Q3 2021 Change Healthcare Inc Earnings Call
Third quarter fiscal year 'twenty 'twenty, one earnings conference call I would now like the hand the conference over to your host today, Evan Smith head of Investor Relations.
Please go ahead.
Thank you operator, good morning, and welcome to change Healthcare's earnings call for the third quarter of fiscal 2021, which ended on December 31 2020.
I'm joined today by Neil de Crescenzo change Healthcare's, President and CEO, and Frederick Elias and change Healthcare's Executive Vice President and Chief Financial Officer first Neil will provide a business update and then Fredrik will provide a review of the financial results for the quarter of followed by closing remarks from Neil the presentations, which will be referenced in the formal remarks.
As posted on the IR website also given the pending transaction with Optum insight, we will not be taking questions moving on to slide two now before we begin I would like to remind you that the comments included in today's conference call include forward looking statements actual results may differ materially for the results suggested by the the comments for several reasons, which are discussed in more detail.
In the Companys SEC filings, except as required by law change healthcare assumes no obligation to update any forward looking statements or information.
Please also note that where appropriate we refer to non-GAAP financial measures to evaluate our business reconciliations for non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix of the supplemental slides accompanying the presentation I want to remind everyone that copies of our earnings release and the supplemental slides accompanying the conference call are available.
In the Investor Relations section of the website at Ww Dot change healthcare Dot com.
Now moving to slide for I'll now turn the call over to Neil Neil.
Thank you Ed good morning, everyone.
While COVID-19 continues to impact our daily lives I hope, everyone remains safe and healthy.
Today I'll review of change Healthcare's performance in the third quarter, which was driven by sequential improvement in health care utilization as well as positive trends in sales activity across our platform.
I will provide insight into our ongoing new business successes on.
Our continued execution on delivering innovation and value to our customers.
And the strategic initiatives, we completed to accelerate growth and expand our opportunities.
Before I get into the details of the quarter. Let me provide you with some background on the pending combination of change healthcare in Optum insight, which we announced on January six.
Under the terms of the agreement change healthcare shareholders will receive $25 75 in cash for each share of common stock.
The consideration of per share represents a premium of approximately 41% over the closing stock price on January <unk> 2021.
And at approximately 98% premium over the $13 IPO share price on June 26, 2019.
The transaction, which is currently expected to be completed in the second half of calendar 2021 is subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory and stockholder approvals.
Okay.
We are excited by the opportunity to unite two technology and service companies focused on serving health care.
The combined capabilities will more effectively connect and simplify core clinical administrative and payment processes.
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Lower cost.
Change healthcare brings key technologies connections and advanced clinical decision administrative and financial support capabilities, enabling better workflow and connectivity across the health care system.
Optum brings modern analytics comprehensive clinical expertise innovative technologies and extensive experience in improving operational and clinical performance.
We share of common mission and values and importantly, a sense of urgency to provide our customers of those they serve with the more robust capabilities. This union makes possible.
Now, let me move on to the quarter.
In addition to improvement in utilization, we saw increased customer activity, including bookings and underlying demand across all three segments.
This further supports our conviction for the increase the value we deliver to our customers today and into the future true.
Driven by our focused investments in capabilities aligned with the healthcare market's evolution.
While there remains some uncertainty due to unemployment levels and payer mix as we move forward in 2021.
The underlying market trends for our business remain positive on multiple fronts.
These include new rules being implemented surrounding interoperability and price transparency as.
As well as continued advances in value based care initiatives, including CMS as new Medicare direct contracting model, which builds on innovations to the Medicare program, including the accountable care organizations for Acos continued advances in Medicare advantage and private sector risk share.
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The acceleration of more of distributed models of care as a result of COVID-19 includes both virtual health and hospital on the home programs.
There is also an increased need for data and analytics to help clients reduce administrative costs meet compliance mandates and approved performance under value based care and new payment models.
And finally, there is an increased convergence of medical care and pharmacy services, helping decrease the total cost of care improve health outcomes and simplify the consumer experience.
In addition, we were also encouraged by the recent findings of the National study Week Commission entitled poised to transform AI in the revenue cycle.
The study found that while two thirds of Doctor's report using AI in some revenue cycle capacity today, nearly all are expected to be using it in three years, providing a significant opportunity for change healthcare as end to end AI lifecycle solutions and the government programs.
As providers begin to use AI more strategically there is an opportunity for significant financial operational and clinical games, including improving the end to end revenue cycle claims accuracy denial of reduction critical insights level of care prediction and more.
These trends will continue to increase demand for payers and providers for change healthcare as platform of integrated solutions and services.
Our platform helps them navigate shifts in coverage improve efficiency streamline payments.
Enable greater interoperability for all market participants and enhance consumer engagement.
Now I'll briefly highlight our financial performance for the quarter.
The quarter reflected an improvement in utilization and new business implementations as well as continued strength in our core franchises and among our extensive customer base.
Our team produced solutions revenue of $735 million of.
Adjusted EBITDA of $233 million.
Adjusted earnings per share of 34 cents per diluted share.
And free cash flow of $134 million during the quarter.
During the quarter, we also repaid $215 million of our term loan b.
Federer who will provide more detail on our financial performance following my remarks.
Our third quarter results demonstrate our continued focus on our enterprise sales efforts in innovation across our platform.
We continue to optimize our cost structure to accelerate growth and performance going forward.
Now, let me provide an update on our success on the new business front.
Within our network segment, we continue to see increased volumes, resulting from new business continued growth in our API related transaction volumes in our all payer electronic attachment service as well as initial traction from new high value added solutions like our connect.
The consumer health E Commerce suite.
We are building momentum across our digital health initiatives with new business from several mid and large health systems as well as innovative digital health companies focused on personalized health care and AI driven solutions to improve administrative processes.
This included new sales of our connected consumer health suite, which allows patients to play a more active role in their health care choices as well as our interoperability and API solutions in areas like eligibility and claims.
We have a solid pipeline with more opportunities either in contracting or in RFP processes with organizations, who are addressing the rise of consumerism in health care.
During the quarter, we launched 13, new products in the change healthcare marketplace spanning medical network decision support data solutions and interoperability solutions to help payers comply with the CMS patient access of interoperability rule.
The change health care marketplace now offers almost 50 API in SaaS products.
Providing solutions to power of revenue cycle management payment and medical network workflows.
We processed nearly 100 million API transactions in the third quarter and are now processing over 30 million API transactions per month, and the volume continues to grow.
In our BTB payments business. In addition to increased volumes with our existing customers. We continue to expand that business, including contracts worth several million dollars annually with one of the largest payers in the country as well as the leading management services organization servicing over one.
1 million lives and a fast growing cloud based integrated health benefits platform company.
Moving to our software and analytics segment.
In our risk of judge adjustment and quality solutions business, we continue to expand our business with large payers by offering a better ROI with our unique data AI models and workflow capabilities.
As a result during the quarter, we signed three multi million dollar of agreements for multiple solutions in this area to support Payors.
We also continued to advance our payment accuracy and decision support business as a result of our continued innovation.
By bringing more intelligence earlier in the workflow change healthcare's coding adviser and enter qual connected auto review of capabilities combined with the integration with leading EMR is continue to drive new opportunities.
As a result during the quarter, we signed several multimillion dollar agreements with some of the largest players in the United States.
In our enterprise imaging business, we continue to grow our pipeline and have signed several new enterprise deals further advancing our position in the imaging market.
In addition to new sales within our core customer base, we again closed several multimillion dollar contracts, including with two government agencies and a complete end to end enterprise imaging solution for a leading hospital growth in the middle East.
And our RCM services business, we continue to expand our pipeline and growth bookings with positive trends in average deal size win rates and ongoing success closing molten multimillion dollar deals.
We continue the signed deals with mid to large scale of Idms and hospital groups in New York, including a large deal with one of the nation's premier academic medical centers, extending our existing patient access services relationship with this organization.
We also added two significant Midwest laboratory customers, providing them broad capabilities, including billing services coverage insight and smart thing.
Our new wins further strengthen the foundation for our RCM services transformation and the underlying performance supporting our growth in FY 'twenty two.
