Edited Transcript of ONE.AX earnings conference call or presentation 27-Feb-20 10:00pm GMT

DUBLIN Mar 23, 2020 (Thomson StreetEvents) — Edited Transcript of Oneview Healthcare PLC earnings conference call or presentation Thursday, February 27, 2020 at 10:00:00pm GMT

Thank you for standing by, and welcome to the Oneview FY ’19 Full Year Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. James Fitter, CEO. Please go ahead.

Good morning. Thank you, and good afternoon, to those in United States and even to those in Europe, thanks very much for joining us here this morning. I’m joined by John Kelly, our CFO, who’s in our Dublin office; and Mark McCloskey, our President, who’s in our Chicago office. Thanks for your time this morning, and I hope you’ve got the presentation material that’s been released to the ASX, and probably I’ll be referencing the page numbers in that presentation.

So starting on Page 5, just looking into 2019 financial highlights. And pleasing growth in our recurring revenue number, which is up 32% year-over-year to EUR 4.5 million due to expansion of live beds, and we finished December 2019 with an annualized exiting recurring rate of just over EUR 5 million. The total revenue number, as you know, is subject to the vagaries of hardware deliveries. So there was a 13% decline in total revenue year-over-year. But amongst them, we also include our implementation services revenue which enjoy a nice growth this year.

Our gross profit is up 8% from EUR 4 million to EUR 4.3 million, and that’s attribute to a higher revenue — a higher margin mix on the basis of the greater proportion of recurring revenue this year, and that resulted through some very strong focus on cost control. We reduced our operating expenses by 16% throughout the year and improved our operating EBITDA by 20% to a loss of EUR 15 million. And it’s important to emphasize this is in view, we were still investing very heavily in the Senior Living product, which we’ll talk about shortly. We’ve reduced our cash burn and finished the year with a robust cash balance of just over EUR 10 million, reflecting the capital raise in May and then reduction in operating cash burn that I already mentioned. And we’ve seen a good diversification with live beds up 36% across the global footprint of the 55 hospitals in 4 countries, with now just over 8,500 beds live.

Next slide, operational highlights. As mentioned, and as we’ve already foreshadowed, we have suspended all our development and sales activities with respect to the Senior Living product after reaching an impasse in negotiations with a major provider in the industry. We have continued our expansion in North America. This year, for the first time, North American hospitals in terms of — surpassed Australia as the company’s largest installed base for the first time with now just over 4,000 hospital beds live in North America. We also enjoyed the deployment of our first contract win in Asia at the Bumrungrad International Hospital in Thailand. Actually we’ve spoken in the past, I think, this really affirmed the need for patient engagement solutions. It’s a global problem. And whilst we’re not actively selling in the emerging market at the minute, we’re very pleased to have that reference size in Thailand.

We’ve had a number of new hospital wins that are detailed here, including the Langone Orthopedic Hospital in New York, the Angie Fowler Cancer Institute in Cleveland, a new customer in Oklahoma University of Medicine in Oklahoma City. We’ve expanded to the Sydney Children’s Hospital in Randwick, complementing the work we’re doing in Westmead Kid’s. And we’ve had our first deployment at The Prince Charles Hospital in Brisbane for Queensland Health.

In terms of product innovation, we are continuing our investment to support legacy coax cabling, we’ll talk a little bit more about that in a second, in established hospitals and really working to expand our product market fit across the globe and continue to build partnerships with the most recent being certification with Imprivata, one of the world’s largest global healthcare and security companies, which enables single-tap access for clinicians to access the Oneview platform for clinical applications here in the Australian market.

So Slide 7 just highlights the change in our business mix at the time of the IPO, and we have nearly half of our business in Australia. And today, you can see that we have nearly half of our business in the United States, so a fairly significant change in mix and important to note that.

Just turning to strategy and reinforcing — for some of you who might be new to the company, on Slide 9, I just wanted to remind everyone of our vision, which is to power personalized, exemplary care experiences. This is a very important concept for us. We began our life very much focused on patient experience. And as we’re continuing to deploy our solution around the world, it’s become very apparent that the care team is equally important in how we think about developing our product.

We need to make sure our product is complementing the work that nurses are doing and actually taking work away from nursing where possible, and that’s been very important nuance in the way we’ve framed the product going forward.

