Change Healthcare Inc. (CHNG) on Q4 2022 Results - Earnings Call Transcript
Operator: Good morning. Thank you for standing by and welcome to the Change Healthcare's Earnings Call for the Fourth Quarter of Fiscal Year 2022. I would now like to hand the conference over to your host today, David Elliott, Change Healthcare Inc. Vice President, Enterprise Strategy and Investor Relations. Please go ahead.
David Elliott: Thank you, operator. Good morning and welcome to Change Healthcare's earnings call for the fourth quarter of fiscal 2022 which ended on March 31, 2022. 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 UnitedHealth Group, 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 for 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 on 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. First, I would like to take a moment to recap a year in which we made considerable progress towards our mission of accelerating the transformation of the U.S. healthcare system through the power of Change Healthcare's solutions. We continue to deliver superior returns on investment to our customers and introduce innovative, new solutions like our Care Cost Estimator API, Stratus Imaging PACS, dual-eligibility advocate and our Coordination of Benefits solution. We developed hundreds of new customer relationships, especially among digital health companies and other fast-growing segments, while expanding and deepening our relationships with existing clients which resulted in our team exceeding our bookings and cross-sell targets for the year. In a year of uncertainty created by the pending UnitedHealth Group merger and continued impacts from the COVID-19 pandemic, our Change Healthcare team members have shown incredible resilience, commitment, creativity and agility as they continue to deliver for our customers and partners. As a result, our business has never been stronger with significant momentum heading into FY '23. Consistent with this momentum, I'm pleased to report that we closed out our fiscal year 2022 with another strong quarter. Our results continue to demonstrate the underlying strength and momentum of our business and the disciplined execution of our growth strategy. Solutions revenue, adjusted EBITDA and free cash flow were $859 million, $282 million and $174 million, respectively, in the fourth quarter. This represents record solutions revenue for Change Healthcare and year-over-year revenue growth of 6.8% and adjusted EBITDA growth of 3.8%. Our performance reflects continued new bookings momentum, existing customers expanding their business with Change Healthcare, new product introductions and new business initiatives. We remain confident in our ability to continue to deliver strong performance while continuing to make significant investments in innovating across Change Healthcare. Fredrik will provide more details on our financial performance shortly. With regards to the pending transaction with UnitedHealth Group, the Department of Justice commenced litigation to block the merger on February 24. We and UnitedHealth Group executed an agreement on April 4 which, among other things, extended the merger agreement to December 31, 2022. As part of the extension, UnitedHealth Group will pay a $650 million fee to Change Healthcare in the event the merger is unable to be completed due to the court's decision. In the event the merger is able to be completed, Change Healthcare will now pay a special cash dividend of $2 per share to its shareholders at or about the time of the merger closing. The extension of the merger agreement reflects our firm belief in the benefits for U.S. healthcare of Change Healthcare becoming part of Optum and in our commitment to contesting the meritless legal challenge to this merger. We and UnitedHealth Group will detail the benefits of this combination at a two week trial scheduled to begin on August 1. 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 this 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 closed multimillion-dollar claims extend deals with two major net new clients, including a large Blues plan and a high-growth, technology-enabled health plan with over 1 million members. We also signed a different Blues plan for our Coordination of Benefits solutions. Our Coordination of Benefits solution for commercial payers delivers savings through both cost avoidance and overpayment recovery by identifying primary coverage for both Medicare and commercial plans which is a key capability most competitors lack. Through this innovative product, our commercial customers realized incremental savings of over $11 per member per year on average. Our risk adjustment and quality solutions continue to be a strong offering in the market as they help customers close gaps in care more rapidly to improve health outcomes and lower costs. In Q4, we closed a five year end-to-end risk adjustment contract worth several million dollars annually. The client replaced an incumbent competitor with Change Healthcare, further evidence of the value of Change Healthcare as a full-service partner in optimizing risk adjustment outcomes. In our RCM technology business, we announced a partnership with Luma Health to codevelop solutions to unify all patient journeys, from clinical to operational to financial. Our strategic partnership will leverage Luma Health's KLAS-recognized Healthcare Engagement Engine alongside Change Healthcare's proven revenue cycle technology and services to develop new patient engagement solutions that seamlessly connect every touch point across the patient journey. This patient-first and interoperability-focused approach to tackling this persistent challenge in health care will create a more intentional, unified patient experience. By keeping patients connected to all aspects of their care and improving communication between staff, providers and patients, this partnership will improve the experience for both providers and patients. 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 integrated predictive analytics into InterQual AutoReview, our medical review automation solution. InterQual AutoReview already populates, on average, 75% of the data needed to complete medical necessity reviews and embeds EHR data into the review to increase trust with payers. We apply artificial intelligence to this real-time EHR data and provide data-driven predictions on which level of care is right for each patient. These predictive analytics equip case managers with insights they can use to proactively improve clinical and financial outcomes while streamlining utilization management. In Q4, we had another major go-live for InterQual AutoReview at a customer with 14 hospitals with a total of 2,100 beds. We also closed new InterQual deals with a number of payers, including a large blues plan. In Enterprise Imaging, we had the strongest bookings quarter since taking Change Healthcare public, including closing several multimillion-dollar contracts with key strategic new clients. Our development road map continues to expand and we now have over 250 APIs available on our Stratus Imaging platform. After several quarters of multiple large, new contract wins, it is clear that the market is embracing our vision of a cloud-native, AI-driven Enterprise Imaging platform. We expect strong growth for our Enterprise Imaging business in FY '23. Now moving on to our Network segment. We've seen double-digit year-over-year growth in transaction volumes across our core networks driven by new customers, expansion of existing customer relationships and the last quarter of COVID-related tailwinds. We saw a 13% year-over-year volume growth in our medical network across eligibility, claims and ERAs, with this January being a record month for medical eligibility transactions. We continue to see solid execution in high-growth, strategic priorities like payments, data solutions and our API marketplace. We closed a multimillion-dollar contract to provide our medical network API to one of the largest tech companies in the world. This client performed deep diligence and technical analysis on our APIs, choosing Change Healthcare because of our RCM experience, our consultative approach, our broad payer connectivity and the capabilities of our innovative Care Cost Estimator API. In Q4 alone, we grew our API-related transaction volume approximately 40% from Q3 and approximately 150% versus Q4 of last year. In January, we celebrated an incredible milestone, achieving 1 billion API transactions in the previous 18 months. We also launched the next generation of our Change Healthcare Marketplace in Q4. The marketplace now includes an extended product catalog and richer user experience that enables our customers and prospects to discover our products and engage with our sales team quickly and easily. As of the end of Q4, we had a total of 324 APIs, software and hardware products from across our portfolio available on the Change Healthcare Marketplace and in multiple online storefronts, including AWS, Azure, Epic App Orchard and the Salesforce AppExchange. Our leadership in providing micro service-based and API-based solutions to the health care industry, along with our payments and data solutions businesses, are fueling the continued growth of our Network segment beyond underlying transaction volume growth. Now moving to our Technology-Enabled Services segment. In Technology-Enabled Services, both the provider- and payer-facing businesses across desks have experienced continued momentum in their go-to-market efforts as evidenced by larger and more strategic deals in the fourth quarter. The value proposition of our patient access business has become even more relevant as our clients face tight labor market conditions. As examples, we recently won a multimillion-dollar contracts as the primary scheduling vendor for a large East Coast health care system as well as for a Florida-based hospital system. These customers placed their trust in Change Healthcare based on our ability to deploy highly trained staff quickly and drive increases in schedule visits. In RCM physician services, we secured a large deal with an East Coast anesthesia group, displacing an incumbent competitor. This client chose Change Healthcare because of our anesthesiology expertise, demonstrated performance with large practices and strong customer references. As in prior quarters, we continue to expand the underlying margins in the Technology-Enabled Services businesses through automation and AI, consistently increasing our efficiency and driving stronger performance for our customers. As an example, we are increasing patient engagement in our financial clearance business through new conversational AI modules in our voice bot program and new patient portals developed with our Behavioral Science team. Our adoption rates and effectiveness for these tools continued to trend upwards last quarter, showcasing the value and usability of our patient self-service offerings. In back-end RCM Services, our AI-enabled accounts receivable management tool continues to see increased adoption and utilization with over 750,000 claims handled by our denials module in Q4, a 20% increase over Q3. Our Consulting Services division continued its multiyear track record of strong performance. The consulting team signed three multi-million-dollar payer contracts in Q4 and was again named best-in-class for Payer IT Consulting Services for the third time in 4 years. So in closing, our Q4 results in FY '22 as a whole demonstrated our team's customer and partner focus, their resilience and their ever-increasing innovation. We continued our strong execution in attaining 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 which provides best-in-class connectivity, transaction management, insights and integrated experiences, will continue to play a central role in helping our customers prove a continuing transformation of health care. Now let me turn the call over to Fredrik, who will review our financial performance. Fredrik?
Fredrik Eliasson: Thank you, Neil. Good morning, everyone. Our strong fourth quarter results demonstrate the resilience of our business and the underlying strength of our core franchises as we continue to make significant investments across the business, deepen our relationships with customers and implement new innovative solutions. Starting with Slide 6, for the fourth quarter, solutions revenue was a record $859 million compared to $804 million in the same period of the prior fiscal year which included a $10 million fair value adjustment associated with McKesson exit. The quarter was positively impacted by volume growth and new sales across all three segments. Net of the impact of the deferred revenue in the prior period, solutions revenue increased 5.5% year-over-year. Net income for the quarter was $7 million, resulting in net income of $0.02 per diluted share compared to a net loss of $13 million or $0.04 per diluted share for the same period of the prior fiscal year. Adjusted EBITDA for the quarter was $282 million, an increase of 3.8% over the same period of the prior fiscal year. Adjusted EBITDA reflects the items I outlined related to revenue, partially offset by investments to support business initiatives, negative mix and increased wage inflation in our Technology-Enabled Services business. Adjusted net income was $130 million, resulting in adjusted net income of $0.39 per diluted share, compared with adjusted net income of $134 million or $0.42 per diluted share for the fourth fiscal quarter of the prior year. Adjusted net income benefited from revenue growth and new sales volume compared to the prior year but these improvements were more than offset by higher depreciation and amortization. There were 331 million diluted shares in the fourth quarter of fiscal '22 compared to 321 million diluted shares in the same period of the prior fiscal year driven by the company's net loss position in the prior year along with vesting of additional equity awards. Now, let's take a look in more detail at the performance of our segments on Slide 7. Starting with revenue; the Software and Analytics segment increased 6.5% year-over-year driven by new customers, volume growth with existing customers and new product introductions. Our Network Solutions revenue increased 9.1% year-over-year. Key drivers include volume growth from existing customers, implementation of new customers and continued double-digit growth in our data solutions and B2B payments businesses. The favorable impact from COVID-related activities was significantly smaller in the quarter compared to earlier in the year as network volumes have normalized. In our Technology-Enabled Services segment, overall revenue increased 3.1% year-over-year primarily as a result of increased volume growth, incremental COVID testing and new sales. We continue to see positive long-term trends in both RCM win rates and deal size. Turning to adjusted EBITDA. Software Analytics increased 14% year-over-year driven by revenue growth and a favorable volume shift to higher-margin products. Network Solutions adjusted EBITDA decreased 4.6% year-over-year driven primarily by continued investments to support the significant number of new product launches and market expansion initiatives we have underway and negative mix as COVID-related activities in Network abated. In Technology-Enabled Services, adjusted EBITDA decreased $4.9 million year-over-year driven by increased wage inflation, negative mix and customer credit adjustments. Moving on to cash flow and our balance sheet on Slide 8. Free cash flow for the quarter was $174 million compared to $36 million in the same period of the prior fiscal year. Full year free cash flow was $421 million versus $340 million in the prior year. Total long-term debt, net of cash, at quarter end, was $4.3 billion. Net leverage ratio was 4.1% at quarter end. Subsequent to the end of the quarter, the company repaid an additional $109 million in senior note obligations. Our liquidity remained strong, ending the quarter with $252 million of cash and cash equivalents and $780 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 regarding our expectations for full year and first quarter fiscal year '23. Due to the underlying momentum in the business, we expect solutions revenue growth of 2% to 4% in FY '23 despite headwinds from lower COVID-related activities and some customer attrition related to the UHG merger. We saw the largest positive impact from COVID-related activities in the first half of fiscal '22 which is why we anticipate more muted year-over-year growth in the first half of FY '23. We expect growth to accelerate in the second half of the year, especially in the fourth quarter, as we lap the FY '22 vaccine impact. So specifically to the first quarter of FY '23, despite the aforementioned headwinds, we expect low single-digit revenue growth year-over-year for both our S&A and Network businesses. Adjusted EBITDA for both S&A and network businesses are expected to be flat to only slightly up due to negative mix year-over-year. In TES, we also anticipate low single-digit revenue growth year-over-year but a modest decline in adjusted EBITDA as wage inflation will continue to impact margins until both appropriate repricing of contracts occurs and additional transformation benefits are realized. Last, we expect free cash flow in the range of $450 million to $500 million for the full year driven by adjusted EBITDA growth and significantly lower add-backs year-over-year, partially offset by increased CapEx as we continue to target CapEx in the range of 8% to 9% of solutions revenue. As a reminder, we are reestablishing imaging solutions as a stand-alone reporting segment and we'll begin providing commentary specific to that segment next 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. I know they remain focused on developing and delivering innovative solutions for health care 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 health care. 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 team members' commitment, innovation and agility. We will continue to partner with our customers to help them lower costs, enhance access and improve outcomes, creating value for everyone in the health care system. Thank you very much for joining us today.
End of Q&A:
