UpHealth, Inc. (NYSE:UPH) Q4 2022 Earnings Conference Call March 2, 2023 8:30 AM ET
Company Participants
Shannon Devine – Managing Director, MZ North America
Samuel Meckey – Chief Executive Officer
Martin Beck – Chief Financial Officer
Conference Call Participants
Mike Latimore – Northland Capital Markets
Operator
Greetings, and welcome to the UpHealth Fourth Quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Shannon Devine. Thank you. You may begin.
Shannon Devine
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 to be filed on Form 10-K before the end of March 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.
UpHealth 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 these statements to reflect new circumstances or unanticipated events that occur except as required by law.
Throughout the call today, 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 to the financial statements of these non-GAAP measures can be found in the tables included in our press release. We believe these non-GAAP measures of UpHealth financial results provide useful information regarding certain financial and business trends and the results of our operations.
I will now turn the call over to Sam Meckey, UpHealth’s Chief Executive Officer. Sam?
Samuel Meckey
Thank you, Shannon, and good morning, everyone. Thank you all for joining us today. Much has occurred since I first joined the company in July of 2022. When I first addressed you, I was merely weeks into my tenure as UpHealth’s new leader. I was optimistic about UpHealth’s mission to enable high quality, affordable, and accessible healthcare for all. The good news is that 8 months later, I am even more enthusiastic about our mission and remain optimistic about our company’s ability to succeed in this space.
During that first call, I committed to expanding upon my initial impressions of UpHealth by the end of the year, commenting on what I think the focus areas will be going forward. And after our full year results, I said we will talk through in more detail about our strategic vision and how they will drive results in 2023 and beyond.
Today, I’d like to expand upon my initial impressions of UpHealth, comment on what occurred in the second half of 2022, particularly in the fourth quarter, and begin to comment on the start of 2023. We shared 2023 guidance in today’s earnings release, and Martin will expand on this in his comments.
Since we first met, I have spent a great deal of time diving deeply into our business. I have visited with our customers, our employees, our investors, our analysts, our partners, and the people whom we have the honor to serve. It was immediately apparent that there was work to be done to improve the state of the business. In the past 8 months, I spent time immersing myself in all parts of UpHealth and conducting an exhaustive review of the business and our leaders.
As I reviewed the asset mix, we set a goal to ensure that we are getting the most out of our businesses. It was imperative to understand what was working well and what we needed to rationalize. My goal is to set the stage for UpHealth to deliver consistently against our commitments, reputable revenue, which is growing appropriately, and converting earnings to positive free cash flow.
In early 2022, we focused on building a cohesive strategy and a plan to make UpHealth’s vision a reality. We reinforced our thinking about Virtual healthcare, Integrated Care, and International as key areas of focus. We adopted a 2-pillar approach to growth, investing and growing our existing capabilities, and integrating our capabilities to solve our clients’ most complex problems.
Our initial thesis and strategic pivot in early 2022 were good or faced with significant challenges. Our growth ambitions required more capital than our budget allowed, leading to overly optimistic revenue targets further impacted by the evolving broader market environment. Significant contracts, particularly in Europe and Africa, did not materialize. The technology integration was more complicated than expected. And, finally, legal issues and shareholder activism consumed resources, further limiting our ability to execute on our strategy.
Additionally, market conditions changed. Inflation and recession fears slowed investments. Labor shortages continue across healthcare post-pandemic, and our customers, particularly payers and providers, are struggling to drive performance in this increasingly changing macroeconomic environment.
That is not to say that we only see headwinds. Many things are going well for UpHealth. Our fourth quarter and full-year results are notable. Revenue for the fourth quarter of 2022 increased 19.5% to $40.5 million compared to revenues for the fourth quarter of 2021 of $33.9 million.
Adjusting for the deconsolidation of Glocal, fourth quarter 2022 revenues increased 32% to $40.5 million compared to $30.7 million in the fourth quarter of 2021. Gross margin expanded to 45% from 18% in the fourth quarter of 2021. The Q4 2021 gross margin was extraordinary, because it included the recognition for various expenses and integrated care management without the benefit of corresponding revenue recognition.
GAAP revenue for the year ended December 31, 2022, was $158.8 million, a 28% increase compared to GAAP revenues for the year ended December 31, 2021, of $123.8 million and a 7% increase compared to pro forma revenues for the year ended December 31, 2021 of $148.9 million. Gross margin for the year ended December 31, 2022, expanded to 44% compared to pro forma gross margin of 33% in the comparable year-ago period.
