Change Healthcare Inc. (CHNG) on Q3 2022 Results - Earnings Call Transcript
Operator: Good morning, everyone, and welcome to the Change Healthcare's Earnings Call for the Third Quarter of Fiscal 2022. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to your speaker host, David Elliott, Change Healthcare Inc. Senior Director, M&A and Investor Relations. Please go ahead.
David Elliott: Thank you, operator. Good morning and welcome to Change Healthcare's Earnings Call for the Third Quarter of Fiscal 2022, which ended on December 31st, 2021. I'm joined today by Neil de Crescenzo, Change Healthcare's President and CEO, and Fredrik Eliasson, Change Healthcare's Executive Vice President and Chief Financial Officer. First, Neil will provide a business update, and then Fredrik will review the financial results for the quarter, followed by closing remarks from Neil. Given the pending transaction with OptumInsight, we will not be taking questions or providing financial guidance. Before we begin, I would like to remind you that the comments included in today's conference call, include forward-looking statements. Actual results may differ materially from the results suggested by the comments, for several reasons which are discussed in more detail in the company's SEC filings, except as required by law, Change Healthcare assumes no obligation to update any forward-looking statements or information. Please also note that where appropriate, we will refer to non-GAAP financial measures to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix of the supplemental slides accompanying this presentation. I want to remind everyone that copies of our earnings release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our website at www. changehealthcare.com. With that, I'll turn the call over to Neil. Neil?
Neil de Crescenzo: Thank you, David. Good morning, everyone. And thank you for joining us. Our results this quarter continue to demonstrate the underlying strength and momentum in our business, and the strong execution of our growth strategy. I want to recognize that this momentum and strong execution, are due to the confidence, our customers and partners have in Change Healthcare's products and services, and our innovation roadmap, as well as the commitment, creativity, and agility of our Change Healthcare team members. We continue to create value for consumers, our payer and provider customers, and our partners by delivering high ROI and innovative solutions. Along with our customers and partners, we remain focused on lowering costs, enhancing access, and improving outcomes for the benefit of everyone in the healthcare system. I will now provide you with some financial highlights and insights into our continuing success as we advance our platform to deliver increased value for all Healthcare stakeholders. First, a quick review of the quarter. Solutions revenue, adjusted EBITDA, and free cash flow were $811 million, $260 million, and $112 million respectively. This represents year-over-year solutions revenue growth of 10.3% and year-over-year adjusted EBITDA growth of 11.2% for the quarter. Our performance reflects continued new bookings momentum, existing customers expanding their business with Change Healthcare, new product introductions and new business initiatives. This quarter was also supported by COVID-19 vaccine and testing volumes. We remain confident in our ability to continue to deliver strong performance as we move through the fourth quarter of our fiscal year, while continuing to make significant investments and innovating across the Change Healthcare platform and executing on the transformation initiatives in our TES segment. Fredrik will provide more details for the financial performance shortly. With regard to the pending transaction with UnitedHealth Group, I remain pleased with our company's efforts progressing the regulatory review and developing plans for a successful integration. We look forward to continuing to work diligently in coordination with UHG to complete the transaction. We anticipate providing updates on expected timing in the coming weeks. Now, let me provide an update on our success across our segments, starting with our software and analytics segment. We continue to see opportunities across these segment as payers, providers, and partners take advantage of our high ROI solutions and realize the benefits of our data, Ai models and workflow capabilities. In payment accuracy, we signed a multi-million-dollar prepayment insight and review contract with one of the largest TPAs in the country. With prepayment, insight, and review, we help customers reduce waste in the payment process by identifying improper payments before they are paid. By adding our solution, this TPA anticipate delivering over $50 million in annual savings to its customers. We also signed a multi-million-dollar payment accuracy contract with a high-growth, technology-enabled health plan with billions of dollars in revenue. With our solution, this customer can execute on its strategy of ensuring accurate payments and promote healthy dynamics between providers, consumers, and their health plan. In RCM technology, we closed a multi-million-dollar long-term contract with a top 10 hospital EHR company, displacing a competitor that previously served as the preferred partner. This win allows our new customers to benefit from our existing high ROI solutions, as well as our innovative product roadmap. With our clinical decision support solutions, we continue to provide innovative ways for clinicians to leverage real-time evidence-based guidance as they serve patients. We've integrated InterQual utilization management and InterQual complex care cloud solutions with the Salesforce Health Cloud and the Salesforce Experience Cloud. These solutions are also available on Salesforce AppExchange and we look forward to accelerated growth from this new integration. In December, we introduced the ASAM Criteria powered by InterQual, a SaaS solution developed through an exclusive partnership with the American Society of Addiction Medicine. This software, which seamlessly integrates into existing care management workflows, significantly reduce the time required for substance use disorder patient assessments, increases consistency, and streamlined the prior authorization process using industry standard criteria. We are grateful to the American Society of Addiction Medicine for the trust they have placed in Change Healthcare as their partner in enabling clinicians and their patients to better address the challenges of addiction in our country. In Enterprise Imaging, we again signed several multi-million dollar contracts in the quarter, including a 10-year contract in London, run through a very competitive RFP process. This health system valued our cloud-native approach and chose Change Healthcare over several of the largest imaging companies in the world. As evidenced by our continued new contract wins, the market is embracing our vision of a cloud-native, AI-driven Enterprise Imaging platform. Our risk adjustment in quality solutions continue to be a strong offering in the market as they help customers’ close gaps in care more rapidly, and improve health outcomes in lower costs. In the third quarter, we expanded our risk adjustment business with one of the nation's largest payers. Including initiating our retrieval as a service program, with this massive payer. Retrieval as a service is a software product, that helps payers retrieved medical records for risk adjustment in quality, at scale, and with real-time transparency. This new offering is another example of the effectiveness of our innovation process and our investments in helping our customers and the industry make complex workflow, simpler, less costly, and more efficient. Now moving on to our network segment. We've seen double-digit year-over-year growth in transaction volumes across our card networks, driven by new customers, expansion of existing customer relationships, and COVID-related tailwinds. We continue to see good execution and high-growth strategic priorities like payments, data solutions and API services. In payments, we closed a multi-million-dollar settlement advocate deal with a large multi-state payer operating in Medicaid, Medicare, and marketplace market. Expectations are that by partnering with Change Healthcare, this customer will see digital payments go from 50% to 90%, driving financial benefits that could exceed $10 million annually, depending upon provider adoption. This high ROI led the customer to choose Change Healthcare over one of the largest banks in the country. The market reception for our API based solutions has been exceptional. In Q3 alone, we tripled our API-related transaction volume versus Q3 of last year. We added 134 new products to our Change Healthcare marketplace this quarter, bringing the total to 332 API software and hardware products from across our portfolio available in the Change Healthcare marketplace and in multiple store fronts, including AWS, Azure, and now, the Salesforce AppExchange. Our leadership in providing micro service and API-based solutions to the healthcare industry, along with our payments and data solutions businesses, is fueling the continued growth of our network segment beyond the underlying transaction volume growth. Now moving to our technology-enabled services segment. In technology-enabled services, we continue to help our clients navigate the strains that COVID-19 is placing on the healthcare system while improving patient access and their revenue cycle management. With a record hospitalizations, staff shortages, burnout, and continuously evolving guidelines, our customers are under more pressure than ever. And with the current condition of the labor market, we're uniquely positioned to staff the specific skill sets required to manage customers patient access and revenue cycle needs, allowing them to focus on providing care to their patients and having a stronger financial base to support their mission. Since the beginning of the COVID-19 pandemic, we have moved quickly to engage with our customers, including across patient access services, tracking trace program, and nurse triage lines. Based with the volatility in demand and the challenges in serving that demand during the pandemic, we have been able to scale quickly, decrease in the load our clients have had to shoulder themselves. In calendar year 2021, our technology-enabled services segment handled approximately 1 million COVID patient access calls, about 200,000 nurse triage calls, sends about 6.5 million automated COVID patient reminders, and process about 8 million COVID testing claims. As in prior quarters, we continue to focus on margin expansion in this segment through automation in AI, constantly increasing our efficiency and driving stronger performance for our customers. As an example, our AI coding offering has processed 36 million charts since late 2019, with over 80% of our volume now being handled by our AI systems with over 95% coding accuracy. Of direct benefit to our customers, this AI capability has reduced unspecified diagnosis codes by over 45% and reduced medical necessities denials by more than 50%. One large globally renowned health system replaced their in-house coding with Change Healthcare, resulting in reduced unbilled inventory, improved overall coding quality, and significant annual savings. Our AI -driven workflow systems have contributed to Change Healthcare increasing our clients net collection rate by as much as 3% worth millions of dollars annually to many clients and accelerating time-to-value for our customers by a full month. Our tech-forward approach to patient access and RCM services is being validated in the market by our growing bookings, expanding pipelines, and positive trends above deal size and win rates. As Fredrik will discuss momentarily, the financial benefits from our RCM transformation efforts remain on track with a team achieving our profitability goals in that business. In closing, we continue to execute on our strategic, operational, and financial objectives. Through continued innovation, we are providing greater value by leveraging technology insights to reduce administrative waste, streamline and accelerate payments, and enhance consumer engagement to drive better experiences and outcomes throughout the patient journey. We remain confident that Change Healthcare's platform, which provides best-in-class connectivity, transaction management, insights, and integrated experiences will continue to play a central role in helping our customers through the continuing transformation of healthcare. Now, let me turn the call over to Fredrik, who will review our financial performance. Fredrik.
