Q4 2021 Change Healthcare Inc Earnings Call

Earnings Conference call at this time, all participants are in a listen only mode.

I would now like to hand, the conference over to speak of the day, Evan Smith Senior Vice President of Investor Relations. Please go ahead.

Operator.

Good morning, and welcome to change Healthcare's earnings call for the fourth quarter of fiscal 2021, which ended on March 31, 2021 I'm.

I'm joined today by Neil de Crescenzo change Healthcare's, President and CEO and Frederick lies in change Healthcare's Executive Vice President and Chief Financial Officer.

First Neil will provide a business update and then Fredrik will review the financial results for the quarter, followed by closing remarks from Neil.

Given the pending transaction with Optum insight, we will not be taking questions or providing financial guidance before.

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 from the results suggested by the comments for several reasons, which are discussed in more detail in the company's SEC filings.

As required by law change healthcare assumes no obligation to update any forward looking statements or information.

Please also note that where appropriate we will refer to non-GAAP financial measure measures, which 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 this presentation.

Want to remind everyone that copies of our earnings release and the supplemental slides accompanying this conference call are available on the Investor Relations section of our website at Www Dot change health care Dot com with that I'll turn the call over to Neil Neil.

11, and good morning, everyone.

Wanted to take a moment to recap the year that demonstrated the resiliency of our company and the health care system as a whole.

Heading into the fiscal year, we quickly responded to COVID-19, pivoting, our working model and business.

Support our customers' needs.

Change healthcare experience scale and insights allowed us to contribute to dozens of research disease tracking and virtual care efforts that were caused or accelerated by the COVID-19 pandemic.

Despite the hardships facing our communities our team continued to plan for the future while navigating the present.

We delivered on our strategy quickly developing new solutions to support our customers as they accelerated their virtual health interoperability and other key initiatives throughout the year, while continuing to focus on our long term investments.

As a company, we make critical decisions on a timely basis and offered new resources to support our team members customers and partners in order to enable everyone to effectively execute their goals, while improving access inefficiency in the health care system for consumers.

We develop disruptive solutions to improve health care, including our industry, leading data science as a service or <unk> offering.

VSAT drives improved outcomes and health care economics for vulnerable health populations.

We also advanced our E Commerce shop book and pay solution and clearance estimate or patient direct solution to help providers comply with the CMS price transparency rural and enhance patient per member engagement.

Finally, we completed strategic acquisitions to expand our capabilities in major markets, such as pharmacy, and accelerate our product Roadmaps and enterprise imaging and value based care.

We will continue to make significant investments in FY 'twenty 2 across the platform to drive innovation and increased value for all healthcare stakeholders, including payers providers partners and consumers.

In a year filled with unexpected and unprecedented challenges I am proud of what we were able to achieve as a team and as a company.

We now turn our focus to the fiscal year ahead fiscal 'twenty, 2 a year full of promise and opportunity.

Clothing, the expectation of becoming part of Unitedhealth group's Optum insight organization, which we believe will position us to make it even bigger impact on improving health care for all participants in the health system.

Before I get into the details of the quarter. Let me provide you with a brief update on the pending combination of change healthcare and Optum insight.

In April we were pleased with the strong support of our shareholders overwhelmingly voted in favor of the transaction.

This is an important milestone towards closing the transaction and pursuing our common vision with United Health group of enhancing the health care system.

The transaction remains subject to the satisfaction of the regulatory and remaining closing conditions.

As disclosed in March we received a second request from the Doj for additional information in connection with their review from the transaction.

We are working diligently in coordination with U H G as well as working cooperatively with the Doj to respond to their requests and no material change has occurred in terms of our timing expectations for closing.

Now I'll briefly highlight our financial performance for the quarter.

The quarter reflected improvement in utilization and new business implementations as well as continued strength in our core franchises sales into a broad spectrum of customer and partner segment and the continued expansion of our business within our extensive customer base.

Our team produced solutions revenue of $804 million.

Adjusted EBITDA of $272 million.

Adjusted earnings per share of 42 cents per diluted share.

And free cash flow of $36 million during the quarter.

During the quarter, we also repaid $50 million of our term loan b.

Fredrik will provide more detail on our financial performance following my remarks.

In addition to the improvement in utilization, we saw increased customer and partner bookings in underlying demand across all 3 business segments.

This growth demonstrates the belief our customers and prospects have and the value we deliver to them today and will in the future.

Driven by our focused investments over many years and capabilities aligned with health Care's evolution.

Our fourth quarter results demonstrate the positive impact of our investments in enterprise sales and innovation across our platform. While we simultaneously continued to optimize our cost structure to accelerate growth and performance going forward.

While there remains some uncertainty due to unemployment levels health care utilization in payer mix as leave you FY 'twenty to the underlying market trends for our business remain positive on multiple fronts, including increased requirements for interoperability.

Advances in virtual health initiatives.

Increased need for data and analytics to help clients reduce administrative costs and improved.

Performance under value based care models.

All these trends are aligned with our long term focus and investment on improving outcomes reducing costs.

And simplify the consumer experience.

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.

And from our all payer electronic attachment service.

As well as increased traction from new high value added solutions like our connected consumer health E Commerce suite.

During the quarter, we launched a number of new products and the change health care marketplace spanning medical network decision support data solution and interoperability solutions to help payers comply with the CMS patient access and interoperability rule.

The change health care marketplace now offer 71, API in SaaS products, providing solutions to power revenue cycle management payments and medical network workflows.

We processed approximately 170 million API transactions in the fourth quarter and are now processing, an average over 50 million API transactions per month and the volume continues to grow.

Moving to our software and analytics segment.

We continue to see opportunities across this segment as payers and providers take advantage of change healthcare is high ROI solutions that leverage our unique data AI models and workflow capabilities.

In enterprise imaging, our end to end cloud Native enterprise imaging solution continues to drive new sales.

And our payment accuracy risk adjustment and quality and clinical decision support solutions, we continue to expand our relationships with a broad range of customers, including some of the largest payers in the country as well as leading health care technology providers as part of our partner community.

Now moving to our technology enabled services segment.

And our RCM services business, our comprehensive approach enables us to improve patient access and experience optimize reimbursement management as well as provide optimal payment solutions.

As a result, we continue to expand our pipeline and growth booking with continued positive trends in average deal size win rate and ongoing success closing billion dollar deal.

Our new contracts in this segment included the expansion of several existing customers as well as a number of new customers looking to leverage change healthcare's breadth of capabilities.

Some examples are a large county in New York contracting for RCM capabilities creates emergency ambulance service, a large COVID-19 testing and vaccine administration company needing a proven partner who could support third party billing at scale as well as several regional.

All systems needing a strong partner with diverse and integrated capabilities across multiple specialties and EMR systems.

We are also strengthening our communication and payment services, our Cps business as well as our consulting business.

Within Cps, we are in the process of rolling out our digital first initiatives, which will provide bottom line savings to our payer and provider clients as well as unlock additional value in the form of increased contact points and patient engagement.

And in our consulting business, we were recently awarded best in class for <unk>.

Payer it consulting services underscoring the value, we bring to payers, but helping them overcome technical challenges and optimize business performance.

More specifically, our interoperability engagements continue to deliver value to our client base and have been a tremendous growth opportunity for us.

During the quarter, we executed on initiatives to strengthen our business and accelerate our growth and performance first we continued to enhance our existing software solutions to support continued improvement in outcome inefficiency for our customers and second we launched new innovative network.

<unk> solutions to support both immediate COVID-19 related needs and the future needs of customers and consumers.

Let me provide a little more color on these investments and their results.

In our clinical decision support business, we unveiled inter qual 'twenty 'twenty, 1 our latest edition of our clinical decision support solution.

The new release features 4 new Medicare criteria modules. In addition to a significant number of evidence based content updates and enhancements, including new guidance on caring for COVID-19 patients addressing social determinants of health and the appropriate use of virtual care services.

Yeah.

In our network business, we announced the launch of our vaccine record solution. This digital solution gives all Americans the ability to access a durable secure and trusted record of their vaccinations and door testing results to be used when and where they choose <unk>.

Several organizations, providing vaccines to millions of Americans are utilizing the service to them.

In closing, we continue to execute on our strategic operational and financial objectives.

Through continued innovation, we are providing greater value every quarter to payers providers and consumers.

Let me reiterate our previous outline focus areas.

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 and network management and optimize payment processes to improve health outcomes and increase operational efficiency, while reducing costs.

And for patients, we drive better experiences and outcomes throughout the patient journey.

We remain confident the change healthcare as platform, which provides best in class connectivity transaction management insights and integrated experiences will continue to play a central role in helping our customers through the continuing transformation of health care.

Now, let me turn the call over to Fredrik, who will review our financial performance Frederic.

Thank you Neil good morning, everyone, the fourth quarter and full year results demonstrate the resiliency of our business and the underlying strength of our core franchises as we continue to make significant investments across the platform.

Deepen our relationships with customers and roll out new innovative solutions.

As we stated previously we believe the recovery in activity levels was a result of the trend towards more normal underlying demand and some catch up of previously deferred visits and procedures.

As Aneel also mentioned, we continue to see 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 fourth quarter of fiscal 'twenty 1.

Starting with slide 6 for the fourth quarter solutions revenue was $804 million, including a deferred revenue adjustment of $10 million as part of the fair value adjustments associated with the Mckesson exit.

Per to $787 million in the same period of the prior fiscal year.

We continue to see momentum in our business with positive bookings and pipeline activity across all 3 segments.

Solutions revenue for the current period reflects $10.7 million net favorable impact from acquisitions and divestitures.

There was possibly impacted by new sales volume across all 3 segments.

Net of the impact of deferred revenue and a net revenue related to acquisitions and divestitures and each peered solutions revenue increased 2.2% a sequential improvement and solid foundation as we move into fiscal 2022.

Adjusted EBITDA for the quarter was $272 million compared to $264 million in the same period of the prior fiscal year <unk>.

Adjusted EBITDA reflects the items I outlined related to revenue as well as incremental synergy realization of approximately $11 million in the quarter.

Net loss for the quarter was $13 million, resulting in net loss of <unk> <unk> per diluted share compared with net loss of $109 million or <unk> 34 per diluted unit for the same period of the prior fiscal year.

Adjusted net income was $134 million, resulting in adjusted net income of 42 cents per diluted share compared with adjusted net income of $133 million for 42 <unk> per.

Per diluted unit for the fourth fiscal quarter of the prior year.

There were 321 million diluted shares in the fourth quarter of fiscal 'twenty, 1 compared to 320 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 7.

Starting with revenue.

For analytics segment declined 6% year over year, however, adjusting for the $25 million impact of the connected analytics and capacity management divestitures revenue in our software and analytics segment increased 5.7% over the prior year.

Network solutions revenue increased 33% year over year, which includes $36 million in revenue from acquisitions.

Excluding the impact of acquisitions network revenue grew 6.8% in the quarter key.

Key drivers include growth from implementations of new customers.

Data solutions and beat to be payments businesses, both growing double digits. We also benefited from increased volumes from existing and new customers and market expansion opportunities for.

For our network, resulting from new solutions and increased API driven volumes.

And our technology enabled services segment overall revenue declined 6.2% year over year, primarily as a result of the impact of the previously disclosed customer that reduced certain RCM services activities with change healthcare.

Excluding the impact of this 1 customer we saw the RCM service business activity, improving sequentially with revenue slightly increasing from prior year levels.

<unk> growth also includes new business implementations across our service portfolio.

Our 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 4.2% year over year, including the impact of the divestitures.

We'll continue to make investments to support our AI initiatives in enterprise imaging transformation, we were able to effectively manage our cost to partially offset divestitures.

Network solutions adjusted EBITDA increased 26, 7% in the quarter, driven primarily by underlying growth across the network and the acquisitions 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 37% in the quarter driven primarily by the impact of the contractual business from the previously disclosed customer.

In addition, we continued to make solid progress on our RCM services transformation and the implementation of our accelerated and enhanced transformation program, we announced last year.

We anticipate cost savings of approximately $60 million on a run rate basis over the next 24 months from this program.

Moving onto cash flow and our balance sheet on slide 8.

Free cash flow for the quarter was $36 million compared to $121 million in the same period of the prior fiscal year for.

For the full fiscal year 'twenty, 1 we delivered $340 million of free cash flow well above our previous guidance of $250 million to $300 million.

While we continue to make significant investments in Capex overall improved business performance and working capital management enabled us to deliver strong free cash flow this past fiscal year.

Our liquidity remains strong ending the quarter with $113 million of cash and cash equivalents and $779 million in undrawn revolver capacity.

Total long term debt net of cash at quarter end was under $4.7 billion.

Which includes the repayment of $50 million in term loan obligations during the quarter.

Net leverage ratio was 5.1 at quarter end.

As noted in the press release due to the pending transaction, we will not be providing financial guidance with that said with positive trends in both bookings and pipeline, we remain confident in our ability to accelerate our growth and improve our financial performance as we move through fiscal 'twenty..2 we will continue to invest in R&D to support.

Innovation expand our capabilities and improve our operating performance, including the transformation initiatives and our RCM services business.

We're also continuing our efforts around facility rationalization in response to a more flexible work environment and continued focus on cost optimization across all segments.

While the first half of fiscal 'twenty, 2 will continue to be impacted by the large contract contraction in our RCM services business, we outline our fiscal 'twenty, 1 and some uncertainty as to payer mix and acuity level, we see our fast from continuing to drive new revenue opportunities through innovation and execution as we meet the.

Increased demand from our customers.

Now 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 developed and delivered innovative and transformative solutions for care providers health care payers and consumers.

Clinical financial and care outcomes, so that everyone in the health care system can thrive.

We remain focused on 3 outcomes for our stakeholders.

First we will deliver superior consumer experiences and make the health care experience as positive as possible for everyone.

Second we will drive increased efficiency and accuracy for financial transactions and the health care industry.

We will help our customers make payments and help them get paid quickly and correctly.

And third we will deliver solutions that optimize decision, making for our customers on their journey to value based care.

We will help our customers navigate the changing healthcare landscape more easily and effectively.

I remain incredibly proud of what our company has accomplished and I am grateful to our employees for their hard work dedication and contributions.

Thanks to the dedication of the change health care team members I remain confident that we will continue to deliver innovation and value to our customers and the communities, we serve helping them navigate the current market environment and future opportunities to lower costs enhance access and improve our.

It comes.

Thank you for attending our earnings call today.