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spk02: and welcome to Upheld's second quarter 2023 earnings conference call. At this time, all participants are in the 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shannon Devine, Investor Relations. Thank you, Ms. Devine. You may begin.
spk01: Thank you, operator. During today's call, management will be making forward-looking statements. Please refer to the company's SEC filings, including the company's annual report on Form 10-K and quarterly report on Form 10-Q, to be filed for a summary of the forward-looking statements, the risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. Up Health cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise the statements to reflect new circumstances or unanticipated events that occur, except as required by law. Throughout today's call, we'll refer to pro forma revenues, pro forma gross margins, and adjusted EBITDA. These metrics are not determined in accordance with GAAP and therefore are susceptible to varying calculations. Definitions, calculations, and reconciliations for financial statements of these non-GAAP measures can be found in the table included in our press release. We believe these non-GAAP measures of Uphill's financial results provide useful information regarding certain financial and business trends and the results of our operations. And now, I will turn the call over to Sam Becke, Uphill's Chief Executive Officer. Sam?
spk06: Thank you, Shannon. Good afternoon, everyone. I appreciate your joining us today. I am very happy to report strong second quarter performance, which builds upon the results that we shared with you in May. We continue to execute on our plans to recalibrate our business, and our second quarter results demonstrate that our narrow focus and our commitment to delivering consistent, steady results is taking the company in a positive direction. While maintaining our keen focus on the bottom line in the second quarter, we pivot our business to growth and continuing to execute on our strategies. Our team has performed well, and as a result, we are increasing our previously stated outlook for the full year 2023, which I'll let Martin address in more detail. As we dive deeper into our results, it is important to remember that Uphouse is not the same company it was a year ago, as a result of various actions that we have taken to concentrate our efforts on the higher growth, higher margin segments of our business. we have taken a comprehensive inventory of our data and our opportunities and continuing to serve our customers and enhance our business using new AI and data and analytics-based solutions. In virtual care infrastructure, the focus of the team is on the U.S. telehealth market and growing our offerings in the 2,900 healthcare facilities that we serve nationwide. In our services business, we are focused on driving growth in our TPC healthcare facilities by improving occupancy rates and driving geographic expansion. As reported last quarter, we streamlined our strategy and solidified our balance sheet by divesting Innovations Group Incorporated and winding down our Missouri-based behavioral health business. Finally, we continue to focus on integrated care management and expanding our professional services revenue in our existing customer base while pursuing new license agreements. We believe these three businesses provide the best opportunity for us to grow. These businesses compete in areas with substantial addressable markets. Our technology solutions and our technology-enabled services address significant customer problems, and our solutions have been validated by the market. We continue to refine our value proposition, and we believe that strong, fundamental execution and delighting our customers is the key to achieving our mission of enabling high-quality, affordable, and accessible healthcare for everyone. This quarter's financial results fully show the impacts of the deconsolidation of global, the divestment of IGI, and the wind-down of the behavioral health business. Each of these actions is a significant milestone toward right-sizing our business and streamlining our core business segments. I'd like to spend a few minutes sharing some of our business highlights this quarter. Within our virtual care segment, our U.S. telehealth business signed contracts with 27 new clients will generate incremental revenues over the next 12 months. Additionally, we had minute utilization of 15.6 million minutes, representing growth of 47% in the second quarter over the same period last year, resulting in the business delivering $16.8 million a month. Our services segment revenues of 15.5 million were impacted by the strategic sale of IGI, coupled with the decision to wind down the behavioral health business, in the first and second quarters of 2022. We continue to see strong revenue of $11.1 million in our present services business, with 15% utilization growth over the same period last year. In our integrated care management segment, we refined our go-to-market strategy and have seen an increase in our professional services, grabbing revenues of $5.5 million this quarter. We remain optimistic about the outlook for this segment for the remainder of the year. Importantly, we are happy to report that all three segments were EBITDA positive on an adjusted basis this past quarter. Our up-to-date innovation lab launched in the first quarter is well underway, and we are in the process of developing use cases with our strategic clients to validate our hypotheses with the market. A key activity in our pivot to growth has been increasing the size, velocity, and quality of opportunities in our pipeline. We made significant progress on this in the second