Electromed Inc

AMEX:ELMD

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Operator]

Greetings, and welcome to the Electromed Fourth Quarter 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Mike Cavanaugh, Investor Relations. Thank you, Mike. You may begin.

[Mike Cavanaugh]

Good afternoon, and thank you for joining the Electromed earnings call. Earlier today, Electromed, Inc. released financial results for the fourth fiscal quarter of 2024, the quarter ended June 30, 2024. The release is currently available on the company's website at www.smartvest.com.

Before we get started, I would like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place any undue reliance on those forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter.

Joining me on the call today are Jim Cunniff, Electromed's Chief Executive Officer; and Brad Nagel, Chief Financial Officer. Jim will provide some operational highlights from the quarter. Brad will then review the financials, and we will close with a question-and-answer session.

With that, I will now turn the call over to Jim Cunniff, President and Chief Executive Officer of Electromed.

[James Cunniff, executive]

Thanks, Mike, and welcome to Electromed's Fourth Quarter Fiscal Year 2024 Earnings Call. I'm pleased to announce another record revenue quarter for Electromed. This is our third consecutive quarter of record revenues. We also successfully delivered record annual revenues for the full year. These results are a testament to the excellent work of our entire team as well as the impact of our relatively new but highly impactful leadership team.

Total net revenue for the fourth quarter of fiscal year 2024 came in at $14.8 million, representing a 9% year-over-year growth from the same period in fiscal year 2023. These results were achieved despite headwinds from the expiration of the CMS waiver that we benefited from in Q4 and the full year in fiscal year 2023. Revenues for the full year came in at $54.7 million, a 14% increase from fiscal year 2023. As you might guess from the strong top line growth, operating income for both the quarter and full fiscal year were both records coming in at $2.3 million and $6.6 million, respectively. These results demonstrate that Electromed continues to deliver compelling top line growth coupled with improved operating leverage, which in turn is driving shareholder value.

Capitalizing on our operating leverage, we continue to build up our cash position, which at quarter end exceeded $16 million. We used part of our cash generated from operations to purchase the remaining $275,000 of stock that was part of our open stock repurchase program, which was approved in May 2021. As always, I'll turn the call over to Brad later on to review our financials in more detail, but I wanted to give you some additional financial highlights before discussing our operating highlights.

First, as mentioned on our previous calls, we've been focused on improving our finished goods inventory while simultaneously lowering our overall inventory, which for the first time is below $4 million for the year. I'm pleased at our progress in this regard, which has a dual purpose, namely to continue to improve our working capital while also improving our service and fulfillment rates. To that end, I'm happy to report that as of June 30, we had 0 back orders.

Turning to our operating growth initiatives. We continue to add direct sales reps during the fourth quarter and ended the year with 53 total sales reps. Looking ahead to fiscal year 2025, we have expanded our regional manager team from 6 to 7. And with this enlarged commercial leadership team, we will expand our U.S. sales team to 57 sales reps in total by year-end. The recruitment for these expanded territories has already begun.

We have also upgraded our sales incentive plan to reward the sales reps directly for the results that they control, namely driving prescriptions for SmartVest Clearway. The new compensation plan has been well received by the reps and should result in improved sales results. With our strong performance in fiscal year '24 and these improvements for fiscal year 2025, we are increasing our expectations for fiscal year 2025 homecare revenue per rep to a range of $900,000 to $1 million.

Another key part of our growth strategy is to invest in market development to continue to raise awareness of bronchiectasis, which most of you on this call know is often overlooked and we believe is underdiagnosed. As part of this effort, our clinical team spoke on podium in 4 regional conferences during the fourth quarter alone with the goal of educating KOLs and other care providers on bronchiectasis patient identification, empowering the clinicians to better identify bronchiectasis in their patient population and to treat those patients with SmartVest. These conference sessions were attended by over 780 participants in total and were very well received.

During the quarter, we also continued the promotion of our continuing medical education or CME course, which is designed to increase the knowledge, skills and professional performance and relationships that a physician uses to provide services for patients. These CME credits are important for health care providers as some states require a minimum number of credits to be earned annually. Our program develops these skills focused on bronchiectasis and the HFCWO therapy that is highly effective at treating and managing the disease. As of June 30, we had issued 855 total certifications, which is a great result from this initiative.

Turning to our operational achievements. Fiscal year 2024 was a year filled with firsts for Electromed, including the introduction of our best-in-class SmartVest Clearway into the hospital market, which grew 22% in fiscal year 2024. This is a departure from our core homecare business and one that we think will pay dividends as it will enable Electromed to capture patients that are being discharged from the hospital who need to be treated for bronchiectasis as they transition to the home. We have a strong service infrastructure in place and being able to receive patient flow from hospitals makes good sense for our business.

Earlier this year, we introduced SmartAdvantage, which consists of sales programs and clinic support resources that highlight our exceptional customer service and seamless ordering process in support of the clinics we serve. This initiative has proven to be effective in improving prescriber loyalty and reducing the time it takes from prescription to payer approval to product delivery to a patient.

We also launched SmartNotes, an important disease management tool for physicians who prescribe the SmartVest for their patients. SmartNotes gives providers updates on a patient's progress and their compliance in using SmartVest Clearway. This tool complements the twin macro tailwinds of remote patient monitoring and care being increasingly delivered at the home. Physicians appreciate being apprised of their patients' therapy compliance and progress in using SmartVest Clearway, which SmartNotes provides.

Electromed's web-based clinical resource center was also launched during the year, which is tailored to the needs of clinicians, enabling them to explore prescriber resources, upcoming events, programs for CME credits, educational videos in our latest clinical studies. The ultimate goal is to help introduce airway clearance therapy earlier in the treatment cycle for patients, so they can breathe easier and live more actively.

On top of the growth of the commercial team, which I mentioned earlier, we also bolstered other critical teams within Electromed with new talent, systems and processes to improve our performance and add value to the patients and providers we serve. In addition to the sales hires we made, we also expanded our fulfillment team to seamlessly meet growing demand and is part of the reason that we have no backlogs and deliveries.

Furthermore, the investments we made in our ERP system is paying dividends as the system gives us valuable insights to our business, both financially and operationally. It has also helped us to identify areas for productivity improvements across the functional areas of our business. We will continue to invest in our teams and processes to support future growth and profitability targets, which provide a return on our investment.

Lastly, before I turn the call over to Brad to review our financials, I wanted to share the news that Electromed was recently named one of the fastest-growing public companies in Minnesota by the Minneapolis / St. Paul Business Journal. In a state with a dynamic medical device sector, it is gratifying to be recognized for our operational execution, unique focus and growth. The results I've highlighted today clearly demonstrate that Electromed is moving from strength to strength.

As you know from previous calls, both my incentive compensation and the senior management team's incentive compensation is tied directly to increasing total shareholder return, ensuring that we are highly focused on our investors' goals. Electromed stock has appreciated over 40% since the beginning of fiscal year 2024, and we intend to continue to drive further price appreciation by delivering top line growth along with robust operating leverage to drive accelerated earnings. I'm pleased with our results this year and look forward to continuing on this track in fiscal year 2025.

With that, I'd like to hand the call over to Brad to discuss our financials in more detail. Brad?

[Brad Nagel, executive]

Thank you, Jim. Net revenue for Q4 grew 9.0% over Q4 of last year to $14.8 million for the quarter, bringing net revenue for our full fiscal 2024 to $54.7 million or 13.8% annual revenue growth over fiscal year 2023. Revenue in our direct homecare segment, which represented 90% of our overall revenue in fiscal 2024, increased year-over-year by $5.6 million or 12.6% to $49.5 million. The increase in revenue was due to an increase in direct sales representatives and efficiencies recognized within our reimbursement department due to recent investments made to streamline the claims process.

Hospital revenue increased year-over-year by $0.5 million or 21.9% to $2.5 million. The revenue increase was due to an increase in sales representatives focused on the hospital market as well as increased demand for both capital devices sold into hospitals and the disposable products used to provide care for each hospital patient.

Homecare distributor revenue increased year-over-year by $0.2 million or 14.5% to $1.9 million. The revenue increase was due to increased demand from one of our primary homecare distribution partners.

