Joseph Capper - President and Chief Executive Officer Heather Getz - Chief Financial Officer

Jan Wald - Benchmark Company Alex Silverman - Special Situations Chip Saye - AWH Capital Marco Rodriguez - Stonegate Capital Bruce Jackson - Lake Street Capital

Good afternoon. Thank you for joining us for the BioTelemetry first quarter 2016 earnings conference call. Certain statements during the conference call and question-and-answer period to follow may relate to future events and expectations and as such constitute forward-looking statements within the meaning of Private Securities and Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the company in the future to be materially different from the statements that the company's executives may make today. These risks are described in detail in our public filings with the Securities and Exchange Commission, including our latest periodic report on Form 10-K or 10-Q. We assume no duty to update these statements. At this time, all participants have been placed on a listen-only mode. The floor will be opened for question and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Joseph Capper, President and CEO. Sir, you may begin.

Thank you, operator, and good afternoon, everyone. I'm Joe Capper, President and CEO of BioTelemetry. Also with me on call today is our Chief Financial Officer, Heather Getz. I'll start with an overview of over first quarter performance, Heather will take you through a more detailed review of our operating results, I will make closing comments, and we'll then open up the call to your questions. Let's get started. I am extremely pleased to report this afternoon that we started out the New Year the same way we exited 2015, with another record-setting quarter, during which we surpassed all expectations, posting our 15 consecutive growth period, with new highs in volume, revenue and EBITDA. This performance is even more noteworthy, given the first quarter is typically our most challenging, especially in terms of EBITDA and cash due to certain front-end loaded expenses. If you followed the company last quarter, you know that our financial guidance for 2016 was a meaningful increase over an extremely successful 2015, calling for revenue between $195 million and $200 million and EBITDA of at least $40 million. In order to achieve these lofty objectives, we must continue to execute on our three-point plan, which is to, solidify our leadership position in cardiac monitoring, establish a leading research services business around the cardio core platform, and look to identify markets that would benefit from the application of a wireless platform and proprietary technology. Our adherence to these principles has been instrumental in generating the consistent growth we have had for more than three-and-a-half years, including the strong results we achieved this most recent quarter. In fact, as you'll hear, our first quarter was such a tremendous success, we once again find ourselves in a position where we are compelled to increase our EBITDA guidance for the full year. Heather will provide more commentary on our guidance in her remarks. But first, let's take a few minutes to review some of the highlights from what was quite an active and productive quarter. During the period, revenue grew by 12% to $48.6 million, exceeding the midpoint of our guidance by approximately $2 million. Overall margins continue to improve as quarterly EBITDA grew by 68% to $10.8 million, far exceeding expectations. Year-over-year quarterly volume was up 10% with MCT volume up 19%. We ended the quarter with $22.8 million in cash, up $3.8 million sequentially, in spite of high cash demand typical in the first quarter. The rollout of CardioKey continues to be an outstanding success story, as we've already serviced in excess of 4,000 patients; we acquired the ePatch division from DELTA Technology; our research services team continue to expand backlog and make progress in several critical areas; we entered into a definitive agreement to acquire VirtualScopics; and we continued to advance business development activities that will create additional sources of revenue. Our much better than expected Q1 results have set BioTelemetry up for a highly successful 2016. Now, let's take a closer look at components of the business, which drove this performance. In our healthcare services division, we continue to generate greater market penetration, with record highs in all three major service types, MCT, event and Holter. As I mentioned a moment ago, overall volume was up 10%, with MCT up an incredible 19% in the quarter. Naturally, you would question, what is driving the accelerated organic growth rate and is sustainable. We believe the growth is coming as a result of several key factors, both internal and external. First, I cannot underscore enough, how effective we have been since shifting our product positioning away from an MCOT-only mindset to a more comprehensive portfolio approach few years ago. This has given us a meaningful competitive advantage, since no other provider in our space can match us in terms of breadth of product offering. Not only do we provide more options, no other competitor comes close in terms of product performance, which brings me to the next factor driving growth. Our sales and marketing team has done a superb job, refining and delivering a message focused on our technology leadership position. We have seen recent movement in certain segments of the cardiac monitoring market toward increased demand for improved diagnostic accuracy. This is good news for us, since MCOT has no equal in this area. One example, where we see this playing out is in the neurology market, when physicians are looking for the possible presence of AFib in cryptogenic stroke patients. As I have mentioned in the past, Medtronic is actively promoting their implantable loop recorder for use with cryptogenic stroke patients. Given that numerous studies have shown MCOT to have a diagnostic yield approximately five times greater than that of Medtronic's device at 21 days, the most appropriate standard of care is MCOT, prior to an implantable loop recorder, 100% of the time for cryptogenic stroke patients. In fact, we have yet to see another device