quarter. Total pipeline increased by 6% over the first quarter of 2020. The velocity of opportunities moving through the pipeline increased as we closed out 20% of the total opportunities in the pipeline during the quarter. We made investments in additional sales and business development roles in the second quarter to improve our sales and bidding processes and to amplify our ability to add significant pipeline for us to pursue. These resources are shifting from focusing on a smaller group of health systems to an expanded group of larger health system opportunities to build upon our success in the provider market. We continue to focus on expenses and aligning our cost structure to our revenue. Through the first six months of 2023, we reduced, as a percentage of revenue, total sales and marketing, R&D, and general and administrative expenses from 44% in the first half of 2022 41% in the first half of 2023. Turning specifically to our second quarter results. At a high level, our second quarter was notable. Revenues in the second quarter of 2023 were $37.8 million compared to $43.7 million in the second quarter last year. Again, it is important to keep in mind that the second quarter 2023 results do not include a full quarter's worth of performance from IGI or the behavioral health business, and that we were on down or any revenues in bulk. Gross margins continue to expand to 53% from 48% in the second quarter of 2022 as a result of improvements across the business and favorable payer banks. Adjusted EBITDA for the second quarter of 2023 improved by 1.3 million to 5.3 million compared to adjusted EBITDA for the second quarter of 2022 of $4 million. Year-to-date, early indicators are very positive, and we are pleased with the results thus far and plan to continue executing on our commitments, revenue that is growing appropriately, with a clear focus on converting earnings to positive free cash flow. Most importantly, our efforts have enabled us to focus on executing our plans of delivering solutions for our customers that combine technology and services to improve access to care, creating a world in which everyone, everywhere, can enjoy the best health. Before I turn the call over to Mark, I want to thank our shareholders and all of our constituents for continuing the journey with us. While much has been accomplished to date, and halfway through 2023, we are pleased with our improvements and fundamental execution, there remains work to be done. We have the right team in place to deliver on our strategic vision, and I can confidently say I'm excited about what lies ahead of us. I'll now turn the call over to Martin to discuss our financial results in detail before we open up the call for questions. Martin?
spk07: Thanks very much, Sam. We appreciate everyone joining us today. Before I begin my review of our second quarter results, I want to first comment on the presentation as it pertains to the results and comparison periods. Recall that the company deconsolidated its Indian business, GloCal, from the financial statements as of July 1st, 2022. And so comparisons between Q2 2022 and Q2 2023 and year-to-date Q2 2023 in the virtual care infrastructure segment need to consider the impact of the deconsolidation of GloCal. Upheld's revenue for the second quarter of 2023 was $37.8 million. This represents a decline from Q1 2023 revenues as a result of the disposition of the IGI business and the wind down of the Missouri behavioral health business during the second quarter. Gross margin for the second quarter was 53% compared to 54% in Q1 2023 and adjusted EBITDA was $5.3 million compared to $6.6 million in the first quarter. Looking at revenue breakdown by segment, virtual care infrastructure, which now includes only our U.S. telehealth business, was the largest contributor with $16.8 million of revenue, or 45% of the total revenue. Though VCI's revenues were down slightly from Q1 2023 due to lower volumes on a sequential quarterly basis, year-over-year growth in the U.S. telehealth business, excluding glocal from the 2022 results, The Q2 2023 was over 27%, and year-to-date Q2 2023 was over 34%. Services, which for the quarter included the results from our Florida behavioral health business, the compounding pharmacy business before the sale transaction, which closed on May the 11th, and the wind-down of our Missouri physician practice business, was next with $15.5 million, or 41% of the second quarter's total revenues. The IGI pharmacy business contributed approximately $3.7 million of revenue during the second quarter, and the Missouri physician practice business contributed approximately $700,000. Integrated care management had revenues of $5.5 million, or 14% of the second quarter's total. The company's gross margin was 53% in the second quarter, down 1% from the first quarter's gross margin of 54%. Second quarter margins by segment were as follows. Virtual care infrastructure, 50%, integrated care management, 69%, and services, 50%. We view gross margin as a key metric for up health and as being useful for comparing our results to peers. Accordingly, let me also provide some additional color on our gross margins from a trend perspective, as well as framing them within the context of our overall financial model. Gross margins in virtual care infrastructure increased from 51% in Q4 2022 to 58% in the first quarter of 2023 and normalized back to 50% in Q2 2023. The increased margins in Q1 stemmed largely from mix and timing issues, and we would expect the U.S. telehealth business to continue to post gross margins of approximately 50%. Gross margins at integrated TAM management increased from 67% in Q1 2023 to 69% in Q2 2023. And we would expect gross margins in this business segment to