Change healthcare inc. reports first quarter fiscal 2023 financial results
Nashville, tenn.--(business wire)--change healthcare inc. (nasdaq: chng) (the “company” or “change healthcare”), a leading healthcare technology company, today reported financial results for the first quarter of fiscal year 2023 ended june 30, 2022. “our first quarter growth, despite headwinds from lower covid-related activities and customer attrition related to the extended merger process, demonstrates the underlying momentum in the business,” said neil de crescenzo, president and chief executive officer. “we believe our sales pipeline and continued investments in innovation establish a strong foundation for growth as we move through fiscal 2023.” fiscal 2023 first quarter highlights: recent business highlights released interqual® 2022, which includes new criteria for emergent trends, restructured and interactive criteria to streamline workflows, and artificial intelligence (ai) to drive proactive insights and efficiency. launched patient engagement suite, which combines luma health’s patient success platform™ solution with change healthcare’s revenue cycle management solutions to give patients and providers a cohesive experience that spans the entire healthcare journey. financial results for first quarter of fiscal 2023 q1 2023 q1 2022 total revenue1 $884.5 million $867.9 million solutions revenue1 $831.3 million $816.6 million net income (loss) $(23.2) million $(3.6) million diluted eps2 $(0.07) $(0.01) adjusted ebitda $280.2 million $282.7 million adjusted net income $123.8 million $133.0 million adjusted diluted eps2 $0.38 $0.41 1. total revenue and solutions revenue for first quarter of fiscal 2022 included the impact of fair value adjustments to deferred revenue resulting from the mckesson exit, which reduced revenue recognized by $4.5 million. solutions revenue in the first quarter grew 1.8% compared to the first quarter of fiscal 2022, driven by volume growth and new sales. adjusted ebitda declined 0.9% over the same period, impacted by investments to support business initiatives, wage inflation and negative mix, partially offset by the aforementioned revenue growth. cash flow and balance sheet highlights net cash provided by operating activities was $83.3 million and free cash flow was $3.8 million, in each case, for the three months ended june 30, 2022. for the three months ended june 30, 2021, net cash provided by operating activities and free cash flow were $110.1 million and $44.1 million, respectively. net cash provided by operating activities and free cash flow each are affected by pass-thru funds we receive from certain pharmaceutical industry participants in advance of our obligation to remit these funds to participating retail pharmacies. such pass-thru funds on hand decreased by $7.1 million in the three months ended june 30, 2022, decreasing free cash flow for the period by that amount, and increased by $7.3 million for the three months ended june 30, 2021. the company ended the quarter with approximately $94.0 million of cash and cash equivalents, and approximately $4,491.3 million of total debt. during the first quarter, the company repaid $100.0 million of its senior notes, and repaid an additional $50 million subsequent to the end of the quarter. segments during the first quarter of fiscal year 2023, the company made certain changes in the way it manages its business and how it views operating results. specifically, the company made the following changes: established the enterprise imaging business as a standalone reportable segment under its own general manager, reporting directly to the company’s chief executive officer. this business was previously presented within the software & analytics reportable segment. shifted responsibility for certain products from one reportable segment to another to better align the company’s portfolio of service offerings, which will impact the technology-enabled services, network solutions, and software & analytics reportable segments. the company now reports its financial results in four reportable segments: software and analytics, network solutions, enterprise imaging and technology-enabled services. segment information for historical periods has been retrospectively restated in the accompanying materials to reflect the new organizational structure. guidance due to the proposed transaction with optuminsight, we will no longer be providing financial guidance. update on proposed merger with optuminsight on january 5, 2021, optuminsight, a diversified health services company and part of unitedhealth group, and change healthcare agreed to combine (the “merger”). under the terms of the merger agreement, unitedhealth group, through a wholly-owned subsidiary, will acquire all of the outstanding shares of change healthcare common stock for $25.75 per share in cash. the boards of directors of both unitedhealth group and change healthcare have unanimously approved the terms of the merger, and change healthcare stockholders voted to approve the merger on april 13, 2021. the closing of the merger is subject to applicable regulatory approval and other customary closing conditions. on february 24, 2022, the department of justice (“doj”) and certain other parties commenced litigation to block the merger, and the company continues to support unitedhealth group in working toward closing the merger. trial for that action commenced on august 1, 2022. on april 4, 2022, the parties to the merger agreement entered into a waiver pursuant to which, among other things, change healthcare and unitedhealth group each waived its right to terminate the merger agreement until the earlier of (i)the tenth business day following a final order issued by the u.s. district court for the district of columbia with respect to the complaint filed by the doj that prohibits the consummation of the merger and (ii) december 31, 2022. optuminsight will pay a $650 million fee to change healthcare in the event the merger is unable to be completed because of the decision issued by the u.s. district court for the district of columbia upon completion of the trial that commenced on august 1, 2022. additionally, the company will be permitted to declare and pay a one-time special dividend of up to $2.00 in cash per each issued and outstanding share of its common stock, with a record date and payment date to be determined in the sole discretion of the company’s board of directors (or a committee thereof). the company expects to pay the dividend at or about the time of closing the merger. on april 22, 2022, unitedhealth group, as seller, entered into an equity purchase agreement and related agreements relating to the sale of the company’s claims editing business to an affiliate of investment funds of tpg capital for a base purchase price in cash equal to $2.2 billion (subject to customary adjustments). consummation of the transaction is contingent on a number of conditions, including the consummation of the merger. webcast information change healthcare will host a conference call on thursday, august 4, 2022, at 8:00 a.m. et. due to the previously announced transaction with optuminsight, the company will not be taking questions during the conference call. investors and other interested parties are invited to listen to the conference call via the company's website at https://ir.changehealthcare.com/. the webcast will be available for on-demand listening at the aforementioned url until august 4, 2023. about change healthcare change healthcare (nasdaq: chng) is a leading healthcare technology company, focused on insights, innovation, and accelerating the transformation of the u.s. healthcare system through the power of the change healthcare platform. we provide data and analytics-driven solutions to improve clinical, financial, administrative, and patient engagement outcomes in the u.s. healthcare system. learn more at changehealthcare.com. chng-ir forward-looking statements this press release contains forward-looking statements within the meaning of the private securities litigation reform act of 1995 with respect to the financial condition, results of operations and businesses of change healthcare. some of these statements can be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “could,” “should,” “may,” “plan,” “project,” “predict” and similar expressions. change healthcare cautions readers of this press release that such “forward looking statements,” including without limitation, those relating to the timing of the proposed merger and change healthcare’s future business prospects, revenue, working capital, liquidity, capital needs, interest costs and income, wherever they occur in this press release or in other statements attributable to change healthcare, are necessarily estimates reflecting the judgment of change healthcare’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the “forward looking statements.” factors that could cause change healthcare’s actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to, the inability to complete the proposed merger due to the failure to satisfy the conditions to the completion of the proposed merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; risks related to disruption of management’s attention from change