DocGo Inc. (DCGO) Earnings Call Transcript & Summary

Greetings, and welcome to the DocGo First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Cole, Director of Investor Relations. Please go ahead.

Thank you, operator. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, aim, believe, estimate, expect, intend, guidance, confidence, target, project and other similar expressions are used to typically 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 Form 10-Q and other reports and statements filed by 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 call contains references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided directly as part of this call or included in our earnings, which is posted on our website, docgo.com as well as in our filings with the Securities and Exchange Commission. The information contained in this call is accurate as of only 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. Anthony Capone, CEO of DocGo. Anthony, please go ahead.

Thank you, Mike, and thank you all very much for joining us today. We had an extremely busy first quarter as we launched multiple new projects late in the quarter that came with challenging logistical time lines. I am pleased to report those launches have gone extremely well, and we are ramping on or ahead of schedule. Demand for DocGo services has never been greater due primarily to the rapidly increasing need for population health services across the United States. During the first quarter, we generated $113 million of revenue, a decline year-over-year of 4%. However, if you include mass COVID testing to exclude mass COVID testing from that comparison, we grew revenues by 40% year-over-year. We have put in place a great foundation for the future, and we expect recent project launches to drive significant sequential gains in both revenue and adjusted EBITDA in the coming quarters. With the first quarter in hand, we're reiterating our guidance of $500 million to $510 million in revenue and $45 million to $50 million in adjusted EBITDA for 2023. At this time, I'm going to hand it over to Lee Bienstock, our President and COO, to talk about some of our operational highlights during the quarter. Lee, please go ahead.

Thank you, Anthony. We continue to see substantial growth in new contract RFP opportunities, both in our mobile health and medical transportation segments. Since our last report on March 13, 2023, we have doubled the number of open RFPs, which collectively cover a total contract value of approximately $1.5 billion. The increase in RFPs is due to a larger number of opportunities in both existing and new geographies as well as our improved internal review and submission capabilities. In particular, we continue to see a substantial amount of new RFP activity for mobile health services. DocGo has successfully transitioned away from a mass COVID-testing-centric business to a mobile health business covering a wide range of clinical services. Our current backlog, which includes contracts that have been awarded but not yet fully rolled out currently totals approximately $205 million compared to $180 million that we announced on March 13 of this year. The recent increase in backlog is largely due to a multiyear municipal mobile health contract in addition to several smaller wins.  In April, we announced a partnership with Fresenius Medical Corporation, the largest kidney dialysis company in the U.S. to offer remote patient monitoring, chronic care management and mobile urgent care services. Fresenius and its affiliate nephrology practices manage a vast pool of 300,000 patients. We expect the initial enrollment to begin in May with several markets rolling out aggressively in Q3. We are very excited about this significant opportunity given the recurring nature of these revenue streams and ubiquitous application of these services to patients with chronic kidney disease. Based on the 8 current CPT codes, we estimate the revenue potential per patient per month to be approximately $250, $100 of that amount is tied to RPM and the remaining 150 to CCM. In addition, this will become a self-referring mechanism when monitored patients have abnormal vitals or are rapidly decompensating. DocGo will respond on site with a mobile health care provider when prudent. We anticipate that gross margins for this RPM, CCM offering when fully implemented, will be above 50% with relatively low levels of associated SG&A, an extremely low customer acquisition cost and a high customer lifetime value.  In the coming months, we will be working closely with Fresenius and its affiliate nephrology practices to identify and enroll qualified cohorts of patients into DocGo's RPM, CCM program. Revenues associated with RPM and CCM are expected to become a significant contributing factor towards 2024 revenue growth, with the early impact felt late in 2023. During the quarter, we also acquired CRMS, which stands for cardiac remote monitoring solutions. The cardiac segment is one of the fastest-growing subspecialties in RPM, and this gives us access to a pool of approximately 400,000 patients, which we can now enroll for RPM and CCM services. Previously, CRMS was focused on just the CIED market, which is the cardiac implanted electronic device market. Now under the DocGo umbrella, we can offer CCM services to this population as well. This is a great example of how we can leverage DocGo's licensure, technology and mobile health workforce to improve patient outcomes and lower cost to payers while expanding our revenue capture potential in the remote patient monitoring space.  DocGo's RPM/CCM strategy is intentionally focused on cardiology with CRMs and nephrology with Fresenius, and we anticipate announcing strategic partners in endocrinology and pulmonology in the near future. Through both organic and inorganic means, we expect to be providing RPM and CCM services to over 50,000 patients by the end of 2023. While we are on the topic of chronic care management, it's critical to understand the strategic value between our municipal population health programs and our CCM programs. In the last 12 months, 75% of the patients we have seen across just 2 programs, approximately 600,000 patients either did not have a primary care provider or did not know who their primary care provider was. A large portion of these patients need someone to manage their care, and this is where DocGo comes in, managing care for the underserved populations of America. At this time, I'll pass it back to Anthony.