decline somewhat as professional services makes up an increasing percentage of the revenue mix over the last half of the year. Gross margins in the services segment increased from 48% in Q1 2023 to 50% in Q2 as a result of higher volumes in our Florida behavioral health business and the reduced contribution of the lower gross margin IGI and Missouri behavioral health assets. Second quarter net income on a GAAP basis included $8.2 million of asset impairments associated with the wind down of the Missouri services business and various leases. and losses recognized upon the sale of IGI in May. Uphill's second quarter adjusted EBITDA was $5.3 million. Adjustments were made for the previously mentioned changes in the carrying values of the Missouri services and IGI businesses and for certain non-recurring expenses, including consulting, legal, and restructuring expenses. We expect legal expenses for existing matters to continue through the third quarter and then to decline significantly thereafter. As a reminder, adjusted EBITDA is a non-GAAP measure, and we have included a reconciliation of GAAP operating loss to adjusted EBITDA in the press release. I'd like to spend a few minutes discussing the company's liquidity position. As of June 30th, 2023, the company had an unrestricted cash balance of over $46 million. The company's cash balance increased over the quarter, largely as a result of the net proceeds from the sale of IGI, which exceeded $54 million, and was offset by a $10.3 million redemption of the company's 2025 senior secured notes in accordance with that indenture. Our current cash position and the financial performance of the business, which we continue to expect to become operating cash flow positive later this year, will provide us sufficient liquidity to execute on our current growth plans. As a result of our strong financial and operating results for the first half of the year, and based upon our expectations for the second half, we expect that our full-year revenue and gross margins will be at the top end of the ranges of $127 to $135 million and 43 to 45% respectively, and that adjusted EBITDA for 2023 will exceed $15 million, well above our original guidance of $7 to $10 million. That concludes our prepared remarks. Operator, we're now ready to take questions.
spk02: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. The first question comes from the line of Bill Sutherland with the Benchmark Company. Please go ahead.
spk03: Thank you. Hey, guys. Very nice quarter. Sam, I noticed that in virtual care, it's been three quarters, roughly around 17 million in volume. But you talked about, you know, a lot of client growth and, you know, and expansion. So just trying to, you know, square those two. Thanks, Bill.
spk06: I appreciate it. Oh, I'm sorry, Bill. I cut you off. Were you finished?
spk03: No, that's all right. I was just sort of fading away.
spk06: Yeah, thank you, Bill. Appreciate the question and feedback on the quarter. So a couple of things. We have been seeing a bit of a mix in the utilization of voice versus video. So that's impacting the numbers a little bit. We're also going through the implementation of getting the new customers up and running. So it takes a little bit of while for the business to that or for that business to grow. And then just the mix of not only the video mix versus voice, but also the different language utilization that we see. is impacting that. So we are confident as we're adding more business into the mix and we're implementing that, that our numbers will continue to trend up. But those are the major factors that are impacting the growth trajectories of that business.
spk03: I'm curious, Sam, what would cause a voice and tele to, you know, move around?
spk06: I think it's just some of the facilities and how they're using our products. Some of it is a little bit of seasonality. We've had a little bit of a change in our customer mix, too, in terms of just how they're utilizing the system. But there's no alarming trends that we're looking at right now, Bill. They were just continuing to drive utilization through our existing customers and onboard the new customers that we've added so far this year.
spk03: Okay. Martin, what did you say about the services margin, gross margin, that went up to 50% in 2Q as far as looking forward?
spk07: I'm sorry, Bill. Was that for me?
spk03: Yeah.
spk07: I was just curious about the gross margin.
spk05: Sorry, I lost the other thing.
spk07: Yeah, so the margin in the services segment increased because we had less contribution from the IGI pharmacy business and the VHS physician practice management business, which we will have no contribution from those businesses in the third quarter. So the gross margin on the behavioral health business that remains is somewhat driven – well, it's driven by mix, but we would expect it to continue in the sort of 45% to 50% sort of range.
spk03: I mean, there's a utilization factor, as I understand it, right, for most of your services?
spk07: Yeah, it's a combination, as you might expect, of mix and utilization.
spk03: Okay. That's it for me. Thank you. Thanks, Bill.
spk02: Thank you. Next question comes from the line of Ben Hainer with Alliance Global Partners. Please go ahead.
spk04: Good afternoon, gentlemen. Thanks for taking the questions. Just was wondering if you could share a little bit more on the pipeline. I think if I heard you right, it expanded about 6%. And you closed out 20% of the opportunities. And maybe provide some clarification on what you mean by, you know, closed out. Is that, you know, delineated one way or the other? Like, you figured out that they're not going to buy or are going to buy? Or how does that terminology work within Outville?
