Signify Health, Inc. (SGFY) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, a warm welcome to the Signify Health First Quarter 2021 Earnings Conference Call. My name is Louisa and I will be the operator for today’s call. . I will now hand over to your host Jennifer DiBerardino, Head of Investor Relations. Jennifer, please go ahead.
Jennifer W. DiBerardino: Good morning and welcome to Signify Health’s first quarter 2021 earnings conference call. This call is being webcast live and a recording will be available on the events page of our investor website, at signifyhealth.com, through July 12, 2021. Throughout the call this morning, we will be referencing the financial tables that appeared in our press release dated May 11, 2021.
Kyle Armbrester: Thank you Jennifer. Good morning and thank you for joining us. Team Signify has continued to drive significantly better outcomes for individuals across the continuous care while supporting customers with our value based payment platform. Our first quarter performance reflects the hard work and investments we have made to generate results. Yesterday evening, we announced our very strong first quarter 2021 financial results driven by significant positive momentum in our home and community services segment and solid execution against our corporate strategy. We grew our overall top line in the quarter by 37% to $180 million and delivered $34.4 million of adjusted EBITDA, an increase of 58% from a year ago with a corresponding adjusted EBITDA margin of 19.1%. We're off to a great start in 2021 with two highly complementary segments, each an industry leader for the respective services. At the quarter what we do is two-fold. One, we improve patient outcomes by sending clinicians into patient’s homes to better assess their needs and provide decision support as they navigate the healthcare system to have more happy, healthy days at home. And two, we reduce costs for insurers, employers, and health systems by the point our data, analytics, software, and contracted networks of healthcare providers.
Steven Senneff: Thank you, Kyle and good morning, everyone. I'm very excited to walk you through our strong first quarter results. I will be referring to the tables that appeared in the earnings press release issued yesterday. As you can see in Table 1, we had strong total revenue growth in the quarter of 37% to $180 million when compared to the same period last year. A reminder that revenue is net of a reduction relating to equity appreciation rates for EARs in our Home and Community Services segment. In the first quarter, the impact of the EARs was $4.9 million and for the full year will be $19.7 million. Revenue strength in the quarter was primarily driven by HCS growth of 48%, which reflects the strong momentum of IHE volume coming into 2021. Evaluations are trending strongly backed to being performed in the home. We anticipate continuing to perform some level of record evaluations as part of our ongoing service offerings, but the strong customer preference is to do them in the home. Total evaluation volume for the first quarter was approximately 462,000, including virtual evaluations compared to 303,000 in the first quarter of 2020. In response to investor request to provide a more detailed number of IHEs to the full year 2020 total IHE volume was 1.435 million in 2020 and our 2021 guidance is 1.7 million to 1.75 million evaluations. Diagnostic and preventative testing continues to contribute to HCS revenue growth. As we grow our pipeline of new testing devices, we believe these services will be a larger contributor to HCS revenue in the future. As I mentioned on our year-end earnings call in March, our expectations are that HCS revenue growth will continue to be strong in 2021 and overall revenue will also follow a more typical seasonality pattern after a COVID distorted 2020, where our cost utilization is better spread out across year. We expect the seasonality turn to be a higher first half for IHE volume compared to the second half of the year, with the fourth quarter projected to be our lowest quarter of the year. Still on Table 1 ECS revenue was 3% lower in the quarter to $27.6 million, which was within our expectations as ECS revenue will continue to reflect the lagged effect of COVID-19. As a reminder, in BPCI program, we recognize the revenue attributable to Episode and savings based on our estimate of savings realized. Each quarter we evaluate if any adjustments to our revenue estimates are required based on the monthly information we receive from CMS. The most significant adjustments tend to be in the second and fourth calendar quarters when we receive full reconciliation statements from CMS. These statements include detailed information about our performance that we typically use to revise estimates in light of actual results. In the first quarter, we did not receive a reconciliation report or any additional information that would inform revenue estimates and as such did not make any adjustments. We will report on program size and savings rate on an annual basis, but to address requests to provide more decimal places for modeling purposes, the previously reported 2020 weighted average program size was $5.207 billion.