Thanks, Lee. Before we hand it over to Norm, I wanted to cover margins and our rapid normalization initiative. In January and February, a major customer asked us to accelerate the rollout of a large project due to the incumbent winding down faster than contractually specified. We were able to successfully launch on this accelerated time line, which caused us to beat our revenue expectations, but it came at the expense of significantly depressed margins. However, as of March and subsequent to quarter end, we experienced a significant rebound as the costs abated. We are in a great position currently, and our margin expectations for the year remain unchanged. We simply had a greater decline than we originally expected in January and February as a result of this accelerated rollout. In a positive note, the rebound was stronger than expected as well and margins are trending in the right direction.  With regard to our rapid normalization initiative, this is currently one of our most critical areas of focus. While we are early on in this process, as I mentioned above, in March and subsequent to quarter end, we experienced considerable company-wide cost reduction improvements, which we expect to support improved margins in Q2 and carry through the balance of the year. Minimizing the impact of staff agency labor constitutes a significant portion of this effort. And in just the last 60 days, we have seen our agency labor utilization rate dropped from 52% to 41%, with continued improvement expected over the coming months. We have also seen a 40% decline in the number of rental vehicles utilized as we replace them with owned or leased units, which are about half the cost.  Lastly, the extremely high mobile health overtime rate, which we experienced in the fourth and early first quarter are abating as we institute controls, which are expected to drive that number toward a long-term expectation of 5% overtime usage from the recent peak of 17%. Currently, that overtime number resides at approximately 7%. Aside from our rapid normalization initiative, we are also seeing a loosening macro labor market, which is conducive to our growth and margin objectives as well. Collectively, we expect these measures to support our projected 37% gross margin exit rate for 2023. I will now hand it over to Norm Rosenberg, our CFO, to review the financials.