So on Slide 10, you can see that our growth strategy is really a 2020 around continuing to expand with our existing customer base. We’re really doubling down on our focus here, obviously, given the disappointments around the Senior Living product. It’s bringing us back to our core business. We see great opportunity to unlock the legacy coax beds. We see a great opportunity to enhance the value proposition with our customers. And if we can focus exclusively on converting those beds, we’re going to generate around a further 60% or 70% in our contracted revenue base. And as we bring that product to market, we see the network effect of that starting to kick in in the United States and allowing us to tackle the 400,000 bed opportunity that we’ve previously identified as we bring these new coax capabilities to market.

On Slide 11, we’ve just articulated again where we stand with regards to our existing customer base. The blue numbers here represent our existing U.S. contracted beds, which is just around 6,000 beds currently, which, as we mentioned earlier, we have about 4,000 live. But those customers manage in aggregate nearly 13,000 beds. So we have close to 7,000 that we’re not yet contracted with. And the primary reason we’re not yet contracted with those beds is because they — that we estimate 90% of them are still running on coax technology. So as we bring that solution to market this year, it’s going to unlock opportunity to expand our footprint.

And drive growth in the business amongst our existing customer base. Slide 12 are the key operating metrics that you’ll be familiar with that we have published here, and you can see at the bottom of the chart, we begin with our live beds, which have grown from just over 6,200 to nearly 8,500 during the year. We have a further 2,322 that are contracted, not yet live. And then we have highlighted the pipeline of opportunities in our health care business, which includes those 6,855 beds that is mentioned, which is expansion opportunities and 12,500 in the sales pipeline itself. You’ll note here that we have reduced the pipeline by 8,500 beds, which were dedicated to the Senior Living business in 2018. And we’ve also adjusted for the 300 beds that were contracted with Christian Living in the United States that we

Have now recused ourselves from. I think it’s important just to take a minute to talk a bit about what has been a disappointing sales period for us in the U.S. market in 2019. And there’s been a number of dynamics that influenced that, so I think it’s important to address. We’ve seen this year the electronic medical record companies have had competing products in the market. That’s not new news. It’s something we highlighted as far back as the IPO, and Gartner have often referred to these products as me-too products. So I think we fervently believe that ourselves. We continue to believe we have a product that not only is superior to the electronic medical record companies, but is also complementary. But we have to acknowledge that when major health systems make an investment in an electronic medical record business, it’s a very significant investment for them. And they will continue to explore as many ways as they can to leverage that investment. So what we’ve seen in recent months is that both of the major electronic medical record companies appear to be stepping back from the patient engagement space. And that’s really around some complications in how their product was being delivered.

One of my core strengths all along has been what we call zero-touch enrollment for nursing. We’ve always fervently believed that the most important thing is we’re putting technology to patient’s bedside that it doesn’t impose the burden on nursing. And that’s not true of some of the competing products that have been delivered by EMRs. So we’ve seen the market partially frozen by them during 2019. We’ve seen some very encouraging signs that, that is reversing. And we’ve actually seen some significant reengagement with a number of customers who had been trialing either of those products. The other thing we want to acknowledge is that one of those EMR companies partnered with one of our competitors in this space, and that certainly impacted some sales activity for us in the first half of the year. So I hope that gives you a little bit of a sense as to why that contracted number has only grown by 4% year-over-year.

As we previously mentioned in our strategic reorganization on Slide 13, we are significantly rightsizing our cost base. That reorganization, which we announced on the 21st of January, is going to eliminate over EUR 8 million of costs on an annualized basis and obviously lead to much lower cash consumption for the business in 2020. We fully expect ongoing growth in recurring revenue as we continue to deploy the beds that are already contracted.

Our operating expenses on the staff side of the business. Staff is obviously the biggest contributor, and as we fully — previously mentioned, we’re reducing our staff cost from an average of nearly EUR 4 million per quarter in 2019 to a number of EUR 2.1 million commencing in the second quarter, bearing in mind that we just incurred a one-off redundancy cost of EUR 750,000 associated with the reorganization. That’s obviously going to significantly reduce our operating losses. It’s going to take a lot of pressure off the business, and we still retain, obviously, a very healthy pipeline of business with not just existing customers but prospective new customers.