spk06: Sure. Thanks, Ben. Appreciate the question. Good to hear from you. So a couple of things. As we've been talking about, one of our major focuses is on our pivot to growth. And we have been working very hard to focus on growing our pipeline, understanding our pipeline, and really pushing that as a key sort of leading indicator for growth. So, as we talked about last time, we set a pretty ambitious goal for growing our pipeline for the business, I always take the view you can never have enough pipeline. You're always looking for more sales opportunities. There's three things that we consistently look at, right? The absolute value of the pipeline, the quality of the opportunities in the pipeline, and the velocity with which they're moving through the pipeline. And we've learned a lot in the business in Q2. So first we mentioned the 27 opportunities that we want. Those were opportunities that we obviously closed up. We lost some opportunities in the second quarter as well, but that we had been on and so that those were important lessons for us as well. What we're seeing is that we definitely have better higher quality opportunities in our pipeline that we've had in the past. And I actually think this velocity is a good thing for us because we're getting to a yes no answer much more quickly. In the past, we would notice that we had some opportunities that stayed in the pipeline for a fairly long period of time, and we've been trying to drive those to completion. So that is really feeding into some of the things that we talked about, that we need more people in our commercial organization, more boots on the ground, focused on getting out into the market and selling our products. We need to focus on putting new high-quality opportunities into the pipeline, moving them through quickly. And then when we do this, this is, of course, going to help us have better data so that we can forecast our growth and plan more appropriately. So I'm actually really happy with the progress that we've made in the first half of the year in terms of how we're thinking about pipeline. And we didn't have that maturity as an organization then. you know, at this point last year, so I'm really pleased with the progress that we're making there.
spk04: Okay, that's definitely helpful, Kohler. And then digging in a little bit on, you mentioned the higher quality pipeline. I mean, is that, you know, strictly numerical? Is that, you know, size of, just sheer size? Is it logos that are better or what's the right way to think about that? And then on the boots on the ground side of things, I mean, you had sales and marketing ticked down pretty dramatically sequentially. Where do you see that tracking from here?
spk06: Yeah. So let me take the first part of your question there first. I think it's kind of an answer of all of the above. So of course we want you know, premier logos with large deals. You know, we're still relatively small company that's growing and we have to prove ourselves in the marketplace. So I would say we've been winning good opportunities. When I talk about the quality of the opportunity, it's are we bidding on business that we've worked with a customer that, you know, understands that they have a problem that needs to be solved, or that we understand they have a problem that we can solve it with our solutions. They understand it's a problem, and also that we're talking to somebody at the right level of the organization that can make a decision on solving that. We've gone after some pretty big deals in the past quarter, and a couple other things that we've learned is we've got some work to do on building relationships at higher levels within the organization, particularly in the C-suite of the organization. When you start adding in data analytics and ai into those solutions the traditional buyer that you know may have historically purchased uh you know a language line for example might not necessarily be the right point of contact to buy a more advanced solution that includes data ai and language capabilities just as one example so those are those are some of the things that we've been working on ben to try and understand so of course trying to you know, always punch a little bit above our weight. We've got work to do. We're figuring that out. We've learned a lot of good things over the past, over the past quarter and we'll continue to drive there. So, and I'm sorry, I didn't get all.
spk04: No, go ahead. I interrupted you. Sorry.
spk06: Oh, I just was going to say, and I'm sorry, I didn't finish my notes. Can you just repeat the second part of your question? I apologize.
spk04: Oh, sure. More boots on the ground. You had a pretty significant decline sequentially. Where does it track from here? Yeah.
spk06: So this comes down to, as we're looking at basically how we are managing the expenses within our business. And so we are, as you know, laser focused on cost management and making sure that our costs are aligned to reference. We think it's critical for us to invest in our commercial organization. And to me, that's additional salespeople, it's additional product people, it's additional marketing people. But we know we cannot keep layering cost into the organization. So we're focused on how we align resources to initiatives that are going to drive higher utilization of our capital so that we can drive a higher return, but also that we're making investments in areas into parts of the business that are growing and that can return cash quickly. So hiring the salespeople, we want to make sure that they're being hired in the right parts of our organization, are hitting the ground very, very quickly, adding to the pipeline and selling what we want to sell within the organization. So I do think as we go further into the year, you're going to see us continue to add in some additional resource into the sales and marketing budget. which will more than likely be offset by reductions in other areas of our G&A expenses.
spk03: Okay.