During the quarter, we also executed on initiatives to strengthen our business and accelerate our growth and performance.
First we continued to advance our data science as the service initiative and second we divested our capacity management business.
Let me provide a little more color on both of these.
And our data science as a service business. We have continued momentum across all targeted verticals life Sciences financial services media and risk decision Sciences.
To further support our double digit growth during the quarter, we launched an innovative national data resource that connects the circumstances of People's lives to the care they receive.
The solution social determinants of health analytics is the resource to help health systems insurers and life science organizations explore how <unk>.
Demographic factors affect patient outcomes.
Change healthcare is S. D O H analytics links D identified claims with factors such as financial stability edgy.
Education level ethnicity housing status in household characteristics to reveal of the correlations between social determinants of health clinical care and patient outcomes.
The resulting data set is of course, the identified in accordance with HIPAA privacy regulations.
In addition in conjunction with Carnegie Mellon University of the Delphi Research Group, we announced the launch of Delphi has enhanced COVID-19 cash real time, COVID-19 indicators the.
The addition of D identified COVID-19 claims from change healthcare allows COVID-19 cash to present, a more complete multi dimensional picture of the pandemic and its impact.
Moving on to the strategic divestiture that we completed in the quarter.
During the quarter, we divested our capacity management business for $67 $5 million.
The sale of aligned with our strategy to concentrate on the primary areas of our business that achieve the best outcomes for our customers through the power of the change health care platform.
So in closing, we continue to execute on our financial and operational objectives.
Through continued innovation, we are providing greater value to payers providers and consumers.
Describe how.
For care providers, we help reduce administrative burden and support the transition to value based care.
For health care payers, we enable a more comprehensive view of risk in network management to improve health outcomes and operational processes, while reducing costs.
And for patients, we drive better experiences and outcomes throughout the patient journey.
We remain confident the change healthcare's platform.
Which provides best in class connectivity transaction management insights and integrated experiences.
We will continue to play a central role in helping our customers through this transformation.
Now, let me turn the call over to Fredrik, who will review our financial performance Frederic.
Thank you Neil Good morning, everyone I'm happy to report a strong third quarter underscoring the central role we play in the health care system, the south care activity continued to improve throughout the quarter.
We believe the recovery in activity levels was the result of the trend towards more normal underlying demand and some catch up of previously deferred visits and procedures.
As Neil mentioned, we continued to the underlying strength in our sales efforts across the platform, including positive market reception for our newly introduced solutions.
Let me now move on to provide more details of our quarterly performance for the third quarter of fiscal 'twenty one.
Starting with slide six for the third quarter solutions revenue was $735 million, including of deferred revenue adjustment of $24 million as part of the fair value adjustments associated with the Mckesson exit compared to $753 million in the same period of the prior fiscal year.
We continued to see momentum in our business with positive bookings and pipeline of activity across all three segments.
Solutions revenue for the current period reflects an $18 $3 million net favorable impact from acquisitions and divestitures, including the negative $2 $2 million impact from the divestiture of the capacity management business in the quarter, which closed on December 2nd.
The quarter was also negatively impacted by the COVID-19, pandemic, which was partially offset by new sales volume across all three segments.
Net of the impact of deferred revenue and the revenue related to acquisitions and divestitures in each period solutions revenue declined one 7%.
Adjusted EBITDA for the quarter was $233 million essentially flat with the prior year adjusted EBITDA reflects the items I outlined related to the revenue as well as incremental synergy realization of approximately $11 million in the quarter net.
Net income for the quarter was $2 million, resulting in net income of <unk> <unk> per diluted share compared with net income of $31 million of 10.
Per diluted unit for the same period of the prior fiscal year.
Adjusted net income was $110 million, resulting in adjusted net income of 34 cents per diluted share compared with adjusted net income of 106 million of 33.
Per diluted unit for the third fiscal quarter of the prior year.
The adjusted net income reflects the increase in adjusted EBITDA as noted earlier as well as the benefit from lower interest expense as a result of the year over year reduction.
Average outstanding debt and lower interest rates.
There were 325 million diluted shares in the third quarter of fiscal 'twenty, one compared to 322 million diluted units in the same period of the prior fiscal year.
Now, let's take a look in more detail at the performance of our segments on slide seven.
Starting with revenue the software analytics segment declined by three 9% year over year.
Our software and analytics segment was essentially flat with the prior year after adjusting for the $17 million impact of the connected analytics and capacity management divestitures rare.
Revenue in our subscription based solutions grew low single digits, which was offset with a mid single digit decrease in our non subscription contingency based businesses, primarily in our legacy imaging solutions due to COVID-19.
On network solutions revenue increased 27, 8% year over year, which includes $35 million in revenue from acquisitions, excluding the impact of acquisitions network revenue grew four 4% in the quarter key drivers include growth from implementation of new customers in our data.
<unk> and BTB payments business.
Both growing double digits. We also benefited from increased volumes from existing and new customers and market expansion opportunities for our network, resulting from new solutions and increased API driven volumes.
The technology enabled services segment overall revenue declined seven 8% year over year, primarily as a result of the impact of the previously disclosed customer that reduced certain RCM services activities with change healthcare and slightly lower volumes related to COVID-19 in the communication and print businesses.
Excluding the impact of this one customer we saw the RCM services business activity improving sequentially with revenue in line with prior year levels underlying.
Underlying growth also includes new business and the implementations across our service portfolio on.
RCM turnaround efforts remain on track and we continue to see positive long term trends in both RCM win rates and deal size.
Turning to adjusted EBITDA software analytics decreased five 5% year over year, while continuing to make investments to support the AI initiatives of enterprise imaging transformation, we were able to effectively manage our cost of partially offset the impact of COVID-19 and divestitures.
Network solutions adjusted EBITDA increased 18, 6% in the quarter, driven primarily by underlying growth across the network and the acquisition of <unk> and pdx.
Results also include a continued investment to support the significant number of new product launches and market expansion initiatives, we have underway.
In technology enabled services adjusted EBITDA declined 49% in the quarter driven primarily by the impact of the contraction of business for the previously disclosed customer and slightly lower volumes related to COVID-19 in the communications and print businesses.
In addition, we continued to make great progress on our RCM services transformation and the implementation of our accelerated and enhanced transformation program, we announced last quarter, we anticipate cost savings of approximately $60 million on a run rate basis over the next 24 months as.
As we indicated last quarter this value creation initiatives will allow us to continue increasing customer innovation, while driving productivity.
Moving on to cash flow and our balance sheet on slide eight.
Free cash flow for the quarter was $134 million compared to $120 million in the same period of the prior fiscal year.
Overall improved business performance on stronger working capital has increased our confidence in our full year cash flow outlook.
Adjusted free cash flow was $154 million compared to $151 million in the third fiscal quarter last year on.
Liquidity remains strong ending the quarter with over $137 million of cash and cash equivalents and $779 million in undrawn revolver capacity.
Total long term debt net of cash at quarter end was slightly under $4 7 billion, which.
Which includes the repayment of $250 million in term loan obligations during the quarter.
The agreement net leverage ratio was five two times at quarter end.
As noted in the press release due to the pending transaction, we will not be providing guidance I would note, though that the full fiscal year 'twenty one assumptions. We previously provided at the end of the second quarter remain unchanged.
With that let me turn it back over to Neal for his closing comments.
Thank you Fredrik.
Over the past several years change healthcare has worked diligently to develop and deliver innovative and transformative solutions for care providers healthcare payers and patients in order to improve clinical financial and care outcomes.
That everyone in the health care system can thrive.
I am incredibly proud of what our company has accomplished and I am grateful to our employees for their hard work dedication and contributions.
As for the quarter demonstrates we continue to deliver increased value to our payer and provider customers as well as consumers.
This transaction with Optum insight when completed will mark the start of an exciting new chapter for change healthcare, bringing together highly complementary cultures and teams.
The realized the long term value of benefits that this combination will deliver.
Thanks for the dedication of the change health care team members I remain confident that we will continue.
The deliver innovation in value for our customers and the communities we sir.
Helping them navigate the current market environment and future opportunities to lower cost enhanced access and improve outcomes. Thank.
Thank you.