Q3 2022 Multiplan Corp Earnings Call
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Hello, everyone and thank you for joining the multi plant Corporation third quarter 2022 earnings Conference call. This call is each beginning couple minutes. Thank you for your patience.
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Hello, everyone and thank you for joining the multi plant coal question third quarter 2022 earnings conference. My name is stylish MLP Dol question. If so how do you. What's your host host Sean I would like to remind you that we would like to ask a question during the Q&A session at the end of the call.
Please press star followed by one on your telephone keypad.
The pledge of HUD, Neil that you show like Oxy AVP Investor Relations. Please go ahead.
Thank you good morning, and welcome to multiplex third quarter 2022 earnings call. Joining me today is bill White, Chief Executive Officer, and Jim <unk>, Chief Financial Officer. This call is being webcast and can be accessed through the investor Relations section of our website at www dot multiply and dot com during <unk>.
Our call we will refer to the supplemental slide deck that is available on the Investor Relations portion of <unk> website, along with the third quarter 2022 earnings press release issued earlier this morning.
Before we begin a couple of reminders, our remarks and responses to questions. Today may include forward looking statements. These forward looking statements represent managements beliefs and expectations only have some data on this call actual results may differ materially from those forward looking statements due to a number of risks a summary of these risks can be found on the <unk>.
Page of the supplemental slide deck and a more complete description on our annual report on Form 10-K, and other documents we file with the SEC. We will also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of market claims underlying operating results and explanation of these non-GAAP measures.
And reconciliations to the most comparable GAAP measure can be found in the earnings press release, and the supplemental slide deck with that I would now like to turn the call over to our Chief Executive Officer Dale weight Dale.
Thank you Sean good morning, everyone and welcome to the call.
By now many of you have had an opportunity to review our third quarter results.
I'll say at the outset that these results were disappointing and while the predominant driver of the shortfall was the decline in patient utilization of healthcare services I would be remiss, if I didn't acknowledge our results. Nevertheless.
Nevertheless fell short of our third quarter expectations.
I am going to cover three topics. This morning, I'll provide some context around the market conditions and moving pieces that drove our third quarter results.
To reinforce that we continue to see strong underlying demand for our services are highly engaged with our customers and remain focused on investing in our business to drive growth.
And then I will review the action plan, our leadership is implementing to manage the business through these more challenging market conditions.
Let's jump into our third quarter results.
As shown on page four of the supplemental deck third quarter revenues of $255 million declined about $40 million from the prior quarter and fell about $30 million short of our third quarter guidance provided in August adjust.
Adjusted EBITDA of $172 $2 million declined about $37 million from the prior quarter and fell about $28 million short of our third quarter guidance.
Despite this quarter's results we remain highly profitable maintained best in class adjusted EBITDA margins and continue to generate significant cash flow.
In the third quarter, our adjusted EBITDA margin was nearly 69% we generated $190 million in free cash flow from operations and we ended the quarter with $439 million of cash on the balance sheet, our profitability provides us with significant flexibility to navigate.
Advocate, a challenging environment, while pursuing our strategic initiatives and to thoughtfully allocate our capital.
Third quarter results exhibited an unusual although not unprecedented level of volatility for a business that has typically.
Stability and visibility.
As shown on page six of the supplemental deck that volatility was caused by a confluence of factors. The single largest factor was external market conditions, which were characterized by a decline in health care utilization among health plan members.
This drove lower savings volume and mix shifts that was unfavorable to revenues separately.
Currently we had an anticipated shift away from us or a portion of an overall program at one of our customers.
And then there were several smaller components that cumulatively impacted revenues yielded from our identified savings in the quarter.
Okay.
On our second quarter call. We noted that volumes reported by a number of hospital and health services groups as well as lower medical loss ratios at some major health insurers were pointing to a sluggish patient utilization during the second quarter and we noted that these trends we're beginning to be reflected in our claim.
And charge volume.
Given our typical lag the full extent of that sluggishness became evident in our third quarter results.
As shown on page seven charges process declined approximately 2% sequentially to $31 4 billion.
And while that may seem like a modest decline at the top of our claims funnel. It masks a mix shift in claim types that drove a larger 4% sequential decline in identified savings to $5 3 billion.
And a 7% decline in identified savings at the core of our revenue model as Jim will discuss momentarily.
In particular at the planned member level, we observed Swiss Swift changes in demand for discretionary care, starting with medical services rendered in May and June .
This supports a growing consensus that health plan members or postponing or foregoing non emerging care and are slightly more hesitant to spend out of network given the environment.
Together these identified savings volume and mix factors explain about $19 million or roughly half of the revenue decline between this quarter and last quarter.
As I mentioned also affecting our revenues this quarter was the anticipated impact of a partial program loss as a customer decided to shift the component of its overall out of network savings program away from us the.
The impact of that decision accounted for about $7 million to $8 million of the decline in revenue relative to the prior quarter.
Such shifts happened from time to time in the normal in the normal course as much as I love to say, we weren't 100% of the time that simply isn't the reality of any business.
Importantly, though our relationship with this key customer, which is not our larger customer that recently renewed its contract with us remains healthy. They continue to use the same breadth of our solutions and the larger portion of the program that remains with us.
Finally, we had a number of customer related adjustments during the third quarter as shown on page six and as Jim will discuss momentarily. These accounted for about $13 million of decline in total revenues. It's typical for us to experience various puts and takes in any given quarter.
But our third quarter headed into normal abnormal number of puts and takes.
Despite the third quarter results I am confident that our business remains robust as evidenced by our strong margins and cash flow. We do not believe that third quarter is indicative of multi plant long term earnings power.
Accordingly, all of our payer customer relationships remain healthy.
Vast group of over 100000 employers and other plan sponsors we serve through these customers is essentially unchanged. We continue to be highly engaged with our customers to help drive deeper medical cost savings for the employers and plan members they serve.
While patient utilization as soft demand for our cost management services is strong and we expect it to remain so given the widely reported decline in affordability of health benefits that employers and plan sponsors presently face.
We believe it is unlikely that patient utilization will remain suppressed indefinitely and while it is difficult to predict when it will rebound we expect it to benefit we expect to benefit when it does just as we have in the past.
In the meantime, we continue to sell new business and we expect these efforts to drive additional revenues in future periods.
We are adjusting to prevailing market conditions, while maintaining our focus on growing the business and keeping our platform and are positioned to benefit from higher volumes when utilization recoveries with these.
Objectives in mind, our leadership team is implementing an action plan for managing through uncertain market conditions as shown on page nine.
First we are aggressively implementing new initiatives with our customers to help them cope with accelerating healthcare costs.
This includes reviewing all of our solution configurations, with our customers and intensifying efforts around enhancements to optimize their medical cost savings.
We expect these initiatives to drive meaningful incremental identified savings for our customers and revenue for multi plan. In fact, we are already seeing results from this area. For example, this quarter, we implemented enhancements to our data eyesight pricing service that are expected to add approximately six.
And annual revenue, which will begin to ramp in Q4.
And during the quarter, we implemented were scheduled implementation of several solutions hierarchy changes for payers to help them quickly pivot in response to changing market dynamics combined these will generate additional savings worth about $14 million to $16 million in annual revenues to <unk>.
The plan.
Second we have been fully immersed in product development and that effort has already yielded plans to launch several promising products. In 2023. This includes one product focused on protecting members against balanced bills on non NSA related claims and another that Leverages <unk>.
Machine learning to optimize claim routing between our solutions.
We're also working with our partner advocates insights to bring our solutions set to their customers on their data interoperability platform.
Third.
We are undertaking a review of multi plans long term growth strategy to ensure we are we are prioritizing our most attractive opportunities to more deeply penetrate our existing markets and to diversify into adjacent markets. The.
The goal of the review is to amplify the progress already made against our strategy.
Among other sides of this progress we've enhanced our solutions with advanced analytics and data to drive savings and service performance.
To this end today, we have a team of about 15 data scientist implementing machine learning and advanced technology initiatives with a focus on surprise billing negotiation and arbitration strategies data mining and prepayment negotiation services.
We have also extended our service penetration in adjacent markets with organic initiatives and the acquisitions of HST and discovery Health partners, both of which target health plant in network claims and one of which also delivered significant business that we've continued to grow in the.
Medicare advantage market segment.
I look forward to communicating the refinements to multi plants growth strategy over the coming months.
Fourth and lastly, as Jim will discuss in greater detail, we have identified internal cost saving initiatives, some of which have some of which already have been implemented.
These will help offset inflationary pressures on our cost and provide capacity for the investments in our talent and platform that are critical to executing on the numerous projects underway and to capturing our growth opportunities.
Now I'd like to turn to some other.
Some other highlights that occurred during the third quarter.
Multi plant closed 148 opportunities during Q3 that we expect to contribute approximately $13 million in annual revenues to the business with some of these starting to contribute as early as Q4.
Value driven health plan services continued to grow above our expectation by January one we will have added 39, new employer groups with nearly 15000 members. This would bring total members under these plans these types of plans to over $1 million.
Multi plants Itemized Bill review service, which was announced just last quarter added two new customers in Q3, and there are an additional 40 opportunities progressing through the pipeline.
There is strong interest in our subrogation service during.
During the quarter, we submitted several proposals to regional health plans, which could contribute up to $20 million in annual revenues.
And finally, we added new network business during the quarter, including one commercial and two Medicare advantage payers.
Moving on to the no surprises Act I am pleased to report that our claim activity is trending as expected this softening somewhat over the quarter given overall utilization a number of our customers continue to use our core cost management solutions, while others use our new <unk>.
<unk> pricing service <unk> as a benchmark established by the act.
While <unk> isn't mandated as a reimbursement amount it does play a role in determining the members' cost share and in an independent dispute resolution or <unk>.
The <unk> process is still in its early stages and continues to be somewhat chaotic for payers and providers as you may recall when NSA interim final rules for the process were published last September provider organization successfully sued in federal Court as a result, the government's struck the Porsche.
<unk> of the NSA interim final rule that had given primacy to the <unk> and the <unk> process. These changes were included in the final rules released this August however provider groups have suite again, citing additional aspects of the implementation guidance that they say still prioritize that.
Over other factors considered in the arbitration that remains to be seen how this continued push back from the provider community will play out.
In the meantime, we have closed one 1240, <unk> cases and have another nearly 18000 process with IV are likely to remain a changing and complicated process. We are confident our data our analytics and our operational.
<unk> in this area will continue to deliver value to our customers.
I would like to turn now to our outlook on the market environment and what that means for our fourth quarter expectations and the starting base for 2023, the third quarter results reported by a number of hospital and health services groups and the continued lower medical loss ratios at several major health insurers.
Suggest that patient utilization remained soft in Q3, which due to our typical claims lag impacts our Q4 revenues.
Utilization tends to be seasonally higher in Q4, but at this point, we have little reason to expect that our fourth quarter results will look better than those in the third quarter.
As such we are guiding to fourth quarter revenues between $235 million and $250 million and fourth quarter, adjusted EBITDA between $155 million and $170 million.
Changes to our full year 2022 guidance are detailed on page 12 of the supplemental deck.
While we are not providing guidance for 2023, clearly our Q4 guidance implies we are exiting the year at a lower run rate than where we were then where we started and next year. We will have the impact of the contract renewal with our with a.
Major customer as announced previously we are cautiously optimistic that patient utilization could begin to recover more broadly.
As I noted, we do not believe it can remain suppressed indefinitely.
Further we've seen periods like this before Covid lockdowns being the most recent episodes and utilization can return swiftly with the with an associated lift and our revenues were.
We're also optimistic that our planned product launches and other growth initiatives will provide some offset if the market softness persists into 2023.
That said visibility on when external pressures might abate as low and as such we feel it's prudent to recalibrate expectations for the time being <unk>.
Consistent with our historical practice, we will provide full year 2023 guidance on our fourth quarter call. This coming February .
Yes.
In summary, while third quarter results missed the Mark and visibility on the road ahead has become more challenging we will stay focused on controlling what we can control that means driving meaningful progress on all fronts by executing on our long term priorities selling new business building our pipe.
<unk> investing in our people and solutions to drive growth, managing our cost and delivering high levels of value and service to our payer customers.
Before I turn the call over to Jim I want to say that I am extremely proud of how our team is responding to these market conditions on their front fee managing actively and focused on growing the business.
All the while maintaining their dedication to our mission to deliver affordability of efficiency and fairness to the U S health care system and to deliver operational excellence and outstanding customer service. Thank you with.
With that I'll turn the call over to Jim to discuss our financial results in more detail.
Jim.
Thank you Dale and good morning, everyone.
I will echo Dale and acknowledging that while we remain confident about the strength of our business and our ability to grow that long term, our third quarter was challenging and our results fell short.
I'll start today with my usual walk through the financial details and then provide some additional commentary about our outlook for Q4 and the action plan. Our leadership team is implementing to manage through the more challenging conditions for revenue and I'll close with balance sheet cash flow and capital allocation.
As shown on page four of the supplemental deck Q3 revenue was $250 5 million down 13, 1% from Q3 dollars 21, and down 13, 7% from the prior quarter.
Today I'll discuss the major components of the sequential decline, which are again detailed on the revenue bridge on page six of the supplemental deck.
Like to touch on some of these components in more detail and relate them to the decline in our revenues as a percentage of identified savings or what we call share of savings.
Lower patient utilization of the health care system accounted for about $19 million of the change in revenues in the quarter.
While total identified savings declined 4% sequentially, we experienced a much deeper decline in the savings categories that comprise most of our revenue.
Specifically as indicated on page eight identified savings related to our percentage of savings revenue model, which represents about three quarters of our savings volumes and over 90% of our revenues.
That declined 7%, while our per member per month savings volumes actually grew 5%.
The net volume effect counted for about half of the $19 million impact from lower patient utilization.
As our identified savings volumes decline, we experienced mixed shift between service lines with products, which unfavorably affected our revenues. This mixed shift comprises the other half of the $19 million impact from lower patient utilization.
Page eight of the supplemental deck also presents identified savings as a percentage of our revenues.
The share of savings declined about 50 basis points from prior quarter from five 5% to $4 five 1%.
This was driven in roughly equal parts by the identified savings volume mix shift.
I just discussed and the cumulative impact of the three other components that are each itemized on the revenue bridge on page six.
These consisted of.
A $6 million impact from above trend revenue yield and analytics based services. During the first half of 2022, which subsided in Q3 and created a negative comparison.
A $4 million impact related to customer contract adjustments.
And approximately $3 million of nonrecurring onetime customer credits that were true ups from prior periods.
As Dale mentioned, our third quarter had an abnormal number of puts and takes.
Neither of the NSA or Covid were significant contributors to the sequential change in revenues in fact savings volumes and revenues related to our NSA services, where a relative bright spot during the third quarter.
NSA related claims volumes were not as soft as overall claim volume is relatively lower level of discretionary and elective health services are included in the mix of NSA claims and as the conversion of Ensco claims to our NFS solutions, otherwise continued to track to our expectations.
Also notable the change in revenue is attributed to the Covid testing and treatment claims with not a material component of the sequential change in our total revenues.
Our net COVID-19 related impact in the quarter was approximately $4 6 million a small percentage of revenues and similar to last quarter and down from approximately $8 million to $10 million in the prior year quarter as detailed on page 17 of the supplemental deck.
We have mentioned that the net COVID-19 related impact is becoming less relevant with more distance from the initial lockdowns two and a half years ago, we plan to assess the ongoing utility providing this metric at the end of the year.
Turning to page five of the supplemental deck revenues were down in each of our service lines in Q3 2022.
Network based services declined 12, 1% year over year, driven by lower patient utilization lower COVID-19 related volumes substitution of analytics based services and some attrition of smaller clients that we had called out with our second quarter results.
The network based services.
Declined based services revenues declined seven 2% sequentially, driven predominantly by lower patient utilization and lower savings volumes.
Analytics based services declined about 11, 8% versus the prior quarter and 15% sequentially driven by lower patient utilization.
The aforementioned partial program loss at one of our customers and the customer revenue adjustments all of which were recognized in this service line.
Payment integrity revenues declined 21, 9% year over year, and 17, 2% sequentially the decline.
And is attributable to our prepayment clinical negotiation business versus our discovery business, which actually grew modestly.
Our clinical negotiation business was softer from lower volumes, but also programmatic shifts to customers and the substitution of clinical negotiation with NSA services, which are part of our analytics reporting lines.
Turning to expenses third quarter 2022, adjusted EBITDA expenses were $78 3 million.
Up from $69 9 million in the prior year quarter and down slightly from $88 5 million in Q2.
22, the increase versus the prior year quarter was caused predominantly by higher personnel costs due to increases in employee head count and year over year wage increases the.
The sequential decline in Q3 represents tightening on hiring and the initial impact of several targeted cost initiatives. We have undertaken in response to more difficult market conditions.
The bulk of the actions will be implemented in the fourth quarter and first quarter and will impact our 2023 base.
Adjusted EBITDA was $172 2 million in Q3, 22 down about 21, 2% from $218 4 million in the prior year quarter and down about 17, 9% sequentially.
Adjusted EBITDA margin came in at 68, 7% in Q3 2022 down from 75, 8% in Q3, 21 and down from 72, 3% in the prior quarter, reflecting the revenue and adjusted EBITDA expense trends discussed previously.
While we remain best in class with our adjusted EBITDA margins our expense base is relatively fixed and therefore, our margins are often driven by the trajectory of our revenues in any given quarter.
In the third quarter net cash provided by operating activities was $109 million and free cash flow was $88 million as a reminder, our cash flow tends to be higher in the first and third quarters, given the timing of our debt interest and tax payments.
Turning to our outlook on page 11 of the supplemental deck, we are projecting Q4, 'twenty to revenue of $235 to $250 million.
As Dale mentioned, our fourth quarter guidance Embeds, an expectation that patient utilization of the health care system remained sluggish in the third quarter.
Even if utilization recovers in the fourth quarter, given our typical claim lag it would be unlikely to material lift our Q4 22 revenues.
We are projecting Q4, 'twenty to adjusted EBITDA of $155 million to $170 million that guidance implies an adjusted EBITDA expenses of about $80 million.
Slightly above the Q3 run rate of $78 3 million or.
Our guidance implies an adjusted EBITDA margin of 66% to 68% for the fourth quarter.
As part of the action plan our leadership team is implementing we're addressing cost proactively we have always been a very cost conscious organization and we are tightening our belt to help fund investments that we're making in the business and to also preempt inflationary pressures on cost.
<unk> is to contain expense growth in 2023, while keeping our platform in a position to benefit from higher volumes when utilization recovers and maintaining our focus on delivering for customers and growing the business.
Turning to the balance sheet and capital our total and operating leverage ratios net of cash were five 4% and three nine times, respectively effectively unchanged from the prior quarter.
We ended the third quarter with $439 million of cash on the balance sheet and combined with the maturity schedule of our debt instruments, we have significant financial flexibility.
Our business continues to generate substantial cash flow, which allows us to balance investing in growth of the business and reducing our leverage.
As we have discussed previously we will continue to take an opportunistic but balanced and disciplined approach to deploying our cash and are considering all options given these unique market conditions.
That brings me to the end of my comments I'd like to turn it back over to Dale.
Thank you Jim.
Before we open it up for Q&A I want to acknowledge again that it was a tough quarter for multi plan.
And for companies inside and outside the healthcare sector. Many many of them household names.
By no means am I Sugarcoating. These results are in a disappointment no question.
As any company does multi plan has had its highs and lows in my 20 years.
With the company I've had a court side seat to most of them.
We always capitalize on the highs to become an even stronger partner to our customers and we always come through the lows with renewed focus and energy I believe this time will be no different because in our view multi plan has the best fundamentals in our space.
Operator would you. Please open it up would you kindly open it up for Q&A.
Of course, so it will be.
I'd like to ask a question. Please press thoughtful about one the near term.
If you change your mind piece best thoughtful by Chi.
So ask your question. Please initially holds and we should know Keith.
Please limit your question to one question on the floor. Thank you.
The next question comes from Joshua Raskin from Nashville, Alicia Research LLC. Please go ahead.
Yes. Thank you good morning.
So that's a question kind of sequentially here. So the first thing I just want to make sure I understood. Your commentary around 2023, it sounds like.
You expect one.
<unk> run rate to sort of can you or at least know what youre, saying, it's okay to continue so can we assume that 2023 is expected to be down relative to the four Q run rate because of the customer.
Big customer.
Great. Thanks.
Or what are you including that.
Right.
Yes, Josh this is Jim.
I think well I'll offer a couple of observations and a couple of dimensions number one we're not providing 2023 guidance and I think we're going to have a lot more visibility on run rate.
At the turn of the year than we have right now so.
I would say on one hand.
We are acknowledging that the run rate of the business today is about.
Third and fourth quarter look a lot alike.
I don't think we're ready to kind of make a prediction as to what next year is going to look like I do think that as we said in the second quarter earnings call. We do have.
This customer.
Contract adjustment, which is going to be a headwind to growth, we've talked about that being muted flattish.
In terms of the impact because it will it will.
Being offset to other initiatives and other growth areas as well as it could be.
All things being equal as kind of a flat environment. So I think it's too early to say, Josh Theres, a little bit of ambiguity on Q3, and Q4 because of utilization.
But as we've seen in prior cycles.
That can change relatively soon and I think we'll have a better handle on that.
After our with our fourth quarter announcement.
Okay. So it sounds like it's more acute utilization were to be the run rate.
Right now.
This customer adjustment will be a headwind right.
But to your point, there is new growth and that sort of thing.
The other question is you had the slide looking at the sequential change of $39 million decline of revenue only $3 million was kind of termed as non recurring.
It seems like just the <unk>.
Huge.
Drop in utilization and you kind of went through the litany of issues, but.
Can you confirm that that was the only catch up and that there was no other sort of <unk>.
<unk> adjustments or anything that was maybe overstated in the first half of the year and then what specifically was the 3 million customer adjustment for.
Yes, so just wanted to make sure I understood.
Let's talk about the one.
It may be going to refer to page six and.
And just to kind of provide some specificity one once the the onetime customer adjustment that $3 million. That's just true ups from frankly, some 2021 claims et cetera, it's not it's not.
Not unusual given our our revenue accounting that we could have some retroactive retroactive true ups, but it is.
Isn't happened very often so those are one time kind of true ups against the past.
I guess I would call it.
And I'll just walk across the cut the contract adjustments those are those are kind of modifications.
With with customers.
Along the way that that are I wouldn't say normal course, but they happen and they are about $4 million adjustments in this quarter, and then last but not least I want to coffee yield normalization because that is that is less about.
That's a lot more about performance than.
History, so to speak in the sense that the.
Yield normalization, we have utilization of savings that we present.
That we present to our customers and we accrue to historical yields and what happened in Q1 and Q2.
And it took a little bit of digging we were just performing above our accrual levels historically and that's because whether it was colgate or some other.
Other classes of claims.
Our clients are just accepting an abnormally high level in Q3, largely because of some of the volume shifts et cetera. It normalize. So what that means is we have a.
A comparison issue, it's less about business walking out the door, it's more like the the yields have come down a little bit in some of those areas, particularly in our analytics business.
And it just creates a tough compare against last quarter. So we wanted to call that out. So you understood where we are where we are today.
So I hope that helps in terms of the componentry.
Yeah, Yeah, so it sounds like.
It's not necessarily run rate.
And environmental.
Quarterly, but I understand youre resetting to a lower <unk>.
Right that the recurring is that it continues in the future not that youre expecting these sorts of headwinds every quarter.
Exactly and listen.
We see we see that kind of that the benefits of volume when things come in a little bit hot.
Our yields are a little bit higher elective surgeries.
Which are oftentimes big tickets, the ortho is et cetera can enhance our yields and when when volumes recede.
And I think you kind of parse through the.
The detail here, but our volumes came down about 7% and our percentage of savings categories. You could argue that they were even higher in some of the discretionary categories because our NSA claims were steady up.
And so we get that we can kind of get that benefit when it swings up and we get the the decrement when it swings them.
Okay got you. Thank you.
The next question comes from Daniel <unk> from Citigroup. Please go ahead Daniel Your line is now open.
Hi, guys. Thanks for taking the question.
Want to stick with that slide six for a little bit.
Really focus in on the $8 million program related attrition curious if you have any color.
Where that client wins that was the issue with that program specifically.
If there is pricing pressure and competition et cetera, just a little more color on that.
$8 million program related.
Decline.
Right.
Thanks, Daniel It is a look as I said and I've said it repeatedly we always like to win 100% of the time in this case.
The customer made a decision.
To shift.
Part of this business and part of this work to a competitor.
And not have all of its eggs in one basket and so.
From that perspective, it didn't have the clients the customer didnt.
The change in service portfolio with us how it utilizes us all the same services that the client the customer utilized prior to the change.
Same array of services.
Use us.
Use through us today for the lion's share of the business.
Okay makes sense.
And then it seems like you're generating more of your revenue from <unk>.
EPS versus shared savings is that just a.
<unk> and maybe <unk> issue and you expect that to normalize back in 2023 or should we think about more savings coming through <unk>, which will continue to weigh on your revenue yield in 'twenty three and beyond.
Yes.
The.
We're being a little bit more transparent on that mix because the.
The ppm waiting so to speak in that savings is getting if it continues to grow is going to be a bigger a bigger component of it. So it does it does.
Speak to a little bit of yield degradation by virtue of volume right.
And our 10-Q, we call out the.
The revenues.
On a percentage of savings versus.
<unk>, so I think that.
You will have the tools I think between.
Our schedule on page eight versus the 10-Q to kind of think through some of those yield implications, but youre absolutely right as we as we grow our <unk> business the.
The savings that are going to be attached to that or associated with that we will continue to grow.
That's our network side and it's also our HFC right.
And as I noted in my comments, Daniel the value driven health plan.
Business grew substantially coming too.
January one right, where I think we're adding 39 groups almost 15000, new lives and we're we've already exceeded 1 million total lives. So as that continues to grow.
And that's that business in particular is based on a p/e and model. It will take it will take a bigger piece of our revenue.
Okay and last one for me just on EBITDA you guys mentioned, you have really good incremental margins, but on the way down high decremental margins. So I'm just curious for 'twenty three if we don't see a nice rebound in utilization are we going to be kind of at the same run rate of EBITDA margin.
As you are in Q3 and Q4, how much cost can you actually take out of the business. If you don't see that return to utilization and then just.
One one kind of accounting thing I guess for EBITDA. This quarter, there was a $28 $5 million.
Add back in EBITDA for Frac centers, where did that come from.
Okay.
Why don't we why don't we take the margin question first and then we'll hit the.
Transaction expenses.
The margin what I can do is give you a little bit of context on the expense side because the margin will be as we said, it's going to be a function of what kind of revenue assumptions youre going to make but the one thing that we can control as is our expenses now having said that it is relatively fixed.
We've got $78 million.
EBITDA expenses in Q3, we've got.
We're predicting 80 in our guidance. So I'm, just kind of think of that as a run rate.
Right.
What we're trying to do here is identify cost to mitigate the inflation of that base or for next year. So.
You can imagine that we're probably the most cost conscious company out there given given the margin profile. We have today, we still have some opportunity to.
To sharpen our pencil out cost, but it is relatively fixed and we don't want to be in a position, where we miss out on our customer commitments.
And our revenue opportunities by.
By cutting our cost too thinly so we're taking a very disciplined approach to this but you should not expect that our our costs are going to take a shift down so to speak in 2023, I think what we're trying to do is.
Mitigate what you could call an inflationary rate against that cost base, and then find some areas of investment and we'll call out those investment areas in our guidance in 2023.
So does that give you some context on how we're thinking about it and then as you as we've talked about 2023.
Be a little bit of a function of where we were we kind of enter the new year and that will drive the margin on weather.
Whether it's 68 or otherwise.
And then secondly, Danielle you'd asked about transaction expenses in the in the.
In our.
The non-GAAP EBITDA and you are correct. There was an increase of track transaction related expenses in Q3.
What you see about $27 million in the schedule.
This is noncash.
The vast majority of that figure relates to reserves that we accrued this quarter for litigation of prior transactions.
Now as a policy, we're just not going to comment on any pending litigation, but I would I would just say that you can look at our 10-Q, our public disclosure and we call out.
What that what that means essentially in our filings.
Got it I appreciate the color thanks, guys.
Thanks Jane.
The next question comes from Shouldnt be much from Goldman Sachs. Please go ahead, Sir your line is now open.
Thanks, Thanks for taking my question and thanks for the detail I just had a couple but just following up on that last thing you said Jim about.
The litigation reserve. So yes, just in looking at the G&A that was reported and then obviously that there was an add back of 2008.
So that so that litigation expense I mean is that going to continue its non cash and is not going to continue correct.
Or how does that work.
We can't we can't comment on.
Whether it.
We'll continue or not but I think the right way to describe it as.
If we are putting a reserve on the balance sheet.
Because there is an estimate.
And I think I would just.
Yes, I would just go to our public disclosure in the 10-Q and it explains our cost how we our philosophy on that.
Okay, and then just some housekeeping with it.
The expenses so the gross profit margin.
Is about 70, 879% is that correct.
Am I getting that.
Alright.
Yes.
If youre calculating it off.
A press release Thats fine, we typically look at our EBITDA margins versus our gross but but.
And then.
Thank you and we will have.
The 10-Q, we will have the breakout of.
The gross margin first of all expenses et cetera, and then the G&A side of things.
That should be able to bridge any any questions you have.
Alright, Okay, and just one just going back to the revenue bridge can you just great detail on page six with the revenue bridge.
So obviously you explained the utilization it looks like the yield is related to this.
But the customer loss as well you said it's partial.
Do you expect potentially.
Potentially it may be other losses with this customer others I know, it's hard to predict but are you.
I understand about utilization and everything but do you feel like the competition.
Is increasing like is it is it coming down to price or just any other color I know you've already talked a lot about the macro but just anything on the competitive situation around pricing would be helpful. Thanks.
Yes indeed.
Look we always.
You always have competitors as every business does right and.
So.
<unk>.
We like our chances we always have a right to win.
But we've never win will never about 1000%.
And so from our perspective, we have a we have a.
We have a great set of services, we have a great client roster.
Our services are broad they are sticky.
They provide flexibility for every market shift and including the one we're facing now.
And we've I think we have a proven track record to both to grow both organically and through through acquisitions, and we clearly <unk> integrating and cultivating those businesses, we acquire and.
Well, yes, we have competitors.
And but we compete every day and I like our chances.
Okay. Thanks for taking my question.
Thank you.
The next question comes from Steven <unk> from Barclays.
Go ahead, Steven your line is now open.
Great. Thanks, Good morning, everybody. So a couple of questions here again that revenue bridge on slide six is definitely useful I guess just to simplify things thinking about going from Q3 to Q4 sequentially guiding for both revenues and EBITDA to be down sequentially in <unk> versus <unk>, but what's the single bigger.
Factor that drives that downward trend sequentially. If you could add as you point out one from all of the moving parts in this.
Second question and I didn't really have time to go look up all the various debt covenants before the earnings call. This morning, but with a downward trend in EBIT.
Let's call it $650 million annualized run rate Peter.
Take the end of the fourth quarter guidance times that by four does.
Does that put the company in jeopardy of tripping any debt covenants into next year.
The current leverage ratio is on page 14 of the slide deck, but those are obviously going to come down into next year and also as your credit definition EBIT.
Comparable to what Youre showing for equity EBITDA.
EBITDA in the slide deck today. Thanks.
So why don't we make sure I got this I'll answer the covenant in the.
The debt EBITDA debt EBITDA and what we put in our press release are the same. So just just so you understand that.
They are consistent.
Our covenants our covenants are largely in current versus maintenance so I.
I don't think we have any.
Material.
Covenant issues coming up and we obviously monitor that pretty closely I would also just point out that.
Charity schedule, which youll see in the supplemental deck.
We've got we're not we're not.
Up against any looming maturities convertibles are 22 end of 2027.
The rest of our.
Capital is at 2028 our.
Our revolver is a little bit sooner than that but the major components of our debt structure. It turned out. So we've got some we've got flexibility here as we as we navigate through a little bit of a soft patch.
So I hope that answers your call it your debt your debt.
<unk>.
And then.
Q4, I think the simplest way to describe it Steve and it's a good question is listen our July or July run rate revenues et cetera, which reflects April may timeframe. What was included in our Q3 was higher and as we went through the quarter, we get to September which was reflecting kind of June .
You lie.
Environment. It was it was.
Is down and so we're kind of we're kind of managing through.
That downturn with a run rate beginning in the quarter, that's just lower than the run rate beginning last quarter and so that's.
That's a major major rationale for why we're a little bit lower.
Okay. That's helpful. Thanks.
Thanks, Steve.
The next question comes from Rishi Parekh from Jpmorgan. Please go ahead Michelle.
Hi, Thanks for taking my questions and I apologize I've been hopping around on calls so if you've already answered these questions.
So that one on the customer loss is it reflective of the net loss for the entire quarter or was it just a portion of the quarter.
And if you were to if it's just a portion of what's the loss of the entire quarter and as it relates to that that customer was that loss as it relates to a competitive didn't move in house with it too.
I think you had noted is competitive and I just want to make sure. It did not move in house and what area did impact US eyesight was in the network business was it payment integrity and was that loss, mostly due to price service I was hoping you could provide some more details as to what led to that loss and I have a follow up.
Okay.
Break that down.
The eight the $8 million is the full quarter.
Yes.
The shift occurred at literally at on July .
<unk> July July one.
And it affected mostly our analytics.
Side, but and negotiations and negotiations.
But again I think as Dale mentioned it is a little bit more of the customer spending in the AG around in their basket versus.
Going in house.
Okay and then.
The utilization.
Can you maybe just break down what areas were impacted wisdom, mostly elective surgeries was it related to the NSA related.
Claims behavioral health I was hoping that maybe you could rank or bucket what areas were impacted in that utilization.
Yes, it's interesting it is not NSA was as we said was a bright spot.
And.
It was mostly I think it was mostly in.
In areas you would expect annually.
I'm sorry.
In the in the elective category.
Facilities like ambulatory surgical centers general surgery, Orthopedics, PT evaluations Cairo muscular skeletal those were the types of services that were largely impacted and we can.
Can see that in the claims data that we're processing savings.
Savings category. So some of these less severe and more non emergent and more elective categories were down were down even more than the average 7% rate that we saw and it affects our business because a lot of that is.
Is processed through data eyesight, where theres.
Really attractive savings.
And so that that's part of that product mix shift in that $19 million, we're talking about Rishi.
Alright, thank you.
It depends you have no questions at this moment, so I'm going to conclude today's call. Thank you everyone for joining us have a lovely day.
Okay.