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spk01: Good day, and thank you for standing by. Welcome to the third quarter 2022 Tabula Rasa Healthcare Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Frank Sparacino. Please go ahead.
spk02: Good morning. This is Frank Sparacino, SVP of Investor Relations and Corporate Development for Tabula Rasa Healthcare. The company intends to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements within the meaning of that law. These forward-looking statements are subject to risks, uncertainties, and other factors that could cause Tabula Rasa Healthcare's actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include our ability to adapt to changes or trends within the market for healthcare in the U.S., a significant increase in competition from a variety of companies in the healthcare industry, developments and changes in laws and regulations, including increased regulation of the healthcare industry through legislative action, and revised rules and standards, and the extent to which we are successful in gaining new long-term relationships with clients or retaining existing clients. For additional information on the risks facing tabula rasa healthcare, please refer to our filings with the SEC, including the risk factors section of our 10-K filed on February 25, 2022, and are 10Q to be filed shortly. When we discuss our results on this call, unless indicated otherwise, we are referring to results from continuing operations. For additional information on our results from discontinued operations, please refer to the financial statements contained in the earnings release issued on November 3, 2022, and the notes to the financial statements to be included in our 10Q for the third quarter of 2022. A recording of this call is accessible through a link on the investor relations page of our website. I will now turn the call over to Brian Adams, President and Interim CEO of Tabula Rasa Healthcare. Thanks, Frank.
spk05: Good morning and thank you for joining us. We've delivered another solid quarter with third quarter revenue of $77.1 million which was 5% ahead of the midpoint of our guidance range for the third quarter provided on August 4th. In our carevention healthcare division, which represents our core PACE business, revenue increased 17% versus a year ago during the third quarter and 18% through the first nine months of 2022. Our growth from existing and new PACE centers is being driven by a combination of factors, including one, a growing number of seniors recognizing the benefits of the PACE model and enrolling with our existing clients, two, existing states expanding PACE service areas, and three, new states authorizing PACE services. In short, we have a strong foundation to build upon as we head into 2023. Tom will provide a deeper dive into our financial performance following my comments. Since assuming my new role in September, I've spent a significant amount of time meeting with our customers directly and interacting with customers at a few important events. In late September, we hosted our care kinesis clinical advisory panel meeting with attendees including taste medical directors from existing customers as well as prospects. And in early October, the National Taste Association, or NPA, held its annual conference in Seattle. where I had the opportunity to spend time with customers, partners, prospects, and employees. There are a couple important takeaways that I want to share based on my interactions with customers over the last several weeks. First, we have longstanding and strong partnerships with our PACE customers, resulting from the benefits they are realizing from our value-focused service offerings. In some cases, these relationships go back more than 10 years. This has allowed us to maintain high retention rates year after year. Second, we continue to have a dominant position in the market, currently serving more than eight out of every 10 PACE participants across the country with one of our core services, which creates opportunities as new organizations enter the market. Third, the PACE market is expanding with interest from a range of healthcare organizations focused on value-based care. In the first half of 2022, Both Missouri and Kentucky opened their first PACE centers, and in August of this year, Illinois selected eight organizations in five regions of the state to begin providing services by 2024. Among these eight organizations are existing PACE operators, an integrated health system, a federally qualified health center, and one of the leading primary care providers serving seniors, Oak Street Health, which speaks to the diverse and growing interest in PACE. I'm pleased to report that we already have relationships with many of these organizations. Looking toward the future for PACE, I wanted to highlight NPA's PACE 200K project, which will launch in 2023 with the goal of growing the program threefold by 2028. We believe this will result in a TAM in excess of $3 billion for Tabula Rasa. An October 2022 publication from the Bipartisan Policy Center provides a number of recommendations that would further accelerate PACE adoption. A few examples include simplifying and shortening the application and review process, which can take more than two years in some cases, expanding enrollment to include Medicare only participants and other high need, high cost populations, and raising consumer awareness through relaxing restrictions on marketing and improving the Medicare.gov website to make it easier for seniors to access information about PACE. We have posted a link to the publication on our IR website for your access if you'd like to review in more detail. In closing, I'm excited about our expanding team and changes underway at the company. One important addition to the team is April Gill, our new Chief Commercial Officer. In this newly created role, April will lead Tabula Rasa's go-to-market vision, overseeing strategy, product commercialization, marketing, communications, sales, and account management. April has a wealth of healthcare experience from startups to large organizations and a proven track record of driving client success, growth, and profitability, all a focus for Tabula Rasa. Last quarter, I talked about the large opportunity ahead of us represented by the more than 12 million dual eligible individuals, specifically with at-risk provider groups and health plans managing high cost and complex patients. We feel April's background is a perfect fit for advancing our efforts in these adjacent markets outside of Pace. April joined us in October, and we're thrilled to have her as part of the team. Additionally, as part of our recent leadership transition, we have three new board members, and I'd like to recognize their early contributions. They have already had a meaningful and positive impact. I'm looking forward to working with this newly constituted board to shape the future strategic direction of the company, and we'll be sharing that with you over the coming months. I will now turn it over to Tom to review our financial performance.
