Babylon Holdings Limited

Good morning, and welcome to Babylon's third quarter 2021 earnings conference call and webcast. All participants will be in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. If you'd like to ask a question, please press star one on your telephone keypad. Please note this event is being recorded. