Q1 2023 Change Healthcare Inc Earnings Call
[music].
Good morning, Thank you for standing by and welcome to the change Healthcare's earnings call for the first quarter of fiscal year 2023.
I would now like to hand, the conference over to your host today, David Elliot.
Health care inks, Vice President Enterprise strategy and Investor Relations. Please go ahead.
Good morning, and welcome to change Healthcare's earnings call for the first quarter of fiscal 2023, which ended on June 32022, I'm joined today by Neil de Crescenzo change Healthcare's, President and CEO and Frederick Eliassen 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 United Health 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.
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 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.
In the appendix to 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 in the Investor Relations section of our website at Www Dot change healthcare dot com with that I'll turn the call over to Neil Neil.
Thank you David Good morning, everyone and thank you for joining us.
Our first quarter results demonstrate the underlying strength and momentum of our business.
We were faced with difficult year over year Comparables in the quarter created by elevated COVID-19 related activities last year and customer attrition related to the extended UHT merger process.
Despite these headwinds we grew revenue in the quarter and positioned ourselves well to deliver on our 2% to 4% revenue growth expectations for the year.
We continue to invest in innovative solutions to create value for our payer provider and consumer customers.
Along with our customers and partners, we remain focused on lowering costs enhancing access and improving outcomes for the benefit of everyone in the health care system.
Now let me provide you with some financial highlights for the quarter and insights into our continued success advancing our solutions to deliver increased value for all healthcare stakeholders.
Solutions revenue adjusted EBITDA and free cash flow were $831 million.
$280 million and $4 million, respectively in the first quarter.
This represents year over year solutions revenue growth of one 8% and an adjusted EBITDA decline of zero <unk>, 9%.
Our performance reflects continued new bookings momentum.
<unk> customers expanding their business with change healthcare.
New product introductions, and new business initiatives, partially offset by lower revenue from Covid related activity customer attrition related to the extended UHT merger process and our continued investments to support business initiatives.
As the combined year over year challenges from Covid related volume in the UHT merger related attrition start to subside in the third quarter, we expect significantly stronger growth starting in the fourth quarter and throughout our next fiscal year starting in April 2023, our fifth.
Full year 'twenty four.
Fredrik will provide more details on our financial performance shortly.
With regards to the pending transaction with United Health Group, we remain firm in our belief in the benefits for U S healthcare of change healthcare, becoming part of Optum and we are committed to contesting the legal challenge to this merger.
We and United Health Group are currently detailing the benefits of this combination at a two week trial that began earlier this week on August one.
If the merger closes we expect that change healthcare shareholders will receive $27 75, and cash comprised of the $25 75 per share deal price along with a special cash dividend of $2 per share.
These payments will only occur if the merger closes and the dividend is subject to final approval of change Healthcare's board at the time of the closing.
In the event the merger is unable to be completed due to the court's decision Unitedhealth group will pay a $650 million fee to change healthcare.
Now, let me provide an update on our success across our segments.
<unk> with our software and analytics segment.
We continue to see opportunities across this segment as payers providers and partners take advantage of our high ROI solution and realize the benefits of our data AI models and workflow capabilities.
At payment accuracy, we again closed several multimillion dollar deals including claims extend secondary editing deals with two blues plan customers.
These customers both recognize the value of the change healthcare can provide and quickly developing and deploy new content via secondary editing to provide them significant savings.
We also signed a multimillion dollar prepayment insight and review deal with a high growth technology enabled health plan with over 1 million members.
With prepay insight and review, we help customers reduce waste and the payment process by identifying in proper payments before they are paid.
Our risk adjustment and quality solutions continue to be a strong offering in the market as they help customers close gaps in care more rapidly to improve health outcomes and lower costs.
In Q1, we signed a medical record retrieval and critical review deal worth over $5 million annually with one of the largest managed care organization in the country.
Continuing our innovation in this field. We also introduced community connect during Q1, a new service for payers, who want to assess their members social determinants of health needs and refer members to community based organizations to provide social service program assistance.
This product re imagine how whole person focused services, such as home environment housing education, and access to food and transportation can work together to improve People's health, well being and quality of life.
And our RCM technology business, we had a strong bookings quarter for both our clearance and assurance solution, including a large new deal with a health system in Hawaii.
Last quarter, we announced the partnership with Lumia health to develop new patient engagement solutions. We have now launched our patient engagement suite, combining lumia helps patient success platform solution with change healthcare revenue cycle management solutions to give patients and providers a cohesive experience.
That spans the entire health care journey.
As evidenced by our large and growing pipeline. The market is excited about this vision to improve the patient and provider experience by keeping patients connected to all aspects of the care and providing communication between staff providers and patients.
With our clinical decision support solutions, we continue to provide innovative ways for clinicians to leverage real time, evidenced based guidance as they serve patients.
Brought three new customers live on <unk> Auto review in Q1, representing 25 facilities and 6500 beds.
We've also seen continued momentum with our care select lab decision support product with three new sales in the quarter.
Clients Youre seeing laboratory decision support as a key tool in their expense reduction initiatives.
Moving on to our network segment.
We've seen continued year over year growth in transaction volumes across our card networks.
Even by new customers and expansions of our business with existing customers offset by customer attrition and lower COVID-19 related claims volume.
Q1 was the strong new bookings quarter, particularly in our pharmacy network business, where we signed several multimillion dollar deals, including a deal worth nearly $5 million annually with an innovative technology company focused on reducing wasteful pharmacy and patient spending.
We continue to see solid execution in our high growth strategic priorities like payment data solutions and our API marketplace.
In Q1, we grew our API related transaction volume by more than 50% versus Q1 of last year.
As of the end of Q1, we had a total of 335 API software and hardware products from across our portfolio available and the change healthcare marketplace and in multiple online storefront, including AWS Azure <unk>.
<unk> App Orchard, and the Salesforce App exchange.
Our leadership in providing micro service space at API based solutions for 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.
Moving to our newly formed enterprise imaging segment.
In Q1, we established enterprise imaging as a standalone reporting segment under its own general manager reporting directly to me.
We made this change in connection with Chris Joe <unk> promotion to assume the role of President software and analytics. In addition to continuing his role as EVP and President for network solutions.
Given our market, leading cloud native enterprise imaging platform, establishing enterprise imaging as a standalone reporting segment will help our team better address the growing demand and unique market opportunities in imaging, while best positioning the imaging team to grow and deliver for our customers.
You can find eight quarters of recast results that reflect the segment changes in the appendix of the slides accompanying this presentation.
In the quarter, we again signed several multimillion dollar imaging contracts winning competitive deals over some of the largest imaging companies in the world.
As evidenced by our continued new contract wins the market is embracing our vision of a cloud native AI driven enterprise imaging platform.
Now moving on to our technology enabled services segment.
In tests, we're continuing our focus on client performance and value creation.
We've continued to refine and communicate our value proposition for both payer and provider customers updating 10 return on investment calculator across test with our sales and account management teams.
We use one of these ROI calculators, along with other customer data analyses to help a large national physician group understand the value of that change healthcare could bring to their practices.
This helped us sign our largest contract in this market segment in over four years.
We've also been successfully expanding our service contracts and other market segment. We recently increased our communications business substantially with a large payer closing two deals worth several million dollars combined.
And as in prior quarters, we remain focused on expanding the underlying margins in the technology enabled services businesses through automation and AI to increase our efficiency and drive stronger performance for our customers.
Our RCM transformation efforts are on track and remain a top priority alongside navigating the current challenges in the labor market.
In closing our Q1 results 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 administrative waste streamline and accelerate payments and enhanced consumer engagement to better drive 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 vital 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 Neal and good morning, everyone.
Our first quarter growth demonstrates that despite headwinds from lower COVID-19 related volumes and customer attrition related to the extended UHC merger process.
Underlying momentum of our core franchises remains strong.
And with our sales pipeline and investments in innovation, we have.
We're well positioned to materially accelerate growth as we get to the fourth quarter and the aforementioned year over year challenges become less impactful.
Starting with slide six for the first quarter solutions revenue was $831 million.
Compared to $870 million in the same period of the prior fiscal year, which included a $4 million fair value adjustment associated with the Mckesson exit.
The quarter was positively impacted by volume growth and new sales, partially offset by the aforementioned UHD merger related attrition and more normalized health care activity compared to last year.
Net of the impact of the deferred revenue fair value adjustment in the prior period solutions revenue increased one 2% year over year.
Net loss for the quarter was $23 million, resulting in net loss of seven cents per diluted share compared to a net loss of $4 million or <unk> per diluted share for the same period of the prior to fiscal year.
Adjusted EBITDA for the quarter was $280 million a decrease of <unk>, 9% over the same period of the prior fiscal year. Adjusted EBITDA reflects the items outlined relative to revenue and our continued investments to support business initiatives.
Adjusted net income was $124 million, resulting in adjusted net income of 38 per diluted share.
Paired with adjusted net income of $133 million or <unk> <unk> per diluted share for the first fiscal quarter of the prior year.
Adjusted net income benefited from revenue growth and a slightly lower tax rate, but these improvements were more than offset by higher depreciation and amortization.
