Babylon Holdings Limited (BBLN) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning and welcome to Babylon’s First Quarter 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Leading the call today is Dr. Ali Parsadoust, Founder and Chief Executive Officer; and Charlie Steel, Chief Financial Officer; and Steve Davis, Chief Technology Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and as further described at the end of the press release that is posted on the company’s website. These forward-looking statements reflect Babylon’s current expectations based on the company’s beliefs, assumptions, and information currently available to the company and are subject to various risks and uncertainties that could cause actual results at differ materially. Although Babylon believes that these expectations are reasonable the company undertakes no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to different materially from these forward-looking statements can be found in the Risk Factors section of the company’s annual report on form 20-F filed on March 30, 2022 and as other filings with the Securities and Exchange Commission. In addition, please note that the company will be discussing certain non-IFRS financial measures that they believe are important in evaluating performance details on the relationship between these non-IFRS measures to the most comparable, IFRS measures and reconciliation of historical non-IFRS financial measures can be found at the end of the press release that is posted on the company’s website. The presentation slide for today’s call is also available on the company’s website. With that, I’d like to turn the call over to Babylon’s CEO, Dr. Ali Parsadoust. Please go ahead.
Ali Parsadoust: I would like to welcome everyone and thank you for your time and interest in Babylon. I’m joined today by Charlie Steel, our Chief Financial Officer and Steve Davis, our Chief Technology Officer. Today, I will share an update on our business progress in the first quarter 2022 including our outstanding revenue growth and cohort engagement. I will then pass the call to Steve to provide more color around our highly advanced technology platform, and how our focused technology investments are enabling best in class data analysis and risk assessment for Babylon members. Charlie will then provide more details on our financial results before we open the call for questions. I would like to center my comments today around four key teams. Firstly, our continued experimental revenue growth. Secondly, our operating discipline. Thirdly, our continued strong engagement trends, and finally, our technological advantage. I will begin by expanding on our growth this quarter. After achieving full time revenue growth in 2021 to a record of $323 million I am pleased to share that our top line growth has continued well into 2022 with our first quarter revenue coming at $266 million comfortably beating consensus estimate. This amount represents 3.5 times growth from the first quarter of 2021. And it’s just under $60 million shy of the revenue generated by Babylon in the entirety of 2021. Importantly, we were able to achieve this level of growth while maintaining excellent levels of customer engagement and satisfaction. We remain extremely optimistic about our prospects for 2022 and are confident that we are tracking to at least $1 billion of revenue for the full year. Accordingly, we are increasing our revenue guidance to $1 billion or greater up from a range of $900 million to a billion dollar previously as Charlie will discuss in a few minutes. This represents a revenue growth greater than threefold from 2021 on top of the fourfold growth we achieved last year. Our revenue growth has been powered by a robust expansion in our value based care membership. Our U.S. BBC membership grew by more than 300% year-on-year to over 270,000 members as of March, 31. This growth was driven by the launch of three new value based care contracts this quarter, which added a further 105,000 U.S. BBC lives across three states. We are proud to now provide clinical services in eight states across the United States, and to work with a broad variety of payers, including BCBS in New Mexico and United Humana, Aetna, Anthem, Blue Cross in California. I appreciate that revenue growth has become an unfashionable word. And the mantra for most investors has turned from growth is everything to profit is everything. Like many I have seen these cycles come and go. And in my view, the companies that are one hand do not to stay oblivious to the prevailing environment around them. But on the other is stay focused on executing the plan will be the ultimate winners. In the same way that we never subscribe to the previous dominant view of growth at any cost and always curved our growth at a sustainable level today, we do not believe in the now dominant bias against growth. We always believe that we should deliver profitable growth and profitability in platform businesses will come from scale and continuous investment in innovation. Your operational leverage that I will highlight in more detail shortly shows that once the scale is achieved, it should lead to substantial cash generation as every incremental dollar contributed to the gross margin should enlarge for directly to the cash line. Moving on to my second point regarding operating discipline, we continue to make progress towards our goal of profitability no later than 2025 delivering an adjusted EBITDA for the quarter ahead of consensus expectations. As we emphasize in our fourth quarter call, a key priority for us in 2022 and beyond is to demonstrate to the market that we can continue to deliver exponential growth, while at the same time the diligently focusing on balancing the cost of that growth to monitoring all contracts from this perspective and have a disciplined approach to their cost structure. For example, when taking on new contracts, we are focused on only those where we can see a path to gross margin neutrality from year one, and with the potential to drive significant margin improvements every year after that until maturity. In addition, we are focusing on expanding our portfolio beyond our initial start with Medicaid, to growing our Medicare Advantage and commercial population. To that sense, we are being very selective in our consideration of new or even existing Medicaid contracts, and only accept or continue with those that are in line with the above objectives. This decision is factored into our outlook and demonstrates the selectivity of our approach and our resolution to grow in a disciplined manner, achieving profitability by or ahead of our targeted timeframe. Moving on to discussing engagement, I would like to take a few minutes to talk about the very positive trends we are observing across our VPC contracts. Engagement is a key to our business model and to our patient journey. In the UK we have already proven our ability to create downstream cost savings through high upfront engagement. An independent study by the National Health Service and Ipsos MORI showed we reduced ER visits by over 25% and a peer review the study proved we create acute care cost savings of up to 35%. Engagement is key to this. By creating a service that is highly accessible and members love we are able to become the gateway to the overall health care system. Once our UK members attend their first appointment, the return for an average of seven more