Thank you, Anthony, and good afternoon. Total revenue for the first quarter of 2023 was $113 million compared to $117.9 million in the first quarter of 2022. Removing mass COVID testing revenues in both periods, recurring revenue increased by 40% year-over-year. Last year's first quarter included an estimated $38 million in mass cover testing revenues, while testing revenues amounted to about $1 million in this year's first quarter, less than 1% of total revenues for the period. Mobile Health revenue for the first quarter of 2023 was $72.9 million as compared to $90.1 million in the first quarter of 2022. Once again, excluding the estimated mass COVID testing revenue in both periods, Mobile Health revenues increased by 38%. Medical Transportation revenue increased significantly to $40.1 million in the first quarter of 2023, representing an increase of 44% from $27.8 million in the first quarter of 2022. Nearly every core transportation market witnessed year-over-year and sequential revenue growth, continuing the strong momentum from the second half of last year. We recorded a net loss of $3.9 million in Q1 2023 compared with net income of $9.4 million in the first quarter of 2022. The net loss was partially driven by a large increase in noncash stock compensation, which was about $7 million higher than in the prior year period and more than the total for all of 2022 as well as an increase of more than $1 million in our insurance loss reserves and approximately $400,000 in nonrecurring legal costs relating to exiting the California transportation market, as we discussed in our previous earnings release. Adjusted EBITDA for the first quarter of 2023 was a positive $5.6 million as compared to adjusted EBITDA of $13.6 million in Q1 of '22. As usual, a reconciliation of net income to adjusted EBITDA has been included as a table in the earnings release.  Total gross margin percentage during the first quarter of 2023 amounted to 28.1% as compared to 33.9% for the same period of 2022, with stronger transportation segment gross margins outweighed by temporary weakness in Mobile Health gross margins. During the first quarter of 2023, gross margins from the Mobile Health segment were 27.7% compared to 37.3% for the first quarter of 2022. Margins were restrained by ongoing start-up costs for projects that were launched late in 2022 and early in 2023, as we discussed on our last earnings call, with the margin dampening effects continuing to provide an impact in January and February. While last year's first quarter Mobile Health gross margins were aided by the spike in COVID testing we witnessed in the first few weeks of the year. Mobile Health gross margins in March improved nicely due in part to the rapid normalization project.  As Anthony just discussed, the key performance indicators that we track on a daily basis are all pointing in a positive direction over the past 60 days, serving as a leading indicator for the gross margin improvement we are expecting in the second quarter. In the Transportation segment, gross margin decreased to 28.9% in Q1 2023, up from 22.7% in Q1 of 2022. This segment's margins continue to improve, aided by higher price realizations on trips, the ongoing shift towards higher-margin lease our business and some easing of fuel prices. Looking ahead to our gross margin trend, we have continued to build on our progress in March with improved metrics through April and into May. This trend certainly bolsters our confidence that we are on track to achieve sequential gross margin improvement through the year. In addition, we continue to make progress on integrating the 6 acquisitions we have made since mid-2022. As we do so, we expect to realize the margin improvements that we have targeted for each of these entities.  Looking at operating costs. Operating expenses as a percentage of total revenues amounted to 34% in the first quarter of 2023 compared with 25% in the first quarter of 2022. The key drivers of the increase in SG&A were depreciation and amortization and stock compensation expense, which are both noncash items. Noncash stock compensation expense, which we add back for the purposes of calculating adjusted EBITDA, was approximately $8.5 million in the first quarter of this year compared to $1.4 million in the first quarter of 2022. Going forward, we expect that the quarterly stock compensation expense will track much more closely to the levels recorded in prior quarters, and we would expect that overall operating expenses as a percentage of revenue will be below 30% going forward. Backing out depreciation of $3.6 million and the aforementioned stock compensation expense and SG&A amounted to 24% of total revenues in the first quarter of 2023, up a bit from 22% of total revenues on the same basis in last year's first quarter.  Over the remainder of 2023, we would expect SG&A expenses to decline as a percentage of revenues as we witness sequential revenue growth while holding the line on or, in some cases, decreasing our SG&A expenses in absolute dollar terms.  Turning now to the balance sheet. As of March 31, 2023, our total cash and cash equivalents, including restricted cash, was $127.5 million as compared to $164.1 million as of the end of 2022. The reduction in cash during the first quarter was due almost entirely to working capital factors as accounts receivable increased by $24.7 million due to several factors, including the timing of payments from high credit quality customers. There were also approximately $11.5 million in acquisition-related payments and about $2 million in capital expenditures. Looking at cash flow from operations. Our negative operating cash flow for the quarter of $23 million was entirely due to changes in operating assets and liabilities, also known as the working capital categories, primarily driven by a longer payment cycle from some of our larger municipal customers. This is purely timing related, and these are some of our highest quality receivables. We would gladly trade longer payment terms for greater assurance of being paid in full as we have up until now from these customers.  Secondly, we feel that this becomes an actual competitive advantage for us when bidding on these large reducible deals. Unlike many of the providers with whom we are competing for these contracts, we have the balance sheet and the capital to undertake large-scale projects that require significant start-up costs before we receive our first payments for services rendered. We have liquidity to withstand temporarily negative cash cycle situation on these projects. In fact, over the second half of April and into May, we have experienced significant collections and cash inflows as our largest age invoices are being paid. Most encouragingly, these recent collections and included primarily our most aged receivables, which will result in a better day sales outstanding, or DSO, for our AR portfolio as we come to the end of the second quarter. While this cycle leads to some large fluctuations in our cash balances from quarter-to-quarter, the balance sheet remains strong throughout the cash cycle.  Given the collections we have seen over the past 20 days or so, we expect that we will return to generating positive operating cash flow in the second quarter as we have in each quarter since we went public, up until this first quarter of 2023. Combined with our $90 million line of credit, which could potentially be expanded by an additional $50 million, we have a financial wherewithal to execute stock buybacks, acquisitions and to invest in new business lines and projects without the need to raise any new capital. Turning to guidance. We are reiterating our revenue guidance for the year in the range of $500 million to $510 million. We are encouraged by the first quarter's revenue performance, which was slightly higher than our internal forecast and by the increase in our backlog to $205 million from $180 million in just the last 7 weeks. The guidance revenue range would represent year-over-year top line growth of about 14% to 16% on a gross reported basis, but excluding the impact of mass coven testing, the revenue growth rate is really in the 36% to 40% annual range. We continue to expect that adjusted EBITDA will be in the range of $45 million to $50 million, with EBITDA margin acceleration expected as we go through the year. This concludes my remarks. At this time, I'd like to hand it back to Anthony.

