DocGo Inc. (DCGO) Earnings Call Transcript & Summary

Thank you. We are ready to begin. Thank you all for coming.

First, I want to start with the disclosure. For important disclosures, please see the Morgan Stanley Research website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Lee, thank you for being here. Maybe I'll pass it over to you for a quick intro on your side.

Yes, absolutely. Chris, it's great to be here with you again. I know you know our story very well. For those new to DocGo, we're a mobile health and medical transportation company. We bring care to where patients are, or we transport them to and from care. Over the last 12 months or so, we've transported about 700,000 patients. We provide services across multiple states, across the U.S. and the UK. We also have a 50-state virtual practice that does about 1 million telehealth visits a year. We also remotely monitor patients, keeping track of patients, making sure their chronic conditions are not getting worse. A lot of heart failure patients. We monitor about 55,000 patients today. And so we have a growing business of medical transportation and mobile health, and we're really excited about it.

Excellent. Thank you. So I want to start off with mobile health. You know, mobile health is experiencing a lot of significant growth in recent years. What sort of services are in that division? Can you discuss that? A little bit about the types of customers you're treating in that division?

Absolutely. So, you know, first off we start with the problem. And in the U.S., there's a big problem with Americans suffering from chronic conditions, which is talked about a lot. There are 160 million Americans suffering from at least one chronic condition. Many are suffering from more than one. And as a result, it's crippling the system, right? So patients are getting sicker. It's costing the system more money. As it costs the system more money, it becomes, you know, more and more strained. And so our goal really is to meet patients where they are. I think if we meet patients where they are in their home, for example, one of the things I did mention in that intro is we'll go and visit 150,000 patients in their home this year. So we're going to meet patients where they are. We think when you meet the customer, in our case, the patient where they are, they're more likely to improve their health outcomes. We can help them improve their health outcomes, and as a result they live happier and healthier lives and cost the system less money. And so, again, we're really targeting patients and helping patients with chronic conditions. We're dealing with aging populations. We're dealing with clinician shortages. We're dealing with rising health care costs. And so we've built an integrated mobile health platform, again, that brings care to where patients are, either virtually through our virtual health care practice. We remotely monitor them, or we will go and visit them in their home when it's necessary. And that's sort of the suite of mobile health care services that we provide. It all works with our proprietary tech platform. So our tech platform is optimizing the right clinician with the right diagnostics, with the right licensure, delivering the care with the right modality, in person or remote, all for the right patient need and optimizing that across the system. So again, we have about 1,000 vehicles providing. We have 3,000 to 4,000 healthcare heroes, ranging from EMTs, paramedics, nurses, advanced providers, MDs. And our goal is to optimize the right clinician with the right diagnostics, with the right modality. If we could do it virtually, we want to provide care virtually. It's efficient and cost-effective. If we need to be hands-on with the patient, we can also do that as well. Integrated mobile health platform is really what differentiates us.

Excellent. So there's been a lot of focus on your path to profitability. Your goal is to be adjusted EBITDA positive by year end. How are you going to get there?

Okay, so I'm really glad you asked this question, Chris. I know you and I have been talking about it, and I really want to be comprehensive and give very detailed specifics. So the first thing to note is that while the company has been generating negative EBITDA the past several quarters, most of our business lines are actually providing a positive EBITDA contribution. So, you know, DocGo, we talked about it just now, consists of multiple service lines and currently only a handful of those service lines in the corporate layer are responsible for the losses of the company. So out of projected 2026 revenue, we shared as approximately, we guided to little over $300 million of revenue, about $240 million of that $300 million is coming from business lines that are currently today adjusted EBITDA positive on a contribution basis. Okay. So I wanted to share that detail. And so our plan and our requirement is that every business line that we continue to operate is going to contribute positive adjusted EBITDA to the portfolio. And we're expecting that that to happen by the end of the year. And so any business that's and any service line that's not generating positive EBITDA contribution is either going to be eliminated or redesigned, as we go as we progress through the year. And again, those steps are already being put in motion. So I really wanted to share that today. Now, some may ask, why haven't we done this already with some of the service lines? Why haven't we started to redesign or sunset some of these service lines? I think for us, we have multiple service lines that are growing very, very nicely. And as they grow, the scale helps us achieve profitability. Some service lines are not, and as a result, again, some of our transportation markets are not. And so, again, as we progress throughout the year and as we enter into next year, our plan is to either, again, sunset some of that work or redesign how we go to market there. So that's the first piece in terms of the revenue and where the profits in the company are coming from and where the investments are that we're making and how long we're going to continue to make those investments in some of the markets we serve. Yes. Then there's the gross margin. And so again, we talked about the top line and which businesses are contributing EBITDA are going to continue on. On the gross margin, we expect to return to about a 34% gross margin from our current level of 30.5%, which is what we shared on the last earnings call. Now, it sounds difficult to do that. But we're not, our plan is not to raise prices or lower wages, right? We have some of our underperforming markets are in the mid-single-digit gross margins. And so just simple math, as we reduce those markets that are producing lower gross margin, that's going to improve the overall gross margin of the business. And we think that's very, very achievable. So just to give you an example. In the lens of our Q2 results, our revenues were in line with expectations, but on the gross margin side, again, using medical transportation as an example, we recorded 32% in transport gross margins in Q2, which was lower than we expected or that we'd like. Again, our goal is to be at that 34% level. But if we remove the two worst performing transport markets from the portfolio, one of which is in the process of being eliminated, the other one's being redesigned. The transport gross margins would have been 35.6%. So up from 32%, transport would have been 35.6%. Again, if we remove those two underperforming markets. So that is a big, big factor for us. Again, we're going to continue to optimize the service lines and the geographies, going to ultimately drive the gross margin higher, which ultimately will lead to the company achieving its profitability goals. And then on the SG&A side, again, in addition to the organic growth that we think we're going to see in Q4, Q4 is seasonally a very big quarter for us on the growth side. Winter months bring infectious diseases, bring respiratory illnesses. So we tend to see volumes go up in Q4. So again, on the growth side, we'll see improvement. On the gross margin side, I just talked about how we're going to see improvement. And on the SG&A side, we'll see improvement. We still need to cut about $3 million per quarter from where we reported our Q2 numbers. And so that's our goal. We already executed a pretty major RIF in June that's going to be more apparent in the second half financials, and that's going to help us again cut down on the SG&A of the company. So the overall profitability is absolutely a priority. I wanted to kind of give those examples of really how we're going to achieve it, both from a top line growth perspective, a gross margin perspective, and what we still are in the process of cutting on the SG&A side. As we're executing on all three of those, we again, we share that we intend to exit the year on a profitable run rate basis.

Thank you, that's very thorough and helpful. Can you spend a minute on the recent HiQuity Health deal that you did and how that adds to the business, congrats.

By the way, on that deal. Yeah, we're very excited. So for those that don't know HiQuity Health well, we announced on our last earnings call that we signed a definitive agreement to acquire HiQuity Health. And we're very excited. I'll talk a little bit about it today, Chris, because I know we wanted to touch on it, but also I wanted to flag that we're going to be hosting a deep dive webinar by the end of the month. So we're going to be putting out a save the date on that to really deep dive in terms of how we plan to integrate HiQuity, some of the savings we think we could achieve, some of the growth vectors we think we could achieve. But at a high level, HiQuity is a virtual care platform. They provide tele-ICU, telemetry monitoring and virtual nursing services to hospital systems. Again, hospital systems is a big customer bucket for us as well. We work with lots, many, many, many hospital systems. They do as well. And so they provide virtual care services for hospital systems. The reason why that's incredibly exciting for us is because we think there's a big opportunity to improve health outcomes by being present with the patient from the hospital to the home. So often the patient is getting dropped post-discharge. But in the hospital they're receiving great care. In many cases, again, they're receiving great care in part with HiQuity services. But then when they get discharged, the patient kind of falls out of the system again. And then as a result, they end up bouncing back to the emergency room or being readmitted and again causing the system a lot of money and no patient wants to end up back in the hospital. So we think there's a really tremendous opportunity for us to bridge the hospital to the home. Be present with the patient when they're in the hospital through HiQuity's suite of services. Of course, we have our medical transportation division that's transporting patients out the hospital or to the next care setting, and then we can follow up with the patient virtually and in their home to make sure that their condition is continued to get better, the incision site is not getting infected, their meds are titrated, they're receiving the proper follow-up care so that they don't end up bouncing back to the hospital. That continuum of care, that we're going to be able to achieve with the HiQuity acquisition is going to have a profound impact on patients. It should be very, very valuable to hospitals and insurance customers.