Kyle Armbrester: Thanks Steve. 2021 is off to a great start. Team Signify is relentlessly focused on the incredible market opportunity we have in front of us to drive value based care payment models forward while expanding services to better serve our customers and individuals. We believe we will drive significant future value for all constituents. Now, I will turn the call over to the operator to take your questions.
Operator: Operator. . Our first question comes from Robert Jones from Goldman Sachs. Robert, your line is open. Please go ahead.
Robert Jones: Great, good morning, thanks for taking the question. I guess you touched on some of this, but maybe just wanted to go back to thinking about the full year in the context of the very strong results that you posted for 1Q. Any more thoughts around maybe why not raise the guidance range for the year, I mean, clearly the performance here was above expectations and just curious if those things that you're thinking about over the balance of the year that could have results degradate in a way that would actually get to the maintained guidance range for the full 2021?
Steven Senneff: Hey Robert, this is Steve. Yeah, good question. Look, we gave guidance at the end of March to begin with, so we kind of knew that quarter one was coming in strong. That said, we are really excited with where we came in at, I mean, the Home and Community Services segment is at another all-time record in revenue this quarter after coming off at Q4 all-time record. So it really sets us up well going forward. But I'm going to -- we're going to take a look at where Q2 comes in. We feel bullish about the trends that's why we said, feel like it's towards the high-end and after Q2 we will see where we are at, and we have the recount in Q2, which is a big event for us on the Episode side. So once we've taken that data to see how the trends continue, then we'll reevaluate guidance.
Robert Jones: No, that makes sense. And I guess maybe Kyle, just looking at the IHE growth in the quarter, clearly extremely strong COVID dynamics, I would imagine our play in some part, given the lack of IHEs that we are able to get done last year, could you talk a little bit just about how you're thinking about the growth in the quarter, kind of just the underlying demand versus kind of pull forward or catch up related to what wasn't able to get done last year?
Kyle Armbrester: Yeah, and I'd keep in mind the shot clock completely resets on January 1st, so anything that happened in last year in general there's no ability to catch back up to it for the previous calendar year. So it's a completely new year when January rolls around. That being said, I mean our conversion rate on the same size of lift is higher than historical averages. And we expected this to happen. We've been investing deeply in analytics and we've hired a bunch of folks and invested deeply in our consumer engagement team and technology. So we're seeing deeper conversion into the same size list if you kind of kept it as a control group. The other big thing, our customers have had a big mindset shift over the last few years. And while they used to -- many of them prioritize and kind of clear out list, the nature of these visits really are holistic and preventative in nature and they're pushing us to do more and more in the home. And as a result of that, they're giving us their full member lists and so the overall pie of what we're able to deliver are great services and partnership with our customers and drive on the value the members is just increasing dramatically as well. And so we're feeling great across all fronts and it's super exciting for me and the team I think personally to see all of the vast kind of technology and analytic investments that we have done over the years really start to pay off.
Steven Senneff: Yeah, just adding to that, with your -- just one last thing there Bob, on the pull forward piece of that, the beauty of that is the conversion is coming out higher and stronger so yes, it is pulling forward. But that gives us more opportunity in the back half of the year to go deeper into the list and also work with our clients to get additional list. So, that's the piece that we'll continue to watch in Q2 and if that conversion stays up then we'll be very optimistic on maybe overachieving guidance.
Robert Jones: Got it. No, that all makes sense. Thank you both.
Kyle Armbrester: Thank you.
Operator: Thank you for your questions. Our next question comes from Kevin Caliendo from UBS. Please go ahead. Your line is open.
Kevin Caliendo: Thanks. Thanks for taking my call. Congrats on the quarter. Really the question is the balance sheet and the cash. You talked about acquisitions and the like, what's your appetite for leverage, what's your appetite to buy sort of -- what are the parameters under which you would look to do M&A either from a financial return, but also thinking about the current leverage on the balance sheet where you might be willing to go with that? And where's -- what's the environment like right now for you, for the targets in terms of valuations and just the pipeline?
Kyle Armbrester: Yeah, that's a great question and thanks for it. So I'd say we're in a great position. Like we like having the cash on the balance sheet, it gives us a lot of flexibility to invest in our current product portfolio, which there's a never ending kind of demand from customers to do more and more for them, which is a great place to be in. And so we've made the choice to opt some investments and to move some of that cash and to pushing forward some of that product portfolio. We just had a fully vaccinated in person offsite in Dallas a few weeks ago with the management team and it was fantastic. The whole team kind of said it was the highlight of the year. Best part is being able to be together and how much we were able to collaborate and cycle time has just reduced on making some of these investment decisions. On the M&A front, the market's hot, right. There's a lot of opportunities out there. I mean, I think our primary goal is looking for good tuck-in acquisitions that tie right into our product and strategy at work. If you guys watched our road show, we talked about that flywheel, where we aggregate data, generate insights, deliver actions, and then make positive outcomes. We're looking for folks that plug into those four kind of quadrants of that flywheel, and we've been pretty active in market. We've looked at several companies, and we've got a really strong core -- integration and finance team that gives us a lot of ability to move in and out quickly on diligence of companies. So I would say that we're quite active and we just see a lot of potential given the platform we built out, the deep multi-year client relationships we have both on the health system and health plan side. And now increasingly as we start to move into the employer space, with our Episode business. It really puts us in a great position to take some of these smaller and/or scaled companies and turbocharge their ability to make a positive impact across our clients. I'll let Steve answer the leverage question, but I would tell you that our primary focus in general is the long-term. Like we're not looking in doing acute accretion, dilution math, and just trying to go out and buy revenue for the sake of it. We want to underwrite real synergies that are strategic to our business and our mission and vision, and are going to really make a tangible impact inside the clients that we touch. And that is the first and most important bar that we're applying to any M&A activity.
Steven Senneff: Yeah. And I don't know if I have a lot to add, I would just say, we continue to look at our capital structure and with the M&A pipeline that's out there, trying to make the best decision for the future. But as Kyle said, we've got a lot of cash on the balance sheet, net negative leverage. So we do have opportunity to lean in and not really impact our leverage in a big way.
Kevin Caliendo: That's really helpful. If I can ask a quick follow-up, just can you talk a little bit about the reimbursement background backdrop and how that's progressing on the virtual visits, has anything changed there, anything unexpected, has it been better than you had expected or held up better, any commentary around that would be helpful?
Kyle Armbrester: Yeah. So it's important context. They are approved right now during the public health emergency, right. And CMS has not commented one way or the other what's going to happen after that. That being said almost every single one, I would say the overwhelming majority -- extreme overwhelming majority of our clients have taken a home first strategy. And so we're pushing harder and harder and the number of verticals are going down because everyone wants us back into the home. You can't take the connected devices virtually, you can't lay eyes on the member and see their living condition. All of the benefits of having that human touch, we think and our clients think are super important. And in fact, I and Steve mentioned on our recording, our transition to home service, we're helping to physically move folks back into the home after a procedure is starting to surge inside the client base as well. And so we think that continues to be the strategic asset. The cool thing to me is we've got the flexibility to go virtual when and where we need it, right. And so if someone's super rural or if we're just checking in on somebody, we built all the capabilities out in the pandemic and so we're always going to have a virtual component to our business. But we believe our bread and butter and what drives the best value to the lives that we touch and allows us to have a positive impact is physically spending time with these individuals, many of them that have fallen off, the kind of traditional chassis of healthcare.
Kevin Caliendo: That's really great. Thanks so much, guys. Really helpful.
Kyle Armbrester: You asked great questions, thank you.
Operator: Thank you for your questions. Next question comes from George Hill from Deutsche Bank Securities. George, your line is open. Please go ahead.
George Hill: Yeah, good morning guys and appreciate you taking the question. I guess Kyle, you made the interesting comment that you think that Medicare is going to mandate the bundle. I'd love you to provide any more color around that and whatever you think about timing? And then maybe my follow-up would be, could you talk about kind of the outlook for commercial bundles and penetrating the employer space and how you guys are seeing the competitive environment there?
Kyle Armbrester: Yeah, absolutely. So on the Medicare front, I mean, they issued a letter in Q3, Q4 of last year. The Director did basically stating that bundles are going to be expanded and mandatory after the 2023 period. I think that the BPCI programs have been fantastic successes, the Federal Government we've guaranteed them and delivered on a lot of savings to the trust, which you and I, and everybody in this country needs to continue to happen if we want Medicare to stay around for all of us and our kids in the future, providing that critical safety net for seniors. We've had great conversations with them since then this year talking about continuing expansion into ambulatory, thinking about prospective payments which we're pioneering and spending a lot of money and time and capital on. And then also just thinking about what chronic conditions and other moves towards mandatory could and should look like. And so we continue to have great, positive, engaged conversations, a lot of the staff that has been there really doing a superlative job. They have been there for quite some time and they're focused on seeing this program become mandatory too. It's the capstone of their career and we're pioneering and working with them to make that happen. And so I have all the beliefs in the world that that's going to continue to track down that path. I think two, what I'm excited about is we're seeing our services regardless of the “value-based” care program out of CMI or in general from CMS inside a lot of our clients, our services transitioning to the home, reducing unnecessary readmissions, taking holistic care of individuals, it's translating to their ATO books. We're in talks with a lot of the current participants in direct contracting to help them out inside the homes and doing a lot of our services as well. And so we're bullish in general I would just say on value-based care as this administration and CMI have been pretty public about stating. And we're super excited to be one of their largest partners nationwide, helping to deliver innovation and insights to keep driving this momentum forward. So that's question one. On the commercial front, we're seeing very good momentum. We're seeing deeper conversations with health plans, more employers stepping into the arena and wanting to understand how they can provide better quality services at a lower cost to their employees, because they've just been getting killed on the medical spend for years. We've also seen -- if you guys saw our press release with the Aspen Physician Network in Dallas, super innovative cardiology group there. Had dinner with those guys a few weeks ago. We're seeing providers come out ahead of the risk-bearing entity saying this is actually the best way to provide care for patients. And so risk-bearing entities like Aspen physicians did, we are open to do business like this and we believe this is the way forward to get off of this fee for service chassis that's been saddling the U.S. healthcare system for far too long. So we're seeing continued great momentum there. I mentioned in the script, we just hired a fantastic SVP of Network Development. She was formerly at Optum and several large health systems. She's an expert at recruiting providers in value-based care centric contracts, and so we're going to be amplifying our density in a lot of our core markets, adding more volume and working hand in hand with the risk-bearing entities, the employers, the ASOs and health plans continue to increase that program size inside that business. And so we feel very bullish about it and delivered a bunch of great stuff on our product roadmap, good integration with patient blocks at acquisition we did late last year where we hit a bunch of our integration milestones. So we're feeling very good about it and feel like we're in a real competitive advantage given all the investments we've done for four or five years to get us to the place we're at today.
George Hill: Okay. I don't know if I can get a sneak in a quick follow up on that, kind of selling into that self-insured and clear sponsor market's pretty different than selling into the MA plan market, I guess. Can you talk about any sales capacity or infrastructure capacity you need to build?
