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spk01: Ladies and gentlemen, thank you for standing by, and welcome to the Change Healthcare, Inc. Third Quarter Fiscal Year 2021 Earnings Conference Call. I would now like to hand the conference over to your host today, Evan Smith, Head of Investor Relations. Please go ahead.
spk03: Thank you, Operator. Good morning, and welcome to Change Healthcare's Earnings Call for the Third Quarter of Fiscal 2021, which ended on December 31, 2020. I'm joined today by Neil DiCrescenzo, Change Healthcare's President and CAO, and Frederick Elias and Change Healthcare's Executive Vice President and Chief Financial Officer. First, Neil will provide a business update, and then Frederick will provide a review of the financial results for the quarter, followed by closing remarks from Neil. The presentations, which will be referenced in the formal remarks, is posted on the IR website. Also, given the pending transaction with OptumInsight, we will not be taking questions. Moving on to slide two now. 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 filing. 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 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 the presentation. I want to remind everyone that copies of our earnings release and the supplemental slides accompanying the conference call are available in the investor relations section of the website at www.changehealthcare.com. Now moving to slide four, I'll now turn the call over to Neil. Neil?
spk04: Thank you, Evan. Good morning, everyone. While COVID-19 continues to impact our daily lives, I hope everyone remains safe and healthy. Today, I will review Change Healthcare's performance in the third quarter, which was driven by sequential improvement in healthcare utilization, as well as positive trends in sales activity across our platform. I will provide insights into our ongoing new business successes, our continued execution, on delivering innovation and value to our customers, and the strategic initiatives we completed to accelerate growth and expand our opportunities. Before I get into the details of the quarter, let me provide you with some background on the pending combination of Change Healthcare and OptumInsight, which we announced on January 6th. Under the terms of the agreement, Change Healthcare shareholders will receive $25.75 in cash for each share of common stock. The consideration per share represents a premium of approximately 41% over the closing stock price on January 5, 2021, and an approximately 98% premium over the $13 IPO share price on June 26, 2019. The transaction, which is currently expected to be completed in the second half of calendar 2021, is subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory and stockholder approvals. We are excited by the opportunity to unite two technology and service companies focused on serving healthcare. core clinical, administrative, and payment processes, resulting in better health outcomes and experiences for everyone at lower cost. Change Healthcare brings key technologies, connections, and advanced clinical decision, administrative, and financial support capabilities, enabling better workflow and connectivity across the healthcare system. Optum brings modern analytics, comprehensive clinical expertise, innovative technologies, and extensive experience in improving operational and clinical performance. We share a common mission and values, and importantly, a sense of urgency to provide our customers and those they serve with the more robust capabilities this union makes possible. Now let me move on to the quarter. In addition to improvement and utilization, we saw increased customer activity, including bookings and underlying demand across all three segments. This further supports our conviction for the increased value we deliver to our customers today and into the future, driven by our focused investments and capabilities aligned with the healthcare market's evolution. While there remains some uncertainty due to unemployment levels and payer mix as we move forward, in 2021, the underlying market trends for our business remain positive on multiple fronts. These include new rules being implemented surrounding interoperability and price transparency, as well as continued advances in value-based care initiatives, including CMS's new Medicare Direct Contracting model, which builds on innovations to the Medicare program, including accountable care organizations, or ACOs, continued advances in Medicare Advantage, and private sector risk sharing arrangements. The acceleration of more distributed models of care as a result of COVID-19 includes both virtual health and hospital in the home programs. There is also an increased need for data and analytics to help clients reduce administrative costs, meet compliance mandates, and improve performance under value-based care and new payment models. And finally, there's an increased convergence of medical care and pharmacy services, helping decrease the total cost of care, improve health outcomes, and simplify the consumer experience. In addition, we were also encouraged by the recent findings of a national study we commissioned entitled, Poised to Transform AI in the Revenue Cycle. The study found that while two-thirds of doctors report using AI in some revenue cycle capacity today, nearly all are expected to be