that approaches MCOT's sensitivity and specificity in the tech in AFib. Another factor driving our growth is the overall productivity improvement of our sales organization. We have the best equipped, best trained and best led sales team in our industry. We have had relatively low turnover amongst our highest performing sales team member. As a result, we are realizing increases in nearly all of our key sales metrics. It is one thing to refine your product position and messaging, but it is all for not if you don't have a high performing sales team that can execute. There are also new external dynamics, which are likely contributing to overall market growth. Most notably is the increased awareness and education about AFib, driven in large part by the advertising associated with the introduction of several orphan replacement medications. Drugs like Xarelto, Pradaxa and Eliquis are being heavily promoted with multimedia direct-to-consumer advertising campaigns. Since these promotions tend to be educational in nature, they improve awareness, which inevitably drives increases in testing and monitoring. We believe we are benefiting from this activity. Finally, we have also been able to restrict or eliminate inappropriate activity from certain rogue competitors, by seeking enforcement of our intellectual property rights. It is impossible to allocate portions of our growth across these factors. However, and more importantly, we do not expect any of these to dramatically change course in the near term. As such, we fully expect to sustain our growth rates for the foreseeable future. This growth will be further augmented with the continued rollout of CardioKey, which is benefiting from widespread market acceptance, having recently surpassed our 4,000 patients served. Consistent with our strategic intent to strengthen our leadership position in remote cardiac monitoring, we recently completed the acquisition of ePatch division of DELTA Technology, a Denmark-based independent technology company. DELTA have been one of our longstanding partners working on the development of our next-generation MCT platform, currently in FDA review. As we move closer to the commercial introduction of this system, we thought it was important to take control of the critical components DELTA had developed and capture the associated cost savings that will come with integration. As part of this transaction, we also acquired the ePatch device, an extended-wear Holter in a patch format. The addition of ePatch to our current product portfolio gives us greater flexibility in terms of product offering, domestically and abroad. Switching gears a bit. We also recently received more good news on the payor front. The Blue Cross Blue Shield of Massachusetts, which insures approximately 2.5 million people, announced it would begin coverage for mobile cardiac telemetry service, effective May 1. Our challenges with some of the carriers in Blue's network remain. However, moving another Blue into the covered life's column can only help in our pursuit of system-wide payor coverage. We remain confident that our strong value proposition combined with robust clinical outcomes will continue to drive conversions and coverage overtime. With demand for remote monitoring solutions on the rise, our healthcare services business is incredibly well-positioned to continue to outperform the market. Our high organic growth rate, improved margin, new products and expanded payor coverage are all contributing to the momentum the business is experiencing. Turning to research services. During the quarter we took an extremely important strategic step, when we reached an agreement to acquire Rochester, New York based VirtualScopics. As a leading provider of clinical trial imaging solutions, VirtualScopics focuses on oncology, musculoskeletal and other therapeutic areas, requiring centralized imaging services. As we have discussed on numerous occasions, expanding our research services offering has been one of our high priority initiatives aimed at improving the long-term competitiveness of this division. The imaging market is growing between 6% to 7% annually and is expected to be approximately $1 billion per year in the next few years. Combining this sizable imaging business with our cardiac services platform will immediately make us a far more formidable competitor and a more desirable partner to our larger research customers. A tender offer to VirtualScopics shareholders is currently underway. We hope to complete the transaction within the next two to three weeks, at which point we will enthusiastically welcome the VirtualScopics team to BioTelemetry. Additionally, we continue to make progress expanding the geographic reach of our research business. As I mentioned on last quarter's call, our newly established business development presence in Japan is already starting to produce meaningful results, having won our first major study from a large Japanese pharma company. In addition to the advancements in our healthcare and research divisions, we continue to invest resources towards further diversification, which I have spoken about on previous calls. We are making excellent progress with the growth of our at-home INR monitoring service, which allows us to leverage our current independent diagnostic testing facility and our sales and marketing infrastructure. This year we have begun to more aggressively resource and promote this business and expect INR to be a meaningful contributor to our overall performance. Our collaboration with Wellbridge Health, a CHF care management solutions company, aimed at reducing unnecessary hospital readmission and emergency room visits, is progressing according to plan. They recently completed a lengthy pilot program, which produced a 150% return on investment, far surpassing initial expectation. And of course, we continue to evaluate other opportunities to leverage certain core competencies within the company. Given the success we are having executing our plan and the positive trends we continue to see in our business, we anticipate building on this record setting first quarter, as we progress throughout 2016. I'll now turn the call over to Heather for a detailed financial review of the quarter. Heather?

Thank you, Joe, and good afternoon, everyone. As Joe just announced, Q1 was another record breaking quarter with revenue coming in ahead of our expectations at $48.6 million. Healthcare revenue was strong with an increase of $6.1 million or 18% growth over the prior year. Our research revenue was essentially flat and technology revenue declined $900,000. The strength in the healthcare revenue resulted from a 10% volume increase across all healthcare product lines, with our MCTs growing at an impressive 19%. Remarkably, this came on the heels of a record-setting fourth quarter. Also contributing to the healthcare revenue was the increased Medicare rate, which as expected added about $1 million. In our technology segment, the softness experienced in the second half of 2015 continued into Q1 2016, as customers have delayed purchases pending the release of our 3G devices to the market. We expect this buying pattern to reverse in the second half of 2016. Moving to gross profit. Our margin was 63%, which was 500 basis points higher than the prior-year quarter. This margin improvement comes from favorable pricing dynamics in the healthcare segment as well as operational and volume efficiencies. These positive benefits were partially offset by lower margins in our research segment due to investments made in the business during 2015 and slightly lower technology margin stemming from the lower revenue and product mix. We have continued to see our increased gross margin leverage combined with operating expense discipline positively impacting the bottomline. We generated adjusted EBITDA of $10.8 million for the first quarter of 2016, a 68% increase, as compared to our Q1 2015 adjusted EBITDA of $6.4 million and a 22% return on revenue. This is our eighth consecutive quarter of EBITDA margin expansion. Now, turning to the balance sheet. We ended the quarter with $22.8 million in cash compared to $19 million at yearend 2015. We generated $8.2 million in cash from operations and $4.7 million in free cash flow in the quarter. Even though during the first quarter we have higher cash outlflows connected with headcount related cost including management incentive payments and payroll taxes, as well as higher sales related expenses for our national sales meeting and trade shows. In addition, we used $3.5 million for capital expenditures, largely for additional devices used in our healthcare segment. At the end of December we had $23.2 million of indebtedness, which is about half our trailing 12 month EBITDA. We also have access to a $15 million facility, which remains undrawn. As you can see, we have maintained a very healthy balance sheet with our cash balance and low debt levels. Shifting gears, I would now like to touch on the outlook for 2016 and more specifically on the second quarter. With better than expected results from the first quarter, the expansion of our product offerings through the DELTA division acquisition as well as the Medicare increase for MCOT, we are increasing our adjusted EBITDA guidance to $42 million to $44 million for the full year 2016. These numbers include the impact of the ePatch product, but exclude the impact of VirtualScopics. We will update guidance in the quarter following the close of this acquisition. Now, more specifically for the second quarter, we expect to see revenue of approximately $49 million or about a 10% increase over the prior-year quarter and EBITDA of about $11 million or a 40% increase over the prior-year quarter. As you can see, we have gotten off to a strong start in 2016 and expect the momentum to carry through the remainder of the year. To summarize, we posted our 15 consecutive quarter of year-over-year revenue growth and eighth consecutive quarter of EBITDA margin expansion. In addition, we have continued to generate GAAP net income in the quarter. We have a strong balance sheet with almost $23 million in cash, low leverage and additional debt capacity, if needed. As such we are confident about the company's position and our ability to achieve the guidance provided for the second quarter and full year 2016. And with that, I will turn the call back over to Joe. Joe?

Thanks, Heather. As you have just heard, we had a highly successful first quarter, starting off 2016 ahead of expectations. In addition to achieving excellent results and improving margins, we completed over 4,000 CardioKey services, acquired ePatch division of DELTA and made progress across our research and INR businesses. Our strategy is clearly working as designed. To ensure continued success in 2016, we must stay laser-focused on the following items. We must build on our comprehensive approach and expand market penetration of CardioKey, followed by our next-generation telemetry system. We need to capitalize on the increased base of awareness and education in the marketplace by showcasing the best-in-class attributes of our technology. We will continue our efforts to expand payor coverage for all services, continue growing our research backlog, at least double the size of our INR services business, drive further efficiencies throughout the organization to maximize margin opportunity, and last, assess additional acquisition targets that will accelerate our strategic plan. By executing on each of these objectives, we expect to be in a strong position to deliver more record-setting quarters. Our guidance for 30% year-over-year EBITDA growth demonstrates the confidence we have in our business. Moreover, we are excited to see a growing trend towards use of remote monitoring technology in healthcare. Given our strong core competency in that area, we are extremely optimistic about what the future holds for us. So in closing, I would again like to thank those at the company who helped deliver our 15 consecutive growth quarter. You should be proud that your hard work is positively affecting the lives of hundreds of thousands of people. With that, we'll not pause and open the call for questions. Operator, we are ready for our first question.

[Operator Instructions] And our first question comes from the line of Jan Wald from Benchmark Company.

Just a couple of questions, I guess. On the research services side, backlog is growing, revenues are flat. When are we likely to see revenue to start to expand or increase in this year or next year or how should we looking at it in terms of our models?

Yes, I think we'll see some expansion this year, Jan. It's a little flatter in the first half than we had anticipated. As you know, that's kind of a choppy business and we had a few cancellations, none of them material, but in aggregate it starts to add up a little bit. So it's flattened out a little bit in the first half of the year. So we hope to see a little bit more of an increase in the back half. I think the good news is we continue fill the backlog at an accelerated rate and we're making some progress obviously with some of the strategic initiatives that we spoke about. So it's a good healthy business, nice margin, nice return, it complements our healthcare services business, but it does tend to be a little bit choppy.

I guess in terms of EBITDA, I guess, given the guidance for the second quarter, I'm surprised that EBITDA guidance is sort of flat with the first quarter. Are there some expenses in the second quarter that are driving that being as flat as it is or what?

So as you can imagine, Jan, with the kind of growth that we experienced in Q1, we really weren't able to hire to meet the demand and we will have to layer in some additional people up in cost to sales. So that will affect the bottomline a little bit. So we're calling for about 22% return, which is on par with what we saw in Q1. But you are going to see a little bit more expense in the latter quarters in addition to potential investments that we've discussed at the end of last year that we may do to accelerate the topline.

So we've given ourselves a little bit of room, Jan.

I guess, my last question is data and, clinical data is what I mean, there is a lot of data coming out from Medtronic that you guys can counter, and it sounds as if your sales force is using data that you have to market with. But are you going to -- is there anything that we can expect to see at the Heart Rhythm Society Meeting or is there any data that's going to made public down the road that we would be able to see and that would support your claims for better specificity, sensitivity than the competition and things like that?

As you're aware, Jan, there has been at least five studies that I'm aware of that have published peer reviewed studies that demonstrate exactly what you say, which forces people to ask the question why, when they ask a question why you drill into product performance capability, re-product inserts and you find out that one product is incapable of detecting what the other product is capable of detecting. So part of that is, as you mentioned, getting that out there promoting it. We're doing it through our sales organization today. I think we're having a tremendous amount of success with that, as demonstrated by the almost 20% increase we saw in MCT. So I think the message is getting out there. We don't have the marketing prowess and resources of Medtronic, but it's certainly not hurting us today. I think it's helping us. And I think we're getting our message out there. So we mentioned that we hedged a little bit of EBITDA, because we intended on investing a little bit in the business. That may be one area where we invest. We have a couple of studies that are under-evaluation, and. I think would be well-received in the marketplace, if we can get those launch this year.