Fredrik Eliasson: Thank you, Neil. Good morning, everyone. The third quarter results demonstrate the underlying strength and momentum in our business and the continued execution of our growth strategy. Starting with slide 6 for the third quarter, solutions revenue was $811 million compared to $735 million in the same period of the prior fiscal year. Which included, a $24 million fair value adjustments, associated with the McKesson exit. The quarter was positively impacted by volume growth and new sales volumes across all three segments of the impact of deferred revenue and the net revenue related to acquisitions and divestitures in each period, solutions revenue increased 17.5% year-over-year. Net loss for the quarter was $24 million, resulting in a net loss of $0.08 per diluted share compared with net income of $2 million or $0.01 per diluted share for the same period of the prior fiscal year. Adjusted EBITDA for the quarter was $260 million, an increase of 11.2% over the same period of the prior fiscal year. Adjusted EBITDA reflects the items I outlined related to revenue, partially offset by investment to support business initiatives, including new product launches and market expansion opportunities. Adjusted net income was a $117 million, resulting in adjusted net income of $0.36 per diluted share, compared with adjusted net income, a $110 million or $0.34 per diluted share for the third fiscal quarter of the prior year. There were 324 million diluted shares in the third quarter of FY ‘22, compared to 325 million diluted shares in the same period of the prior fiscal year. Now let's take a look in more detail at the performance of our segments on slide 7. Starting with revenue, the software analytics segment increased by 3.7% year-over-year. However, adjusting for the $5 million impact of the Capacity Management divestiture last year, revenue in our software analytics segment increased 5.1% over the prior year. Our network solutions revenue increased 17.8% year-over-year. Key drivers include volume growth and incremental revenue from COVID-19 vaccines, growth from implementations of new customers, and continued double-digit growth in our data solutions and B2B payment businesses. In our technology-enabled services segment, overall revenue increased 4.6% year-over-year, primarily as a result of increased COVID testing volume growth and new sales, partially offset by customer attrition. Our RCM transformation efforts remain on track and we continue to see positive long term trends in both RCM win rates and deal size. Turning to adjusted EBITDA, Software and Analytics increased 3.6% year-over-year, driven by the impact of the divestiture increased product investment. Network solutions adjusted EBITDA increased 16.3% year-over-year, driven primarily by continued growth across the segments and COVID-19 vaccine-related revenue. Results also include our continued investments to support a significant number of new product launches and market expansion initiatives we have underway. In technology-enabled services, adjusted EBITDA increased 55.4% year-over-year, driven by the same factors that impacted revenue, as well as the continued austenization of our cost structure, partially offset by increased wage inflation. Since announcing our RCM transformation efforts last year, we’ve operationalized margin improvements of over $40 million and are well on track to exceed our original $60 million run rate target by the end of fiscal year '23. Moving on to cash flow and our balance sheet on Slide 8. Free cash flow for the quarter was $112 million compared to $134 million in the same period of the prior fiscal year. Total long-term debt, net of cash at quarter-end was under $4.5 billion. Net leverage ratio was 4.2 at quarter-end. During the quarter, the company repaid $80 million in term loan facility obligations. Our liquidity remained strong, ending the quarter with $96 million of cash and cash equivalents and $779 million in undrawn revolver capacity. As noted in the press release, due to the pending transaction, we will not be providing financial guidance. With that said, let me provide some color in regards to our fourth quarter expectations and especially around our current assumptions for COVID vaccine-related revenue. As in previous years, we anticipate sequential improvement in revenue and adjusted EBITDA, for both our S&A and TES segment. As they indicated last quarter, a network business materially benefited from COVID-related vaccine volume in the first half of the fiscal year. That trend continued into the third quarter with a surge of Omicron cases, leading to higher vaccine volume and testing. However, we anticipate vaccine-related revenue to trail off. And as a result, we expect lower sequential revenue and adjusted EBITDA for the network segment in the fourth quarter. Now with that, let me turn it back over to Neil for his closing comments.
Neil de Crescenzo: Thank you, Fredrik. In closing, I want to express my appreciation for the dedicated team members of Change Healthcare. They remain focused on developing and delivering innovative solutions for healthcare providers, payers, partners, and consumers to improve clinical, financial, and care outcomes. As I have stated previously, our goal is to deliver on three key objectives for our stakeholders. First, we will deliver superior consumer experiences. Second, we will drive increased efficiency and accuracy, for financial transactions in healthcare. And third, we will deliver solutions that optimize decision-making for our customers, on their journey to value-based care. The strength of our financial performance to-date, and the ability to continue to deliver innovative, value-added solutions to our customers, is a testament to our employee’s commitment, innovation, and agility. We will continue to partner with our customers to help them lower cost, enhance access, and improve outcomes, creating value for everyone in the healthcare system. Thanks very much for dialing into our call today and have a good day.
End of Q&A:
