DocGo Inc. (NASDAQ:DCGO) Q4 2022 Earnings Call Transcript

DocGo Inc. (NASDAQ:DCGO) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Greetings, and welcome to the DocGo Fourth Quarter and Full Year 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. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Cole, Vice President of Investor Relations. Thank you, Mike, you may begin.

Mike Cole: 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 the earnings release, which is posted on our Web site, 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.

Anthony Capone: Thank you, Mike. Looking back on 2022, we did an exceptional job at meticulously replacing substantial mass COVID testing revenue streams with a variety of new programs while laying the foundation for continued profitable growth in 2023 and beyond. In 2022, we generated revenues of 440.5 million, up from 318.7 million in 2021, a growth rate 38%. Excluding mass COVID testing revenues, we grew 75% year-over-year. Our initial revenue guidance at the start of last year was for 400 million to 420 million with 35 million to 40 million in adjusted EBITDA and we are proud to have seated both of these measures. Along with our 2022 results today, we are introducing 2023 guidance of 500 million to 510 million in revenue and 45 million to 50 million in adjusted EBITDA.

Our gross margin expectations for the year are 35%. Gross margin is expected to be slightly below that rate in Q1 and Q2, then improving approximately 50 to 75 basis points per quarter over the course of the year. We expect to finish 2023 at an annual rate for gross margin of approximately 37% and an adjusted EBITDA margin of approximately 13%. Our target consolidated gross margin over the longer term remains at 40%. We are sharing our backlog today for the first time, which we define as projects that have been awarded, but not yet started or fully implemented. Our current backlog stands at $180 million over three years. We anticipate this backlog to be fully rolled out by the end of the third quarter of this year. This backlog gives us excellent visibility into 2023 revenue and allows us to provide 2023 revenue guidance with a high degree of confidence.

At this time, I’m going to hand it over to Lee Bienstock, our President and Chief Operating Officer to provide an update on some of our key growth initiatives.

Lee Bienstock: Thanks, Anthony. We were very pleased to recently announce a number of successful contract wins and we continue to pursue large opportunities that are working their way through the RFP process. As part of that recent announcement, we secured a $94 million medical transportation contract with a major hospital system, our largest RFP win to date. This is a 100% leased hour contract providing DocGo downside margin protection with significant upside. As we move through 2023, we also expect to see further traction with our population health offerings in new geographies, such as Connecticut and Chicago. We recently won an RFP to provide occupational health services for public health workers in Southern California, and we are in the final stages of a public health RFP for remote patient monitoring and chronic care management in Illinois.

Currently, DocGo has 34 active RFP submissions pending award totaling over $1 billion in aggregate contract value. None of these RFPs are included in our current guidance as an award to DocGo is not guaranteed. We have built one of the nation’s largest mobile health workforces on top of a unique clinical delivery model that leverages lower cost medical professionals. Due to the large pool of these clinicians, we are able to scale quickly while realizing highly profitable unit economics. In addition, our leased hour reimbursement model provides downside margin protection, mitigating our exposure to demand risk. Our recent success in the RFP channel and growing interest in DocGo services across the country highlights the attractiveness of our value proposition to customers.

Notably, our pilot program with Dollar General continues to proceed as well. We have seen week-over-week growth in patient volume with this past week being our highest demand week ever. This program’s appeal is further validated by an exceptionally strong customer Net Promoter Score. In a recent survey, nearly all patients who have used the service report that they would recommend the service to a friend and plan to use the service again. DocGo does and will continue to have pilots, which are reimbursed on a fee-for-service basis. However, we do not plan to scale any pilot on a fee-for-service basis where we assume demand risk. For any pilot project to expand, including our existing payer pilots, there must be a reimbursement model which ensures downside margin protection for our company.

I will now hand it back to Anthony.

