Q3 2022 Tabula Rasa HealthCare Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day and thank you for standby welcome to the third quarter 2022.
Rasa Healthcare, Inc. Earnings Conference call at this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during this session you each press star one one on your telephone please be advised that today's conference is being recorded I would now like that.
Now the conference over to your speaker today.
Thanks, Paresh you know please go ahead.
Okay.
Good morning. This is Frank Sparacino, SVP of Investor Relations and corporate development for Tabula Rasa healthcare.
The company intends to avail itself of the safe Harbor provisions of the <unk>.
The Securities Litigation Reform Act of $19 95.
Certain statements made during this call will be forward looking statements within the meaning of that law.
These forward looking statements are subject to risks uncertainties and other factors that could cause tabula rasa healthcare's actual results to differ materially from those expressed or implied by the forward looking statements.
These risks and uncertainties include our ability to adapt to changes or trends within the market for health care in the U S.
A significant increase in competition from a variety of companies in the health care industry.
Developments and changes in laws and regulations, including increased regulation of the healthcare industry through legislative action.
And revised rules and standards.
And the extent to which we are successful in gaining new long term relationships with clients or retaining existing clients.
For additional information on the risks facing tabula Rasa healthcare, please refer to our filings with the SEC, including the risk factor.
Section of our 10-K filed on February 25, 2022, and our 10-Q to be filed shortly.
When we discuss our results on this call unless indicated otherwise we are referring to results from continuing operations.
For additional information on our results from discontinued operations. Please refer to the financial statements contained in the earnings release issued on November <unk> 2022, and the notes to the financial statements to be included in our 10-Q for the third quarter of 2022.
A recording of this call is accessible through a link on the Investor Relations page of our website.
I will now turn the call over to Bryan Adams, President and interim CEO of Tabula Rasa healthcare.
Thanks Frank.
And thank you for joining us.
We delivered another solid quarter with third quarter revenue of $77 1 million.
Which was 5% ahead of the midpoint of our guidance range for the third quarter provided on August 4th.
And our care mentioned healthcare division, which represents our core business revenue increased 17% versus a year ago during the third quarter and 18% through the first nine months of 2022.
Our growth from existing and new pace centers is being driven by a combination of factors, including one.
A growing number of seniors recognizing the benefits of the <unk> model at a rolling with our existing clients to existing states expanding paid surface areas and.
And three new state authorizing pay services.
In short we have a strong foundation to build upon as we head into 2023 Tom.
Tom will provide a deeper dive into our financial performance following my comments.
Since assuming my new role in September .
Significant amount of time meeting with our customers directly and.
Interacting with customers at a few important events.
In late September we hosted our care can be clinical advisory panel meeting with attendees, including pace medical directors from existing customers as well as prospects.
And in early October the National Association or NPA held its annual conference in Seattle, where I had the opportunity to spend time with customers partners prospects and employees. There are couple of important takeaways that I want to share based on my interactions with customers over the last several weeks.
We have long standing and strong partnerships with our customers, resulting from the benefit they are realizing from our value focused service offerings.
In some cases these relationships go back more than 10 years.
This has allowed us to maintain high retention rates year after year.
Second we continue to have a dominant position in the market currently serving more than eight out of every 10 taste participants across the country with one of our core services, which creates opportunities as new organizations enter the market.
Third the paste market is expanding with interest from a range of health care organizations focused on value based care.
In the first half of 2022, both Missouri, and Kentucky opened their first pace centers and in August of this year, Illinois selected eight organization in five regions of the state begin providing services by 2024.
These aid organizations, our existing paced operators.
An integrated health system, a federally qualified health center and one of the leading primary care providers, serving seniors Oak Street health, which speaks to the diverse and growing interest in PE.
I am pleased to report that we already have relationships with many of these organizations.
Looking towards the future for pace I wanted to highlight NPA pace 200, K project, which will launch in 2023 with the goal of growing the program three fold by 2028, we believe that full resulted a tam in excess of $3 billion for Tabula Rasa.
In October 2022 publication from the bipartisan policy Center provides a number of recommendations that would further accelerate pace of adoption.
A few examples include simplifying and shortening the application and review process, which can take more than two years in some cases.
Expanding enrollment to include Medicare only participants and other high need high cost population.
And raising consumer awareness through relaxing restrictions on marketing and improving the Medicare Dot Gov website to make it easier for seniors to access information about pace.
We have posted a link to the publication on our IR website for your access if you'd like to review in more detail.
In closing I am excited about our expanding team and changes underway at the company.
One important addition to the team is April <unk>, our new Chief commercial officer.
Newly created role April will lead tabular routes as go to market vision overseeing strategy product commercialization marketing communications sales and account management.
<unk> has a wealth of healthcare experience from startup to large organization and a proven track record of driving client success growth and profitability all of focus for Tabula Rasa.
Last quarter I talked about the large opportunity ahead of us represented by the more than 12 million dual eligible individuals.
Specifically with at risk provider groups, and health plan, managing high cost and complex patient.
We feel April background is a perfect fit for advancing our efforts in these adjacent markets outside of pace.
April joined US in October and we're thrilled to have her as part of the team.
Additionally, as part of our recent leadership transition, we have three new board members and I'd like to recognize the early contribution.
I've already had a meaningful and positive impact.
Im looking forward to working with the newly constituted board to shape, the future strategic direction of the company and we'll be sharing that with you over the coming months.
I will now turn it over to Tom.
To review our financial performance.
Thank you, Brian and good morning, everyone.
I will focus my comments on three areas third quarter results, our balance sheet and fourth quarter guidance.
Third quarter revenue of $77 $1 million increased 14% versus the year ago quarter and.
And 6% on a sequential basis versus the second quarter of 2022.
Our solid revenue performance was attributable to better than expected pace participant growth at existing pace centers and the full onboarding of a new large pace client in California.
This resulted in product revenue growth of 19% versus a year ago.
Excluding <unk> revenue of $2 3 million in the third quarter of 2021 service revenue increased 13% versus a year ago driven.
Driven by our <unk> and risk adjustment services, both of which increased more than 20% during the quarter versus a year ago.
The CMS MTM program concluded on December 31, 2021.
Overall gross margin as a percentage of revenue of 21, 9%.
Is down versus $24, 6%, a year ago, and effectively flat versus second quarter of 2022.
Third quarter product gross margin of $22, 7% compares with 23, 5% a year ago.
With the decline driven by revenue mix and increased shipping costs.
Third quarter service gross margin of 19, 1% compared with 27, 8% a year ago with the decline driven by the ongoing business process outsourcing transition, including increased consulting and professional service fees.
As we noted last quarter, we expect these headwinds to normalize in 2023.
Our GAAP net loss of $25 9 million includes $8 1 million of stock based compensation and.
And other costs related to our leadership transition in September .
Adjusted EBITDA of $2 1 million from continuing operations is down from $3 1 million a year ago.
And flat versus the second quarter of 2022.
This decline versus the year ago quarter is primarily due to the timing of cash compensation expense and gross margin pressure as noted earlier.
Moving to cash we ended the third quarter with $88 million of cash, which is $54 $3 million higher than June 32022, and is due to the net proceeds received from the sale of prescribe wellness after paying down our short term debt.
The company has no debt maturity until 2026.
We generated about $1 million in cash flow from operations during the third quarter and $9 8 million through the first nine months of 2022.
Third quarter cash flow was negatively impacted by our discontinued operations as well as divestiture related expenses.
Turning to guidance for continuing operations, we are introducing fourth quarter 2022 revenue guidance as follows.
Revenue of $77 5 million to $80 5 million.
This represents growth of 12% to 17% versus a year ago.
Including <unk> health care growth of 16% to 20%.
For the full year 2022, we are raising our revenue guidance for continuing operations to a range of $294 million to $297 million.
Which represents growth of 13% to 14%, including.
Including Coeur invention healthcare growth of 17% to 18%.
Mid point of our new range is $6 $5 million higher than our most recent full year revenue guidance.
With that I will turn it back to the operator for Q&A.
Thank you.
This time, if you'd like to ask a question. Please press star one one which again.
101, one moment for our first question.
Our first question comes from the line of Sean Dodge from RBC. Your line is open.
Yeah. Thanks, Scott Good morning, and congratulations on the good progress this quarter.
Tom I wanted to start just on the better than expected Q3 results.
You said, partly driven by higher pace census growth.
The guidance originally it assumes nine tenths of a percent month on month.
Increase in expenses.
Did you actually recognize over the quarter and I just.
How much how much better did census growth run.
What are you all.
I had assumed.
Yes, it was probably like a 10th of a percent better but.
<unk>.
It occurs to me that we should provide more clarity around that and some of you in the analyst community have.
Asked us to.
Maybe think about that in a different way because the census growth is kind of same store sales right.
That doesn't really.
Hello, the whole story because.
We mentioned, we added a huge program in California.
In third quarter, we have another one coming on in fourth quarter and so sometimes these these new centers.
Well overwhelm.
Number the new participants at existing centers.
And then of course it goes the other direction to you have you have churn you have some people who passed away this involved whatever.
So the net number the story of the net increase isn't told entirely by.
Same store sales growth if you will so we'll have to.
Perhaps provide more clarity going forward on that maybe give the total number of participants.
But to answer your question both are doing meaningfully better than we projected.
The growth of new participants at existing centers.
And.
New participants at newly added centers newly won Rfps and both contributed to that outperform in revenue in the quarter and therefore, the guidance raise as well.
Okay. That's helpful and then just one.
Under the new metrics you did give us was with the average PM TM in pace, you said that was up 9% year on year during the third quarter.
So there'll be a few drivers within there how much of that was cross selling versus is there a pricing component to that too and then.
As we look at these new metrics that you've given us.
This average <unk>, how should we think about maybe the levels that you guys can maintain.
They are going forward.
Well I.
I don't know that we've guided to that so I don't know that I'm going to get into levels going forward I think our guidance.
As reflected in our revenue guidance and coming next year.
Reintroduce EBITDA guidance I don't know that were going to guide to a pnp because it's.
It's a mix factor and you can't always predict that.
Tom.
As to the first part of your question what.
How much did that contribute I'd say mix was an important part.
The story.
We do a great job of cross selling.
From one product to another and so.
That's a big part of it.
Sean This is Brian I would just add to Tom's comments I mean this is.
Really.
A measure of our success with cross selling and the area, where we have the least penetration in pace today is on the pharmacy side.
And the pharmacy is where we have the largest potential for revenue contribution.
<unk> basis. So it is part of our strategy to continue to push on that that cross sell opportunity.
No.
Our desire is to have that number continue to increase over time.
Okay.
Sorry to cut you off.
We're good.
Okay.
All I have I'll get back in queue. Thanks. Thanks.
Thanks, Sean.
One moment for our next question.
Our next question comes from the line of Ryan Daniels from William Blair. Your line is open.
Yes, hi, good morning, Thanks for taking the questions. This is Jared haase in for <unk>.
Ryan.
So I wanted to ask one around the cadence of implementations for pace.
It's up significantly both year to date this year and also in the quarter relative to last year. So I'm just curious on that sort of cadence of implementations.
How much of that should we read into that just sort of easing of kind of COVID-19 related conditions is just a little bit easier to get out there and do those implementations. This year relative to last year, how much of that is sort of just a reflection of our growing sales funnel more opportunity to use that sort of thing and how much of it is kind of just.
The natural benefit of better execution.
I would say, it's really gerrick. Thanks for the question, it's really the latter two.
I wouldn't say this is a COVID-19 factor at all.
I would primarily say that there is there is a lot of activity in the market right now as I mentioned in my prepared remarks I was at the National Pace Association meeting.
In October and the.
The energy at the conference was amazing I would say.
It's really incredible to see the number of organizations that are recognizing the pace model and the ability to really drive down cost improve quality.
And the different areas that this model can be applied so as we continue to see more of that recognition. There's definitely more activity. We are signing more contracts the implementation pipeline continues to grow.
It's really an exciting place to be right now so.
It is about the activity in the market.
And our execution so I.
I don't see that slowing anytime soon.
Okay, that's great to hear thanks for that color and then maybe I'll just ask a quick follow up on the model.
Thinking about the gross margin line.
Out of 2023, and you say I know there is some headwinds present that sounds like youre expecting to alleviate as we get into next year.
I guess, obviously I get that you guys are still holding back on the profit guidance here, but just any sort of directional commentary on how to think about sort of where that gross margin line in particular might settle out or maybe any thoughts on sort of the magnitude of those headwinds are happening right now.
Yes, I'll give some color on that.
Shawn and his earlier question.
Asked about pricing as well as cross selling.
<unk>.
Let me speak to that now as well as to your question.
There are.
Two drivers both of which I believe can go in a favorable direction if management does its job.
And impacting margin.
The pricing side.
Is a large one we are seeing enhanced pricing power in our contracting.
Approximately 20%.
Our pharmacy contracts, which was our largest.
Revenue center and largest.
Driver of margin about 20% or up for renewal between now and December 21 2023.
And the renewals were seeing are happening at 2023 pricing, they're not happening at the legacy pricing when those contracts were signed years ago and that is significantly higher.
On the cost side on the margin side.
We're starting to see we had a little tail of headwinds from.
Shipping costs.
Versus last year.
But it starts to level out.
Versus last quarter, so that's starting to abate a little bit.
Revenue mix played a little bit in our.
Margin.
Diminishing this quarter that tends to level out over time.
The real driver of not just gross margin, but ultimately EBITDA margin.
He is going to be our ability to iterate on cost savings.
On the operating expense side.
The disposition of Symphony in particular will facilitate cash and margin savings will shed 400 heads right there.
And while Thats discontinued ops.
There are many shared services costs that support those 400 heads professional service costs that tend to scale with head count.
Outsourced support legal fees real estate insurance other costs.
So you ought to see that push in a favorable direction. Our capitalized labor I know this is less of a margin question more of a free cash flow thing, but capitalized labor declined to $4 5 million for continuing ops, that's one $5 million improvement over last quarter, So as symphony.
Eventually is disposed of.
It's a large bleed on our cash but it also will enable us to iterate on support costs and that ought to drive margin up the more favorable pricing environment.
To drive margin up a bit and Youll see this reflected when we give guidance in.
Fourth in our fourth quarter earnings call for 2003.
Okay, I think Thats Super helpful. I'll leave it there, but congrats on the progress thus far.
Thank you thanks Gerrick.
Thank you once again.
Star one.
One moment.
Our next question comes from.
The Securities Your line is open.
Hey, Bob Thanks for taking my questions.
I just wanted to get an update from you Brian .
The strategic review Committee that's been formed after the cooperation agreement are there any early read on incremental value creation.
Hey, Stephanie that's a great question I would say the immediate focus of the strategic review committee has been centered around the divestiture process.
And I believe we're on track with both dose and Symphony and we will continue to report out over the coming months, but.
Yes in general.
I would say that there is.
Nice alignment between the newly constituted board.
That really for the first time this past week.
And the management team to ultimately drive enhanced performance.
Increase shareholder value so I'm excited about this.
This new group and what we can do together.
With the idea.
Management, our as has often been one of the biggest limiting factors for Kathy Lovaza strategy, how are you and Tom really focusing your time right now.
Well that is a great question and you always have limited bandwidth right.
We are focused in a couple of different areas I would say one of those as evidenced by an announcement we made earlier this week.
With the Onboarding of the April Gill, who is our new Chief commercial officer, a new function.
It's really aligning.
All of our commercial activities, so she's overseeing strategy as well as sales account management marketing communications client success.
And that is an important focus for us in terms of how we are going to market.
And the commercial infrastructure that we need and rigor as a company.
To really execute on on.
On our plans going forward.
And then the second is as Tom was just mentioning is on the cost side as well so.
We.
I think we both believe that there is an opportunity to maintain a very strong growth rate while improving margins.
And cash flow all at the same time, so none of those need to be sacrificed and so I think youre going to see a continued focus from us on refining that go to market strategy. So that we can really.
Direct resources towards a few key opportunity.
That really provides some nice leverage going forward.
Helpful. Thank you.
Thank you one moment for our next question.
Our next question comes from the line of David Grossman from Stifel. Your line is open.
Thank you good morning.
Im wondering Thomas.
Go back to your comments.
About symphony.
<unk>.
Any information you could go ahead, sorry, if this was in the press release and I missed it but if you could break out the drag on free cash flow from Symphony.
This year or perhaps I don't know if that helps.
For the quarter, but somehow to frame for us what kind.
Drag that is and what impact that may have once divested.
And the last quarter.
Simpson.
All in by which I mean.
Margin bleed and the P&L, but also cap capitalized costs capitalized software development.
Was close to $5 million.
And Thats a lot.
And.
When that business is disposed of that's an.
Overhang that will go well.
And is that $5 million.
Appropriate run rate to use for the year or it was last quarter, particularly.
It was higher this quarter than in prior quarters.
David you might remember there is some seasonality to this business.
The second half of the year.
Particular is where.
Top line starts to contract a bit.
Q2.
The second half of the first quarter is really where you would see.
Profitability.
At a much higher level.
Got it.
And so as we.
Kind of look forward.
Yes.
Is the disposition of Symphony.
And up.
To catch you.
On a consistently positive free cash flow trajectory.
I wouldn't look at.
One item is.
The sole driver. This will obviously help I mean anytime you put $5 million in quarter four one business unit.
That business unit goes away by definition, that's a positive.
But when I think of the cash generating.
<unk> for this business.
I think of two things.
First thing I think about and it's.
Hardaway above that $5 million.
I think of this business being at double digit EBITDA margins.
Before it acquired a number of businesses that perhaps distracted management.
Well and then you got to go back to 2018 or so to see that.
When we are done with this realignment restructuring of the business.
Dispose of those businesses and the remaining core business.
Resembles what it looked like when you had those double digit EBITDA margins and so that seems like a good starting point.
But also remember that this is a business, particularly when you strip out the MTM sunset.
That is growing.
High teens year over year.
That doesn't seem to be abating anytime soon.
And so one of the things we will do.
Some point in 2023.
After we have been able to iterate on the cost structure is project out a multi year model. Because then you will see with revenues growing at what they are growing if you rightsize and.
Generally grow the cost structure.
See the leverage in the model and so if you project two years out.
The way this places grown and you iterate on both the cost side, but also on the pricing side like I mentioned.
It can be a dramatically different story that far and away overwhelms the benefit of just getting rid of symphony.
That is Brian .
And the teams mandate I believe.
Right.
So so it sounds like longer term youre, pointing our eyeballs that kind of going back to what it looked like pre acquisition to get back to that model right. So.
I understand and appreciate that so as you.
Think about getting to that model.
Can you give us any sense of what it may cost you in cash flow to get there or is that do you.
Thank you.
That's really not the others.
That's really not going to substantially impact cash flow over the next 12 months or 24 months or whatever it takes you to get to that model.
I don't think it's substantial whether it be some investment, let's say and things that allow us to scale.
When your business is growing when your pharmacy business is growing high teens.
At some point.
To make sure you can scale.
Yes.
Could there be an investment of Capex investment that.
Allows you to.
Handle that growth a little more efficiently and therefore get a little more scale in your margins yes.
Is any of that.
Recurring annually no is any of that terribly troublesome to accompany the $80 million of cash on its balance sheet and no debt maturity for.
Three and a half years not really.
We will guide to all of that.
When we guide for 'twenty, four and will enumerate the run rate.
Capex required as an ongoing investment in the business.
And any one time items, we may choose to do too.
Achieve synergy and to help our margin scale better.
Which by definition ought to pay for itself in a short period of time, but we're not going to guide on that today.
Right.
And just one last thing on the comment on pricing how much of the pricing is.
Actual pricing power versus passing through.
Higher costs.
So I don't know that they are.
<unk> different I would say that.
A lot of our contracts that are expiring.
We're priced several years ago in a very different environment.
So it's.
And remember a lot of our.
Costs are.
Ultimately pass throughs to CMS and as long as a reasonable.
That tends to be acceptance on the part of our customers.
So some of it is simply catching up to 2022 and 2023.
Inflationary environment, but a lot of it is our customers recognize the value they get.
Relative to our competitors.
Our pricing Hasnt always.
Did that.
I can tell you. This is an anecdote of course, but I can tell you there were three.
Contracts renewals and proposals that we put forth recently.
That ore.
Happily accepted.
At a margin level that was higher than what we've done in the past.
A view that as a good omen.
For the future.
Alright, very good that's it for me good luck. Thank you David Thanks, David.
Thank you one moment.
Once again Thats star one one for any additional questions.
One moment.
And this will conclude our Q&A session as well as our conference for today.
Thank you for participating you may now disconnect.
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As Johan during Q&A, you can dial one one.
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Good day and thank you for standby welcome to the third quarter 2022, Tabula Rasa Healthcare, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now like that.
The conference over to your speaker today.
Frank Sparacino. Please go ahead.
Good morning. This is Frank Sparacino, SVP of Investor Relations and corporate development for Tabula Rasa healthcare.
The company intends to avail itself of the Safe Harbor provisions of the private Securities Litigation Reform Act of $19 95.
Certain statements made during this call will be forward looking statements within the meaning of that law.
These forward looking statements are subject to risks uncertainties and other factors that could cause tabula rasa healthcare is actual results to differ materially from those expressed or implied by the forward looking statements.
These risks and uncertainties include our ability to adapt to changes or trends within the market for health care in the U S.
A significant increase in competition from a variety of companies in the healthcare industry.
Developments and changes in laws and regulations, including increased regulation of the healthcare industry through legislative action.
And revised rules and standards.
And the extent to which we are successful in gaining new long term relationships with clients or retaining existing clients.
For additional information on the risks facing tabula Rasa healthcare, please refer to our filings with the SEC, including the risk factor section.
Section of our 10-K filed on February 25, 2022, and our 10-Q to be filed shortly.
When we discuss our results on this call unless indicated otherwise we are referring to results from continuing operations.
For additional information on our results from discontinued operations. Please refer to the financial statements contained in the earnings release issued on November <unk> 2022, and the notes to the financial statements to be included in our 10-Q for the third quarter of 2022.
A recording of this call is accessible through a link on the Investor Relations page of our website.
I will now turn the call over to Bryan Adams, President and interim CEO of Tabula Rasa healthcare.
Thanks, Frank Good morning, and thank you for joining us.
We delivered another solid quarter with third quarter revenue of $77 1 million, which was 5% ahead of us.
The midpoint of our guidance range for the third quarter provided on August four.
And our care mentioned healthcare division, which represents our core business revenue increased 17% versus a year ago during the third quarter and 18% through the first nine months of 2022.
Our growth from existing and new paid centers has been driven by a combination of factors, including one okay.
A growing number of seniors recognizing the benefits of the <unk> model at a rolling with our existing clients to existing states expanding paid surface areas and three new state authorizing pay services.
In short we have a strong foundation to build upon as we head into 2023 Tom.
Tom will provide a deeper dive into our financial performance following my comments.
Since assuming my new role in September .
Significant amount of time meeting with our customers directly and.
Interacting with customers at a few important event.
In late September we hosted our care can meet the clinical advisory panel meeting with attendees, including pace medical directors from existing customers as well as prospects.
And in early October the National Association or NPA held its annual conference in Seattle, where I had the opportunity to spend time with customers partners prospects and employee. There are couple of important takeaways that I want to share based on my interactions with customers over the last several weeks.
We have long standing and strong partnerships with our customers, resulting from the benefits. They are realizing from our value focused service offerings.
In some cases these relationships go back more than 10 years.
This has allowed us to maintain high retention rates year after year.
Second we continue to have a dominant position in the market currently serving more than eight out of every $10 eight participants across the country with one of our core services, which creates opportunities that new organizations enter the market.
Third the paste market is expanding with interest from a range of health care organizations focused on value based care.
In the first half of 2022, both Missouri, and Kentucky opened their first pace centers and in August of this year, Illinois selected eight organization in five regions of the state to begin providing services by 2024.
Among these aid organizations, our existing paced operators and integrated health system, a federally qualified health center and one of the leading primary care providers, serving seniors Oak Street health, which speaks to the diverse and growing interest in paid.
I am pleased to report that we already have relationships with many of these organizations.
Looking towards the future for pace I wanted to highlight NPA paid 200, K project, which will launch in 2023 with the goal of growing the program three fold by 2028. We believe this will result in a tam in excess of $3 billion for Tabula Rasa.
In October 2022 publication from the bipartisan policy Center provides a number of recommendations that would further accelerate pace of adoption.
Few examples include simplifying and shortening the application and review process, which can take more than two years in some cases expanding.
Expanding enrollment to include Medicare only participants and other high need high cost populations.
And raising consumer awareness through relaxing restrictions on marketing and improving the Medicare Dot Gov website to make it easier for seniors to access information about pace.
We have posted a link to the publication on our IR website for your access if you'd like to review in more detail.
In closing Im excited about our expanding team and changes underway at the company.
One important addition to the team as April Gill, our new Chief commercial officer.
Newly created role April will lead tabular Rasa as go to market vision overseeing strategy product commercialization marketing communications sales and account management.
<unk> has a wealth of healthcare experience from startup to large organization and a proven track record of driving client success growth and profitability all of focus for Tabula Rasa.
Last quarter I talked about the large opportunity ahead of us represented by the more than $12 million dual eligible individuals.
Specifically with at risk provider groups, and health plan, managing high cost and complex patient.
We feel April background is a perfect fit for advancing our efforts in these adjacent markets outside of <unk>.
April joined US in October and we're thrilled to have her as part of the team.
Additionally, as part of our recent leadership transition, we have three new board members and I'd like to recognize the early contribution.
They have already had a meaningful and positive impact.
I'm looking forward to working with the newly constituted board to shape the future strategic direction of the company and we will be sharing that with you over the coming months.
I will now turn it over to Tom.
To review our financial performance.
Thank you, Brian and good morning, everyone.
I'll focus my comments on three areas third quarter results, our balance sheet and fourth quarter guidance.
Third quarter revenue of $77 $1 million increased 14% versus the year ago quarter.
6% on a sequential basis versus the second quarter of 2022.
Our solid revenue performance was attributable to better than expected pace participant growth at existing pace centers and the full onboarding of a new large pace client in California.
This resulted in product revenue growth of 19% versus a year ago.
Excluding <unk> revenue of $2 3 million in the third quarter of 2021 service revenue increased 13% versus a year ago driven.
Driven by our <unk> and risk adjustment services, both of which increased more than 20% during the quarter versus a year ago.
The CMS MTM program concluded on December 31, 2021.
Overall gross margin as a percentage of revenue of 21, 9%.
Is down versus $24, 6%, a year ago, and effectively flat versus second quarter of 2022.
Third quarter product gross margin of $22, 7% compares with $23, 5% a year ago.
With the decline driven by revenue mix and increased shipping costs.
Third quarter service gross margin of 19, 1% compared with 27, 8% a year ago with the decline driven by the ongoing business process outsourcing transition, including increased consulting and professional service fees.
As we noted last quarter, we expect these headwinds to normalize in 2023.
Our GAAP net loss of $25 9 million includes $8 1 million of stock based compensation and.
And other costs related to our leadership transition in September .
Adjusted EBITDA of $2 1 million from continuing operations is down from $3 1 million a year ago.
And flat versus the second quarter of 2022.
This decline versus the year ago quarter is primarily due to the timing of cash compensation expense and gross margin pressures noted earlier.
Moving to cash we ended the third quarter with <unk> dot $8 million of cash, which is $54 $3 million higher than June 32022.
And as due to the net proceeds received from the sale of prescribe wellness after paying down our short term debt.
The company has no debt maturity until 2026.
We generated about $1 million in cash flow from operations during the third quarter and $9 8 million through the first nine months of 2022.
Third quarter cash flow was negatively impacted by our discontinued operations as well as divestiture related expenses.
Turning to guidance for continuing operations, we are introducing fourth quarter 2022 revenue guidance as follows.
Revenue of $77 5 million to $80 5 million.
Which represents growth of 12% to 17% versus a year ago.
Including care mentioned health care growth of 16% to 20%.
For the full year 2022, we are raising our revenue guidance for continuing operations to a range of $294 million to $297 million.
Which represents growth of 13% to 14%.
Including <unk> health care growth of 17% to 18%.
Mid point of our new range is $6 $5 million higher than our most recent full year revenue guidance.
With that I will turn it back to the operator for Q&A.
Thank you Ned.
And at this time, if you'd like to ask a question. Please press star one one once again Thats Star 111 moment for our first question.
Our first question will come from the line of Sean Dodge from RBC. Your line is open.
Yeah. Thanks, Scott Good morning, and congratulations on the good progress this quarter.
Tom I wanted to start just on the better than expected Q3 results.
Partly driven by higher pace census growth.
I think the guidance originally it assumes.
Nine tenths of a percent month on month.
Increase in.
What did you actually recognize over the quarter and I just.
How much how much better did census growth run.
Listen what you all had assumed.
Yes, it was probably like a 10th of a percent better but.
No.
It occurs to me that we should provide more clarity around that and some of you in the analyst community have.
Asked us to.
Maybe think about that in a different way because the census growth is kind of same store sales right.
That doesn't really.
Hello, the whole story because.
We mentioned, we added a huge program in California.
In third quarter.
We have another one coming on in fourth quarter and so sometimes these these new centers.
Well overwhelm.
Number the new participants at existing centers.
And then of course it goes the other direction to you have you have churn you have some people who passed away this involved whatever.
So the net number the story of the net increase isn't told entirely.
Hi.
Same store sales growth if you will so we'll have to.
Perhaps provide more clarity going forward on that maybe give the total number of participants.
But to answer your question, both or doing meaningfully better than we projected.
Both the growth of new participants at existing centers.
And.
New participants at newly added centers newly won Rfps and both contributed to that outperform in revenue in the quarter.
And therefore, the guidance raise as well.
Okay. That's helpful. And then one of the new metrics you did give us was with the average PM TM in pace, you said that was up 9% year on year during the third quarter.
Well so there's a few drivers within there how much of that was cross selling versus is there a pricing component to that too and then.
As we look at these new metrics that you've given us.
On this average <unk>, how should we think about maybe the levels that you guys can maintain.
They are going forward.
Well.
I don't know that we've guided to that so I don't know that I'm going to get into levels going forward I think our guidance.
As reflected in our revenue guidance coming next year.
Reintroduce EBITDA guidance I don't know that we're going to guide to <unk> because.
It's a mix factor and you can't always predict that.
Tom.
As to the first part of your question what.
How much did that contribute I'd say mix was an important part.
The story.
Do a great job of cross selling.
From one product to another and so.
That's a big part of it.
And John This is Bryan I would just add to Tom's comments I mean this is.
Really.
A measure of our success with cross selling and the area, where we have the least penetration in pace today is on the pharmacy side.
And the pharmacy is where we have the largest potential for a revenue contribution.
On a <unk> basis. So it is part of our strategy to continue to push on that that cross sell opportunity.
So.
Our desire is to have that number continue to increase overtime.
Okay Alright.
Sorry to cut you off you are good.
Okay.
That's all I had I'll get back in queue. Thanks.
Sure.
One moment for our next question.
Our next question comes from the line of Ryan Daniels from William Blair. Your line is open.
Yes, hi, good morning, Thanks for taking the questions. This is Jared haase in for Ryan.
So wanted to ask one around the cadence of implementations for pace.
That was up significantly both year to date this year and also in the quarter relative to last year. So I'm just curious on that sort of cadence of implementations.
How much of that should we read into that just sort of easing of kind of COVID-19 related conditions is just a little bit easier to get out there and do those implementations. This year relative to last year, how much of that is sort of just.
A reflection of our growing sales funnel and more opportunities that sort of thing and how much of it is kind of just.
The natural benefit of better execution.
I would say, it's really gerrick. Thanks for the question, it's really the latter two.
Yes, I wouldn't say this is a COVID-19 factor at all.
I would primarily say that theres a lot of activity in the market right now as I mentioned in my prepared remarks I was at the National Pace Association meeting.
In October and the.
The energy at the conference was amazing I would say, it's really incredible to see the number of organizations that are recognizing the pace model and the ability to really drive down cost and improve quality.
And the different areas that this model can be applied so as we continue to see more of that recognition. There is definitely more activity. We are signing more contracts the implementation pipeline continues to grow.
It's really an exciting place to be right now so.
It is about the activity in the market.
And our execution.
Don't see that slowing anytime soon.
Okay, that's great to hear thanks for that color and then maybe I'll just ask a quick follow up on the model.
About the gross margin line looking out to 2023.
So there is some headwind good precedent that sounds like youre expecting to alleviate as we get into next year.
Yes.
I get that you guys are still holding back on the profit guidance here, but just any sort of directional commentary on how to think about sort of where that gross margin line in particular might settle out or maybe any thoughts on sort of the magnitude of those headwinds are happening right now.
I'll give some color on that.
Shawn and his earlier question.
Asked about pricing as well as cross selling.
Let me speak to that now as well as to your question.
There are.
Two drivers both of which I believe can go in a favorable direction if management does its job.
And impacting margin.
The pricing side.
Is a large one we are seeing enhanced pricing power in our contracting.
Approximately 20%.
Our pharmacy contracts, which is our largest.
Revenue center and largest.
Driver of margin about 20% or up for renewal between now and December 21 2023.
And the renewals were seeing are happening at 2023 pricing, they're not happening at the legacy pricing when those contracts were signed years ago and that is significantly higher.
On the cost side on the margin side.
We're starting to see we had a little tail of headwinds from.
Shipping costs.
Versus last year.
But it starts to level out.
Versus last quarter, so that's starting to abate a little bit.
Revenue mix played a little bit in our.
Margin.
Diminishing this quarter does that.
It tends to level out over time.
The real driver of not just gross margin, but ultimately EBITDA margin.
He is going to be our ability to iterate on.
Cost savings.
On the operating expense side.
The disposition of Symphony in particular will facilitate cash and margin savings will ship 400 heads right there.
And while that's discontinued ops.
There are many shared services costs that support those 400 heads professional service costs that tend to scale with head count.
Outsourced support legal fees real estate insurance other costs.
So you ought to see that push in a favorable direction. Our capitalized labor now. This is less of a margin question more of a free cash flow, but capitalized labor declined to $4 5 million for continuing ops, that's $1 5 million improvement over the last quarter So as symphony.
Eventually is disposed of.
It's a large bleed on our cash but it also will enable us to iterate on support costs and that ought to drive margin up the more favorable pricing environment.
To drive margin up a bit and Youll see this reflected when we give guidance in.
Our fourth quarter earnings call for 2003.
Okay, I think Thats Super helpful. I'll leave it there, but congrats on the progress thus far.
Thank you thanks Derek.
Thank you once again Thats star one.
One moment.
Okay.
Our next question comes from.
It's from <unk> Securities. Your line is open.
Hey, folks thanks for taking my questions.
I just wanted to get an update from you Brian about the strategic review Committee. That's been formed after the cooperation agreement are there any early read on incremental value creation.
Hey, Stephanie that's a great question I would say the immediate focus of the strategic review committee has been centered around the divestiture process.
And I believe we are on track with both dose and Symphony and will continue to report out over the coming months, but.
In general I would say that there is.
Nice alignment between the newly constituted board.
That met really for the first time this past week.
And the management team to ultimately drive enhanced performance.
Increase shareholder value so I'm excited about.
This new group and what we can do together.
With the idea that.
That management, our it has often been one of the biggest limiting factors for Kathy Lovaza strategy, how are you and Tom really focusing your time right now.
Well that is a great question and you always have limited bandwidth right.
We are focused in a couple of different areas.
I would say one of those as evidenced by an announcement we made earlier this week.
With the Onboarding of the April Gill, who is our new Chief commercial officer is a new function.
That is really aligning.
All of our commercial activities, so she's overseeing strategy as well as sales account management marketing communications client success.
And that is an important focus for us in terms of how we are going to market.
And the commercial infrastructure that we need and rigor at the company.
To really execute on.
On our plans going forward.
And then the second is as Tom was just mentioning is on the cost side as well so.
We.
I think we both believe that there is an opportunity to maintain a very strong growth rate while improving margins.
And cash flow all at the same time, so none of those need to be sacrificed and so I think youre going to see a continued focus from us on refining that go to market strategy. So that we can really.
Direct resources towards a few key opportunity.
That really provide some nice leverage going forward.
Helpful. Thank you.
Thank you one moment our next question.
Our next question comes from the line of David Grossman from Stifel. Your line is open.
Thank you good morning.
Im wondering Thomas.
Go back to your comments.
About symphony.
<unk>.
Any information you could go ahead, sorry, if this was in the press release and I missed it but if you could break out the drag on free cash flow from Symphony.
This year or perhaps I don't know if that helps.
For the quarter, but somehow to frame for us what kind of drag that is and what impact that may have once divested.
And the last quarter.
Simpson.
All in by which I mean.
Margin.
Lead and the P&L, but also cap capitalized costs capitalized software development.
Was close to $5 million.
And Thats a lot.
And.
When that business is disposed of that's an overhang that will go well.
And is that $5 million.
Appropriate run rate to use for the year or it was last quarter, particularly.
It was higher this quarter than in prior quarters.
David you might remember there is some seasonality to this business.
Half of the year.
In particular is where.
Top line starts to contract a bit in Q2.
In the second half of the first quarter is really where you see.
Profitability.
At a much higher level.
Got it.
And so as we.
Kind of look forward.
Yes.
Is the disposition of Symphony.
And up.
To catch you.
On a consistently positive free cash flow trajectory.
I wouldn't look at.
One item is.
The sole driver. This will obviously help I mean anytime you put $5 billion in quarter for one business unit.
That business unit goes away by definition, that's a positive.
But when I think of the cash generating.
Potential for this business.
I think of two things.
First thing I think about and it's.
Hard way above that $5 million.
I think of this business being a double digit EBITDA margins.
Before it acquired a number of businesses that perhaps distracted management.
Well and then you got to go back to 2018 or so to see that.
When we are done with this realignment restructuring of the business.
Have to dispose of those businesses and the remaining core business.
Resembles what it looked like when you had this double digit EBITDA margins and so that seems like a good starting point.
But also remember that this is a business, particularly when you strip out the MTM sunset.
That is growing.
High teens year over year.
And that doesn't seem to be abating anytime soon.
And so one of the things we will do.
At some point in 2023.
After we have been able to iterate on the cost structure is project out a multiyear model. Because then you will see with revenues growing at what they are growing if you right size.
Gently grow the cost structure.
See the leverage in the model and so if you project two years out.
The way this places drone.
You iterate.
Both the cost side, but also on the pricing side like I mentioned.
It can be a dramatically different story that far and away overwhelms the benefit of just getting rid of Cincinnati.
So that as Brian and my and the team's mandate I believe.
Right.
Alright, so so.
Sounds like longer term youre, pointing our eyeballs that kind of going back to what it looked like pre acquisition to get back to that model right. So.
I understand and I appreciate that so as you.
Think about getting to that model.
Can you give us any sense of what it may cost you in cash flow to get there or is that.
Do you think.
That's really not.
That's really not going to substantially impact cash flow over the next 12 months or 24 months or whatever it takes you to get to that model.
I don't think it's substantial.
There'll be some investment, let's say and things that allow us to scale.
New business is growing when your pharmacy business is growing high teens.
At some point you've got to make sure you can scale.
Yes.
Could there be an investment of Capex investment that.
Allows you to.
Handle that growth a little more efficiently and therefore get a little more scale in your margins yes.
Any of that.
Recurring annually no is any of that terribly troublesome to accompany with $80 million of cash on its balance sheet and no debt maturity for.
Three and a half years not really.
We'll guide to all of that.
When we guide for 'twenty four.
Numerate the run rate.
Capex required as an ongoing investment in the business.
And any one time items, we may choose to do.
<unk>.
Achieve synergy and to help our margin scale, better which by definition ought to pay for itself in a short period of time.
We're not going to guide on that today.
Alright.
And just one last thing on the comment on pricing how much of the pricing is.
Actual pricing power versus passing through.
Higher costs.
Oh, I don't know that they are.
Terribly different I would say that.
A lot of our contracts that are expiring.
We're priced several years ago in a very different environment.
So it's.
And remember a lot of our.
Costs are.
<unk> pass throughs to CMS and as long as a reasonable.
<unk>.
That tends to be acceptance on the part of our customers.
So some of it is simply catching up to 2022 and 2023.
Inflationary environment, but a lot of it is our customers recognize the value they get.
As to our competitors.
Our pricing Hasnt always reflected that.
I can tell you. This is an anecdote of course, but I can tell you there were three.
Contracts renewals and proposals that we put forth recently.
That were.
Happily accepted.
At a margin level that was higher than what we've done in the past.
And I view that as a good omen.
For the future.
Alright, very good that's it for me good luck. Thank you David Thanks, David.
Thank you.
One moment.
Once again Thats star $101 for any additional questions.
One moment.
And this will conclude our Q&A session as well as our conference for today.
You for participating you may now disconnect everyone have a great day.