using it in three years, providing a significant opportunity for Change Healthcare's end-to-end AI lifecycle solutions and development programs. As providers begin to use AI more strategically, there is an opportunity for significant financial, operational, and clinical gains. including improving the end-to-end revenue cycle, claims accuracy, denial reduction, clinical insights, level of care prediction, and more. These trends will continue to increase demand from payers and providers for Change Healthcare's platform of integrated solutions and services. Our platform helps them navigate shifts in coverage, improve efficiency, streamline payments, enable greater interoperability for all market participants, and enhance consumer engagement. Now I'll briefly highlight our financial performance for the quarter. The quarter reflected an improvement in utilization and new business implementations, as well as continued strength in our core franchises and among our extensive customer base. Our team produced solutions revenue of $735 million, adjusted EBITDA of $233 million, adjusted earnings per share of 34 cents per diluted share, and free cash flow of $134 million during the quarter. During the quarter, we also repaid $215 million of our term loan bids. Frederick will provide more detail on our financial performance following my remarks. Our third quarter results demonstrate our continued focus on our enterprise sales efforts and innovation across our platform, while we continue to optimize our cost structure to accelerate growth and performance going forward. Now, let me provide an update on our success on the new business front. Within our network segment, we continue to see increased volumes resulting from new business, continued growth in our API-related transaction volumes, and our all-payer electronic attachment service, as well as initial traction from new, high-value-added solutions like our connected consumer health e-commerce suite. We are building momentum across our digital health initiatives with new business from several mid and large health systems, as well as innovative digital health companies focused on personalized healthcare and AI-driven solutions to improve administrative processes. This included new sales of our connected consumer health suite, which allows patients to play a more active role in their healthcare choices, as well as our interoperability and API solutions in areas like eligibility and claims. We have a solid pipeline with more opportunities, either in contracting or in RFP processes, with organizations who are addressing the rise of consumerism in healthcare. During the quarter, we launched 13 new products in the change healthcare marketplace, spanning medical network, physician support, data solutions, and interoperability solutions to help payers comply with the CMS patient access and interoperability rule. The Change Healthcare Marketplace now offers almost 50 API and SaaS products, providing solutions to power revenue cycle management, payments, and medical network workflows. We processed nearly 100 million API transactions in the third quarter and are now processing over 30 million API transactions per month, and the volume continues to grow. In our B2B payments business, in addition to increased volumes with our existing customers, we continue to expand that business, including contracts worth several million dollars annually with one of the largest payers in the country, as well as a leading management services organization servicing over 1 million lives and a fast-growing cloud-based integrated health benefits platform company. Moving to our software and analytics segment. In our risk adjustment and quality solutions business, we continue to expand our business with large payers by offering a better ROI with our unique data, AI models, and workflow capabilities. As a result, during the quarter, we signed three multi-million dollar agreements for multiple solutions in this area to support payers. We also continue to advance our payment accuracy and decision support business as a result of our continued innovation. By bringing more intelligence earlier in the workflow, Change Healthcare's Coding Advisor and InterQual Connect and Auto Review capabilities, combined with the integration with leading EMRs, continue to drive new opportunities. As a result, during the quarter, we signed several multimillion-dollar agreements with some of the largest payers in the United States. In our enterprise imaging business, we continue to grow our pipeline and have signed several new enterprise deals, further advancing our position in the imaging market. In addition to new sales within our core customer base, we again closed several multimillion-dollar contracts, including with two government agencies and a complete end-to-end enterprise imaging solution for a leading hospital group in the Middle East. In our RCM services business, we continue to expand our pipeline and grow bookings with positive trends in average deal size, win rates, and ongoing success closing multimillion-dollar deals. We continue to sign deals with mid- to large-scale IDNs and hospital groups in New York, including a large deal with one of the nation's premier academic medical centers, extending our existing patient access services relationship with this organization. We also added two significant Midwest laboratory customers, providing them broad capabilities, including billing services, coverage insights, and SmartPay. Our new wins further strengthened the foundation for our RCM services transformation and the underlying performance supporting our growth in FY22. During the quarter, we also executed on initiatives to strengthen our business and accelerate our growth and performance. First, we continue to advance our data science as a service initiative. And second, we divested our capacity management business. Let me provide a little more color on both of these. In our data science as a service business, we have continued momentum across all targeted verticals, life sciences, financial services, media, and risk decision sciences. To further support our double-digit growth, during the quarter we launched an innovative national data resource that connects the circumstances of people's lives to the care they receive. The solution, Social Determinants of Health Analytics, is a resource to help health systems, insurers, and life science organizations explore how geodemographic factors affect patient outcomes. Change Healthcare's SDOH analytics links de-identified claims with factors such as financial stability, education level, ethnicity, housing status, and household characteristics to reveal the correlations between social determinants of health, clinical care, and patient outcomes. The resulting dataset is, of course, de-identified in accordance with HIPAA privacy regulations. In addition, in conjunction with Carnegie Mellon University's Delphi Research Group, we announced the launch of Delphi's enhanced COVID-Cas real-time COVID-19 indicators. The addition of de-identified COVID-19 claims from Change Healthcare allows COVIDcast to present a more complete, multi-dimensional picture of the pandemic and its impact. Moving on to the strategic divestiture that we completed in the quarter. During the quarter, we divested our capacity management business for $67.5 million. The sale aligned with our strategy to concentrate on the primary areas of our business that achieve the best outcomes for our customers through the power of the Change Healthcare platform. So in closing, we continue to execute on our financial and operational objectives. Through continued innovation, we are providing greater value to payers, providers, and consumers. Let me describe how. For care providers, we help reduce administrative burden and support the transition to value-based care. For healthcare payers, we enable a more comprehensive view of risk and network management to improve health outcomes and operational processes while reducing costs. And for patients, we 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 this transformation. Now, let me turn the call over to Frederick, who will review our financial performance. Frederick?
spk02: Thank you, Neil. Good morning, everyone. I'm happy to report a strong third quarter, underscoring the central role we play in the healthcare system as healthcare activity continued to improve throughout the quarter. We believe the recovery in activity levels was a result of the trend towards more normal underlying demand and some catch-up of previously deferred visits and procedures. As Neil mentioned, we continue to see underlying strength in our sales efforts across the platform, including positive market reception for our newly introduced solutions. Let me now move on to provide more details of our quarterly performance for the third quarter of fiscal 21. Starting with slide six, for the third quarter, solutions revenue was $735 million, including a deferred revenue adjustment of $24 million as part of the fair value adjustments associated with the McKesson exit, compared to $753 million in the same period of the prior fiscal year. We continue to see momentum in our business with positive bookings and pipeline activity across all three segments. Solutions revenue for the current period reflects an $18.3 million net favorable impact from acquisitions and divestitures, including the negative $2.2 million impact from the divestiture of the capacity management business in the quarter, which closed on December 2nd. The quarter was also negatively impacted by the COVID-19 pandemic, which was partially offset by new sales volume across all three segments. Net of the impact of deferred revenue and the revenue related to acquisitions and divestitures in each period, solutions revenue declined 1.7%. Adjusted EBITDA for the quarter was $233 million, essentially flat with the prior year. Adjusted EBITDA reflects the items I outlined related to revenue, as well as incremental synergy realization of approximately $11 million in the quarter. Net income for the quarter was $2 million resulting in net income of 1 cent per diluted share compared with net income of $31 million or 10 cents per diluted unit for the same period of the prior fiscal year. Adjusted net income was $110 million resulting in adjusted net income of 34 cents per diluted share compared with adjusted net income of $106 million or 33 cents per diluted unit for the third fiscal quarter of the prior year. Adjusted net income reflects the increase in adjusted EBITDA, as noted earlier, as well as a benefit from lower interest expense as a result of the year-over-year reduction in average outstanding debt and lower interest rates. There were 325 million diluted shares in the