Anthony Capone: Thanks, Lee. While we are extremely excited about our growth prospects for 2023, we are also laser focused on maximizing profitability and reducing costs where prudent. A good example of these efforts is our rapid normalization initiative, which began in early February. As we have mentioned frequently in the past, the first 90 to 120 days of a new program launch have higher associated costs than our mature programs that have been running longer than six months. Typically, the greatest driver of this increased cost is our usage of staffing agency labor to help ramp programs quickly. This ability is a distinct competitive advantage for DocGo, but it becomes an immediate term cost. Typically, when utilizing staffing agency clinicians, we are paying a rate that is about 40% higher as compared to a traditional W2 employee.

After 90 days, we can hire that clinician with no additional fee to the staffing agency. Our goal is to reduce that to 60 days over the course of 2023, which is not only expected to increase profitability, but also allows us to potentially grow faster as we can better absorb the upfront costs associated with the rapid growth that we are experiencing. This as well as other initiatives, such as reducing our usage of rental vehicles while procuring long-term vehicle leases and our efforts to reduce overtime during project launches are also expected to positively impact margins over the course of the year. Collectively in 2022, we estimated the combination of all these factors to press margins by approximately 600 basis points. Fortunately, all of these costs are a byproduct of our substantial growth.

We will continue to mitigate these costs over time. We also expect to drive greater profitability in our medical transportation business in 2023. Specifically, we continue to work to transition existing medical transportation business to a leased hour model by the end of the year. Half of our current medical transportation business is fee-for-service, a legacy model that is vulnerable to swings in demand. Our increasingly popular leased hour model provides much greater visibility to revenues and margins. Given the incredibly strong demand for this service by health care institutions, it offers an exceptional opportunity to get our foot in the door and expand that relationship into mobile health care services such as our RPM and our ER readmission avoidance programs.

During 2023, we will be repositioning medical transportation assets to service these more lucrative leased hour contracts, while discontinuing service in select markets with lower profitability. We’ve already begun discontinuing service in markets which are not achieving our target margins. We expect these collective changes to have a material positive impact on medical transportation margins over the course of the year with minimal impact on revenue. Additionally, it’s worth noting that on May 11 of this year, the Federal public health emergency is set to expire. We have been preparing for this, and it is fully considered in our 2023 revenue and EBITDA guidance. At this time, I will hand it over to our CFO, Norm Rosenberg, to review the financials.

Norman Rosenberg: Thank you, Anthony, and good afternoon. I’ll begin my comments by looking at full year results and then turn to discuss the fourth quarter. Total revenue for the 12 months ended December 31, 2022 amounted to 440.5 million representing growth of 38% over total revenue of 318.7 million for the year ended December 31, 2021. Mass COVID testing revenues in 2022 were estimated about 75 million compared to 110 million in 2021. Removing these revenues from both periods, revenues increased by 75%. This year-over-year revenue growth was driven by a combination of expanded relationships with existing customers, new customer additions, and inorganic growth through the acquisition of licenses and capabilities in various markets.

Mobile health revenue amounted to 325.8 million in 2022, up 39% from 234.4 million in 2021. Once again, by removing mass COVID testing revenues from both periods, mobile health revenues doubled in 2022. While our mass COVID testing contracts concluded in September of last year, we do still have standby surge contracts, which will occasionally generate relatively minor amounts of revenue like we saw in Q4. Medical transportation revenue was 114.7 million in 2022, up 36% from 2021. This growth was fueled by both organic and inorganic sources, with higher trip counts, average price per trip or what we call APC and continued adoption of our leased hour model where we supply an ambulance and related personnel and equipment for a fixed daily or hourly fee.

Gross margins improved to 35.1% in 2022 compared to 34.4% in 2021. Mobile health gross margins were 38.9% compared to 38.1%, while transportation gross margins were 24.5%, virtually unchanged from the 24.7% in 2021. Adjusted EBITDA for 2022 amounted to 41.3 million, up more than 60% from the adjusted EBITDA of 25.1 million for 2021. Net income for 2022 amounted to 30.7 million, up nearly 60% from 19.2 million in 2021. EPS was $0.34 on both the basic and fully diluted basis in 2022, up from $0.30 on a basic basis and $0.25 on a fully diluted basis in 2021. Now turning to the fourth quarter. Total revenue for the fourth quarter of 2022 amounted to 108.8 million compared to 121.3 million in the fourth quarter of 2021, which included an estimated 49 million in mass COVID testing revenues.

By contrast, mass COVID testing revenues represented a relatively insignificant portion of total revenues in 2022’s fourth quarter. Removing these testing revenues from both periods, and recurring underlying revenues increased by approximately 49% year-over-year in the fourth quarter. Mobile health revenue for the fourth quarter of 2022 amounted to 71.8 million as compared to 102.6 million in the fourth quarter of 2021. Once again, looking at recurring mobile health revenues by removing mass COVID testing revenues from both periods, and mobile health revenues increased by 32%. Medical transportation revenue increased significantly to 37 million in Q4 of 2022, nearly doubling from the levels that we saw in the fourth quarter of 2021. Nearly every core transportation market witnessed year-over-year growth in the fourth quarter, and we finished the year with significant momentum.

We recorded net income of about 7.1 million in Q4 compared with net income of 20.3 million in the fourth quarter of 2021. There were several significant non-recurring items in the other income and expense categories that had an impact on the net income in the fourth quarter of 2022. Please refer to the financial statements attached to the earnings release for more detail on these items. Net income in last year’s fourth quarter of course included a $5.2 million gain on the remeasurement of warrant liabilities. As you will recall, those warrants were redeemed in Q3 of last year. Adjusted EBITDA for the fourth quarter of 2022 amounted to 6.8 million as compared to adjusted EBITDA of 17.3 million in last year’s fourth quarter. The total gross margin percentage during the fourth quarter of 2022 amounted to 39% as compared to 40.7% for the same period in 2021.

Now gross margins in both periods benefited from items beyond their regular run rate levels. The fourth quarter of 2021 benefited from a surge in COVID testing revenue. In the fourth quarter of 2022, we recognized significant savings across multiple insurance expense categories, and a reduction of certain revenue reserves due to cash collections, which drove margins higher. During the fourth quarter of 2022, gross margins for the mobile health segment were 43.9% compared to 44.7% for the fourth quarter of 2021. And in the transportation segment, gross margins increased to 29.4% in Q4 of ’22, up from 20.7% in Q4 of 2021. We recently made the decision to exit the transportation business in California, which we estimate was costing us about $1 million in EBITDA per year.

We will continue to operate the mobile health business throughout California. We are at a stage as a company where we have a significant set of opportunities to pursue, and we intend to focus on those markets and business lines that offer us the highest expected returns on investment. Turning to the balance sheet. As of December 31, 2022, our total cash and cash equivalents including restricted cash was 164.1 million as compared to 179.1 million as of the end of fiscal ’21 and 179.4 million as of the end of Q3. The reduction in cash during the fourth quarter was due to several factors, including the timing of payments from high quality credit customers, which resulted in an increase of approximately $8 million in accounts receivable, $3 million in acquisition payments and capital expenditures, and approximately $3.2 million spent on stock buybacks.

These factors outweighed the cash that we generated from our regular operations. For the full year, operating cash flow was about $29 million. We used $41 million for acquisitions and capital expenditures, and we also used for the year a total of $3.7 million on share repurchases during the year. During the fourth quarter, we bought back approximately 465,000 shares at an average price of $7. We plan to continue to use our balance sheet to support our ongoing stock buyback program where we have approximately $36 million left in our approved program. Combined with our $90 million line of credit, which could potentially be expanded by an additional $50 million, we have the financial wherewithal to execute buybacks, acquisitions, and to invest in new business lines and projects without the need to raise any new capital.

We continue to focus on our capital-light model while pursuing selective acquisitions funded by cash flow from operations. With the price of capital increasing in the market, this provides us with a distinct competitive advantage. Now turning to our 2023 outlook. We anticipate continued strong demand from our customers from both mobile health and transportation services. As Anthony mentioned, our revenue guidance for the year is in the $500 million to $510 million range. While this range would represent year-over-year top line growth of about 14% to 16% when removing the 75 million of mass COVID testing from our 2022 revenue baseline and considering that we’re not expecting any mass COVID testing revenues in 2023, then we’re looking at top line growth of approximately 36% to 40%.