Okay. Thank you. So as it relates to HiQuity, you're assuming $52 million of debt for that deal, plus gaining access to additional funding up to a total of $100 million from that. Can you just talk a little bit more about how you plan to kind of service the debt?

Yes. Another great question. I'm glad we're touching on. So first of all, we do not intend to hold a substantial amount of debt for an extended period of time. Okay, so there is a debt component to this acquisition. We're assuming the current debt on HiQuity, which is $52 million. The lender on that is also going to provide us with additional funding of availability should we use it, up to an additional $50 million. Now there's five components to how we're thinking about this debt. So the first off is profitability is a big, big component of this. As the company achieves profitability, which I just laid out, that gives us a lot of avenues for paying service on the debt, refinancing unit debt and so forth. So that's #1. #2 is HiQuity is already coming to us with adjusted EBITDA, with profitability already. So HiQuity, as you mentioned, has about $65 million of revenue and it has about $4.5 million of adjusted EBITDA today. That's before we effectuate any synergies, any integration. And so, again, we think that there's opportunity to improve the profitability of HiQuity as we put the companies together. So that's, again, profitability. HiQuity is already coming with adjusted EBITDA. #3 is, we have a, Chris, I know you know this, and people that know our story well, we did a tremendous amount of emergency response work for the City of New York. During COVID, there was a migrant crisis that happened here in New York, where asylum seekers were being bused up from southern states, and we did a lot of work with the city. They still owe us about $13 million to $15 million, which we expect to collect here over the balance of the year. So that will bring in additional cash and capital that we can use to pay down the debt as that money comes in. And then the other piece I think we're looking at is, we have an opportunity to sell some non-core service lines of the company, which, again, will bring in additional cash into the company. So, you know, through those avenues, profitability, HiQuity coming in with profitability, synergies that can be effectuated there, the collection of the city receivables that they owe us, which will bring in a significant amount of cash, and then our ability to sell some of our non-core service lines, even the markets that we're perhaps looking to exit on the medical transportation side have licenses that we can sell that will bring in additional cash into the company. Again, all used to either service or pay down the debt, and so we have a very, you know, concrete plan on how to handle that.

Thank you. Can you spend a minute on the front and back end tech stack for the business? How does EHR integration with Epic, Athenahealth impact overall referrals and enhance functionality for your business?

Yes, so tech is a big component of what we do. You know, I like to share that the doctor coming to your home is an old idea. I know we've spoken about this, Chris, before in the past. It's just wildly inefficient to send a doctor door to door. There's drive time, there's lag time in between patient visits. Sometimes you show up, the patient's not home. So the doctor's office, the physical doctor's office kind of solved that, right? They'll book 12 patients, they don't know which two are not going to show up, but they have capacity for 10. They book 12 and two don't show up. But they're there and they're waiting for the patients to arrive. And they're dropping in from room to room. So we've essentially recreated that experience, but in the patient's home. So what we do is we send an LPN or a phlebotomist or a medical assistant, actually a big component of us making these visits more and more profitable and achieving profitability for these visits is our ability to use lower-cost medical assistance or mobile phlebotomist to go to the home. And then the physician or advanced practice provider telehealth in and directs the clinician in the home what they want. I want to take a swab. I want to provide a vaccine. I want to do a bone density scanning. We do about 45 different clinical offerings in the home. The clinical clinician that is overseeing the visit remotely is the one treatment planning, prescribing, and diagnosing. And they're dropping in home by home virtually, while the mobile health clinician, the lower cost clinician, is driving door to door. So we've built that entire tech stack to be able to make it feel like the doctor is in your living room, when in reality, again, we have a mobile phlebotomist there, and the clinician is remote. The other piece that we've done is we've integrated our logistics and routing platform into Epic. And this is a big deal. So directly from the patient's chart, in Epic, a discharge nurse can click a button and order medical transportation to come pick that patient up at discharge. Now they're not picking up the phone calling an ambulance company to say, hey, when can you be here? They're clicking a button in the patient's chart and they're seeing exactly just like Uber, just like Instacart, when we're going to arrive. And as a result, housekeeping knows when the bed is empty and now it's available to be made ready for the next patient. Intake knows when the patient's, the patient is more likely to be ready when we get there because the discharge nurse knows when we're arriving. So that integration into the hospital's workflow is very valuable. It's very valuable for us because the patient will be ready when we get there. It's very valuable for the hospital system because it integrates into their day-to-day workflow. It allows us to optimize the patient's stay, all the vehicles in the field and on the road. And once we integrate it, the hospitals love it. And because they love it and because it's integrated, it tends to be very, very sticky.