Thanks, Norm. Before we jump into Q&A, I just wanted to briefly remind everybody that we will be having our Investor Day on June 20 at the NASDAQ market site in New York. For interested parties, please reference our recent press release on this event and follow the registration link. Now operator, please go ahead and open it up for Q&A.

[Operator Instructions] Your first question comes from Mike Latimore with Northland Capital Markets.

Great. Interesting that the RFP value doubled since March 13, fairly significantly. Can you talk a little bit more about that? Are there a couple of federal deals in there? Or is that mostly municipalities? Maybe a little more color on that would be great.

Sure. Mike, it's Lee. So the number of RFP submissions outstanding is -- has actually doubled since we last reported that number. The total contract value has increased from $1.1 billion to $1.5 billion. So just to clarify that, we're seeing really an increase across the board from federal deals to local municipal deals. We continue to evaluate RFP opportunities across the spectrum on the government side. So really, it has included representation from the federal opportunities as well as the local and state municipal opportunities.

I can add on with what we just said, there is certainly a macro trend across the country in more and more mobile health contracts existing RFPs being posted. RFIs, RFQs are more or less the same thing, but there is a much larger growing need for population health, especially for the underserved communities, not just underserved communities more the classical sense of like a local homeless population, but also VA, in health service, maybe even these communities that once aren't as a parent, there's a growing need for those.

Yes. And then the mobile transport did very well again this quarter. Is that -- is the current revenue level in mobile transport a good baseline you can build off of? Or was there some sort of added used to gain there or something?

Yes. So a couple of things. Something that we noted at the beginning of the quarter is that we still had a percentage of our -- I think, at the beginning of the year was closer to 40% of our ambulance contracts that were on a fee-for-service basis, where we took risk on demand. And we've been very successful in converting an increasing percentage of our revenue on the transport side to at least our model by which we have downside margin protection. So that's a significant part of it as well as trying to keep the SG&A on the transport segment, mostly flat. So it's amortized over a greater revenue base. Lee, do you have anything to add on that?

I would say the same thing. It's always been, as we've said, it's a little bit of a mix of organic and inorganic growth, but really, it's a continuation of a trend that we've seen really since early 2022. A lot of it is a matter of a little bit more focus, some other customers coming online, I think it is a pretty good base to build off of. Not much nonrecurring in the...

Okay. Perfect. And just last, the comment about a goal of getting to 50,000 patients in RPM. I mean just sort of the back of the envelope calculation would suggest that's probably well over $100 million business then if you hit that number? I guess one, is that right? And second, if you get to that 50,000, how are you thinking about organic versus inorganic?

Yes. I mean it's really all of the remote patient and remote device monitoring, which then leads to chronic care management comes from -- where we're planning on it from 2 main areas. The bulk of it is going to come from patients that are part of the cardiology practices that are already customers of Sierra Mass, a company that we mentioned that we acquired very late at the end of Q1. And so they basically already provide what's called CID, which is implantable devices. And we are going to be able to offer to those cardiology practices, RPM, which is kind of a non-implantable device. And then for the existing ones, both on CID and RPM being able to give them chronic care management solutions, which is actually a larger reimbursement than both of those. So that's it. And then a smaller but still significant portion is going to come from the deal with Fresenius that we announced. So those kind of our main focus is on cardiology and then secondary focus is on nephrology.

