DocGo Inc. (DCGO) Earnings Call Transcript & Summary

Greetings, and welcome to the DocGo Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Halper. Please go ahead, sir.

Thank you, Irene. Before turning the call over to management, I'd like to make the following remarks concerning forward-looking statements. All statements in this conference call, other than historical facts, are indeed forward-looking statements. The words anticipate, believe, estimate, expect, intend, guidance, confidence, target, project and other similar expressions are used typically to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and may involve and are subject to certain risks and uncertainties and other factors that may affect DocGo's business, financial condition and other operating results. These include, but are not limited to, the risk factors and other qualifications contained in DocGo's annual report on Form 10-K, quarterly reports filed on Forms 10-Q and other reports and statements filed by go DocGo with the SEC, to which your attention is directed. Actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. In addition, today's presentation contains references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release as well as in our filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain relevant and operative at a later time. We undertake no obligation to update any information discussed in this call in the future. At this time, it is now my pleasure to turn the call over to Mr. Stan Vashovsky, CEO and Co-Founder of DocGo. Stan?

Thank you, Steven, and thank you all for joining us today. The second quarter represented another period of strong operational execution. Our revenues increased 76% year-over-year to $109.5 million. Continued sales momentum and acquisition-based contributions have supported an increase in our 2022 revenue guidance to a range of $425 million to $435 million, up from a previous range of $400 million to $420 million. We're also raising our guidance for adjusted EBITDA to a range of $40 million to $45 million compared to our original guidance of $35 million to $41 million. Some of the key factors driving our continued organic growth, including the expansion of our agreements with Carnival Cruise Lines, new municipal programs in New York, new Mobile Health programs in Los Angeles and expanded Medical Transportation business with [ Northwell ]. Our mass COVID testing revenues for the quarter were approximately $28 million and are expected to decline significantly in the third quarter. We have already begun offsetting with non-COVID-related business in place and in many cases, the customers will remain the same. An example of this in New York is our transition from mass COVID testing with a municipal client directly into providing primary care at homeless shelters or medical imaging services for that same client. In sum, we expect the transition to these new non-COVID projects to be relatively seamless with minimal impact on revenue generation. On the M&A front, we expect to increase our activity with several prospective transactions in the pipeline, about which we are very excited. We continue to pursue synergistic opportunities where prospective targets may be currently outsourcing services, which DocGo could directly provide. This is in addition to those opportunities, which open up new markets and drive enhanced profitability. Our goal is to continue utilizing our strong balance sheet and cash flow from operations to expand the breadth, depth and profitability of the company portfolio of services. We continue to do an excellent job both securing your customers and deepening those relationships considerably over time. Last quarter, we shared a statistic that approximately 90% of DocGo's revenues are generated from customers in the third, fourth or fifth generation contract, and that trend continues today. This success has occurred across all varieties of customers, from corporations to health care systems and municipal accounts. This achievement speaks volumes about our ability to get our foot in the door, provide exceptional value to the customer and grow that business substantially. We have also significantly enhanced our RFP capabilities in recent months, allowing us to actively bid on larger contracts across the country. While it is too early to quantify expectations, the pace of activity in this channel has more than tripled recently, and we anticipate a meaningful contribution from these efforts as we enter 2023. It is clear that the municipal customer segment will remain a cornerstone of our business for the foreseeable future, providing us with a stable base of revenue upon which we can build. Our direct-to-consumer and corporate health beta tests continues to provide very encouraging results. The direct-to-consumer market represents a tremendous opportunity, and we have partnered with some of the largest payers in the industry, including Aetna, BlueCross, L.A. Care. We expect coordinated marketing efforts to begin with these partners in late 2022 and early 2023. One market I would like to take a moment to review in greater detail is the cruise line business, given that it represents a great business study regarding the value of DocGo's services to the customer. Initially, we entered this market with a relatively small contract to provide COVID-related testing services to Carnival staff in early 2021. By the end of 2022, we expect to be facilitating full spectrum of standard health care services for doctors, not to lower-level clinicians, a majority of Carnival's fleet. In 2022, we began serving 2 additional major cruise lines that we expect to follow a similar growth trajectory. The pace at which these initial contracts expanded highlights the attractiveness of DocGo's unique model and commitment to customer service. This success is also reflected in our NPS, or Net Promoter Score, which is the gold standard of customer experience metrics. Scores are measured from a range of negative 100 to positive 100, with scores over 30 commonly viewed as good, with over 50 being considered excellent. Our Q2 Mobile Health NPS score was an impressive 77, which is a testament to our customers' strong perception regarding the value of DocGo service. Another example of continued business execution comes from a major hospital system in Southern California. This customer utilizes DocGo's emergency room avoidance program, which attempts to mitigate unnecessary emergency room visits. With our program, we achieved a 35% reduction in ER visits resulting in a significant financial savings for that institution and earning bonus payments to DocGo or hitting that goal. At the end of the day, our proprietary technology is the lifeblood that allows us to deliver efficient, cost-effective health care in a mobile setting, and we are making further substantial investments to support the next generation of functionality. At this time, I will hand it over to Anthony Capone, our President, to provide us some details on that front. Anthony?