appointments annually, I’m pleased that we are seeing the same pattern of engagement across our U.S. contracts this quarter. We saw members in our most mature contract in Missouri return for an average of four further appointments annually. And to help you understand why this is and why our members keep returning to our services we’ve shared one member’s testimonial about their experience with Babylon, which you can access to these conferences accompanying deck posted on the investor relations page of our website. In addition to this success with engagement, we also see that all servicing the U.S. leads to a reduction to expensive emergency room visits across all of our BBC contracts, only 7% of appointments this quarter resulted in avoidance of emergency rooms and urgent care visit. Moreover, we are also seeing that our ability to engage members has ramped up to be even faster over time. For example, compared to our older New York, and Missouri contracts, our rate of signing up highest members and the new contracts in Georgia and Mississippi has been respectably four to five times, and 8 to 10 times faster. We have been able to do this due to continuous optimization of our outreach approaches. For example, by adding the ability for our staff to manually sign up members, live on an initial phone call and by shifting our focus from high volume of outreach to creating fewer but high quality interactions. We are very pleased with this success and confidence that we will continue to optimize further and ramp up even faster in future. What we are learning today will give Babylon a structural advantage tomorrow in the way we can onboard and engage our future members that scale and speed. Babylon took on its first value based care deal in October 2020 on the midst of the COVID-19 pandemic, assuming global risk of approximately 17,000 Medicaid beneficiaries. It is worth noting that some of these beneficiaries were intentionally selected by Babylon’s payer partner based on a lack of historical primary care utilization. Over the contract nearly 40% of households have engaged with Babylon’s digital first model of primary care, and integrated behavioral health. This is a significant accomplishment, especially given these beneficiaries historical disengagement from the healthcare system. The headwinds of COVID, the presence of digital divide in the rural markets, and the lack of accurate contract information that is endemic in medication population. Despite the headwinds faced by Medicaid health plans nationally during 2021, whereby many saw worsening MLR performances, Babylon maintain the MLR, for our members at projected levels, and observe decrease patient utilization over the first 15 months of the contract, all while increasing engagement and access to the care for this historically underserved Medicaid members. This as we have seen in our UK population, once our members are engaged on our platform, we are able to deliver significant cost savings. Currently in the U.S. 59% of our total BBC membership was added last quarter, and a further 23% were added in the fourth quarter of the last year. Members, by definition, have a higher cost profile when they enter our system. However, these cohorts, as these cohorts mature over time, we expect to see these contracts flip to profitability as the impact of our investments in proactively engaging members upfront in preventative care, reduces the longer term in healthcare costs. In a moment, I will turn the call to Steve to expand upon our technology platform. But before I do, I would like to give you some more detail on the advantages provided by our technology. As we have stated in the past, our technology and our ongoing investment in R&D are a key differentiator for Babylon. Our AI and data analytics will increasingly be able to stratify population, conduct detailed risk assessments and positively influence outcomes while ultimately driving down costs. Our significant investments and advances in the Babylon suite of technology and analytics are the key to switching from costly reactive sick care to proactive healthcare improving members health and creating cost savings for both our partners and ourselves. While we cannot be certain how the accelerating pace of innovation will cause our technology to unfold we expect that unlike our clinic focus peers, our costs of computing the scale of data collection, speed of processing and ability to predict to prevent will exponentially improve with time. Our belief remains that there are structural advantages to a digital first approach and betting against technology has often proved wrong in the past and will do so in the future. Technology licensing will be a key revenue flywheel within our business model. Through our licensing partnership across three continents, we are able to expand the reach of our technology, learning and bring in very high margin revenue. We continue to focus on building technology licensing capabilities and pipeline this year with the expectation to convert the pipeline to increasing licensing revenue growth from 2023 driving towards our goal of profitability no later than 2025. Understanding the importance of our technological moat is key to understanding Babylonish competitive advantage. We are a technology company just as much as we are a healthcare company. We employ over 600 engineers and developers with roughly 100 in a specialized areas of AI, data science and predictive analytics. We expect to invest somewhere between $125 million to $135 million this year on our technology, having already invested over $350 million in our technology since 2019. This investment enables us to stay ahead of the innovation curve and stay leaps ahead of our competition. Through our technology, we are able to achieve significant operational leverage. Last year alone, whilst growing our top line by over 300% we reduce our costs of technology as a percentage of revenue by three quarter to 28% of the revenue. And this quarter, we made further progress, reducing the cost of technology to just 10% of revenue. In addition to leveraging this investment and scaling our business, we will bring down our operating costs to a steady state and reach our goals of profitability. Before handing over to Steve, in closing out my prepared remarks I like to thank the entire Babylon team for their hard work so far this year. Our company has continued to make strong progress this quarter and we have much to celebrate. I am of course also conscious that due to many factors, both general to the market sentiments and the specific challenges around the liquidity of our stock our share price has not performed well. We will do all returns to address the part of this challenge that is in our hands. As I mentioned in my inaugural shareholder letter, our focus in Babylon has always been to create a platform that delivers the compounding competitive advantage to us over the long term. As Benjamin Graham wrote, in the short term, the market is a voting machine. In the long term, the market is a weighing machine. We will remain focused on putting the weight on that long term advantage. I am so proud of the amazing work of our team that continues to relentlessly drivers towards our goals to make high quality healthcare accessible and affordable for everyone on it. With that, I’ll pass the call over to Steve, who will provide more details about the Babylon technology suite. Steve, over to you.
Steve Davis: Thanks, Ali. One of the reasons I joined Babylon over a year ago was the belief that human life is one of the most valuable assets in the world and the impact that we as an organization can have with the right technology strategy tied to such an incredible mission. Having worked in industries where the investment and the purpose built platforms fueled by data and AI unlock so much value for hundreds of millions of consumers around the world I saw that same unlock and potential here at Babylon providing higher quality healthcare at a lower cost will result in the level of scale already achieved in other industries, yet healthcare seems continually to lag behind. Over the past year, our global teams have been hard at work. They focused on delivering immediate value, as well as investing into the core building blocks of our platform which we will believe provide us a competitive advantage and the delivery of value based care core building blocks of our platform which we will believe, provide us a competitive advantage, and the delivery of value based care and growing our Babylon cloud services strategy. At the core of that platform is our investment into our Health Graph strategy and platform. The Health Graph is our ability to ingest large volumes of data, both in real time and in batch, unstructured and structured, from hundreds of various providers, wearables, and health record systems. This platform creates a data access strategy that powers our integrated AI capabilities, while simultaneously enabling real time member and clinical product experiences, all coupled with advanced analytical use cases. Sitting on top of that Health Graph platform is our Health IQ service. Health IQ is a growing library of predictions that allows for real time segmentation, and health record enrichment of our members. These predictions provide our care teams with a scalable and effective way to service our members that may be at higher risk. Furthermore, our continued investment in causal AI has led to the growth of our triage product, which now includes Babylon advisor. Babylon advisor gives us the ability to codify industry leading care guidelines into actionable member insights that allow our clinical care teams to provide scalable care delivery. Our goal with our technology, investment and delivery is to elevate the quality of care, improve its accessibility, and deliver it in the most cost effective way at scale. This reflects our core mission as a company. You will hear more about our latest release, which is a large coordinated development effort that introduces upgrades to our platforms and applications and a single seamless experience at our capital markets day on May, 23. It remains our goal to continuously improve our purpose built platform with our proprietary technology to assure a sustainable competitive advantage and the delivery of value based care. With that, I’ll pass the call over to Charlie to give an update on our financial progress this quarter. Charlie?
Charlie Steel: Thank you, Steve. And thanks to everybody today for joining the call. We appreciate your time and interest in Babylon. Today, I’ll provide some further perspective on the performance and trends we’re seeing in the business as we review our Q1, 2022 financial results, as well as providing an update on our 2022 revenue guidance. As Ali mentioned, we’re very happy with our financial performance this quarter and are pleased to report we exceeded our revenue EBITDA growth delivering revenue of $266 million and we can reach consensus estimates for the quarter by over $30 million. We also achieved adjusted EBITDA margins and negative 27% for Q1 have a consensus and ahead of our guidance and negative 30% for the full year. Financial highlights in the quarter, I’d like to discuss our financial performance and some of our KPIs such as our cost of care delivery margin, and one of the impact of our increase in value based care revenue for our new contracts in Georgia, Mississippi, and our new DC Direct contracting line of business this quarter. We also generated significant operating expense leverage with discipline or expense management in combination with our significant top line year-over-year growth. Moving to our financial results, as mentioned earlier, revenue for the quarter came in at $266 million which is more than 3.5 times the revenue we generated in the first quarter of 2021. Top line revenue growth was again driven by our value based care segments and was over nine times the value based care revenue we generated in the first quarter 2021. During this first quarter, we also initiate new contracts to over 100,000 new members bringing our total global managed care membership which includes customers in the UK to over 440,000. In terms of the contribution mix, almost significant contributor to top line growth, with value based care revenue. BBC and related revenue increased by $219.3 million in the first quarter to total $246.6 million and accounted for 93% of Q1 revenue. This has been driven by significant increases in our BBC membership base, including adding 86,000 members in Q1 to new contracts in Iowa and Georgia, and 19,000 members in California through our partnership with a direct contracting entity as part of the CMS direct contracting model. Both provide crucial care management services to Medicare beneficiaries in California in a value based care arrangement. Licensing revenue was $7.8 million during the first quarter of 2022 versus $36.0 million in Q1, 2021. Although this is decline year-on-year this is largely due to upfront revenue recognition in connection with the software licensing arrangements in Q1 last year of $28.4 million. When normalizing the figures to this one item, year-over-year licensing revenue growth would have increased by 2%. As Ali mentioned this year we are actively engaged in building our licensing pipeline, with the aim to increase our proportion of high margin licensing revenue in 2023. Licensing revenue will also be a key contributor towards our profitability by 2025. Clinical services revenue, which includes our clinical services in the UK and Rwanda, as well as our USP services business, was $12.1 million during the first quarter of 2022, which is an increase of 50% to $8.1 million in the first quarter of 2021. This year-on-year growth is attributable to the additional 1.7 million clinical service members in New York added in the last year, as well as organic growth in GP at hand and memberships in the UK. Over the first quarter of 2022, we’ve continued to diversify the next value U.S. BBC members were more than 2.5 times increase our Medicare population from 14 to 2021, from 11,000 to 31,000, primarily due to our partnership with direct contracting entity. So this quarter, we reported total of 271,000 U.S. value based members of which 83% were Medicaid, 6% was commercial and 11% was Medicare. Compared with the end of the first quarter of 2021, where we’ve had 66,000 U.S. value based members with 88% to Medicaid and 12% to Medicare. One of the key focuses in 2022 is to enhance cost of care delivery margin, and utilize our operational leverage as we scale. Our continued rapid revenue growth has had associated margin impacts in the short term as we proactively engage our members up front, which comes with associated costs in order to prevent expensive prices and reduce long term damage in healthcare costs. In order to provide more clarity on the components, without proper care delivery expensive quarter, we’ve broken it down into two components a team care spends and clinical care delivery expense. We’ve done this to help differentiate between the costs incurred by Babylon delivering our service offering, which as we discussed previously, is a highly scalable operating model. From our members claims expenses are the main driver of a value based care cost of care delivery margin reciprocally starts in the range of 100% to 105%. Of each value based care carrier cohort matures we expect to their claims cost is essential revenue reduce over time. And we believe that by breaking these metrics out, we’ll be able to show the market, our rate of profitability scale. For this quarter claims expense of $247.6 million, which has increased from $23.9 million in Q1, 2021 primarily due to the addition of over 200,000 new value based care members in the last year. As Ali mentioned, we continue optimizing our processes and we are seeing the results of this in two new value based care contracts which launched in Q4, 2021, where we’re signing up high risk members previously allowing us to engage our members even earlier, and impact patient health medical claim expenses performance. Clinical care delivery expense increased year-on-year coming in at $23.9 million for the first quarter of 2022, up from $11.8 million in Q1, 2021. We expect our clinical care delivery expense to be highly scalable, and we’ve seen progress this quarter across dropping as a percentage of revenue in 17% in the first quarter of 2021 to 9% this quarter and progress quarter-on-quarter clinical care delivery expense, and 21% to 9%, utilizing operational leverage across our network. We’re exploring additional operational opportunities to further leverage our economies of scale. For example, we have 10 practice licenses for a year safe conditions across all states in the U.S. which allow clinicians to utilize more efficiently deliver care on a national basis, and better match supply demand clinical services. We are significantly increasing clinician efficiency. Further, this model also allows the longitudinal high quality care for workforce at Trinity practice virtual first. Combining both our cost of care delivery expense payment came to $271.5 million for the quarter, which is an increase from $129.2 million figure announcing Q4, 2021. However, on essentially revenue basis, we’ve seen improvements from quarter-over-quarter for cost of care delivery dropping by six percentage points to 102% of revenue from 108% in Q4, 2021. I’d like to now move to discuss our operational costs. As mentioned earlier, the scalability, operational leverage is a key pillar in our path to profitability on both technology and SG&A expenses falling revenue this quarter. Our technology expenses which comprise platform and application expenses and research and development expenses were $26.8 million in the first quarter of 2022 which is an increase of $9.9 million from Q1, 2021. While our total technology expenses were greater as a result of increased platform expenses this quarter, due to the operational leverage our technology cost actually decreases in potential revenue by more than half from around 24% from 2021 to just 10% this quarter. Similarly our are SG&A expenses, which increased to $58.3 million this quarter versus was $31.5 million in Q1, 2021, and also decrease in revenue. SG&A expenses this quarter compared to 24% of revenue in the first quarter of 2021. So demonstrating the scalability of our operations, and also considering the significant amounts of our increase in SG&A expenses coming from being a publicly listed company. Moving on to discuss adjusted EBITDA. For the first quarter 2022 our adjusted EBITDA loss of $72.2 million, an increase loss from Q1, 2021 adjusted EBITDA loss of $4.6 million. However, the figure includes the previously mentioned $28.4 million, one off licensing revenue recognition, excluding this comparative adjusted EBITDA loss would have been 70.9 million in Q1, 2021. On this normalized basis, we can see a continuing trend marginal improvement in adjusted EBITDA loss margin of 77% in Q1, ‘21 compared to 27% in Q1, 2022. We represent 50 percentage points improvement year-over-year and the piece of our guidance for the year was 30%. Moving to the balance sheet, I’ll provide the most relevant balance sheet and cash flow information and some context on the changes. Cash and cash equivalents at March 31, 2022, $275.0 million, and that rates totaled 300 million since October 2021. As mentioned on our fourth quarter earnings call at the end of 2021, we executed some additional debt funding arrangements for $100 million of growth of issuance costs, which we received the funds at the end of March 2022. This will receive that any interest expense for Q1, 2022 and is included in the caption debtors as Ali just mentioned. We’re comfortable our cash and borrowing capacity can fund operations efficiently through to year end without the need to raise additional capital. I’d also like to address our outstanding share count on the call following the end of our lockup period April. As for registration document that we signed currently have 416.4 million ordinary shares issued and outstanding, which includes 38.8 million stock holder earn out shares of 1.3 million sponsored shares. I’d like to end by giving out this guidance to our 2022 performance. In January 2022, we increase our revenue guidance from 700 million to range from 900 million to $1 billion. As Ali mentioned, given our revenue over attainment during the first quarter, and our current revenue run rate now exceeding $80 million per month, we’re very comfortable increasing our revenue guidance, again from our prior 900 million to a billion dollars to now achieving revenues as a billion dollars or greater. We’re also updating our adjusted EBITDA guidance and our expectations for the year by guiding to adjusted EBITDA loss and maximum $295 million for revenues at the $1 billion mark. We are confident that we continue to see positive terms of profitability and reiterate our expectations of the EBITDA by 2025. That makes an incredibly strong financial results are delivered so far this year. I’d like to thank all Babylonians for hard work this quarter. And I look forward to continue to work alongside our amazing team to deliver our mission to make high quality health care and accessible and affordable for everybody. And operator with that now open for questions.
Operator: Thank you. And I’ll be conducting a question and answer session. Our first question today is coming from David Larsen from BTIG. Your line is now live.
David Larsen: Hi, congratulations on the beat and rise in the quarter. Can you maybe talk a little bit more about the speed of interactions and on-boarding for new value based care lives? I think you mentioned for the high risk groups that the rate of communications with those members has accelerated significantly relative to your initial Missouri cohorts. What’s driving that? Any color there will be very helpful especially on a tech side what are you doing on the tech side from an automated AI perspective that identifies which members are at the highest risk of high claims costs. And like, how are you measuring consistent communications with them? Thank you.
Ali Parsadoust: David, thank you for your question, this is Ali. As you can imagine, we are a highly learning organization. And what we do, as we go forward with any new cohort, we spend a significant amount of time analyzing what we had done in the past. And we learn every week based on our interactions with our members, that how we can improve our interactions as we encounter them again. As a result of that continuous learning and that is the advantage as you quite rightly say, of a technology based approach, we can learn from every interaction and improve it. And as a result of that, as you quite rightly said, we improved our results in Georgia by four to five times for the same period of time, compared to Missouri. And I believe around eight times for the same period of time in Mississippi. That learning will continue, they’re still at the very beginning of our approach and our data capabilities. And I think as time goes by, you should expect to see better and better approach. That is fundamentally the advantage of a learning organization that is based on data analytics.
David Larsen: Okay, that’s, that’s very helpful. Thank you. And then can you talk a little bit more about some of the mix shift, I can see that your penetration rate in commercial and Medicare is increasing. Are plans I mean, can maybe talk about how you’re winning those lives, is that part of a lot of the new RFPs? And then what are the economics like for commercial and Medicare relative to Medicaid? Thanks.
Charlie Steel: Thanks, David, Charlie here. I think it’d be pretty previously announced DC is accounting for a lot more of the Medicaid Medicare population. And as we said, in the past, we want to improve the mix away from purely being Medicaid where we have been in the past, I think you’re seeing those numbers come through, quite strongly. Commercially we also see the great opportunity for us. And part of the reason for that is it’s easier to get employers to help us drive people through the funnel as well and to accelerate that engagement once again. So I think sort of going forwards, what you’ll see more and more of us is more of that mix starting to evolve, particularly with commercial and Medicare, but as I say, a lot of the change in Medicare for first quarters as a result of DC.
David Larsen: Okay. So the direct contracting program with CMS, I mean, how many lives are in that, and we’ve seen with like Oak Street, and a couple of other public providers that it can take time to stabilize those direct contracting lives. Just any color on are those Medicare lives as they were contracting, or is going to be breakeven in 2022, or any thoughts there will be harmful.
Charlie Steel: Yes sure. So we got 19,000 lives on the management under the DC program. And exactly as you say, David, we’ve actually adopted a very conservative approach to how we think about MLR on DC. There are a couple of percentage points that you take, because CMS retains that. And then on top of that, we’ve been again, quite conservative on how we accrue for the quality ratings as well and the revenue we get from that. So in first quarter, we’ve assumed that our MLR and DC is around 104%. So as you can see, that’s basically making up actually the majority of the drag on the MLR for the overall business, but it’s built over the course of the year, we expect that to improve.
David Larsen: Okay, and then the last one for me, and I’ll hop back in the queue. When health plans go to increase their premium prices and there is typically an increase every year, let’s call it mid to high single digits. How do you make sure that you get your fair share of that? Is that built into your contracts or not? Thanks.
Ali Parsadoust: The answer is absolutely yes, David. We take a percentage of the premium of the totality of the MLR where possible, sometimes there will be some exceptions to the amount to the part of the MLR we take they’re part of the MLR we just cannot influence. So we may sometimes exclude those, but otherwise we take the totality of the MLR which usually is a percentage of the premium and as a result as the premiums go up, our revenue also goes up.
David Larsen: So assuming you can hold back the cost trend at a pretty stable pace or even improved cost trend or reduce it, those premium increases should flow through to earnings and margin for you?
Charlie Steel: Correct.
David Larsen: Okay. Congrats on a very good quarter. I’ll hop back on the queue.
Operator: Thank you. Next question is coming from Dev Weerasuriya from Berenberg. Your line is now live.
Dev Weerasuriya: Hey, good morning, everybody and great quarter. Thanks for taking my questions. I’ll kick it off actually just want to follow up on David’s question. Just to confirm as to premium has increased as a percentage, the percentage of taking stay stable. Is that premium increase really to address kind of inflation and cost of claims expenses or do you think you’re going to have kind of additional gap between cost inflation in claims expenses and the premium expense where it’ll be a benefit to margin?
Charlie Steel: Yes, that’s exactly correct. As the prices go up, we will be the beneficiaries of that. But clearly that does take an assumption that you can hold the cost stable underlying that. And in general, there’s a reason why the price is going up because there’s a general market overview of the costs going up. Now where we’ve been so far as you’ve actually been very efficient on holding those costs stable, but as I say that whilst we do get the benefit coming through on the revenue, we also do need to continue holding those costs stable.
Dev Weerasuriya: Yes, absolutely. And then I’d just like to ask a couple of questions around care margins. Could you talk a little bit about your line of sight into claims expenses? And provide a little bit of color on the leverage in particularly just a clinical care delivery expense from the technology side. As you bring on different geographies, different contracts what are kind of the implementation costs? Is it very minute or does it takes a little bit more costs, as you bring on new contracts to get them set up. And then that goes down. I would assume pretty dramatically over time. Any color on that those who would be helpful? Thanks.
Charlie Steel: Yes. So the incremental cost of taking on new states on the OpEx side are actually very, very small. I think that’s the reason why you’ve seen the massive, massive operational leverage come through in the business, particularly in the last couple of quarters, where we’ve increased revenue, both on the relative and absolute basis hugely. So when we think about the OpEx costs to take on new business, that sort of largely sits around marketing, there is a little bit of IT costs as well that you have with that. In the rare cases, we have some level of customization. But also, at the same time you might have some regulatory stuff that you need to amend. And then there’s a small amount of variable costs as people use the platform. But by and large, though, we do have huge operational leverage in the business by taking on new contracts.
Dev Weerasuriya: Yes. And then just on the line of sight into kind of claims extensive. Could you talk about how far ahead does technology enable you to kind of see that get a line of sight into claims expenses and maybe the benefits to get there versus peers using a technology?
Charlie Steel: The fundamental thing that we all need to and we do understand about healthcare, and you do very well, is that usually about 20% of your members account for 80% of your expenses. The important work is to identify who those 20% are, and instead of sitting back reactively, and waiting for them to hit crisis and emergencies and land in hospitals, is to proactively engage with them ahead of time to try to keep them healthy and away from those crisis. Our technology and our employees what they do is they as soon as we take over a contract we analyze deeply the data available on those members, and we have the ability to proactively reach out to them to try to bring them and sign them up to one of our programs and to try and be with them throughout their journey on healthcare. That usually takes away enough of their challenges to be able to save costs. I mean, in a nutshell, that is what any healthcare company should do to keep members healthy. But the reality is of course, as you know, most will be called healthcare the sicker companies who wait until you get sick and then you go through the usual things and the fee for service system is designed to benefit from that. So we have a very different approach and philosophy of how you make these things work.
Dev Weerasuriya: Okay, great. And then I’ll have just one more, and then we’ll hop back. On the interactions between the engagements, it seems like it’s ramping up quite nicely here. Could you talk about any differences between the different contracts, whether it’s Medicare, Medicaid or commercial members, and whether the ramp up in engagement or the types of interactions differ?
Charlie Steel: Absolutely, as you know, traditionally, the Medicaid community, the community with which we have started, has been the most difficult community to engage. Often the cohorts that have been given to us, or the cohorts that insurers or the payers have found the most difficult to find, engage. And sometimes, they have been included in all members, because they had very little engagement with the existing health system, and they wanted or help to found them, seek them, and then engage them. So when you get the result of as much as 37% engagement in our very first cohort from Missouri, or now that number is increasing this is accelerating by four to five to eight times on new contracts, what you have is not your normal Medicare cohorts that would have joined a practice or a clinic one at a time. And therefore, by definition, they should be engaged with a cohort of employees who always are at work or through the structure of a company can easily be found. Often these people are people whose addresses, email addresses, phone numbers, are not even identify, so the work that our team has done to identify these people to bring them online to engage them. I think is exceptional. And as we move from Medicaid to Medicare, and then to the corporate to the commercial, I think what you will see the significant improvement on these engagements because it’s simply a lot easier.
Dev Weerasuriya: Great, thank you so much for your color. Appreciate it.
Operator: Thank you. Next question today is coming from Daniel Grosslight from Citi. Your line is now live.
Daniel Grosslight: Hi, guys, thanks for taking the questions. Medicaid redeterminations are likely to come back in the second half of this year. And if you look at some of the projections by geography, some of your states are going to get hit pretty hard and Missouri down around a third and Medicaid enrollment, Georgia projected to go down around a quarter in Medicaid enrollments when redeterminations come back. I’m just curious how you’re factoring in Medicaid redeterminations into your guidance and growth strategy going forward?
Charlie Steel: Yes. Hi Daniel, thanks for the question. I think so as we said before we put a massive pipeline. We will actually also be announcing some more contracts at our capital markets day on May 23 that will sort of bolster that as well. But we have factored that in. One thing to note, though, is that the Medicaid redeterminations have been pushed out further than we originally believed at the start of the year. And therefore that was sort of one of the factors we had in our ability to increase guidance for the full year revenue as well.
Daniel Grosslight: Yes, okay. That’s helpful color, looking forward to that analyst day. And then just on your cash burn and path to profitability, Ali you mentioned. And I appreciate kind of that first point in your prepared remarks about growing profitably. You mentioned that you’re going to still target reaching profitability by 2025 at the latest. You have around 275 million of cash now you burned around 80 million of free cash flow this quarter. It seems if you’re going to continue to grow rapidly in value based care, you’re going to need to raise additional capital before hitting that 2025 bogey. So can you just help bridge your capital needs as you run towards that profitability target?
Charlie Steel: Yes. So Daniel, I think what we’ve said is, and I’ll reiterate this now that we do not need to raise capital in order to ride out this year. And that sort of goes again with what Ali said about thinking very, very strongly about cash requirements when we take on new contracts. We’re very cognizant of the burn. It’s incredibly important to us to be focusing on that and I think you should be expecting to see that reduce during the rest of this year. And some of that will be how we think about contracting and think one of the advantages we’ve got at the moment is we’ve got a massive, massive pipeline. We’ve already raised our guidance twice so far this year and therefore we don’t feel as though we need to be in any stretch that by any stretch of the imagination chasing any type of revenue. So we can be incredibly selective about the revenue we take on and making sure that that’s beneficial to us from a cash perspective.
Daniel Grosslight: Yes. And I was really talking about 23 through 25. I know you’re not providing that type of guidance quite yet. But just how should we think about that burden in outer years and your propensity to issue either more debt or more equity to fund that growth. Should we think about you guys titrating growth down in outer years so you don’t have to come back to the capital markets in ‘23, ‘24 and ‘25, before you reach profitability, or should we have you funding yourself with additional capital in outer years?
Charlie Steel: Exactly, we do not intend to be coming back to the market. That is when we don’t intend to this he coming back to the market in 2024, 2025, for sure. At the same time, though, we’re very cognizant of the market has basically turned massively since November last year. I think we’re in a very different market environment today than we were six months ago. And we might be in very different market environments in 2024 versus 2025. So whilst I would never say never at the same time, though, it goes back to how we think about our growth. And we want to create a growth engine where that’s fueled by the revenue that we’re taking on rather than additional capital. And that’s really our focus in the two years.
Daniel Grosslight: Okay, great. And one last one for me, I’ll hop back in the queue. You saw a substantial amount of PMPM uplift this quarter? I assume that’s largely due to the mix shift to Medicare in DC in particular, but I was curious just to get your thoughts on the causes behind that and cadence going forward. And then sorry, just to add on to that, on that DC question, how much of that DC membership is flowing through your California IPAs?
Charlie Steel: So to start with, all of the DC is going through California. So that’s where our DC contract is based. And you’re exactly correct Daniel, it’s all coming through the Medicare. It’s basically Medicare DC. It’s a big uplift in the PMPMs.
Operator: Thank you. Our next question is coming from Glen Santangelo from Jefferies. Your line is now live.
Glen Santangelo: Yes. Thanks for taking my question. Hey, Ali, I just wanted to follow up on some of your prepared remarks you were talking about the typical path to profitability for some of these contracts when you sign them suggesting that, there are higher costs, they have a higher cost profile when they enter the platform, and then they flip the profitability. I was wondering if you could maybe describe maybe in a little bit more generalized terms what that normalized path to profitability looks like. And also, in your prepared remarks, you talked about the engagement trends that you originally experience in the UK versus what you’re seeing now in the U.S. And so I was wondering if you could maybe talk about what that normalized path to profitability look like in the UK? And if you think it’ll be very similar in the United States, and then I just have a quick follow up. Thanks.
Ali Parsadoust: Thank you for a very tough question. I think that goes to the core of our model. What we see in the UK is that normally when a patient uses us, the member uses us initially, they use it once or twice, and then as they get used more and more to the platform, they use a significantly more than the average in the country. So while the average usage of healthcare in UK by cohort similar to ours in age and demographic is around three times, all member users are twice as much as that. As a result of these continuous engagement, and they’re often monitored by us. And the conditions are helped by us. And as a result of that we’ve seen cost savings as much as 35% on the totality of the medical expenses for the National Health Service in the UK. Now in the UK, we are only the beneficiaries of the primary care expenditure, and therefore the savings go to the National Health Service. And you’ve seen a peer reviewed data published based on the NHS data that demonstrate that. When we came to the United States, we hope to follow the same program of identifying our members early, particularly those in most need targeting them, significantly trying to onboard them and then as a result of that, trying to get the benefits down the street. So when we take on a new contract as you quite rightly say, our starting point is, of course, zero engagement, and often if they are Medicaid contracts these are the people who often have been unfoundable if you wish or unreachable by many other companies. And as a result, we have a big job in our task in our hands. In our very first contract, it took us about 15 months or so to just reach to shy of 40% of members’ engagement. As you know, from your work with other organizations in other sector, numbers, like 40% is very high in any sector but unheard of, particularly in the meditate sector. As we learn more and as we analyzed our data continuously, what we figured out is how to engage the teams better. So what you saw in Georgia, is a significant improvement on Missouri by a factor of four to five times, and then sorry, and then what we saw in Mississippi was a significant improvement on that too, by, as we mentioned, by five to eight, six to eight times. So we are a learning organization as I mentioned before, we are improving our methods of reaching out people better every time base almost on every interaction. So the more the engagement comes, we should see the same approach. And we’re seeing that already. So those members who are now using us while their average usage of our system has gone now to about three times a year, we see that in the older cohorts, and that should bring significant benefits with.
Glen Santangelo: Maybe I just asked related question to that. So if we assume for a second that we’re looking at roughly, I don’t know, a two to three year path to profitability for these different contracts or cohorts. Just to sort of think about that relative to the promise to be profitable in fiscal 25 we try and understand what does that really say about your expectation for future revenue growth because if you continue to bring on business at the same level with what you did over the past 12 months you’re continuously adding negative profitability into the mix for new contracts. And I appreciate you being able to leverage your technology and SG&A costs but the market and investors are very focused on this path to profitability, as you have some older vintages may be turning property more, but you’re adding unprofitable vintages as you go between now and 2025, and I pick up on Dan’s question I think people are trying to just model out for that cash burn, just sort of given what your revenue growth rate will look like. I know it’s a lot there but hopefully that makes -
Ali Parsadoust: No. No. I think that’s super helpful. So let me be very clear. When we take a contract on full on the first year, we do everything possible to make that contract breakeven on that first year. The only additional cost we have is the starting a new state. So if the contract belongs to a new state, is we need to set up our clinical services which as you know, is fundamentally virtual and therefore costs significantly less than setting up trains of clinics, or others to deal with it. And then we have some marketing costs for reaching costs, reach out cost to our members. But we hope that every contract almost makes it or comes near breakeven in its first year and be profitable by the second year. And the way we look at it is that in the first year, you are in, hopefully breakeven, in the second year you make 0% to 5% gross margin contribution then you add up to 5% a year after that, if you can. Now contract fluctuates and there are differences between geographies between Medicaid and Medicare and so on and so forth. But we do we try and today because of our very strong pipeline, we have the ability to choose the contracts that are not necessarily loss making and certainly not for a period of as long as two to three years.
Glen Santangelo: Okay, super helpful. Thanks, Ali.
Operator: Thank you. We reached the end of our question answer session. I’d like to turn the floor back over to management for any further closing comments.
Ali Parsadoust: As I mentioned before, I’m super grateful to all of you for your interest in Babylon in this very tough market for all of us and you. We understand what all of you are going through and we’re grateful to you for your time in this busy period. I’m also, once again, I have to finish by being grateful to my colleagues and my Babylonian team. Companies do not deliver. It’s people who do. It’s their hard work and they show a control that gives the result that it does. We’re going to save on our part. We have a very clear idea of the way that the Babylon platform will deliver in time. And we’ll keep going. But thank you so much for your time. We look forward to talking to you hopefully all on our analyst day on the 23rd of this month, looking forward to seeing you there.
Operator: Thank you. That does conclude today’s teleconference and webcast and you can disconnect your line at this time and have a wonderful day. We thank you for your participation today.