Additionally, several of our business segments had very good years. Our U.S. Telehealth business, exceeded its revenue and margin goals for the year and achieved record minute [ph] growth. We had strong EBITDA margin growth in IGI, and our Behavioral Health services business also outperformed its targets. And we recently treated our 10,000th client and continued to expand our work with veterans and first responders.
We served our long-term customers in the state of California, delivering data integration and interoperability for 2 of the most significant counties in the state. And we stand committed to executing additional business and deepening our relationships for mutual growth.
We achieved over $2 million of savings from G&A consolidation and over $1.5 million of savings from external spend reductions as part of our integration and transformation work. But the fact remains that despite all of the good things we accomplished, we missed our targets.
What all of this means for UpHealth is that we are in a different place today. Because of this, we are recalibrating our business. We are focusing on fewer objectives. We have acknowledged the macroeconomic realities of the market, and we are responding to them accordingly. We are reducing our cash burn rate, investing wisely, and improving our operating discipline. We will stabilize and accelerate the growth of our core performing businesses, and we will shut down any initiatives and businesses that are not working.
Our objective is to move as quickly and as efficiently as possible, identifying the areas of the business that are not in line with our go-forward strategic vision of building a fully integrated platform to drive growth beyond 2023.
Earlier this week, we announced that we reached a definitive agreement to divest Innovations Group Incorporated, our compounding pharmacy business to Belmar Pharma Solutions. We consider the sale of IGI the jumping off point for our recalibration year. We are focused on rightsizing the organization. We reduced headcount by over 6% since August.
We have decreased contractor spend, and we will continue to reduce our SG&A further through the first quarter. We completed a thorough strategic business review of all UpHealth business lines, and we narrowed our focus to those businesses that present the largest opportunity: Telehealth, which is part of the Virtual Care Infrastructure segment; Behavioral Health, which is part of the services segment; and Integrated Care.
We worked extremely hard to determine our clear, achievable plan to turn the company around. We created a 3-year plan that focuses on recalibrating the business in 2023 and building and scaling for growth in 2024. We will recalibrate the baseline of the business this year, and we seek to double the size of the business within 3 years. It is a pragmatic and practical approach that acknowledges the reality of the markets we compete in, and it leverages wisely the capital on our balance sheet.
At this point, we have touched on where we started and where we are today, but I’d like to spend some time on our strategic plan and near-term execution milestones. First, it’ll come to no surprise that as part of our strategic efforts, capital conservation is a top priority. In the fourth quarter, we identified additional cost savings of $3 million, the majority of which are being implemented in the first quarter of 2023.
These identified cost savings were a direct result of restructuring the overall business based on our current revenues and the visibility we have into our near-term pipeline. We are conserving capital as we work toward closing the sale of IGI, which will deliver $56 million in gross proceeds to our balance sheet, ensuring our current capital needs are solidified.
Second, we will focus on the Telehealth, Behavioral Health, and Integrated Care businesses. This will require us to take a step back and ensure we have the necessary foundation for a technology and technology-enabled services business that can sustainably scale. While we build on our technology foundation in 2023, revenue growth will be moderate, and we will be aggressively managing our cash with the goal of working towards delivering positive operational cash flow.
Lastly, while growth is in the foreseeable future. We want to temper expectations and ensure the proper foundation is built to set us up for go-forward success. Our breakout years will come in due time. Assisting and building the groundwork and responsible for revenue, products, and product marketing is our newly appointed Chief Growth Officer, Melissa Frieswick, who brings a tremendous record of driving growth across the healthcare continuum, bringing more than 25 years of healthcare experience to UpHealth.
Additionally, we hired Timothy Wilde, as our Chief Technology Officer. He comes to us with 30 years of experience leading business transformations and innovative approaches to technology. Finally, we hired Dr. Mahesh Inder Veer Singh to lead UpHealth International. Mahesh began his career as a practicing physician and comes to us with 25 years of experience as a visionary and expert leader in health management.
Before I turn the call over to Martin, I want to thank you for continuing with us on this journey. I fully appreciate and acknowledge your support and continue to believe there is a bright and remarkable future for this company. As evident first in our announcement with IGI, the recalibration here is well underway, and we look forward to continuing to deliver on our strategic plans and priorities and, most importantly, to delivering for our shareholders.
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?