Thanks, Stan. At its heart, DocGo is a technology company. As its former Chief Technology Officer, I've observed our software evolve into a highly sophisticated system. In Q2, we greatly enhanced our dispatching application with the ability to assign mobile health and ambulance resources based upon predictive demand analysis. This sophisticated model allows for increased utilization, thus decreasing the idle time of our mobile units, further enabling our ability to deliver cost-effective health care. Our team also built a highly intelligent machine learning system to help predict reimbursement and help ensure collectibility. At DocGo, we build software that is core to our business model and integrate with systems that support our business. In Q2, we completed our integration with one of the nation's largest EHRs, athenahealth. Additionally, DocGo was accepted into the Epic App Orchard as its first and currently only fully embedded Mobile Health ordering application. Being in the Epic App Orchard granted the thousands of hospitals using Epic, the ability to order DocGo services directly from within their native EHR. DocGo believes in virtual and mobile-first medicine. To support this vision, we've improved HealthPoint, our patient EHR system, by embedding telehealth support, which ensures a seamless in-app patient experience. Software and automation is at the heart of our company. And over the coming years, DocGo will continue investing tens of millions of dollars into our engineering teams. Stan, I'll hand it back to you.

Thanks, Anthony. In sum, after an excellent quarter, we continue to see tremendous growth potential coming from a variety of different avenues in the years ahead. At this point, I will hand it over to Andre Oberholzer to address the financial details.

Thank you, Stan, and good morning. Total revenue for the second quarter of 2022 amounted to $109.5 million, representing growth of 76% as compared to the $62.2 million recorded for the second quarter of '21. Year-over-year revenue growth was driven mainly by the contribution of revenue from continued expansion of major corporate accounts, new and expanded municipal Mobile Health contracts and the expansion of key customer relationships on the Medical Transportation side, such as [ Northwell ]. Mobile Health revenue for the second quarter of 2022 amounted to $87.3 million as compared to $33.2 million in Q2 of '21, up approximately 163%. Excluding mass COVID testing revenues from both quarters, Mobile Health revenue amounted to $59.3 million, up from $23.2 million last year, an increase of 156%. Total Medical Transportation revenue amounted to $22.2 million compared to $28.9 million in Q2 '21. Recurring Transportation revenue increased to $20.2 million as compared to $18.7 million in the prior year quarter, an increase of 8%. It is important to note that last year's second quarter included approximately $10.2 million project-based standby Transportation revenue, comprising emergency deployments on behalf of different municipal agencies to provide standby services at testing and vaccination sites. These emergency deployments were gradually wound down by the end of the second quarter of '21. During Q2 '22, project-based emergency deployment revenues are now to approximately $2 million. Mobile Health revenue amounted to 80% of total revenue during Q2 this year versus 53% in the prior year with Transportation as the remainder. Revenue generated by the U.K. market grew by 45% to $3.2 million during Q2 of this year, representing approximately 3% of total revenue. Net income amounted to $11.8 million in the second quarter of 2022, which represents a substantial improvement over net income of $100,000 recorded in the second quarter of the prior year. Please note that net income includes a gain of approximately $3 million from the remeasurement of warrant liabilities and $1.4 million in a gain from remeasurement of finance leases. Even after removing these items, net income amounted to more than $7 million for Q3. The net income improvement resulted from a strong increase in revenues during the quarter, coupled with improved total gross margin, while certain overhead costs related to infrastructure provided leverage as it did not increase in the same proportion as the revenue growth. Adjusted EBITDA grew to $12.3 million during the second quarter of '22, up from $3.4 million in the prior year period, even with additional investments we made in regional expansion, product offering and infrastructure. As a reminder, adjusted EBITDA as a non-GAAP measure representing earnings before interest, tax, depreciation, amortization, stock-based compensation, warrant and finance lease liabilities, revaluation and other non-recurring expenses, please refer to our earnings release for a reconciliation of adjusted EBITDA to net income. Total gross margin percentage during Q2 '22 amounted to 35.9% as compared to 34% in the same period of '21. It is important to note that on a consolidated basis, DocGo was able to drive year-over-year gross margin improvement despite the negative impact of inflation on the cost of labor and other cost of sales items. The 1.9% increase in the total gross margin percentage was driven by the Mobile Health segment, where gross margins increased from 28% during Q2 last year to 39.9% during our second quarter this year. This Mobile Health gross margin improvement was driven by a combination of factors, including lower lab fees and a continued shift away from higher price subcontractor labor, which represented a much lower percentage of Mobile Health revenues this quarter versus last year's second quarter. Positive [indiscernible] were reduced somewhat by higher costs on certain medical supplies. Margins from the Transportation segment were 20% year in Q2 this year compared to 22.7% during Q1. Our Transportation gross margin this year continues to be suppressed by the impact of higher hourly wages over time and a significant increase cost of fuel. Transportation gross margins last year benefited from the inclusion of over $10 million in the high-margin emergency deployment standby revenues. As of June 30, '22, our total cash and cash equivalents totaled $208 million as compared to $199 million and $179 million as of the end of Q1 this year and the end of fiscal '21, respectively. During the first half of '22, positive net cash provided by operational activities amounted to $30 million versus $1.1 million cash used in operations during the prior year period. Excluding vehicle leases, outstanding debt amounted to $2.6 million at end of Q2 versus $1.9 million at the end of last year. In May of this year, DocGo announced a share repurchase program of up to $40 million of common stock. Under this program, we need to adjust 70,000 shares at an average cost of $7.10 during the quarter. In terms of the impact of inflation, as previously discussed, we have 2 major expense categories where inflation may significantly impact our results. Our 2022 guidance provided at the beginning of this year assume that the average cost per hour of labor would increase by approximately 7% versus the already inflated '21 labor rates, and at the average cost of gas would be $4.30 per gallon. During the second quarter of '22, the actual increase in average hourly labor rate was higher than last year's actual rate, but lower than our assumptions, while the average fuel cost per gallon was significantly higher versus both the prior year and our forecasted rates. During Q2 of this year, the negative impact of the increased gas cost was approximately 73 basis points on gross margin compared to the second quarter of '21 with a negative impact of 55 basis points against our assumptions for '22. As for the cost of labor, year-over-year increase in the average hourly rate was a negative impact of 129 basis points on margins during Q2 of this year. However, the actual average hourly rate was lower versus our 2022 assumptions, which resulted in a positive impact against forecasted gross margins of approximately 94 basis points. COVID related testing and revenue declined to $28 million during the second quarter of '22 as compared to $38 million in the first quarter. Excluding COVID testing revenue from both Q1 and Q2 of this year, Mobile Health revenue increased by 13% to $59.3 million in the second quarter of '22 up from approximately $52 million in the first quarter. As we have indicated before, going forward, we will no longer break up COVID related testing revenue from total revenue. Adjusted EBITDA amounted to $12.3 million in the second quarter of 2022, approximately 11.2% of revenue, basically in line with the first quarter's EBITDA margin of 11.5% and above the annual guidance of 9.3% given at the beginning of the year. For the 6 months ended June 30, '22, total revenue amounted to $227 million (sic) [ $227.4 million ], representing growth of 104%, over total revenue of $112 million last year. Adjusted EBITDA for the 6 months ended June 30, '22 amounted to $25.9 million representing a substantial improvement versus the adjusted EBITDA of $3.8 million last year. Now turning to our '22 outlook. We anticipate strong demand from our customers for both Mobile Health and Transportation Services. Given our strong year-to-date performance, as Stan mentioned earlier, we are increasing our revenue guidance to $425 million to $435 million up from our prior guidance of $400 million to $420 million, and we are increasing our adjusted EBITDA guidance to $45 million -- to $40 million to $45 million, up from $35 million to $41 million. This represents revenue growth of 33% to 36% year-over-year, while adjusted EBITDA will show improvement as a percentage of revenue to approximately 10% this year versus 7.9% during fiscal '21. In terms of segment revenues, we expect that the Mobile Health segment will continue to contribute approximately 74% to 76% of revenues with Medical Transportation as the remainder. That concludes our prepared remarks. At this time, we will ask the operator to open the call to questions. Thank you.

[Operator Instructions] Our first question is from Richard Close of Canaccord Genuity.

Yes. Congratulations on the continued success. Andre, I was wondering maybe just some housekeeping, is there any way you could provide us the transport volumes and pricing for the quarter? And then as we think about the growth rate in Transportation on the recurring revenue side, I'm just curious your thoughts on the 8% growth. Should we be looking for something greater than that going forward? Or how should we think about growth on recurring revenue in Transportation?

In terms of the actual volume and the price per trip, at this time, we have not disclosed that. It will be [indiscernible], may be filed with the SEC. When you see the results, you will see both an increase in the trip volume as well as the increase in price per call, which drove the 8% increase year-over-year. That excludes the project-based revenue, so just recurring. We still feel, as in the past, that Transportation year-over-year will grow around 30%. We do not see that trend changing at this point in time.

Okay...

Let me add to that, Richard. Richard, it's Stan. Good to hear from you again. Also, as we've discussed earlier, our business model has evolved over the last several years where the metric of quantity of trips per day is really no longer relevant because of the way we charge our customers, what we refer to as our leased out program. So we get paid the exact same dollar amount by the customer, they're paying us at a, call it, a minimum rate per day, which includes vehicle, cruise, supplies, everything. So if we do 1 transport or if we do 7 transports with that single vehicle for that 1 customer, our compensation for that day is the same. This helps mitigate days that are quieter versus days that are busier, bring some consistency and allows us to better forecast our business. It also allows the customer to be assured that they have dedicated resources versus on-demand resources that in the past have proven to be somewhat not reliable.

Okay. And then -- but 30% is a good growth rate in Transportation? Yes, I just want to...

Yes, we're still going to stick with 30% growth for the year in that range.

Okay. And is there any nonrecurring revenue in the third quarter of 2021 that we should be aware of?

Well, Richard, it's kind of hard to project. Right now, we're not projecting much. But the reality is that there could be a hurricane tomorrow, there could be forest fire in California, where we get notified by [ FEMA ], we get notified by state agencies to come in and assist. Those are project-based onetime touch services. They happen several times throughout the course of the year, but projecting them is quite difficult. But we're always going to be super conservative and say that we can accomplish our growth target with what we can rely on, which is our contracted business. We don't know if Q3 is going to have that onetime, call it, project-based emergency response that we've had in the past. [indiscernible] will probably have a little bit of it there, but no way to gauge on how much of it will be Q3.

But, Richard, in terms of last year, Q3 did not have any significant project-based revenue. Most of that work wound down by the end of Q2 last year.

Okay. That's very helpful, Andre. And then, Stan, on the M&A opportunity, maybe if you could just dive into that a little bit more. Based on your comments, it somewhat sounded like you guys are seeing opportunities on the Mobile Health side, maybe with some additional services. Did I hear that correctly? Or just any thoughts on M&A?

No, you're absolutely right, Richard. Our focus on M&A is Mobile Health services. We think there will be opportunities. We're starting to see more and more opportunities approaching us. We hope to execute in the near future on some of these opportunities. We'll always acquire licenses and small little companies on the Transportation side because that's just the most effective way to get a license and break into a market. You can file for one, but you can wait 6, 12, 24 months if you're working through the municipality for a license where you can spend a few hundred thousand dollars and acquire a small company and then just use that license as a starting point. So there will always be some, call it, license acquisitions on the Transportation side, but we are reserving most of our, call it, capital for a significant amount of M&A activity in the future around Mobile Health. That's the space that we're mostly excited. It's a very fast growing space. We see endless amounts of possibilities. We see lots of areas that we're very interested in, that we've proven to be very effective, and that's how we're going to put our capital to work.

Our next question is from Michael Latimore of Northland Securities.

Great. Congratulations. Excellent execution again. So I guess just on the guidance. In the press release, it says guidance increases based on organic growth and M&A activities, which occurred subsequent to the quarter end. It kind of sounds like you've already made an acquisition? Or am I interpreting that incorrectly?

No, your assumption is correct. We've made what we call -- we use a term tuck-in acquisitions, small acquisitions that give us licensing capabilities. So we haven't spent any material amount of money. We haven't acquired any material amount of revenue. But we're always, I mean, historically buy 5, 6, 7 little companies. We use our licenses at launching points. And we haven't done anything, call it, material, Richard, I mean, Mike. But if historically, you look at our pattern, every quarter, we always buy a small little mama pop out somewhere for their license.

Yes. So most of the increase relates to organic activity?

Virtually all of it. I mean, very, very [indiscernible]

Yes, and you also have to understand, a lot of times we'll acquire a company that may have a couple of few million dollars in revenue, but it's not the kind of business we want to keep anyway. So we'll release that revenue and focus more on the way we want to conduct our business.

Okay. Okay. And the -- obviously, the gross margins were great, should we view them as relatively maintainable at these levels? Or are there room for expansion in the second half of the year?

Well, the reality is, Mike, we're always going to make them better. We still pay premium for staffing where as the market is talking about contracting on staffing, we're doing the opposite, we're hiring full speed ahead. We're paying recruiter fees, we're paying staffing agencies. We're still giving up a lot of margin that over time, I think, will stabilize and that will help drive continued improvement of our gross margins. We've always said Mobile Health ideally should be somewhere about 42%, 43% gross margin and Transportation slightly below that. So there's still room for growth and improvement.

Got it. And then just last on the -- I think you said you're hiring -- you want to hire 600 people by year-end. How many of those are sort of net new versus replacing a staffing agency person?

All 100% are incremental to our current headcount. So whatever we have right now, we're not -- that 600 does not include replacement from attrition. Just based on current workload contracts that we've executed with [indiscernible] to work that we're anticipating in the second quarter of the year, our need for clinicians and operational staff is quite strong. We have a recruiting group of over 20 people. We have a whole bunch of agencies that help us bring candidates. So we're continuing to hire as aggressively as -- almost as aggressive as last year.

Mike, I just -- this is Andre. I just want to clarify something Stan said. For Mobile Health, we still price contracts with a desired margin around 50% to 53%. And based on the improvement you saw in Q2 using the subcontracting labor, we are on that path towards those desired margins.

Next question is from Sarah James of Barclays.

So you guys had a really strong quarter as far as contract signing goes. I think you signed Carnival L.A. Care, the Empire Blue Cross in the release. Can you give us any idea on size of those? Or how we should think about modeling new contract adds as far as the Transportation revenue growth is?

So we -- that's a great question, Sarah. We don't really provide details down to the customer level. We -- our agreements with our customers prohibit us from sharing that kind of information. In terms of modeling, all I can say is we have a very good, strong track record of meeting and beating our guidance. We feel very comfortable with the municipal contracts, the hospital contracts that we've signed. The percentage of customers that are migrating from COVID-related work to non-COVID related work is extremely high, well over 80%. And I would just say that municipal work will continue to be our biggest contributor throughout the country. We have some very unique programs that I think differentiates DocGo from other medical providers and then followed by hospitals and insurance companies from there. Andre, anything else you want to add to that? Or what do you think, Andre?

No, that sounds good. I mean, year-over-year, we see this year about 33% to 36% growth and that's kind of contracted systems that have a growth.

Let me just add 1 more thing. We talk about 30%, 36% growth, but if you take the number of 319 from last year compared to the guidance that we provided this year, the realities are that 319 number from last year has about $40 million, $50 million of COVID testing that's not going to replicate in this year. So if you take that 319 number down to, let's say, 250, that's the real incremental business that we're out there securing. So it's been a wonderful year. We're very excited about the year. The demand for our services continues to be very strong. We provide clinical services in a way that our competition does not extremely innovative and very tech-enabled. So it's 30%, 35%, if you look at it from end of last year. But in reality, that number is closer to 50%, 60%, if you remove last year's second half portion of the COVID testing, which we do not see as a major contributor this year.