Growth in 2023 is expected to be driven primarily by organic means and same-store sales. We expect that adjusted EBITDA will be in a range of $45 million to $50 million. We expect to finish 2023 at an annual rate for gross margin of approximately 37%, which would be our high quarter for the year and an adjusted EBITDA margin of approximately 13%. That concludes my financial comments. And at this time, I’d like to hand it back to the operator to open the call up for Q&A.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. . Thank you. Our first question is from Richard Close with Canaccord Genuity. Please proceed with your question.

Richard Close: Yes. Thank you. Can you hear me okay?

Anthony Capone: We can hear you, Richard. Great to hear you again.

Richard Close: Good. Congratulations on the year and the outlook. Anthony, if you could talk about the startup, ramp up expenses and maybe the buckets, the composition of those expenses, like how much of it is labor related versus other costs in terms of winning business and starting those contracts? And then with respect to the 108 million in revenue that was one — I guess since January, beginning of January, how much of the startup expenses do you think is associated with those contracts?

Anthony Capone: Good questions. So the composition certainly weighted much heavier towards labor, both labor regarding staffing agencies as well as labor regarding overtime. When we looked at 2022 just in that timeframe, we had subcontractor costs that were around 12 million and overtime that was around 14 million, where the other large category or significant category was vehicle rentals, which was around 3 million. Those are the three main categories and those are all in excess. So it’s important understand that’s not how much we spent in subcontractors or in overtime, it is relative to what we deem as being in excess. So actually the amount we spent is quite a bit more than that. But compared to what we say is a standard mature run rate basis, from there going forward, there was excess cost. So those are the three biggest ones; overtime, subcontractor and then vehicle rental.

Richard Close: Okay.

Anthony Capone: Then going forward on the 100 — I’m sorry. Go ahead. On the 180 million on the going-forward basis, at the time being you’ll still continue to see similar percentages on those or they have similar ramps. And just as a reminder, we had disclosed that we plan to have the 180 million fully ramped by the end of Q3. The only significant difference is, is that we’ve already begun our rapid normalization project. And so that will also be kind of coming through to fruition in Q3. So I would expect that the upfront costs on that 180 million will be less than what it has been historically.

Richard Close: Okay. And just as a follow up on the rapid normalization, will that be slowly fully in place and seeing all the benefits of that with these contracts, or is that a gradual improvement as you move forward?

Anthony Capone: I’d say it’s gradual from when we started last month through Q3. So you can think about maybe about half of the projects getting the maximum benefit, some of them have already begun rolling out to the 180 million right now. But I would say it’s fairly linear, and it’s improvement from February through Q3 as far as the reduction in those kinds of 600 basis points, which we currently are getting hit with for the excess costs.

Richard Close: Okay, great. Congratulations. I’ll jump back in the queue. I’m sure others have a decent number here as well.

Operator: Thank you. Our next question is from Ryan MacDonald with Needham & Company. Please proceed with your question.

Ryan MacDonald: Hi. Thanks for taking my questions and congrats on a nice quarter. Maybe the first question for Lee. As we think about the pipeline, you talked about RFPs I think 34 sort of up for decision here. How should we think about the expected timelines for those decisions to be rolled out? And when you think about the average size of those RFPs, where’s that range come into play? Is it more in the 1 to 10 million range or I think you had bucketed like 10 to 200 million range? Thanks.

Lee Bienstock: Yes, absolutely. So first up on the timeline, those really do vary. We can hear back in a matter of weeks on some and it could be in a matter of, let’s say, a couple months on others. Really the timeline is part of the RFP process from the issuing body of the RFP. So it really does vary there from weeks to just a couple of months. The average size we’ve increased significantly. We had originally started with the size that you just mentioned around the $10 million mark. But we’ve increased that substantially to 30 million to 50 million is our average submission at this point. So we’re going after larger opportunities, and we’re going after more opportunities.