So just turning to the problems that we’re solving. I think we’ve acknowledged that health care is an increasingly competitive business. We are really at the intersection of where health care and consumers collide. We continue to see very important competitive pressures in the United States, where major health systems are consolidating. There’s been a lot of merger activity. There’s a very strong desire and need to promote their brand, particularly there’s a lot of them have rebranded, and that’s something that’s a very powerful element, the Oneview platform. Commission workload, we know is already too heavy. We know clinician burnout is a fact and we know nurse burn out is a factor, and that’s something that we’ve really

Factored into the architecture of our product, as we mentioned earlier. We want to complement the electronic medical records. We don’t want to duplicate any work. And I think that’s something that’s coming through loud and clear as we continue to develop the product. And this product needs to be personalized. It needs to be delivered at scale. And as you can see from the customer base we have in the United States, most of them are deploying technology solutions across thousands of beds. We’ve made a very important investment in our scalability and stability in the last 12 months, and we’re starting to enjoy the benefit of that. And I think as we’ve spoken about in the past, hospitals with superior patient experience are generating significantly better financial returns.

So our value proposition is really around providing technology that enables that whole-person care, supports the entire care team, provides a foundation for innovation. It unifies systems data and most importantly, people, to improve outcomes, quality and value. And when we look at our health care product focus, we’re really dividing that patient experience into 4 very important buckets: convenience and control; distraction and calming; the ability to measure and manage the patient experience; and to optimize discharge, which will obviously have a very positive impact on the health systems’ financial position.

We’ve obviously made a very significant investment in Android-based hardware. We know that has lowered the capital cost for our solution materially. We continue to work with a number of providers to deliver android-certified hardware for the health care market. Unfortunately, this market is still in its infancy. We’d love to have off-the-shelf solutions available to us, and we have some encouraging conversations going on that are leading us that way, but it’s important to acknowledge that hardware can be a barrier to deployment if that configuration is not available readily on the market.

Slide 18 is just a reminder of the integration points and the fact that we are the one platform that brings all of these disparate apps together. Think of this as being the enterprise app store at the bedside. And you can see here a very broad and diverse group of integrations that we now have live in the market. As I mentioned, Imprivata is the most recent of those, which we’re deploying clinical single-tap access at the Chris O’Brien Lifehouse here in Sydney and for the Mater Group in Brisbane.

Our business model for those who are less familiar, is a subscription-based software model, which we charge a price per bed per day and where we enjoy 90% gross margins. Typically 5 to 7-year contracts, and we’re still very proud of our 100% customer retention.

Our hardware sales and professional services are also an important part of the business. In the perfect world, we would not have to be pushing hard to enter the business. But ultimately, customers want an end-to-end solution. We’ve worked very hard to deliver our best-of-breed hardware and to lower the cost where we can. And the combined impact of the hardware and the professional services business is delivering around about a 20% gross margin for the business.

So I’ll pause there. I’m just going to pass across now to John, who is going to talk us through a little bit more detail on the financial results.

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John Kelly, Oneview Healthcare PLC – CFO & Company Secretary [3]

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Thank you, James. Turning to Page 21 of the presentation. We set out the full year 2019 income statement. And as noted by James, our recurring revenue has increased by 32% over the prior corresponding period to EUR 4.5 million. Nonrecurring revenue represented by sales of hardware and professional services, however, has reduced somewhat by 46% in financial year 2019. But combined total revenue of EUR 7.1 million for the period represents a 13% reduction.

Gross margins in the period are reported at EUR 4.3 million, representing a 60% blended margin across the business. This, as noted, is an 8% improvement on the prior year.

On the overheads front, total overheads, excluding depreciation and amortization and noncash share-based payment expenses, come in at EUR 19.6 million for the year, which compares to EUR 23.2 million for the prior year, representing a reduction of 16% year-on-year. Specifically, within overheads, sales and marketing of EUR 4 million are down 29%. Establishment expenses being rental rates, et cetera, at EUR 0.7 million are down 42%. And G&A expenses at EUR 2.9 million are down 23% and [direct ship] related expenses down 38%. Overall, operating EBITDA is reported as a loss for the year of EUR 15.4 million, which is down from EBITDA loss the prior year of EUR 19.2 million, representing a 22% reduction.

