Q4 2022 Change Healthcare Inc Earnings Call

Good morning, Thank you for standing by and welcome to the change Healthcare's earnings call for the fourth quarter of fiscal year 2022. At this time all participants are in a listen only mode. I would now like to hand, the conference over to your host today, David Elliot change Healthcare, Inc. Vice President of Enterprise strategy and Investor Relations.

Please go ahead.

Thank you operator, good morning, and welcome to change Healthcare's earnings call for the fourth quarter of fiscal 2022, which ended on March 31, 2022, I'm joined today by Neil de Crescenzo change Healthcare's, President and CEO and project a lot of some change out there as 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.

The pending transaction with Unitedhealth group, we will not be taking questions or providing financial guidance.

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 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 this presentation.

I 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 healthcare dotcom.

With that I'll turn the call over to Neil Neil.

Thank you David.

Good morning, everyone and thank you for joining us.

Sure I would like to take a moment to recap a year in which we made considerable progress towards our mission and accelerating the transformation of the U S health care system through the power of change healthcare solutions.

We continue to deliver superior returns on investment to our customers and introduce innovative new solutions like our care cost estimate or API.

Stratus imaging pack.

Dual eligibility advocate and our coordination of benefits solution.

Wait developed hundreds of new customer relationships, especially among digital health company and other fast growing segments, while expanding and deepening our relationships with existing clients, which resulted in our team exceeding our booking and cross sell targets for the year.

In a year of uncertainty created by the pending Unitedhealth group merger and continued impacts from the COVID-19 pandemic.

Our change health care team members have shown incredible resilience.

Creativity and agility as they continued to deliver for our customers and partners.

As a result, our business has never been stronger with significant momentum heading into FY 'twenty three.

Consistent with this momentum I am pleased to report that we closed out our fiscal year 2022 with another strong quarter.

Our results continue to demonstrate the underlying strength and momentum of our business and the disciplined execution of our growth strategy.

Solutions revenue adjusted EBITDA, and free cash flow were $859 million $282 million and $174 million, respectively in the fourth quarter.

This represents record solutions revenue for change healthcare and year over year revenue growth of six 8% and adjusted EBITDA growth of three 8%.

Our performance reflects continued new bookings momentum existing customers expanding their business with change healthcare, new product introduction and new business initiatives.

We remain confident in our ability to continue to deliver strong performance, while continuing to make significant investments and innovating across change healthcare.

Fredrik will provide more details on our financial performance shortly.

With regards to the pending transaction with United Health through the Department of Justice commence litigation to block the merger on February 24.

We and Unitedhealth group executed an agreement on April , Florida, which among other things extended the merger agreement through December 31 2022.

As part of the extension Unitedhealth group will pay a $650 million fee to change healthcare in the event. The merger is unable to be completed due to the court's decision.

In the event the merger is able to be completed change healthcare will now pay a special cash dividend of $2 per share to its shareholders at or about the time of the merger closing.

The extension of the merger agreement reflects our firm belief in the benefits for U S healthcare of change healthcare, becoming part of Optum and in our commitment to contesting the merit less legal challenge to this merger.

We and Unitedhealth group will detail the benefits of this combination at a two week trial scheduled to begin on August one.

Now, let me provide an update on our success across our segments, starting with our software and analytics segment.

We continue to see opportunities across this segment has payors providers and partners take advantage of our high ROI solutions and realize the benefits of our data AI models and workflow capabilities.

And payment accuracy, we close multimillion dollar claims extend deals with two major net new clients, including a large blues plan and a high growth technology enabled health plan with over 1 million members.

We also signed a different blues plan for our coordination of benefits solution.

Our coordination of benefits solution for commercial payers deliver savings through both cost avoidance and overpayment recovery by identifying primary coverage for both Medicare and commercial plans, which is a key capability most competitors lack.

Through this innovative product our commercial customers realized incremental savings of over $11 per member per year on average.

Our risk adjustment and quality solutions continue to be a strong operating in the market as they help customers close gaps in care more rapidly to improve health outcomes and lower costs.

In Q4, we closed a five year end to end risk adjustment contract worth several million dollars annually.

The client replaced an incumbent competitor with change healthcare further evidence of the value of change healthcare as a full service partner and optimizing risk adjustment outcomes.

And our RCM technology business, we announced the partnership with Lumina health to co develop solutions unify all patient journey from clinical operational and financial.

Our strategic partnership will leverage Lumia health class recognized healthcare engagement engine alongside change healthcare's proven revenue cycle technology and services to develop new patient engagement solutions that seamlessly connect every touch point across the patient journey.

This patient first and interoperability focused approach to tackling this persistent challenge in health care, we will create a more intentional unified patient experience.

By keeping patients connected to all aspects of their care and improving communication between staff providers in peso. This partnership will improve the experience for both providers and patients.

With our clinical decision support solutions, we continue to provide innovative ways for clinicians to leverage real time evidence based guidance as they serve patients.

We integrated predictive analytics into inter Cal Auto review, our medical review automation solution.

<unk> Auto review already populate an average 75% of the data needed to complete medical necessity reviews, and Embeds EHR data into the review to increase trust with Payors.

We apply artificial intelligence to this real time, EHR data and provide data driven predictions on which level of care is right for each patient.

These predictive analytics equip case managers with insights they can use to proactively improve clinical and financial outcomes, while streamlining utilization management.

In Q4, we had another major go live for <unk> auto with you at a customer with 14 hospitals with a total of 2100 that.

We also closed new inter cloud deals with a number of payers, including a large blues plan.

In enterprise imaging, we have the strongest bookings quarter since taking change healthcare public including closing several multimillion dollar contract with key strategic new clients.

Our development roadmap continues to expand and we now have over 250 Apis available R&R Stratus imaging platform.

After several quarters of multiple large new contract win it is clear that the market is embracing our vision of a cloud native AI driven enterprise imaging platform.

We expect strong growth for our enterprise imaging business in FY 'twenty three.

Now moving onto our network segment.

We've seen double digit year over year growth in transaction volumes across our core networks, driven by new customers expansion of existing customer relationships and the last quarter of Covid related tailwind.

We saw 13% year over year volume growth in our medical network across eligibility claims.

With this January being a record month for medical eligibility transactions.

We continue to see solid execution in high growth strategic priorities like payments.

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Our API marketplace.

We closed a multimillion dollar contract to provide our medical network API to one of the largest tech companies in the world.

This client performed deep diligence and technical analysis on our API choosing change healthcare because of our RCM experience, our consultative approach, our broad payer connectivity and the capabilities of our innovative care cost estimate or API.

In Q4 alone we grew our API related transaction volume approximately 40% from Q3 and approximately 150% versus Q4 of last year.

In January we celebrated an incredible milestone achieving 1 billion API transaction and the previous 18 months.

We also launched the next generation of our change healthcare marketplace in Q4.

The marketplace now includes an extended product catalog and richer user experience that enables our customers and prospects to discover our product and engage with our sales team quickly and easily.

As of the end of Q4, we had a total of 324 API software and hardware products from across our portfolio available the change healthcare marketplace and in multiple online storefront, including AWS Azure Epic's, App Orchard and the Salesforce.

Appexchange.

Our leadership and providing micro service based that API based solutions to the health care industry, along with our payments and data solutions businesses are fueling the continued growth of our network segment beyond underlying transaction volume growth.

Now moving to our technology enabled services segment.

In technology enabled services, both the provider and payer facing businesses across that have experienced continued momentum and their go to market efforts as evidenced by larger and more strategic deals in the fourth quarter.

The value proposition of our patient access business has become even more relevant as our clients face tight labor market conditions.

For example, we recently won multimillion dollar contract as the primary scheduling vendor for a large east coast health care system as well as for our Florida based hospital system.

These customers place their trust in change healthcare based on our ability to deploy highly trained staff quickly and drive increases in scheduled visits.

And RCM physician services, we secured a large deal with an east coast anesthesia group displacing an incumbent competitor.

This client chose change healthcare because of our anesthesiology expertise demonstrated performance with large practices and strong customer references.

As in prior quarters, we continued to expand the underlying margins in the technology enabled services businesses through automation and AI consistently increasing our efficiency and driving stronger performance for our customers.

As an example, we are increasing patient engagement in our financial clearance business grew new conversational AI modules and our voice spot program and new patient portal developed with our behavioral science team.

Our adoption rate and effectiveness for these tools continue to trend upwards last quarter showcasing the value and usability of our patient self service offerings.

And backend RCM services, our AI enabled accounts receivable management tool continues to see increased adoption and utilization with over 750000 claims handled by our denials module in Q4, a 20% increase over Q3.

Our consulting services Division continued its multiyear track record of strong performance.

The consulting team signed three multimillion dollar payer contracts in Q4 and was again named best in class prepare it consulting services for the third time in four years.

So in closing our Q4 results and FY 'twenty two as a whole.

Demonstrated our team's customer and partner focus.

Their resilience and their ever increasing innovation.

We continued our strong execution in attaining our strategic operational and financial objectives.

Through continued innovation, we are providing greater value by leveraging technology and insights to reduce the administrative waste stream.

Streamline and accelerate payments.

And enhance consumer engagement to drive better experiences and outcomes throughout the patient journey.

We remain confident that change healthcare, 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 healthcare.

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

Right.

Thank you Neil good morning, everyone.

Our strong fourth quarter results demonstrate the resilience of our business and the underlying strength of our core franchises.

As we continue to make significant investments across the business deepen our relationships with customers and implement new innovative solutions.

Starting with slide six for the fourth quarter solutions revenue was a record $859 million compared to $804 million in the same period of the prior fiscal year, which included a $10 million fair value adjustment associated with Mckesson exit.

The quarter was positively impacted by volume growth and new sales.

All three segments.

Net of the impact of the deferred revenue in the prior period solutions revenue increased five 5% year over year.

