This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning. Thank you for standing by and welcome to the Change Healthcare's earnings call for the fourth quarter of fiscal year 2022. At this time, all participants are in a listen-only mode. 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.
spk04: Thank you, Operator. Good morning and welcome to Change Healthcare's earnings call for the fourth quarter of fiscal 2022, which ended on March 31st, 2022. I'm joined today by Neil DiCrescenzo, Change Healthcare's President and CEO, and Frederick Eliasson, Change Healthcare's Executive Vice President and Chief Financial Officer. First, Neil will provide a business update, and then Frederick 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 on 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 in the investor relations section of our website at www.changehealthcare.com. With that, I'll turn the call over to Neil. Neil?
spk03: Thank you, David. Good morning, everyone, and thank you for joining us. First, I would like to take a moment to recap the 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 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 packs, 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 FY23. 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 health care. Frederick 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 24th. We and UnitedHealth Group executed an agreement on April 4th which, among other things, extended the merger agreement to December 31st, 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 special cash dividends 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 in UnitedHealth Group will detail the benefits of this combination at a two-week trial scheduled to begin on August 1st. 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 multi-million 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 solution. Our coordination of benefits solution for commercial payers delivers savings through both cost avoidance and overpayment recovery by identifying primary coverage from both Medicare and commercial plans, which is a key capability most competitors lack. Through this innovative product, our commercial customers realize 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 LumaHealth to co-develop solutions to unify all patient journeys, from clinical to operational to financial. Our strategic partnership will leverage LumaHealth's class-recognized healthcare engagement engine Alongside change, healthcare has proven revenue cycle technology and services to develop new patient engagement solutions that seamlessly connect every touchpoint across the patient journey. This patient-first and interoperability-focused approach to tackling this persistent challenge in healthcare 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 Auto Review at a customer with 14 hospitals with a total of 2,100 beds. We also closed new inter-qual deals with a number of payers, including a large blues plan. In enterprise imaging, we have the strongest bookings quarter since taking change healthcare public, including closing several multi-million dollar contracts with key strategic new clients. Our development roadmap 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 FY23. 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 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 and high growth strategic priorities like payments, data solutions, and our API marketplace. We closed a multi-million 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 App Exchange. Our leadership in providing microservice-based and API-based solutions to the healthcare 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 TESS 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 multi-million dollar contracts as the primary scheduling vendor for a large East Coast healthcare system, as well as for a Florida-based hospital system. These customers place their trust in Change Healthcare based on our ability to deploy highly trained staff quickly. and drive increases in scheduled 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 of 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 VoiceBot program and new patient portals developed with our behavioral science teams. Our adoption rate 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 multi-year 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 four years. So in closing, our Q4 results and FY22 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 and 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 competent to change healthcare, which provides best-in-class connectivity, transaction management, insights, and integrated experiences. We'll continue to play a central role in helping our customers through the continuing transformation of healthcare. Now, let me turn the call over to Frederick, who will review our financial performance. Frederick?
spk02: 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 six 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 2 cents per diluted share compared to a net loss of $13 million for $0.04 per delivery 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 39 cents per diluted share, compared with adjusted net income of $134 million, or 42 cents 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 seven. Starting with revenue, the software analytics segments increased 6.5% year over year, driven by new customers, volume growth with existing customers, and new product introduction. 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 investment to support the significant number of new product launches and market expansion initiatives we have underway and negative mix as COVID-related activities in the 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 in senior note obligations. Our liquidity remains strong, ending the quarter with $252 million of cash and cash equivalent 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 FY23, 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 FY23. We expect growth to accelerate in the second half of the year, especially in the fourth quarter, as we lap the FY22 vaccine impact. So specifically to the first quarter of FY23, despite the aforementioned headwinds, we expect low single-digit revenue growth year-over-year for both our SNA and network businesses. Adjusted EBITDA for both SNA and network businesses are expected to be slashed only slightly up due to negative mix year-over-year. In TESS, 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 to $500 million for the full year driven by adjusted EBITDA growth and significantly lower ad 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 standalone 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.
spk03: Thank you, Frederick. 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 healthcare providers, payers, partners, and consumers to improve clinical, financial, and care outcomes. As I have stated previously, our goal is to deliver on three key objectives for our stakeholders. First, we will deliver superior consumer experiences. Second, we will drive increased efficiency and accuracy for financial transactions in healthcare. And third, we will deliver solutions that optimize decision-making for our customers on their journey to value-based care. The strength of our financial performance to date and the ability to continue to deliver innovative, value-added solutions to our customers is a testament to our 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 healthcare system. Thank you very much for joining us today.
Disclaimer