Martin Beck
Thanks very much, Sam. We appreciate everyone joining us today. Before I begin my review of our 2022 results, I want to first comment on the presentation in our earnings release as it pertains to the results and comparison periods. Recall that we completed the merger transactions on June 9, 2021, and so it was only from that day forward that we have consolidated results that we can report and compare to on a GAAP basis. 2022 is the first full year that UpHealth’s financial statements will include all the businesses combined in the June 9, 2021 transactions.
In addition, we have deconsolidated our Indian telehealth subsidiary, Glocal from our financial reporting effective July 1, 2022. So Q1 and Q2 of 2022 include the financial results of the Glocal business and the U.S. Telehealth business and our Virtual Care Infrastructure group. Quarters 3 and 4 of 2022, include only the U.S. Telehealth business and our Virtual Care Infrastructure segment.
We completed 2022 with revenues of $158.8 million, representing year-over-year growth of 13% over our 2021 pro forma revenue numbers, excluding the Indian businesses in the second half of both years. Gross margin for 2022 was 44% compared to 33% in pro forma 2021. In 2022, UpHealth recorded adjusted EBITDA of $3.3 million compared to 2021’s pro forma adjusted EBITDA of negative $4 million.
The company’s year-over-year growth in revenue, gross margin, and adjusted EBITDA represents strong progress towards our goals. But as Sam mentioned, we have additional work to do to reach our goal of achieving positive operating free cash flow.
UpHealth’s revenue for the fourth quarter of 2022 was $40.5 million and did not include any revenue from Glocal, our deconsolidated Indian telehealth subsidiary. This represents a 4.7% increase over Q3 2022 and a 32% increase over Q4 2021 revenue, excluding Glocal. Gross margin for the fourth quarter was 45%, up slightly from Q3. And the adjusted EBITDA was $1.9 million, up from negative $1.2 million in the third quarter and negative $13.8 million in the fourth quarter of 2021.
Looking at revenue breakdown by segment, Services, which again includes our Pharmacy and Behavioral Health businesses, was the largest contributor to the company’s 2022 revenue with $75.8 million or 48% of the total revenue. In the fourth quarter, Services represented $19.1 million or 47% of total revenues. Services revenue grew 17% from pro forma 2021 to 2022. IGI contributed approximately $32 million to UpHealth’s 2022 revenues, and we expect to recognize approximately 40% to 45% of that amount in 2023, assuming a late May closing of the sale transaction.
Virtual Care Infrastructure, which for the third and fourth quarters, included only the U.S. Telehealth business and not the Indian business, was next with $65 million of revenue or 41% of the company’s total 2022 revenues. U.S. Telehealth revenue grew from $15 million in the third quarter to $17.6 million in Q4; and in Q4, represented 43% of the company’s total revenues.
The U.S. Telehealth business grew approximately 58% from pro forma 2021 to 2022. The company’s revenue mix in 2022 continued to shift towards the higher margin U.S. Telehealth business, and we expect that trend to continue into 2023.
Integrated Care Management, or ICM, had revenue of $18 million in 2022, which represented 11% of the company’s total revenues. When factoring out European sales in 2021, the receivables of which were written off in the third quarter of last year, ICM’s 2022 revenue was up modestly from pro forma of 2021 revenue.
The company’s gross margin for 2022 was 44% and was 45% in the fourth quarter. 2022 gross margins by segment were as follows: Virtual Care Infrastructure, 46%; Services, 35%; Integrated Care Management, 76%. We view gross margin as a key metric for UpHealth and as being useful for industry comparison purposes.
Accordingly, let me also provide some additional color on our gross margin 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 36% in pro forma 2021 to 46% in 2022, including both the Indian and U.S. Telehealth businesses in pro forma 2021 and in the first two quarters of 2022. U.S. Telehealth business recorded fourth quarter gross margins of 51%, up from 48% in Q3 as we continue to see operating leverage contribute to improving gross margins in the U.S. Telehealth business.
Gross margins in the Services segment increased from 31% in pro forma 2021 to 35% in 2022 as a result of strong performance in parts of our behavioral health and compounding pharmacy operations. Gross margins increased from 35% in Q3 2022 to 36% in Q4, which included normal holiday season declines in our Florida Behavioral Health business and weakness in our medical group performance in Missouri that were more than offset by strong pharmacy volumes. We would expect gross margins in the services sector to increase slightly in 2023 as we divest IGI and integrate BHS into our legacy TTC operations.
Gross margin at Integrated Care Management was 76% for the full-year 2022 and was 61% in Q4. The fourth quarter gross margin was in line with the more normalized 60%-plus gross margin expectation for ICM that we have discussed in previous calls.
UpHealth’s fourth quarter adjusted EBITDA was $1.9 million, which was along with revenue in line with our expectations. Adjustments were made for certain non-recurring expenses, including legal and restructuring expenses. We expect expenses for legal and restructuring costs to continue as we deal with various shareholder litigation matters, including with the former owners of our Indian subsidiary and as we consolidate corporate operations to drive efficiencies and lower costs. 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 want to spend a few minutes discussing the company’s liquidity position. As of December 31, 2022, the company had an unrestricted cash balance of $13.5 million and $2 million of cash at IGI, which is included in assets held for sale on the balance sheet, but which will be swept to the corporate balance sheet as part of the transaction. In addition, this does not include approximately $7 million held in an account from India that has been effectively frozen by the emergency arbitrator and our actions against the former Glocal shareholders.
The company’s cash balance declined over the quarter, largely as a result of interest payments and payments to various professional fees, including legal and consulting expenses. But our business segments continue to show good revenue and EBITDA growth.
As it relates to the definitive agreement to divest IGI for $56 million in gross proceeds, which is subject to customary adjustments for items such as working capital, in accordance with the terms of the indenture with our secured note holders, the company will following the close of the sale transaction offer to repurchase an amount of secured notes equaling 20% of the net proceeds of the IGI sale over $15 million. The sale of IGI will result in significant cash being added to the company’s balance sheet.
Our current cash position, combined with the financial performance of the business, which is trending toward being operating cash flow positive the next several months, when adjusted for extraordinary expenses such as legal fees and following the collection of the proceeds from the sale of IGI will provide the company with sufficient liquidity to execute on our current growth plans. We expect 2023 revenues to be in the range of $127 million to $135 million. This represents growth of 5% to 12% over pro forma 2022 revenue of $121 million.
For comparison purposes, both the 2023 estimated revenue and the 2022 pro forma revenue include 5 months of operations for IGI and exclude the Indian operations. In 2023, we expect gross margins to be in the range of 43% to 45%, and adjusted EBITDA to be in the range of $7 million to $10 million.
That concludes our prepared remarks. Operator, we’re now ready to take questions.
Question-and-Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Mike Latimore with Northland Capital. Please go ahead.
Mike Latimore
All right. Great. Thanks. Good morning, everybody. Well, thanks for that comprehensive review, very helpful. And nice to see the positive EBITDA in the fourth quarter there. I guess, Sam, I think you talked about incremental cost savings you’re implementing currently, just want to clarify that’s right. And is that sort of the last cost reduction you expect?
Samuel Meckey
Good morning, Mike, and thank you for the question. I appreciate it. So, yes, we’ve been working on cost reductions for the past several months as we’ve adjusted the focus of our build of our business. We’re currently executing a series of initiatives that are lowering spend to get our cost structure in line with our revenues, and we’ll continue to evaluate that as we see what the results are and as how things come through over the course of the year. But, right now, that’s what we have wanted to say to you here for the first quarter of the year.
Mike Latimore
Got it. Okay. And then in terms of the guidance for the year, it includes 5 months of the IGI business. Should we think then about the revenue being higher in the first half of the year versus second half, just given you’re including that IGI business there?
Samuel Meckey
I would say the revenue does include IGI for the first 5 months of the year, as you indicated. As we’re thinking throughout the course of the year, you obviously are going to want to model that out for the second half. You’ll see a consistent pattern of growth throughout the course of the year.
Martin, anything do you want to add?
Martin Beck
Yeah. Hey, Mike. How are you? I think it’s fair to say that we would expect the revenue to decline a little bit in the third quarter as we take IGI out. It’s obviously not enough forecast results for Q3 or Q4, but then the bounce back in Q4.
Mike Latimore
Got it. Okay. And then, you gave, obviously, positive EBITDA guidance for the year. Are you thinking that each quarter should be positive EBITDA as well?
Martin Beck
Yes.
Mike Latimore
Got it. Okay. Great. Thanks very much. Good luck this year.
Samuel Meckey
Okay.
Martin Beck
Thanks, Mike.
Operator
Thank you. That concludes our question-and-answer session. I would like I turn the floor back over to the management for closing comments.
Samuel Meckey
To wrap up, we want to thank everybody for joining today, and we appreciate all of the interest in the business. We realize that we’re on a journey right now, and the company is trying to be as transparent and as open with as much information as we can possibly share. So we appreciate your patience and your support as we work through this, and we look forward to a very good year in 2023. Thank you for joining us this morning.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