There were 327 million diluted shares in the first quarter of fiscal 'twenty, three compared to 323 million diluted shares 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 increased two 1% year over year, driven by new customers volume growth with existing customers and new product innovations, partially offset by attrition related to dependent USG transaction.
Our network solutions revenue increased two 3% year over year.
Key drivers include volume growth from existing customers and the implementation of new customers.
The favorable impact from Covid related activities with significantly smaller in the quarter compared to the prior year.
Revenue in our new enterprise imaging segment increased <unk>, 8% year over year, driven by new sales growth and partially offset by the timing of implementation revenue.
And our technology enabled services segment overall revenue decreased one 7% year over year.
As a result of onetime projects during the prior year that did not recur during the current quarter and lower Covid revenue.
We continue to see positive long term trends in both RCM win rates and deal size.
Turning to adjusted EBITDA software analytics increased five 8% year over year, driven by the aforementioned revenue growth.
<unk> solutions adjusted EBITDA decreased one 9% year over year, driven primarily by continued investments to support a significant number of new product launches.
Can expansion initiatives that we have underway and negative mix as COVID-19 related activities and the network debated.
Enterprise imaging adjusted EBITDA decreased $1 $3 million year over year, driven by hiring to support business growth and research and development expenses.
In technology enabled services adjusted EBITDA decreased $7 million year.
Year over year, driven by the same factors that impacted revenue as well as increased wage inflation and hiring challenges in a difficult labor market.
Moving onto cash flow and our balance sheet on slide eight.
Free cash flow for the quarter was $4 million.
Compared to $44 million in the same period of the prior fiscal year.
In addition to lower net income to decline versus last year was due to unfavorable net working capital and Capex timing.
Both of which are expected to reverse in the remainder of the year.
Total long term debt net of cash at quarter end was $4 4 billion.
Net leverage ratio was $4 one at quarter end.
During the quarter the company repaid $100 million senior note obligations and subsequent to the end of the quarter repaid an additional $50 million on the senior notes.
Our liquidity remains strong ending the quarter at $94 million of cash and cash equivalents of $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 the full fiscal year in the second quarter.
Starting with the full year, our expectation of 2% to 4% solutions revenue growth is unchanged from what we outlined last quarter.
The underlying growth of the business is strong.
But as mentioned earlier, we are experiencing headwinds from lower COVID-19 related activities and customer attrition related to the extended USG merger process.
We expect that these factors.
Along with negative mix shifts and wage inflation within test.
We will drive flat to slightly contracting full year, adjusted EBITDA margin versus last year.
Our full year free cash flow expectation of $150 million to $500 million.
It remains the same albeit most likely at the lower end of the range due to the higher litigation costs associated with the merger.
As for the full year cadence, we began seeing a material impact from attrition related to the UHD merger in the fourth quarter of fiscal year 'twenty two.
Which is why we anticipate more muted year over year growth through the first three quarters of the fiscal year.
We expect strong growth acceleration in the fourth quarter.
The lower combined impact of the attrition and the COVID-19 activities provide for easier year over year comparison.
This coupled with strong bookings performance will set up nicely for not just the strong fourth quarter, but also a strong FY 'twenty four.
Specific to the second fiscal quarter.
2023, we expect flat to low single digit revenue growth in all four segments due to the aforementioned headwinds.
For second quarter adjusted EBITDA, we expect year over year declines in all four segments due to the aforementioned revenue headwinds along with other factors unique to each business unit.
And software analytics, we expect a high single digit percent decline in adjusted EBITDA year over year due to negative mix shift for the quarter.
This mix shift is driven by higher growth in lower margin risk adjustment and quality solutions.
And customer attrition related to the <unk> merger and some higher margin solutions.
We expect this mix shift to normalize by the fourth quarter as we lap most of the attrition impacts.
In network, we expect a low single digit percent decline due to lower high margin COVID-19 related revenue.
In enterprise imaging, we continued to invest in R&D sales and marketing and implementation staff to fuel growth from our new cloud Native enterprise imaging platform as.
As a result, we expect mid single digit million dollar adjusted EBITDA decline in the second quarter.
After that we expect double digit percent EBITDA growth for that business unit for the remaining two quarters of the fiscal year as prior year bookings start to drive significant revenue growth.
And in technology enabled services, we expect a low double digit million dollar decline.
And adjusted EBITDA.
Merely to increased contractor costs wage inflation and lower COVID-19 volume versus prior year.
Now with that let me turn it back to Neil for his closing comments.
Thank you Fredrik.
In closing I want to express my appreciation for the dedicated team members of change healthcare.
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've 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 in health care.
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.
This concludes today's conference call. Thank you for participating you may now disconnect.