Change Healthcare Inc (CHNG) 2022 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Change Healthcare's earnings call for the third quarter of fiscal 2022. (Operator Instructions)

I would now like to turn the conference over to your speaker host, David Elliott, Change Healthcare Inc.'s Senior Director, M&A and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Change Healthcare's earnings call for the third quarter of fiscal 2022, which ended on December 31, 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?

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 road map 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 health care system.

I'll now provide you with some financial highlights and insights into our continuing success as we advance our platform to deliver increased value for all health care 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 in innovating across the Change Healthcare platform and executing on the transformation initiatives in our TES segment. Fredrik will provide more details on our 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 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 signed a multimillion 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 anticipates delivering over $50 million in annual savings to its customers.

We also signed a multimillion 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 multimillion 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 customer to benefit from our existing high ROI solutions as well as our innovative product road map.

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 these new integrations.

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 reduces the time required for substance use disorder patient assessments, increases consistency and streamlines 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 multimillion dollar contracts in the quarter, including a 10-year contract in London, went 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 and 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 and 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 retrieve medical records for risk adjustment and 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 workflows 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 core networks, driven by new customers, expansion of existing customer relationships, and COVID-related tailwinds. We continue to see good execution in high-growth strategic priorities like payments, data solutions and API services. In payments, we closed a multimillion dollar settlement advocate deal with a large multistate payer operating in Medicaid, Medicare and Marketplace markets.

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 on the Change Healthcare marketplace and in multiple storefronts, including AWS, Azure and now the Salesforce AppExchange. Our leadership in providing micro service and API-based solutions to the health care 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 health care system while improving patient access and their revenue cycle management. With 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, track and trace programs and nurse triage lines. Faced with the volatility in demand and the challenges in serving that demand during the pandemic, we have been able to scale quickly, decreasing 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, sent about 6.5 million automated COVID patient reminders and processed about 8 million COVID testing claims. As in prior quarters, we continue to focus on margin expansion in this segment through automation and 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 necessity 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 pipeline and positive trends in both deal size and win rates. As Fredrik will discuss momentarily, the financial benefits from our RCM transformation efforts remain on track with the 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 health care.

Now let me turn the call over to Fredrik, who will review our financial performance. Fredrik?

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 adjustment associated with the McKesson exit. The quarter was positively impacted by volume growth and new sales volume across all 3 segments. Net of the impact of deferred revenue and the net revenue related to acquisitions and divestitures in each period, solutions revenue increased 7.5% 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 $117 million, resulting in adjusted net income of $0.36 per diluted share compared with adjusted net income of $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 fiscal '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 and 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 and 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 and increased product investments. Network Solutions adjusted EBITDA increased 16.3% year-over-year, driven primarily by continued growth across this segment 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 optimization of our cost structure, partially offset by increased wage inflation. Since announcing our RCM transformation efforts last year, we've operationalized margin improvement 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 regard 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 segments. As I indicated last quarter, our 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.

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 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 3 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 employees' 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 health care system.

Thanks very much for dialing into our call today, and have a good day.