Kyle Armbrester: Yeah, so it's actually super related on one hand, right? So we are going in and doing these episodes for Medicare Advantage and Managed Medicaid individuals. So the same people that were in their homes, right. And we can trigger those episodes directly out of the home. So it's actually selling frequently into the same book. I mean, sometimes we get down into the regional level or the market president level and so it's given us the ability to tie together a lot of our services. And frankly, it's one of the big synergies of why we brought all this organization together, because of those relationships and visibility and data and analytics we have into these members lives. On the other hand with the employers we've gone through a lot of -- there's a lot of trade groups and brokers that have deep relationships there. So it has been building out a different channel. But going into them with the value prop of guaranteed savings on their medical spend is pretty compelling and it's also something that not a lot of folks are -- to them, right. A lot of folks are looking for a PMPM or some model that's disconnected from the specific outcome and so it's given us a lot of traction with folks like the State of Connecticut, which we're doing fantastic work with to go in and make a real impact. And then keep in mind our goal, once we get an anchor risk-bearing entity, a self-insured employer health plan, etcetera and then we recruit provider volume our goal is to stack more of its bearing entities on top and more provider volume in those markets to change the dialogue in that market to be predominantly one of using episodes as a means to drive better quality, lower cost care up in the individual's lives to be touched. And we're starting to see that pickup in earnest in some of our core markets.
George Hill: It’s helpful, thank you.
Kyle Armbrester: Yes, good questions.
Operator: Thank you for your question. Our next question comes from Matt Larew from William Blair. Your line is open Matt. Please go ahead.
Matt Larew: Hi, good morning guys. Just wanted to ask as program is starting to build back up, if there are particular clinical areas that you're seeing scale up more quickly and then when you talk about subside with respect to COVID, just curious if that includes the potential bump in the fourth quarter when a normal flu season might occur, just how you are I guess thinking about subside within the context of COVID?
Kyle Armbrester: Yeah, I'll let Steve answer on the segment, but on the first one it's really across the board. As your first question was kind of what's coming back, it's really across the board. It's obviously some elective procedures that goes without saying, but I would say that the U.S. healthcare system, like the volume is just coming back, right. It's not like these procedures or other things disappeared. Steve and I had mentioned that during the road show and so we're excited about early signs here and it's something we're going to continue to watch. But without a doubt, we're feeling more engagement, less stress with our health system clients, just the pandemic is not hitting them as hard. Obviously as it was you guys are well aware of the vaccination rates and the positive momentum we've had in the country. And so folks are showing back up to back out and it's without a doubt a challenge to procedural volume in general across the U.S. and I think that's why we're seeing the slight uptick and we're cautiously optimistic about program size as a result.
Steven Senneff: Yeah, just to follow up on that, Q1 came in exactly where we thought it would for the ECS segment. Not a lot of news report there waiting for the reconciliation that will hopefully drop any day now. But the one thing to your question on the program size, we are seeing positive trends there that as we projected early on at the Q4 that we would see that program size grow throughout the year and at a run rate into the year close to where we were at 2019 or above. And so there's nothing in the metrics or data that has taken us off that protection. So yes, we would expect throughout the year that would continue to grow or being our largest program size quarter.
Matt Larew: Okay. And then Kyle to your point in terms of doctor's offices opening up vaccination rollout, you all pointed out on the last call some of the benefits of the assessment taking place, obviously in the home relative to the physician office. We've seen a number of sort of site of care in the home, showing signs of sticking around in sort of this post-vaccination world. Just curious what you're seeing in terms of any potential share gains you might've had versus doc offices or any activity market as doc offices now are back open for business?
Kyle Armbrester: Yeah, we don't compete with them very often, right. And keep in mind 90% of the time pre-COVID folks really inside folks homes, we were getting them an appointment book back in their doctor's office. So we're a big tailwind to that I would say. It's just a completely different service that we're offering and I think that our higher conversion rates and the bigger list that we're getting from our partners and the multi-year contracts. And many of them extended with us during the pandemic are an indication that the type of work we're doing is going to continue to grow and for many years to come, which is only amplified by the diversity of more devices, more social coordination, deeper clinical insights that were driving inside these homes to better coordinate care for these lives that we're touching. We don't want to compete with primary care doctors, surgeons. We want to be an amplifying force to help increase their value based care panels and help them better manage these individual's lives, right. They're our partners, not our competitors.
Matt Larew: Yeah, that makes sense. Just quickly last one, you hosted an interesting event in April on the Episode business for Pacific commercial partners. And just curious if you could share any feedback or any metrics in terms of judging that as a success?