spk04: That's helpful. And then most likely the last one for me on the enhancements you've mentioned previously and, you know, kind of I suppose that goes hand-in-hand with, you know, some of the AI stuff and the data side of things that you're developing. Mm-hmm. What, you know, anything more that you can kind of talk about there that you're excited about? You know, just any color is always appreciated on the pond. Of course.
spk06: So we did a lot of work in the second quarter around understanding and assessing our data assets and working on finding partners that we can work with from AI into our business, basically. And we're currently designing some additional capabilities that we think are going to be able to help our customers, but also help our business as well. So just two quick examples, looking at our data assets, we've developed some interesting tools that help with things like next best actions for case managers, or some AI driven clinical capabilities that will allow our provider clients to deal or to help them address the shortfall or the difficulties that they're having hiring people right now for some of the processes that they might use, especially focusing on a limited English proficiency population. So we're testing a couple of these capabilities out within our own delivery business right now. So that work is going well. And we're having conversations with our key strategic clients about how we can work with them to solve some of those problems that they're seeing as well. So early on, we've got a lot of really good hypotheses that we're testing in the market, Ben. And I think you're going to see some more coming out from us on that throughout the course of the year.
spk04: Okay, so the pump's already kind of primed and now you're already talking with some potential customers on how these things can get implemented and how they work within their app feeds.
spk06: Absolutely. And that's the key is going to be finding a couple of customers that, it goes back to what I mentioned earlier, we've got to clearly articulate what the problem we're trying to solve is. They have to understand it's a problem and we've got to the right part of the organization to solve that. So those are some of the key lessons that we've learned sort of in the second quarter as we've gotten out and started talking to our clients about this.
spk04: Okay, good deal. Very helpful. Thanks for taking the questions, gentlemen.
spk07: You're welcome. Thanks, Ben. Thanks, Ben.
spk02: Thank you. Next question comes from the line of Mike Latimore with Northland Capital. Please go ahead.
spk00: Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on the labor shortage? Is there any tailwinds over there? Are you seeing more demand for your telehealth services due to the labor shortage?
spk06: Sure. I think we're seeing this. This is a pretty common topic across the provider industry in particular. You're seeing a bit of a nursing shortage. You're seeing a bit of a provider shortage. organizations are having a hard time recruiting and hiring for those roles. And so this really starts to affect areas, and this is part of the reason why we've seen so much growth in our telehealth business, is when they're looking for resources, not only that can fill the nursing functions, but basically be bilingual, multilingual, and deal with their limited English proficiency populations. That's an area where we're seeing or those customers are the ones where we're seeing kind of an uptick in the utilization of those services. So we also have a theory that we can start to fold in some additional capabilities to help address that. Like I said, we're testing some of those things in our existing business to refine it and figure out how that works. And we're talking to some of our customers about how we can take on some additional work for them where they're seeing that. But just in general, when you look across the industry trends, It's a pretty well documented phenomenon in the healthcare industry right now that we expect the country to be several hundreds of thousands of nurses short here by 2025 for the demand that they're seeing. So we think it's an area that is ripe for innovation and ripe for some solutions that can help the providers address those needs.
spk00: All right. And how much were your legal expenses in this quarter?
spk06: Martin, you want to take that one?
spk07: Sure. Hey, so we haven't announced, nor have we ever announced legal expenses. What we have added back to the calculation of adjusted EBITDA was just north of $3.6 million for the quarter. And that related almost exclusively to the glocal arbitration and litigation matters.
spk00: All right. And can you just repeat me what was the sequential and year-over-year growth for continuing operations?
spk07: I'm sorry, one more time?
spk00: What was your sequential growth for the continuing operations, excluding GloCal? What was your growth?
spk05: Excluding GloCal for the quarter? Yeah.
spk07: Yeah. So in... In ICM, that number was about 34% year-to-date.
spk05: All right. All right. Thank you. Thank you.
spk02: Thank you. There are no further questions at this time. I would like to turn the floor back over to Sam McKee for closing comments.
spk06: I want to thank everybody again for joining us today and also for all of the very, very thoughtful questions. We really appreciate this discussion. We really appreciate the ability to speak to you. As I mentioned, I'm very pleased with the work that we've done in the first half of 2023, and I look forward to speaking with you again in November to discuss our third quarter results. Martin and I are excited to share how we're progressing with you. We're working very hard to finish our recalibration gear strongly and to transition to building and scaling for growth for uphouse in 2024. We are very confident in our team's ability to execute on our strategy, and we're really grateful for your continued interest in uphouse. Thanks again for joining us, and I hope you have a wonderful evening.
spk02: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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