third quarter of fiscal 21, compared to 322 million diluted units 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 seven. Starting with revenue, the software analytics segment declined by 3.9% year over year. Our software analytics segment was essentially flat with the prior year after adjusting for the $17 million impact of the connected analytics and capacity management divestitures. Revenue in our subscription-based solutions grew low single digits, which was offset with a mid-single-digit decrease in our non-subscription, contingency-based businesses, primarily in our legacy imaging solutions due to COVID-19. Our network solutions revenue increased 27.8% year-over-year, which includes $35 million in revenue from acquisitions. Excluding the impact of acquisitions, network revenue grew 4.4% in the quarter. Key drivers include growth from implementation of new customers in our data solutions and B2B payments business, both growing double digits. We also benefited from increased volumes from existing and new customers and market expansion opportunities for our network resulting from new solutions and increased API-driven volumes. In a technology-enabled services segment, overall revenue declined 7.8% year-over-year, primarily as a result of the impact of the previously disclosed customer that reduced certain RCM services activities with changed healthcare and slightly lower volumes related to COVID-19 in the communication and print businesses. Excluding the impact of this one customer, we saw the RCM services business activity improving sequentially with revenue in line with prior year levels. Underlying growth also includes new business implementations across our service portfolio. Our RCM turnaround 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 analytics decreased 5.5% year-over-year. While continuing to make investments to support our AI initiatives and enterprise imaging transformation, we were able to effectively manage our costs to partially offset the impact of COVID-19 and divestitures. Network solutions adjusted EBITDA increased 18.6% in the quarter, driven primarily by underlying growth across the network and the acquisition of ERX and PDX. Results also include our continued investment to support the significant number of new product launches and market expansion initiatives we have underway. In technology-enabled services, adjusted EBITDA declined 49% in the quarter, driven primarily by the impact of the contraction of business from the previously disclosed customer and slightly lower volumes related to COVID-19 in the communications and print businesses. In addition, we continue to make great progress on our RCM services transformation and the implementation of our accelerated and enhanced transformation program we announced last quarter. We anticipate cost savings of approximately $60 million on a run rate basis over the next 24 months. As we indicated last quarter, this value creation initiative will allow us to continue increasing customer innovation while driving productivity. Moving on to cash flow and our balance sheet on slide eight. Free cash flow for the quarter was $134 million compared to $120 million in the same period of the prior fiscal year. Overall improved business performance and stronger working capital has increased our confidence in our full-year cash flow outlook. Adjusted free cash flow was $154 million compared to $151 million in the third fiscal quarter last year. Our liquidity remains strong, ending the quarter with over $137 million of cash and cash equivalents and $779 million in undrawn revolver capacity. Total long-term debt, net of cash at quarter's end, was slightly under $4.7 billion, which includes the repayment of $250 million in term loan obligations during the quarter. Credit agreement net leverage ratio was 5.2 times at quarter end. As noted in the press release, due to the pending transaction, we will not be providing guidance. I would note, though, that the full fiscal year 21 assumptions we previously provided at the end of the second quarter remain unchanged. Now, with that, let me turn it back over to Neil for his closing comments.
spk04: Thank you, Frederick. Over the past several years, Change Healthcare has worked diligently to develop and deliver innovative and transformative solutions for care providers, healthcare payers, and patients in order to improve clinical, financial, and care outcomes so that everyone in the healthcare system can thrive. I am incredibly proud of what our company has accomplished, and I am grateful to our employees for their hard work, dedication, and contributions. As the quarter demonstrates, we continue to deliver increased value to our payer and provider customers as well as consumers. This transaction with OptumInsight, when completed, will mark the start of an exciting new chapter for Change Healthcare, bringing together highly complementary cultures and teams to realize the long-term value and benefits that this combination will deliver. Thanks to the dedication of the Change Healthcare team members, I remain confident that we will continue to deliver innovation and value to our customers and the communities we serve. helping them navigate the current market environment and future opportunities to lower costs, enhance access, and improve outcomes. Thank you.
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