Turning to Page 22 of the deck. We present the closing balance sheet as at December 2019. Net assets are reported EUR 7.7 million, underpinned by year-end cash of EUR 10.3 million, which compares to EUR 9.3 million cash the prior year. Cash is obviously strength — has obviously strengthened earlier this year through the net equity raise of EUR 14.7 million in May 2019. Again, important to note, we have no debt whatsoever in the business.

On Page 23, we present the cash flow for the year. Total operating cash outflows were EUR 13.2 million, down from EUR 18.7 million the prior year. Important to note, we continue to keep costs under tight control. And following the reorganization announced in January of this year, we expect operating expenses, a net operating cash burn to significantly reduce further effective from Q2 of this year. That represent — that presents our cash flow.

Thank you. And handing back to James for concluding comments.

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James Fitter, Oneview Healthcare PLC – CEO & Executive Director [4]

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Thanks, John. So to that point, the final slide on Slide 24, we’re just talking to the 2020 outlook. And we obviously see ongoing growth in our live beds due to the increased penetration of our existing customer base. We are very excited about the new product innovation in the coax space, which is going to materially expand our addressable market. By some estimates, as much as 60% of the U.S. hospital market is still running on coax technology. So we see that as a major driver. It certainly impacted our success in some RFPs, where we’ve been asked to confirm that we can scale across the enterprise. We haven’t been in a position to do that previously for certain customers. And I think this is going to be a very significant and positive impact on our growth outlook.

We’re reducing our operating expenses by nearly — between 40% and 50% on an annualized basis. That is obviously as a result of a very significant strategic reorganization that’s clearly going to dramatically reduce our cash flow in 2020. And our growth strategy is really around solidifying our financial foundations to make sure that we can deliver innovation at scale for what is an increasingly complex and discerning customer base globally. And I think all of the steps that we’ve taken in recent months to achieve that is going to set us up very nicely for future success.

So that concludes my prepared comments, and Izzy, I’ll pass it back to you now for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We are showing no questions at this time. Pardon me, we have a late questioner. Your first question comes from Zara Lyons with Fidelity International.

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Zara Lyons;Fidelity International;Analyst, [2]

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I just wondered, the recurring revenue stream, I was just wondering, if you thought about that revenue stream in isolation, what sort of margin would it be generating in the sense that if I was to — if you didn’t have the sort of recurring revenue lumpiness coming through, what would the profitability look like?

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James Fitter, Oneview Healthcare PLC – CEO & Executive Director [3]

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Yes, that’s a good question. So the blended margin at 60% is really a combination of a software margin of roughly 90% gross margin and the 20% that we attribute to hardware implementation services. And depending on the mix, that’s going to give you somewhere between 50% to 60% blended. So if we were purely software, Zara, we could get all the hardware of the business and we’d be much closer to 90%. And because we take all of our implementation services costs below the line, that’s obviously pure margin as well.

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Zara Lyons;Fidelity International;Analyst, [4]

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Yes. And I just wondered — you sort of talked about coax liberation of potential customers and beds. So I’m just wondering, what would you have already guess as to the revenue opportunity there or the size of the price, so to speak.

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James Fitter, Oneview Healthcare PLC – CEO & Executive Director [5]

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I think it’s fairly significant just because — if we look at our existing customer base alone where we have nearly 6,000 coax beds that we have been unable to deliver on today — and I should stress, it’s not necessarily that we’re technically unable to deliver them, it’s the cost of supporting them that would be prohibitive. And what we’ve been working with is a very innovative partner on the hardware side that will allow us to deliver a coax solution that we can support over the year, which is incredibly important, because the alternative would be if we delivered a coax solution today, if, for any reason, that device failed, someone would physically need to go into the hospital room and get behind the TV to fix it. And that’s something that we obviously don’t want to impose on our customers, and we certainly don’t want to incur that cost. So whilst it would be technically achievable, what we’ve really been aspiring for is the sort of nirvana where we can service that device over the year and deliver across coax infrastructure. And as I said before, I think there’s potentially as much as 60% of the U.S. market is still coax.

And historically, our position has been to suggest to prospective customers that they upgrade their infrastructure. But obviously, that comes with a very significant cost. So I think the investment in coax is incredibly important, and I think it’s going to unlock a lot of value for us.

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Operator [6]

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There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.

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