Next question, Ryan MacDonald with Needham.

This is Matt Shea on for Ryan. I wanted to follow up on the RPM commentary. So when we think about the 50,000 patient goal and the 2 partners that you guys have announced or I suppose the one you acquired in the -- the one you've announced with Fresenius, what kind of percentage of the population, the 50,000 patients represent? And assuming this is a small part of the population today, how do you kind of see that opportunity today versus how can you scale to reach a bigger part of that population? Like what is that total population what those partners look like in your mind?

We look at it very much as a -- when you look at the provider like the cardiologist and the nephrologist, what percentage of their patients that they see meet medical need for these services. So for a cardiology practice on average, it's between 30% and 50% of the patients that are at cardiology practice will receive value and meet the medical necessity for an RPM solution. And then of those, you have chronic care management or PCM, both of those, you're going to have about half of that or meted necessity for the management services. It kind of goes up in levels of complexity. On the nephrology side, nearly all of the patients. It's very close to 100% of the patients have medical need to meet medical necessity for RPM and the vast majority for CCM because a patient that's in a nephrology practice or patients being dialyzed usually doesn't just have kidney disease. They also have diabetes, hypertension. And so they're polychronic and thus, management is really critical. So that's why the nephrology practices have such a high percentage of the patients there. So when we look at it and you want to look at what's the addressable market, you can look at the stats on patients with cardiovascular issues as well as patients with kidney issues and kind of the conversion percentages I gave you is what we see for each one of the kind of clinics and providers.

Got it. That's helpful. And then when we think about scaling that RPM solution into other specialty areas that you're not in, you mentioned endocrinology and pulmonology. Do you look at that as an organic expansion? Or would that be something that you would need to partner with or acquire in that space? Or how do you look at adding other specialties to your RPM offering?

Yes. I think those 2 are going to come on the partnership side. We have some exciting partnerships that will be announced. But in general, DocGo's strategy of growth is one that we don't -- we try to find synergies with other companies so that we can eliminate the customer acquisition cost. So we'll find a partner. In this case, we already have the 2 partners. And those partners already have access to patients that have these diseases or multiple diseases, and they don't currently offer RPM, PCM or CCM or mobile urgent care services to this population. So say, okay, you already have a relationship with the patient uses very close intimate relationship with the patient. Can we now offer these increased value-add services to them. So both of those will be launched in partnership with 2 existing large players.

Next question, Richard Close with Canaccord Genuity.

This is John Pinney on for Richard. So you're adding -- the backlog you added $25 million sort of since last quarter. And is any of that like factored into guidance as of now? Or is that more of a 2024 start story?

Yes. It's a good question. Lee, why don't you take that one?

Yes. Absolutely. John. So the vast majority of those projects will launch towards the back half of this year, and we'll ramp those significantly heading into 2024. So some of that revenue will come online, but the vast majority of it will be starting and ramping in 2023 as we head into 2024.

Worth noting that also those revenue streams also have kind of a similar time line on them. So most of the revenue we have is kind of -- it's a 3 -- you're looking at that $200-plus million over a 3-year period.

So short answer is that it's not baked into guidance, right?  Okay. Great. Also, like do you have any insight as far as that backlog or anything you can provide us as far as what the breakdown would be for like mobile health versus transportation revenue?

Yes. So the vast majority of the increase in the backlog are Mobile Health, new Mobile Health contracts. Almost all of the increase that you noted is our Mobile Health contracts.

Okay. Great. And then just one more question. For the rapid normalization, you say here that, that Phase I is coming to complete like completion at the end of July. That's what you're saying in the press release that sort of implies like a Phase II. Is there any like detail you can provide there? Is there something that's going to be like additional in that initiative coming in after July?

There will. The Phase II will get the additional 300 basis points. I'll give more detail as to the very details of how that's achieved. We already have it quite planned out. But yes, there will be a Phase II to get the entirety of that 600 basis point margin that we at some degree, would give up. And we're actually ahead of track on Phase I right now.