Net income for the quarter was $7 million, resulting in net income of <unk> <unk> per diluted share compared to a net loss of $13 million or <unk> <unk> per diluted share for the same period of the prior fiscal year.

Adjusted EBITDA for the quarter was $282 million, an increase of three 8% over the same period of the prior fiscal year.

Adjusted EBITDA reflects the items I outlined related to the revenue, partially offset by investments to support business initiatives negative mix and increased wage inflation and our technology enabled services business.

Adjusted net income was $130 million, resulting in adjusted net income of 39 per diluted share compared with adjusted net income of $134 million or <unk> 42 per diluted share for the fourth fiscal quarter of the prior year.

Adjusted net income benefited from revenue growth and new sales volume compared to the prior year, but these improvements were more than offset by higher depreciation and amortization.

There were 331 million diluted shares in the fourth quarter of fiscal 'twenty, two compared to 321 million diluted shares in the same period of the <unk>.

Fiscal year, driven by the company's net loss position in the prior year, along with vesting of additional equity awards.

Now, let's take a look in more detail at the performance of our segments on slide seven.

Starting with revenue.

Software and analytics segment increased six 5% year over year, driven by new customers volume growth with existing customers and new product introductions.

Network solutions revenue increased nine 1% year over year.

Key drivers included volume growth from existing customers implementation of new customers and continued double digit growth in our data solutions and beat to be payments businesses.

Favorable impact from Covid related activities with significantly smaller in the quarter compared to earlier in the year as network volumes have normalized.

In our technology enabled services segment overall revenue increased three 1% year over year, primarily as a result of increased volume growth incremental COVID-19 testing in new sales.

We continued to see positive long term trends in both RCM win rates and deal side.

Turning to adjusted EBITDA software analytics increased 14% year over year, driven by revenue growth and a favorable volume shifts to higher margin products.

Network solutions adjusted EBITDA decreased four 6% year over year, driven primarily by continued investments to support the significant number of new product launches and market expansion initiatives, we have underway and negative mix, that's COVID-19 related activities network abated.

In technology enabled services adjusted EBITDA decreased $4 $9 million year over year, driven by increased wage inflation negative mix and customer credit adjustments.

Moving on to cash flow and our balance sheet on slide eight.

Free cash flow for the quarter was $174 million compared to $36 million in the same period of the prior to fiscal year <unk>.

Full year free cash flow was $421 million versus $340 million in the prior year.

Total long term debt net of cash at quarter end was $4 3 billion net.

Net leverage ratio was $4 one at quarter end.

Subsequent to the end of the quarter the company repaid an additional $100 million.

Senior note obligations.

Our liquidity remains strong ending the quarter with $252 million of cash and cash equivalents and $780 million in undrawn revolver capacity.

As noted in the press release due to the pending transaction, we will not be providing financial guidance.

With that said, let me provide some color regarding our expectations for full year and first quarter fiscal year 'twenty three.

Due to the underlying momentum in the business, we expect solutions revenue growth of 2% to 4% in FY 'twenty three despite headwinds from lower COVID-19 related activities and some customer attrition related to the UHT merger.

We saw the largest positive impact from Covid related activity in the first half of fiscal 'twenty, two which is why we anticipate more muted year over year growth in the first half of FY 'twenty three.

We expect growth to accelerate in the second half of the year, especially in the fourth quarter as we lap the FY 'twenty two vaccine impact.

So specifically to the first quarter of FY 'twenty three despite the aforementioned headwinds we expect low single digit revenue growth year over year for both the SMA and network businesses adjusted.

Adjusted EBITDA for both SMA and network businesses are expected to be flat to only slightly up due to negative mix year over year.

In tests, we also anticipate low single digit revenue growth year over year, but a modest decline in adjusted EBITDA as wage inflation will continue to impact margins until both appropriate repricing of contracts of course, an additional transformation benefits are realized.

Last we expect free cash flow in the range of $450 million to $500 million for the full year, driven by adjusted EBITDA growth and significantly lower add back to year over year, partially offset by increased capex as we continue to target capex in the range of 8% to 9% of <unk>.

<unk> revenue.

As a reminder, we are reestablishing imaging solutions as a standalone reporting segment.

Begin providing commentary specific to that segment next quarter.

Now with that let me turn it back over to Neal for his closing comments.

Thank you Fredrik.

In closing I want to express my appreciation for the dedicated team members of change healthcare.

I know they remain focused on developing and delivering innovative solutions for health care providers payers partners and consumers to improve clinical financial and care outcomes.

As I have stated previously our goal is to deliver on three key objectives for our stakeholders.

First we will deliver superior consumer experiences.

Second we will drive increased efficiency and accuracy for financial transactions and healthcare.

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

The strength of our financial performance to date and the ability to continue to deliver innovative value added solutions to our customers is a testament to our team members' commitment innovation and agility.

We will continue to partner with our customers to help them lower cost enhance access and improve outcomes, creating value for everyone in the health care system.

Thank you very much for joining us today.