Kyle Armbrester: Yeah, we had a few webinars, they were very well attended by current and prospective clients. So we were very satisfied with the results. And I think in general, just folks are kind of waking up after the pandemic and figuring out their strategy, getting back to what can we do to promote growth, better patient outcomes, cut unnecessary waste out. And our message of episodes as a vehicle is really resonated in market. And so we had a really diverse set of attendees. We had employers, health plans, health systems, a whole battery, and then some of them I said are existing clients and some prospects on those webinars. And we're going to be doing more and more there. We've really upgraded a lot of our marketing and go to market efforts over the last three years and I am excited to see all the hard work that's been put in there and all the reception that we're getting out in market as a result of that great content and thought leadership that we're promoting.
Matt Larew: Thanks Kyle.
Kyle Armbrester: Yeah, great questions.
Operator: Thank you for your question. Our next question comes from Sean Wieland from Piper Sandler. Sean, your line is open. Please go ahead.
Unidentified Analyst : Hi, thanks for taking my question. This is Jess on for Sean. I think we are interested, if you guys could give us maybe a sense of pricing trends in IHEs and your expectations for the full year, I think by our estimates price per IHE was down a little bit year-over-year, so just interested to know what are the factors that caused that fluctuation?
Kyle Armbrester: Yeah look, we have not seen any pricing pressure to drive trends down. In fact, I think it's actually the opposite because of we're seeing the rebound and the ancillary and the devices being added onto the visits. So we feel bullish about that trend continuing. You'll also get -- you will also start to see the lift from the price differential between virtual and in the home. And so those two items alone will be positive pricing trends when you take the total revenue divided by the volume.
Unidentified Analyst : Got it. And so can you -- what are some of the most, I guess, popular diagnostic add-ons that is premium and have trends in the type of diagnostic add-on changed in the wake of COVID and is the fact that you can offer those diagnostic add-on trends the key reason why health plans would be outsourcing IHEs to Signify as opposed to insourcing an increasing amount of volume?
Kyle Armbrester: Yeah, so I would say it's a reason, not -- I wouldn't say it's one of the key reasons. The main reason they outsource to us is our -- we're in every County in the United States with 9,000 plus credentialed providers. So we have vast utilization capacity and can just do it at a lower cost and at a higher fidelity and services given the density that we have out in market. And so that's been the key driver of a lot of our success. You couple that with our $100 million plus a year R&D and analytics budget, we're just getting better and better at engaging these folks. And so it's created a real economies of scale. Now, we have a device connected entity, native iOS, iPad application, and it's without a doubt a technological advantage that we have too. The big ones that we're doing, a bone density scans, eye exams, we're actually doing fusion right in the home. It's a new thing that we started to do. And a lot of these devices are directly related to the clinical trials that we really scaled up nicely into the home as well directly with big life sciences companies. And so I'd say it's a without a doubt a differentiator. You asked about the mix changing during the pandemic, it's actually stayed pretty consistent. These have been a very high demand, innovative part of our business for some time. We're seeing more demand for them, but I would say the mix is not materially shifting. It's high really across the board. We've got a really great pipeline of additional devices that we are mid-flight and integrating into as well, which will help us identify more conditions, help us more proactively manage this condition, and get the whole care team activated to provide better care to these that we're talking to. It's a fully staffed team, the R&D operations, sales and customer support all attached to it. And it's really becoming a well running chunk at a business that's scaled tremendously over the last few years with all that R&D investment.
Unidentified Analyst : Thank you.
Operator: . It appears we have no further questions. So I hand back over to Kyle Armbrester for any closing remarks. Thank you.
Kyle Armbrester: Great, well thank you all so much. It was a great quarter and we really appreciate all the support of our shareholders, employees, network. Everybody who's done so much to help continue to make a positive impact on all the lives we are touching. If you have any additional questions, please reach out to Jennifer and have a nice week everybody. Thank you so much.