Other revenue increased year-over-year by $0.4 million or 94.8% to $0.8 million. The increase in other revenue was primarily due to increased demand of international distributor purchases and purchases by customers that do not fall within the other markets previously described.

Gross profit increased $41.7 million in fiscal 2024 or 76.3% of net revenues from $36.5 million or 76% of net revenues in fiscal 2023. The increase in gross profit was primarily due to increased revenue in fiscal 2024, decreased shipping expenses and higher material costs in the prior year to expedite inventory purchases, which did not recur in the current year.

Selling, general and administrative or SG&A expenses were $34.5 million in fiscal 2024, representing an increase of $2.9 million or 9.2% from $31.6 million in fiscal 2023. Payroll and compensation-related expenses increased by $2.9 million or 14.0% to $23.4 million in fiscal 2024. The increase was primarily due to increased share-based compensation, salaries and incentive compensation related to the higher average number of sales, sales support, marketing and reimbursement personnel to process higher patient referrals.

Travel, meals and entertainment expenses increased $0.4 million or 11.8% to $3.3 million in fiscal 2024. The increase in the current year period was due to a higher average number of direct sales representatives, higher travel costs and increased number of sales territories and a midyear sales meeting held in Q3.

Professional fees decreased by $0.5 million or 8.6% to $4.8 million. Professional fees are primarily for services related to legal costs, reporting requirements, information technology technical support and consulting fees. The decrease was primarily related to higher fiscal 2023 costs such as consulting costs associated with the termination of the public health emergency for COVID-19 and recruiting costs for multiple senior leadership positions that did not recur in fiscal 2024.

Total discretionary marketing expenses increased by $0.5 million or 43.7% to $1.5 million. The increase was primarily due to an investment in market research as well as direct-to-consumer and direct-to-physician marketing. R&D expenses decreased by $0.3 million or 28.4% to $0.7 million in fiscal 2024. The decrease was primarily due to reduced costs associated with our SmartVest Clearway platform development in the prior year, which has now been launched into both the homecare and hospital markets.

Net income for fiscal 2024 was $5.2 million or $0.58 per diluted share compared to net income of $3.2 million or $0.36 per diluted share in fiscal 2023. The increase of 62.7% in current year net income over 2023 was primarily driven by the combination of strong revenue growth, diligent expense management and increased interest income on our growing cash position. As of June 30, 2024, Electromed had $16.1 million in cash, $23.3 million in accounts receivable and no debt, achieving a working capital of $36.5 million and total shareholders' equity of $44.5 million.

With that, we'd like to move to the Q&A portion of the call. Operator, please open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

[Aaron Wukmir, analyst]

This is Aaron on the line for Brooks. Are you able to hear me okay?

[James Cunniff, executive]

Yes.

[Aaron Wukmir, analyst]

Congrats, you guys, on the record year and quarter. Very encouraging to see. Just have a couple for me. So you mentioned operating leverage and we're definitely seeing strong evidence in progress there, which is great. Just curious on maybe some of the key levers in your mind that are going to continue to drive this leverage for you guys as we head into fiscal '25.

[James Cunniff, executive]

Yes. So Aaron, I think we've communicated this in the past, but especially in fiscal year 2024, we really got some great tailwinds from a couple of things. Number one of which is during the pandemic, we were settled with some challenges from a supply chain standpoint, so we had to expedite componentry we're using in production. That's no longer the case. And our distribution costs, as an example, as a percent of our cost of goods sold have declined quite substantially, which is fantastic.

Secondarily, in the past, we used to have pretty much a one-to-one correlation between when we made a sales rep investment that we had to make a corresponding investment within our reimbursement team to help on the payer adjudication with our patients, et cetera. And that's really no longer the case. We're getting a lot more leverage from our reimbursement team, so as we add sales reps, we don't have to add as many folks on our in-house reimbursement team. So it's been a real big boon for the business.

[Aaron Wukmir, analyst]

Absolutely, yes. Super helpful. And then I'm just curious if you had any comment or expectations regarding how the drug being developed by Insmed to treat patients with bronchiectasis might affect you guys either positive or negative. Just any thoughts there would be helpful.

[James Cunniff, executive]

Well, I think it's early innings on that, Aaron. And the drug that you referenced has not been approved by the FDA. I think that Insmed is encouraged by the results, but really the focal point of that is on inflammation. So when you look at a bronchiectasis patient in particular, there's a couple of things that what they call is the vicious vortex. So you have a patient who has infections. They have inflammation, and then they have mucus that gets built up in their lungs that needs to be expelled. And so I think the Insmed drug is interesting in that it's really focused on the inflammation that the patient who has bronchiectasis and really retarding that.

But it's not going to diminish the infection that those patients still may have, and it's not going to diminish the fact that the patient still needs to remove their mucus. And so I think it's part of the care continuum. I don't think it's the silver bullet. And again, it hasn't been approved by the FDA. It hasn't been launched. And I think we're kind of in early innings on that.

[Aaron Wukmir, analyst]

Well, appreciate that color. And Jim, this marks about a year, I believe, maybe a little less that you've been at the company. Can you just maybe reflect on your first year and then maybe talk about some of the biggest opportunities you see, especially in this next year for the company going forward?

[James Cunniff, executive]

Yes, I'd love to. Yes, it's been a fantastic first year in the saddle here. And I've taken over from Kathleen Skarvan, who's still the Chair of our Board, so she is involved in the business as well. But I think, as I reflect on the past year, what I'm really most excited about is the team that we have. We've got, as I've mentioned on previous calls in the past, a relatively new team but a team that's come to the company with great ideas and great experience, and they've really infused that into the different functional areas of our business.

I'd also say that it's a very cohesive team that we have at Electromed that really does a great job of collaborating. And I think it's that collaboration, which has really enabled us to really go from strength to strength in all functional departments, whether it's the service levels and the inventory results that we've been able to drive in operations or the improved support that we're providing our clinicians from a reimbursement standpoint and our payers and reducing the amount of personnel that we need within that department. So as we talked about earlier, we're getting more leverage. But I would say that it's really the talent. We've really upgraded the talent within the team, and I think they're making a difference.

And I'd also say, on the commercial side, we've been able to provide our sales force with a lot of tools and equipment to help them be more successful in the marketplace. We've got a best-in-class product with SmartVest Clearway that we introduced at the end of 2022 but then introduced into the hospital market this past fiscal year, which has been both very well received on the home side as well as the hospital side of our business. It's still the newest HFCWO product in the market. It's the lightest weight. It's the most comfortable, and we've got just fantastic industrial design with that.

And then as we've talked about on some previous calls, Aaron, we've upgraded what we're looking for in our sales team. And so I think that's helped us to recruit better talent and that talent, I think, is hitting the ground running. And that's one of the reasons why, for fiscal year 2025, we're increasing our expectations of revenue per rep from $850,000 to $950,000 per rep, which is what we had in fiscal year 2024 to $900,000 to $1 million this fiscal year.

[Aaron Wukmir, analyst]

That makes sense. Appreciate all that. And then maybe if I can just squeeze a quick one in for Brad. I know you guys don't give specific numbers in your guidance. But I was just curious, as far as revenue trends, do you expect anything out of the ordinary or any major deviations? Are we -- can we kind of assume that they're going to sort of follow the pattern that we've seen in the past couple of years?

[Brad Nagel, executive]

Thanks for the question, Aaron. Yes, we do continue to see opportunity to grow our sales team, grow the support that they have and with that, continue to drive double-digit growth consistently on the top line as well as expanded operating leverage as we said in the past.

[Aaron Wukmir, analyst]

We're really excited about this next fiscal year, so congratulations.

[James Cunniff, executive]

Operator, are there any other questions?

[Operator]

There are no further questions at this time.

[James Cunniff, executive]

Very good. Thank you, Aaron, and thank you all very much for joining the call today, and thank you for your continued support of Electromed. I'm pleased with the results that we drove in fiscal year 2024, but we're not resting on our laurels. And we'll look to deliver another exceptional year of operating results in fiscal year 2025. We're always happy to speak with investors. And if you're interested in a follow-up call, please contact our Investor Relations partners at ICR Westwicke. Thanks again for your time today. Operator, please close the call.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.