Thank you. So I want to talk a little bit about labor and the inflationary environment we're in. How have you navigated this labor and inflationary environment? And then can you talk a little bit about your ability to adjust staffing, automate processes to address this area?

Yes, so any, I know there's a lot of biotech and pharma companies at the conference, and there's some healthcare services company. Any healthcare services company is dealing with labor, is dealing with the clinicians, is dealing with those heroes that go into healthcare to help patients, and there's a lot of dynamics happening right now. The last time we spoke, there's always puts and takes, right? So what's the difficulty right now we're experiencing? So #1, on the inflationary side, we're seeing gas prices hurt us, right? We drove 11.5 million miles over the last 12 months to give a sense, and so for every dollar at the pump, we see about a 37% margin erosion. So again, we don't control gas prices, and our goal is to be more efficient. The goal is not to drive more miles. The goal is to drive fewer miles and see more patients with those fewer miles. And so being more efficient in the field allows us to address the gas prices. But we see some gas price. You know, the gas prices are obviously from an inflationary perspective, hurting us. We think hiring, we have to hire up for the back half of the year. And so the cost to hire, typically, we'll see that rise in the first half of the year and then help us to serve the bigger volume in the back half of the year. So that part is we're seeing pressure there. What we also know, which we haven't seen in previous years, is AI is helping us a lot with the pressure we're experiencing. On gas and sort of higher clinician costs, we're able to automate a lot more of what we're doing. So as an example, we are automating a lot of our patient scheduling, a lot of our patient outreach. When a patient texts us or has a question, our system is able to answer that question for them, reach into the patient's chart or reach into our protocols or reach into what to expect during a visit and answer the questions so that a human being doesn't actually have to answer the question. We have to schedule. Sometimes patients have to reschedule. Sometimes we want to confirm with the patient. We want to confirm they're going to be there when we arrive. We're automating all of that. All the order intake. We used to have multiple people receiving mobile phlebotomy orders. Now we've automated about 80% of that. But net-net, you know, our North Star is anything that is not involved in the clinical delivery of the service, sticking a needle in someone's arm, taking someone's blood, scanning someone's bone density, doing a diabetic retinal scan. Anything that doesn't involve the clinical care, anything that's relating to admin, anything that's relating to core with the patient, we're automating. And so that's what gives us an opportunity, right? And we're not just a healthcare company, we're a technology company. We built that routing and optimization platform, right clinician with the right vehicle for the right patient need, all automated and optimized. And now we're also using our tech resources to automate a lot of the, a lot of the function that's not directly involved in the clinical delivery of service. And as we do that, we have about 10 initiatives right now that we think are going to save us about $6 million on the SG&A line. So that's a new, we've always been pressured by gas prices, rising clinician costs, but now finally we have something that we're implementing that allows us to drop, drop the cost of the delivery of our service, which everyone will benefit from. As we drop the cost, our company becomes, you know, more profitable and more successful, and then we can offer a much more comprehensive, robust suite of services to our patients. So, that's the difference this year from last year or prior years, where we've been very successful and we have a number of different projects that are working towards automating and allowing us to scale without having to scale up the same size team.