healthcare’s ongoing business operations due to the transaction; the effect of the announcement of the proposed merger on change healthcare’s operations, results and business generally; the risk that the proposed merger will not be consummated in a timely manner, exceeding the expected costs of the merger; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; macroeconomic and industry trends and adverse developments in the debt, consumer credit and financial services markets; uncertainty and risks related to the impact of the covid-19 pandemic (including the rise of covid-19 variant strains such as the delta and omicron variants) on the national and global economy, change healthcare’s business, suppliers, customers, and employees; change healthcare’s ability to retain and recruit key management personnel and other talent (including while the proposed merger is pending); change healthcare’s ability to retain or renew existing customers and attract new customers; change healthcare’s ability to connect a large number of payers and providers; change healthcare’s ability to provide competitive services and prices while maintaining its margins; further consolidation in change healthcare’s end-customer markets; change healthcare’s ability to effectively manage its costs; change healthcare’s ability to effectively develop and maintain relationships with its channel partners; change healthcare’s ability to timely develop new services and improve existing solutions; change healthcare’s ability to deliver services timely without interruption; a decline in transaction volume in the u.s. healthcare industry; change healthcare’s ability to maintain access to its data sources; change healthcare’s ability to maintain the security and integrity of its data; change healthcare’s reliance on key management personnel; change healthcare’s ability to manage and expand its operations and keep up with rapidly changing technologies; the ability of outside service providers and key vendors to fulfill their obligations to change healthcare; risks related to international operations; change healthcare’s ability to protect and enforce its intellectual property, trade secrets and other forms of unpatented intellectual property; change healthcare’s ability to defend its intellectual property from infringement claims by third parties; government regulation and changes in the regulatory environment; changes in local, state, federal and international laws and regulations, including related to taxation; economic and political instability in the u.s. and international markets where change healthcare operates; the economic impact of escalating global tensions, including the conflict between russia and ukraine, and the adoption or expansion of economic sanctions or trade restrictions; litigation or regulatory proceedings; losses against which change healthcare does not insure; change healthcare’s ability to make acquisitions and integrate the operations of acquired businesses; change healthcare’s ability to make timely payments of principal and interest on its indebtedness; change healthcare’s ability to satisfy covenants in the agreements governing its indebtedness; change healthcare’s ability to maintain liquidity; the potential dilutive effect of future issuance of shares of change healthcare’s common stock; the impact of anti-takeover provisions in change healthcare’s organizational documents and under delaware law, which may discourage or delay acquisition attempts, and other risks. for a more detailed discussion of these factors, see the information under the captions “risk factors” and “management’s discussion and analysis of financial condition and results of operations” in change healthcare’s most recent annual report on form 10-k filed with the securities and exchange commission (“sec”) on may 26, 2022 as such factors may be updated from time to time in our periodic filings with the sec. change healthcare’s forward-looking statements speak only as of the date of this press release or as of the date they are made. change healthcare disclaims any intent or obligation to update any “forward looking statement” made in this press release to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. non-gaap financial measures in the company’s earnings releases, prepared remarks, conference calls, slide presentations and webcasts, there may be use or discussion of non-gaap financial measures. we believe such measures provide supplemental information to investors with regards to our operating performance and assist investors’ ability to compare our financial results to those of other companies in the same industry. the gaap financial measure most directly comparable to each non-gaap financial measure used or discussed, and a reconciliation of the differences between the comparable gaap financial measure and each non-gaap financial measure are included in this press release after the consolidated financial statements. these non-gaap financial measures are calculated and presented on the basis of methodologies other than in accordance with gaap. these non-gaap financial measures should be considered only as supplemental to, and not as superior to, financial measures prepared in accordance with gaap and may be defined and calculated differently by others in the same industry. consolidated statements of operations (unaudited and amounts in thousands, except share and per share amounts) three months ended june 30, 2022 2021 revenue: solutions revenue $ 831,343 $ 816,648 postage revenue 53,126 51,208 total revenue 884,469 867,856 operating expenses: cost of operations (exclusive of depreciation and amortization below) 357,096 352,063 research and development 74,197 71,240 sales, marketing, general and administrative 197,886 177,955 customer postage 53,126 51,208 depreciation and amortization 171,722 168,211 accretion and changes in estimate with related parties, net 3,189 3,037 total operating expenses 857,216 823,714 operating income (loss) 27,253 44,142 non-operating (income) and expense interest expense, net 56,870 59,386 loss on extinguishment of debt 390 — other, net 2,472 (3,189) total non-operating (income) and expense 59,732 56,197 income (loss) before income tax provision (benefit) (32,479) (12,055) income tax provision (benefit) (9,311) (8,450) net income (loss) $ (23,168) $ (3,605) net income (loss) per common share: basic and diluted $ (0.07) $ (0.01) weighted average common shares outstanding: basic and diluted 326,562,482 322,546,171 consolidated balance sheets (unaudited and amounts in thousands, except share and per share amounts) june 30, 2022 march 31, 2022 assets current assets: cash and cash equivalents $ 94,009 $ 252,298 accounts receivable, net 717,684 720,122 contract assets, net 130,351 162,828 prepaid expenses and other current assets 204,357 177,659 total current assets 1,146,401 1,312,907 property and equipment, net 126,781 141,340 operating lease right-of-use assets, net 61,423 65,680 goodwill 4,101,659 4,112,904 intangible assets, net 3,587,019 3,699,603 other noncurrent assets, net 613,698 600,061 total assets $ 9,636,981 $ 9,932,495 liabilities current liabilities: accounts payable $ 85,208 $ 104,273 accrued expenses 383,368 461,506 deferred revenue 409,952 469,098 due to related parties, net 29,560 13,057 current portion of long-term debt 4,708 10,006 current portion of operating lease liabilities 20,009 21,726 total current liabilities 932,805 1,079,666 long-term debt, excluding current portion 4,486,565 4,580,087 long-term operating lease liabilities 48,580 52,286 deferred income tax liabilities 555,616 563,606 tax receivable agreement obligations to related parties 79,503 104,863 tax receivable agreement obligations 174,445 202,762 other long-term liabilities 68,581 73,118 total liabilities 6,346,095 6,656,388 commitments and contingencies stockholders' equity common stock (par value, $0.001), 9,000,000,000 and 9,000,000,000 shares authorized and 313,131,714 and 306,796,076 shares issued and outstanding at june 30, 2022 and march 31, 2022, respectively 327 313 preferred stock (par value, $0.001), 900,000,000 shares authorized and no shares issued and outstanding at both june 30, 2022 and march 31, 2022 — — additional paid-in capital 4,384,631 4,340,759 accumulated other comprehensive income (loss) 29,177 35,116 accumulated deficit (1,123,249) (1,100,081) total stockholders' equity 3,290,886 3,276,107 total liabilities and stockholders' equity $ 9,636,981 $ 9,932,495 consolidated statements of cash flows (unaudited and amounts in thousands) three months ended june 30, 2022 2021 cash flows from operating activities: net income (loss) $ (23,168) $ (3,605) adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: depreciation and amortization 171,722 168,211 amortization of capitalized software developed for sale 1,302 717 accretion and changes in estimate, net 4,800 4,732 equity compensation 49,961 26,166 deferred income tax expense (benefit) (10,411) (8,989) amortization of debt discount and issuance costs 7,770 7,910 loss on extinguishment of debt 390 — non-cash lease expense 5,681 7,007 other, net 3,916 249 changes in operating assets and liabilities: accounts receivable, net 1,991 (11,773) contract assets, net 30,028 (3,090) prepaid expenses and other assets (20,811) (25,029) accounts payable (2,481) 34,722 accrued expenses and other liabilities (75,394) (53,649) deferred revenue (61,981) (33,472) net cash provided by (used in) operating activities 83,315 110,107 cash flows from investing activities: capitalized expenditures (79,535) (66,006) other, net — (1,000) net cash provided by (used in) investing activities (79,535) (67,006) cash flows from financing activities: payments on senior notes (100,000) — payments under tax receivable agreements (48,462) (21,537) receipts (payments) on derivative instruments (410) (7,364) employee tax withholding on vesting of equity compensation awards (6,407) (13,015) payments on deferred financing obligations (2,331) (6,796) payment of senior amortizing notes (4,254) (3,965) proceeds from exercise of equity awards 1,274 5,225 other, net (58) (116) net cash provided by (used in) financing activities (160,648) (47,568) effect of exchange rate changes on cash and cash equivalents (1,421) 470 net increase (decrease) in cash and cash equivalents (158,289) (3,997) cash and cash equivalents at beginning of period 252,298 113,101 cash and cash equivalents at end of period $ 94,009 $ 109,104 reconciliation of net income (loss) to adjusted ebitda (unaudited and amounts in thousands) three months ended june 30, 2022 2021 net income (loss) $ (23,168) $ (3,605) income tax provision (benefit) (9,311) (8,450) income (loss) before income tax provision (benefit) (32,479) (12,055) amortization of capitalized software developed for sale 1,302 717 depreciation and amortization 171,722 168,211 interest expense, net 56,870 59,386 equity compensation 49,961 26,166 acquisition accounting adjustments (4,613) (559) acquisition and divestiture-related costs 17,944 6,394 integration and related costs 1,428 11,368 strategic initiatives, duplicative and transition costs 5,629 9,928 severance costs 2,482 4,720 accretion and changes in estimate, net 4,800 4,732 impairment of long-lived assets and other 1,161 1,612 loss on extinguishment of debt 390 — other non-routine, net 3,583 2,108 adjusted ebitda $ 280,180 $ 282,728 reconciliation of net income (loss) to adjusted net income (loss) (unaudited and amounts in thousands, except share and per share amounts) three months ended june 30, 2022 2021 net income (loss) $ (23,168) $ (3,605) amortization expense resulting from acquisition method adjustments 113,194 124,314 ebitda adjustments 82,765 66,469 tax effect of ebitda adjustments and amortization expense (49,012) (54,222) adjusted net income (loss) $ 123,779 $ 132,956 adjusted net income (loss) per diluted share $ 0.38 $ 0.41 segment results (unaudited and amounts in thousands) three months ended june 30, $ % 2022 2021 change change segment revenue software and analytics $ 344,927 $ 337,823 $ 7,104 2.1 % network solutions 223,283 218,264 5,019 2.3 % enterprise imaging 83,085 82,396 689 0.8 % technology-enabled services 213,169 216,776 (3,607) (1.7) % postage and eliminations (1) 20,005 17,058 2,947 17.3 % purchase accounting adjustment (2) — (4,461) 4,461 (100.0) % net revenue $ 884,469 $ 867,856 $ 16,613 1.9 % segment adjusted ebitda software and analytics $ 144,973 $ 137,028 $ 7,945 5.8 % network solutions 111,433 113,617 (2,184) (1.9) % enterprise imaging 18,648 19,960 (1,312) (6.6) % technology-enabled services 5,126 12,123 (6,997) (57.7) % adjusted ebitda $ 280,180 $ 282,728 $ (2,548) (0.9) % (1) revenue for postage and eliminations includes postage revenue of $53.1 million for the three months ended june 30, 2022 and $51.2 million for the three months ended june 30, 2021. (2) amount reflects the impact to deferred revenue resulting from the mckesson exit which reduced revenue recognized during the three months ended june 30, 2021. reconciliation of cash provided by (used in) operating activities to free cash flow and adjusted free cash flow (unaudited and amounts in thousands) three months ended june 30, 2022 2021 cash provided by (used in) operating activities (1) $ 83,315 $ 110,107 capital expenditures (79,535) (66,006) free cash flow 3,780 44,101 adjustments to free cash flow (2): integration and related costs 1,428 11,368 strategic initiatives, duplicative and transition costs 5,629 9,928 severance costs 2,482 4,720 integration and strategic capital expenditures 845 6,395 adjusted free cash flow $ 14,164 $ 76,512 (1) includes cash used by pass-thru funds of $7.1 million for the three months ended june 30, 2022 and cash provided by pass-thru funds of $7.3 million for the three months ended june 30, 2021. (2) all operating costs and integration and strategic capital expenditures are presented on an as-incurred basis.