And our next question comes from the line of Alex Silverman from Special Situations.

Really great quarter, 22% EBITDA margins, pretty shocking. Wondering your prior 2016 guidance was for low double-digit revenue growth with patient reps growth rate sort of continuing at these levels, product sales looking positive in the second half, research services turning positive in the second half, that former guidance seems low, am I wrong?

No. I think the low double-digit got you to the midpoint of $195 million to $200 million, we're probably a little bit more bullish on the upper end of that, but it's only one quarter, so we basically have a year or so to unfold.

You finished last year with just jumping around; you finished last year with 2,500 INR patients. I think you said your goal for this year is to double that?

Yes, double at least the active patient count and the revenue. So just kind of rule of thumb about it, each 1,000 patients is roughly $1 million in annualized revenue on a run rate basis.

Each 1,000 is -- okay, that's right.

What we did last year, we sort of skunkwork it, worked up at [indiscernible] set up operations for it. This year we assigned quota to our sales organization and we're starting to promote it and we're starting to get some traction in the marketplace around our product offering or service offering. And I think we'll start to see that pickup as we move through the year.

And then last question, you said, CardioKey volume was up by a third sequentially. Can you give us some number what that was?

Well, as Joe mentioned in his script, we've done about 4,000 patients to date and we launched it in like the end of Q3 for sure,

We're kind of selective in how we rolled it out. We did it where we had market opportunity to go against a specific competitor who already had an extended-wear Holter in the marketplace. We're really focused on targeting those accounts and we've had some success there. We're just now starting to kind of roll it out on a wider basis, if you will, and evaluating how we want to position the product vis-à-vis traditional 24 and 48 hours Holters.

And our next question comes from the line of Chip Saye from AWH Capital.

Number one, Heather, I have asked you about this before, but could you give a breakout between Holter, Event and MCOT in your cardiac services revenue?

Absolutely. So if I look at it as a percentage of healthcare revenue, MCOT was about 70%, Event was about 21% and Holter was the remaining.

And secondly, my second question revolves around physician reimbursement for MCOT. I didn't realize this, but I was reading the cardiacmonitoring.com website and it said that MCOT uptake was really hurt by the fact that physicians have poor reimbursement for doing this monitoring. And number one, is that the case that they're reimbursed around the $1 a day. And number two, are there business models out there that maybe you could split some of the revenue with physicians in attempt to increase usage? And I guess, thirdly, have you guys looked at this?

Yes. So to answer your first question, the economic incentive for a physician to use this service is almost non-existent specific to the service itself. However, we have thousands of physicians that use it, because it produces a yield that nothing else is even close to, which means, their revenue will come with follow-on procedures and inflations and implants and such. So if you think about it in terms of a treating physician, the quicker they get the diagnosis, the more accurate diagnosis, the faster they can get into the therapy. But I'd be lying if I told you that hadn't been a barrier to growth and a challenge the growth over the years that we've been in the marketplace with it, but it hasn't stopped us, because it's a wonderful product. Your second question was about business models that would allow us to share some of that revenue. We really can't do that. You run into -- you want to [ph] follow a lot of regulations and compliance rules and what not when you start talking about revenue sharing. So it's not a subject that that we entertain much. There are opportunities at times for physicians to make an investment in capital, both software and hardware, which would allow them to take a partial ownership of the business and then outsource some of the monitoring. There is relatively few. We have found relatively few locations in the market that have an appetite for that. I'd say, less than 5% of the market is somewhere in the neighborhood with an appetite for making a capital investment like that, it's just not a big revenue generator for them. So you understand that when there are other services out there, that do offer economic incentives to physicians, you could see where they might be lowered in that direction. However, when those products are far inferior at actually arrhythmia when a physician is attempting to diagnose to saving a life, they do tend to follow there more accomplish and use the most accurate device available.

Lastly, and this is INR business that you talked about doubling that business this year. What is the incremental cost or incremental spend that you'll have to have in order to double that business this year?