spk04: Thank you, Brian, and good morning, everyone. I will focus my comments on three areas, third quarter results, our balance sheet, and fourth quarter guidance. Third quarter revenue of $77.1 million increased 14% versus the year-ago quarter. and 6% on a sequential basis versus the second quarter of 2022. Our solid revenue performance was attributable to better than expected PACE participant growth at existing PACE centers and the full onboarding of a new large PACE client in California. This resulted in product revenue growth of 19% versus a year ago. Excluding EMTM revenue of $2.3 million in the third quarter of 2021, Service revenue increased 13% versus a year ago, driven by our PBM and risk adjustment services, both of which increased more than 20% during the quarter versus a year ago. The CMS EMTM program concluded on December 31st, 2021. Overall gross margin as a percentage of revenue of 21.9% is down versus 24.6% a year ago and effectively flat versus the second quarter of 2022. Third quarter product gross margin of 22.7% compares with 23.5% a year ago, with a decline driven by revenue mix and increased shipping costs. Third quarter service gross margin of 19.1% compares with 27.8% a year ago, with a decline driven by the ongoing business process outsourcing transition, including increased consulting and professional service fees. As we noted last quarter, we expect these headwinds to normalize in 2023. Our gap net loss of $25.9 million includes $8.1 million of stock-based compensation and other costs related to our leadership transition in September. Adjusted EBITDA of $2.1 million from continuing operations is down from $3.1 million a year ago and flat versus the second quarter of 2022. This decline versus the year-ago quarter is primarily due to the timing of cash compensation expense and gross margin pressures noted earlier. Moving to cash, we ended the third quarter with $80.8 million of cash, which is $54.3 million higher than June 30, 2022, and is due to the net proceeds received from the sale of prescribed wellness after paying down our short-term debt. The company has no debt maturity until 2026. We generated about $1 million in cash flow from operations during the third quarter and $9.8 million through the first nine months of 2022. Third quarter cash flow was negatively impacted by our discontinued operations, as well as divestiture-related expenses. Turning to guidance for continuing operations, we are introducing fourth quarter 2022 revenue guidance as follows. Revenue of $77.5 million to $80.5 million which represents growth of 12% to 17% versus a year ago, including carevention healthcare growth of 16% to 20%. For the full year 2022, we are raising our revenue guidance for continuing operations to a range of $294 million to $297 million, which represents growth of 13% to 14%, including carevention healthcare growth of 17% to 18%. The midpoint of our new range is $6.5 million higher than our most recent full-year revenue guidance. With that, I will turn it back to the operator for Q&A.
spk01: Thank you. At this time, if you'd like to ask a question, please press star 1-1. Once again, that's star 1-1. One moment for our first question. Our first question will come from Sean Dodge from RBC. Your line is open.
spk03: Yeah, thanks. Good morning, and congratulations on the good progress this quarter. Tom, I want to start just on the better-than-expected Q3 results. You said partly driven by higher-paced census growth. I think the guidance originally had assumed 9 tenths of a percent month-on-month increase in census growth. What did you actually recognize over the quarter? And I guess, you know, how much better did census growth run versus what you all had assumed?
spk04: Yeah, it was probably like a tenth of a percent better. But, you know, it occurs to me that we should provide more clarity around that. And some of you in the analyst community have asked us to – maybe think about that in a different way because the census growth is kind of same store sales, right? Well, that doesn't really tell the whole story because we mentioned we added a huge program in California in third quarter. We have another one coming on in fourth quarter. And so sometimes these new centers overwhelm and outnumber the new participants at existing centers. And then, of course, goes in the other direction, too. You have churn, right? You have some people who pass away, disenroll, whatever. So the net number, the story of the net increase isn't told entirely by same-store sales growth, if you will. So we'll have to perhaps provide more clarity going forward on that, maybe give the total number of participants. But to answer your question, both are doing meaningfully better than we projected. Both the growth of new participants at existing centers and new participants at newly added centers, newly won RFPs, and both contributed to that outperform in revenue in the quarter and therefore the guidance raise as well.
spk03: okay that's helpful and then so one of the new metrics you did give us was with the average pm pm in pace you said that was up uh nine percent year on year during the third quarter so there'd be a few drivers within there how much of that was cross-selling versus is there a pricing component to that too and then um you know as we look at these new metrics that you've given us on on this average pm how should we think about maybe the levels that you guys can maintain they're going forward?
spk04: Well, I don't know that we've guided to that, so I don't know that I'm going to get into levels going forward. I think our guidance, you know, is reflected in our revenue guidance and coming next year, reintroduce EBITDA guidance. I don't know that we're going to guide to a PMPM because it's a mixed factor and you can't always predict that. As to the first part of your question, you know, how much did that contribute? I'd say Nix was an important part of the story. We do a great job of cross-selling from one product to another. And so it's a big part of it.
spk05: And, Sean, this is Brian. I would just add to Tom's comments, I mean, this is really and a measure of our success with cross-selling. And the area where we have the least penetration in PACE today is on the pharmacy side. And the pharmacy is where we have the largest potential for a revenue contribution on a PMPM basis. So it is part of our strategy to continue to push on that cross-sell opportunity so our desire is to have that number continue to increase over time.
spk03: Okay. Sorry, I didn't mean to cut you off, Brian.
spk05: No, you're good.
spk03: Okay. That's all I had. I'll get back in the queue. Thanks. Thanks, Sean.
spk01: One moment for our next question. Our next question comes from Ryan Daniels from William Blair. Your line is open.
spk06: Yeah. Hi. Hi. Good morning. Thanks for taking the questions. This is Jared Hostin for Ryan. I wanted to ask one around the cadence of implementations for PACE. You know, that was up significantly both year-to-date this year and also in the quarter relative to last year. So, you know, I'm just curious on that sort of cadence of implementations. You know, how much of that should we read into as just sort of easing of kind of COVID-related conditions? It's just a little bit easier to get out there and do those implementations this year relative to last year, you know, how much of that is sort of just a reflection of a growing sales funnel, more opportunities, that sort of thing, and how much of it is kind of just the natural kind of benefit of better execution?
spk05: I would say it's really, Jared, thanks for the question. It's really the latter two. You know, I wouldn't say this is a COVID factor at all. I would primarily say that there's a lot of activity in the market right now. As I mentioned in my prepared remarks, I was at the National PACE Association meeting in October, and the energy at the conference was amazing, I would say. It's really incredible to see the number of organizations that are recognizing the PACE model and the ability to really drive down costs and improve quality. and the different areas that this model can be applied. So as we continue to see more of that recognition, there's definitely more activity. We are signing more contracts. The implementation pipeline continues to grow. It's really an exciting place to be right now. So it is about the activity in the market. and our execution. So, you know, I don't see that flowing anytime soon.
spk06: Okay, that's great to hear. Thanks for that caller. And then maybe I'll just ask a quick follow-up on the model. You know, thinking about the gross margin line, you know, looking out to 2023, obviously I know there's some headwinds at present that sounds like are expected to alleviate as we get into next year. I guess, Obviously, I get that you guys are still holding back on the profit guidance here, but just any sort of directional commentary on how to think about sort of where that gross margin line in particular might settle out, or maybe any thoughts on sort of the magnitude those headwinds are having right now?
spk04: Yeah, I'll give some color on that. You know, Sean, in his earlier question, asked about pricing as well as cross-selling. And let's speak to that now as well as to your questions. There are two drivers, both of which I believe can go in a favorable direction if management does its job in impacting margin. The pricing side is a large one. We are seeing enhanced pricing power in our contracting. Approximately 20% of our pharmacy contracts, which is our largest, you know, revenue center and largest driver of margin. About 20% are up for renewal between now and December 21st, 2023. And the renewals we're seeing are happening at 2023 pricing. They're not happening at the legacy pricing when those contracts were signed years ago. And that is significantly higher. On the cost side, on the margin side, We're starting to see, we had a little headwinds from shipping costs versus last year. But it's starting to level out versus last quarter. So that's starting to abate a little bit. Revenue mix played a little bit in our margin diminution this quarter. That tends to level out over time. The real driver of not just gross margin, but ultimately EBITDA margin is going to be our ability to iterate on cost savings on the operating expense side. The disposition of Symphonia in particular will facilitate cash and margin savings. We'll shed 400 heads right there, and while that's discontinued ops, there are many Shared services costs that support those 400 heads, professional service costs that tend to scale with headcount, outsourced IT support, legal fees, real estate, insurance, other costs. So you ought to see that push in a favorable direction. Our capitalized labor, now this is less of a margin question, more of a free cash flow thing, but capitalized labor declined to $4.5 million for continuing on. That's $1.5 million improvement over the last quarter. So as Sinfonia eventually is disposed of, it's a large bleed on our cash, but it also will enable us to iterate on support costs. And that ought to drive margin up. The more favorable pricing environment ought to drive margin up a bit. And you'll see this reflected when we give guidance in the fourth quarter earnings call for 23. Okay.
spk06: I think that's super helpful. I'll leave it there, but congrats on the progress thus far. Thank you. Thanks, Jared.
spk01: Thank you. Once again, that's a star one for questions. One moment. Our next question comes from Stephanie from SB Securities. Your line is open.
spk00: Hey, folks. Thanks for taking my questions. I just wanted to get an update from you, Brian, about the strategic review committee that's been formed after the cooperation agreement. Are there any early reads on incremental value creation ops?
spk05: Hey, Stephanie, that's a great question. I would say the immediate focus of the Strategic Review Committee has been centered around the divestiture process. And I believe we're on track with both DOSME and Symphonia, and we'll continue to report out over the coming months. But in general, I would say that there's nice alignment between the newly constituted board that met really for the first time this past week, and the management team to ultimately drive enhanced performance and increase shareholder value. So I'm excited about this new group and what we can do together.
spk00: With the idea that management hours has often been one of the biggest limiting factors for Tabula Rasa's strategy, how are you and Tom really focusing your time right now?
spk05: Well, that is a great question, and you always have limited bandwidth, right? We are focused in a couple different areas. I would say one of those is evidenced by an announcement we made earlier this week with the onboarding of April Gill, who's our new chief commercial officer. This is a new function that is really aligning all of our commercial activities. So she's overseeing strategy, as well as sales, account management, marketing, communications, client success. And that is an important focus for us in terms of how we are going to market and the commercial infrastructure that we need and rigor as a company to really execute on our plans going forward. And then the second is, as Tom was just mentioning, is on the cost side as well. So we... I think we both believe that there's an opportunity to maintain a very strong growth rate while improving margins and cash flow all at the same time. So none of those need to be sacrificed. And so I think you're going to see a continued focus from us on refining that go-to-market strategy so that we can really direct resources towards a few key opportunities that really provide some nice leverage going forward.
spk00: All right, helpful. Thank you.
spk01: Thank you. One moment for our next question. Our next question comes from David Grossman from Stiefel. Your line is open.
spk05: Thank you, Leroy. Good morning.
spk04: I'm wondering, Thomas, we could just go back to your comments about Symphonia and you know, any information you could get, and sorry if this was in the press release and I missed it, but if you could break out the drag on pre-cash flow from Symphonia this year, or perhaps, I don't know, if we have, you know, for a quarter, but, you know, somehow to frame for us, you know, what kind of drag that is and what impact that may have once divested. In the last quarter, Symphonia, all in, by which I mean margin bleed in the P&L, but also capitalized costs, capitalized software development, was close to $5 million. And that's a lot. And when that business is disposed of, that's an overhang that will go away. And is that $5 million an appropriate run rate to use for the year or it was last quarter particularly high? It was higher this quarter than in prior quarters.
spk05: David, you might remember there's some seasonality to this business. The second half of the year in particular is where top line starts to contract a bit in Q2 and the second half of the first quarter is really where you see profitability at a much higher level.
spk04: I got it. And so as we kind of look forward, is the disposition of Symphonium enough to get you kind of on a consistently positive free cash flow trajectory? I wouldn't look at any one item as you know, the sole driver, this will obviously help. I mean, anytime you put $5 million in a quarter for one business unit, and that business unit goes away, by definition, that's a positive. But when I think of the cash generating potential for this business, I think of two things. The first thing I think about, and it's, you know, far and away above that $5 million, I think of this business being at double-digit EBITDA margins, before it acquired a number of businesses that perhaps distracted management. Well, and you've got to go back to 2018 or so to see that. When we are done with this realignment restructuring of the business, you'll have disposed of those businesses, and the remaining core business resembles what it looked like when you had those double-digit EBITDA margins. And so that seems like a good starting point. But also remember that this is a business, particularly when you strip out the EMTM sunset, that is growing high teams year over year. And that doesn't seem to be abating anytime soon. And so one of the things we will do at some point in 2023 is after we've been able to iterate on the cost structure, is project out a multi-year model. Because then you will see, with revenues growing at what they're growing, if you right-size and gently grow the cost structure, you see the leverage in the model. And so if you project two years out, the way this place is growing, and you iterate on both the cost side, but also on the pricing side, like I mentioned, It can be a dramatically different story that far and away overwhelms the benefit of just getting rid of Symfony. That is Brian and my and the team's mandate, I believe. Right. So it sounds like longer term you're pointing our eyeballs at, you know, kind of going back, you know, to what it looked like. you know, pre-acquisitions to get back to that model, right? So, I understand and appreciate that. So, as you, you know, think about getting to that model, can you give any sense of what it may cost you in cash flow to get there? Or is that, do you think, you know, that's really not the, you know, that's really not going to substantially impact cash flow over the next 12 months or 24 months or whatever it takes you to get to that model? I don't think it's substantial. You know, will there be some investment, let's say, in things that allow us to scale? When your business is growing, when your pharmacy business is growing high teens, at some point, you know, you've got to make sure you can scale. And could there be an investment, a CapEx investment that allows you to handle that growth a little more efficiently and therefore get a little more scale in your margins? Yes. Is any of that recurring annually? No. Is any of that terribly troublesome to a company with $80 million of cash in its balance sheet and no debt maturity for three and a half years? Not really. We'll guide to all of that when we guide for 24. And we'll enumerate the run rate CapEx required as an ongoing investment in the business. and any one-time items we may choose to do to achieve synergy and to help our margins scale better, which by definition ought to pay for itself in a short period of time. But we're not going to guide on that today. Right. And just one last thing. The comment on pricing, how much of the pricing is actual pricing power versus passing through higher costs? Oh, I don't know that they're terribly different. I would say that a lot of our contracts that are expiring were priced several years ago in a very different environment. And remember, a lot of our costs are ultimately pass-throughs to CMS, and as long as they're reasonable, you know, there tends to be acceptance on the part of our customers. So some of it is simply catching up to 2022 and 2023 inflationary environment. But a lot of it is our customers recognize the value they get relative to our competitors. And our pricing hasn't always reflected that. And I can tell you, this is an anecdote, of course, but I can tell you there were three contracts renewals and proposals that we put forth recently that were um happily accepted at a margin level that was higher than what we've done in the past and i view that as a good omen for the future all right very good that's it for me good luck thank you david thanks david
spk01: Thank you. One moment. Once again, that's star 11 for any additional questions. One moment. And this will conclude our Q&A session as well as our conference for today. Thank you for participating. You may now disconnect. Everyone have a great day.
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