? And what about some of these, you know, labor supply constraints that you're talking about? Do we have to think about that as you take on more responsibilities as an organization? Sorry, one more just as an offshoot to that same question. What's the like-for-like ASP increase? In other words, if you were doing similar volumes for that same said partner with the packaging and labeling, what does it do from sort of an ASP perspective? Thanks.
spk08: Yeah. So within the packaging and labeling on those products, it's not all products. It's certain products going to certain geographies. So we'll see ASPs increase roughly – 10 to 12 percent on those products going into certain geographies. We've started to recognize some of that revenue here early in 2021. We think that's going to ramp more quickly in the back half of the year as some of these new products get potentially and hopefully approved. But in terms of labor, look, this is This is one of the things that we're focused on is making sure that we can get the qualified labor in place to meet that demand. And so that's one of the challenges that we've outlined, and I can tell you it's one of the highest priorities that we have going on, and this is not a problem unique to Intracon. But I think with some of the measures we're taking and ways to attract and retain employees That is, we move into the back half of the year, we will be in a strong position, and these labor constraints won't have the type of impact that we're seeing now.
spk04: Okay, and last one or two from me. Just first of all, on the IDTEC, you know, any additional call you're willing to share? Maybe just when we think about the model longer term, How does the margin structure work out in that regard? In other words, DTC was always a much higher gross margin relative to corporate. With what you're experiencing from these pilots and the way that the structure is working out and the support you're giving, do we think about the IDTEC? as accretive to corporate gross margin, and sorry, last one, to walk back to 10% to 12% higher ASP that you mentioned because of the packaging and labeling, how do we put that in the construct of the overall guidance this year, right, which might imply, I don't know, around $60 million in 1H and $60 million in 2H, give or take, but yet the higher ASP, do we just view that as maybe a sense of conservatism? Thanks, Scott.
spk08: Yeah. Very good question. So on that last point in terms of how we think about the back half of the first half, remember it's just on select products that are going to this customer. And because we aren't positive or sure of the timing of when some of these launches will be, we didn't want to bake much into the back half of the year on that front end.
spk04: Okay, thanks. And I'm sorry, I rambled for a while, but just the margin structure on the IDTEC long-term, Scott?
spk07: Yes, thank you.
spk08: So, John, within the IDTEC, and we think about the OTC market, I envision there's going to be several channels and several ways that Intracon participates. But I will say within the pilots that we have and the opportunities that we have in front of us, we're going to see a margin structure and a financial makeup similar to our corporate averages, where gross margins should be in the low 30s, operating expenses in the 20s, and ultimately giving us profitability in the 10% range. Now, obviously, there's a lot of work that needs to be done to get to those volumes that will support those margins. But long-term, that's how I see we'll be participating in the OTC market, which to your point was a departure from the DTC effort that we were doing down at HHE.
spk06: Thanks for the time, guys. Thanks, John.
spk11: Your next question is from Kyle Bowser of Collier Securities. Kyle, your line is open.
spk10: Great, thanks. Good evening. Thanks for all the updates here. So maybe I'll start with EMS. It's come in well above expectations, and you already anticipated at the time of the acquisition of it being very accretive. Can you talk again about the growth profile? I think you mentioned 15% quarter-over-quarter growth, but I'm not sure if that applied just to the EMS line or if that was more a Medtronic-related stat. But just kind of trying to understand how we might, model this over the coming quarters, so any sort of growth profile expectations would be great.
spk08: Yeah, so within EMS, the quarter-over-quarter growth in their total business was 12%, and again, doing a fantastic job as they're meeting demand coming in from Medtronic, but also other customers alike. Our goal there is to continue, obviously, to serve and be the best partner we can be. But as I highlighted, it's important for us to figure out how do we take the Emerald technology, the Emerald abilities and confidence they built with Medtronic and be able to take Intercom's financial stability and go out and sell that competencies with other customers in other regions of the world. And so that's one of the things that we're focusing on right now is building those partnerships over in Asia that can leverage some of the capabilities that we have at Emerald. And I think those will be important growth drivers for us as we look out a year, two, three years.
spk10: Got it. Thanks. And maybe switching to OTC guidelines and us continuing to wait, for the FDA, just kind of curious, how have you, how would you characterize the willingness of potential partners in this space to move forward with at least just maybe discussions given the ongoing pilot programs and your success today? Just kind of wondering if those conversations have continued to develop or if we're still kind of in a holding pattern here.
spk08: Yeah, and I'll answer that on two fronts. So I think with the OTC, what we saw in 2020, we saw the conversations simmer a little bit, and I think most of the large entrants or people that were looking at that market kind of took a deep breath and started looking internally in the business that they were already engaged in. Now that we're starting to see the COVID cloud lift, we are seeing more potential partners engage. Obviously, we announced the pilot with Hurex here in the first half of the year, and there's others that we're in collaboration with and discussion with. So I would say today there's more activity, Kyle, than I've seen over the last couple of years in terms of discussion and collaboration.
spk10: Great, appreciate that. And just lastly, so you talked a little bit about the hiring constraints, supply constraints. I'm just curious, what is the latest head count and how many positions do you have open or would you ideally fill over the next, it's called, three to six months?
spk08: Yeah, so that's a pretty broad question. We have roughly 850 employees now. A number of those are international employees. and where we're seeing the greatest constraints is here in the U.S. market, and specifically our three manufacturing facilities in Minnesota. So we have over 200 direct labor here in Minnesota, closer to about 280, and we would like to add anywhere from 10 to 20% over the course of the next quarter. That's quite a bit in terms of trying to find skilled labor, but again, we've adopted some new techniques and what we're seeing from early returns, I think we'll be in a good position the back half of the year.
spk10: That's great. Hey, thanks so much. I'll jump back in queue.
spk06: Thanks, Kyle. Have a good day.
spk11: At this time, I would like to turn the conference back to... I would like to turn the conference back to Mr. Scott Longwell for any further comments.
spk08: Great. Thank you, everybody, for joining on the call today. I appreciate your time. We look forward to giving you updates as we move through on the year. Stay healthy. Have a good night.
spk11: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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