Yes, I mean it's nominal to be honest with you, because the business is still so small. So I mean it's not -- you're talking about maybe $1 million or so dollars of the capital that's required. Your first part of your question was is it just the capital or are you saying how much would drop to the bottomline?

It's just how much additional incremental expenses would you have to incur in order to have that double the patients in the revenue?

So on the capital side you're looking at maybe a $1 million to $2 million depending on where the patients come in; if they're brand new patient versus coming over from another service provider. And then on the margin side, right now given the low scale, we have about 40% gross margins that obviously will increase with scale, probably closer to what we're experiencing now in the 60% to 70% range.

And our next question comes from the line of Marco Rodriguez from Stonegate Capital.

I have to apologize, I have some technical difficulties with my phone and miss part of the Q&A session. So if I have repeated a question, please let me know and I'll follow back up with you.

No problem.

In terms of the guidance, I just want to get a little bit better handle on the gross margin aspect. I know that in Q4, you were looking for kind of flattish gross margins and then 60% to 61% gross margins in the following quarters through fiscal '16. Obviously you did substantially better in Q1 on your gross margins. Just trying to understand how you seem those gross margins proceed to the rest of fiscal '16?

I would expect it to remain relatively flat maybe give or take 50 basis points to 75 basis points, Marco. And that's because as I mentioned earlier that we will need to hire some additional folks to keep up with the volume, that we're seeing, but I believe that will be offset by some favorable pricing dynamics on the commercial side as they follow Medicare. So you're probably looking at given the mix that that also helps that 63% see a higher margin, because 85% of our revenue came from patients or healthcare, which has typically been closer to 80%. All those factors contributed to the higher margin and I why would expect it to continue.

And then in terms of the performance, I mean very impressive growth rates on the revenue side. I'm just wondering, if -- obviously it's above what you guys were kind of expecting and I do appreciate the commentary you guys had in prepared remarks in terms of what was kind of driving things there. I am just kind of curious here though, were there certain things that basically really took you guys by surprise or was it just kind of again being conservative on your Q1 type guidance?

Maybe a little bit of both. MCT growth probably was slightly more them we expected. And that obviously is our best revenue generating product line. So that was probably slightly better than we had anticipated, but I'd say probably a little bit of both.

And a last quick question. Was there any update on the MCOT patch?

No. It's currently in FDA for review, so nothing really to report.

And our next question comes from the line of Bruce Jackson from Lake Street Capital.

If we could just follow-up on one of the comments made about some patent litigation that's ongoing, are there any major events coming up with regard to any hearings or decisions, trials, anything?

Not before September, would be the next event that we would be dealing with and that's a trial date for one of the cases that we are involved in.

And then Jan mentioned the R&D backlog, what's it going to take to shake loose some of that backlog and when do you think that that could happen?

The research services backlog?

Yes. Some of it's in the back half of the year, so in our guidance, we still have year-over-year growth related to the research business, but as we get larger studies and longer-term studies that impacts the timing. So even though our backlog can grow the length of the studies are growing as well, so it's going out further. We do expect to see year-over-year growth, even though it was flattish this quarter.

And then last question. You've got a fair number of challenges here 2016, what are you are envisioning right now as a long-term growth rate for the business going into like 2017 and beyond?

Look, we evaluate the business on ongoing basis and we look at the factors that are affecting our growth. And I have talked about the ones that are most important to us. But the ones that we saw affecting the growth this quarter and last couple of quarters frankly, none of those looked like they're going to change anytime soon, so the way we've discussed the business, look we think could still handle over the long-term, high single-digit, low double-digit growth rates. I mean that's pretty healthy for a healthcare services platform like this. So if we can do that, we can continue to find margin with scale, I think that's going be a darn healthy business for the foreseeable future.

And I am not showing any further questions. I would now like to turn the call to Mr. Joseph Capper for any further remarks. End of Q&A

Thanks to everybody. Thanks for getting in the call today and thanks for your continued support and interest in the company. That concludes today's call. And we will speak to you next quarter. Thanks, operator.

If you join the conference late today, you may listen to the conference call via digital replay, which will be available through the investor information's section of BioTelemetry, let's say, at www.gobio.com until Tuesday, May 10, 2016. Thank you. Have a wonderful day, ladies and gentlemen.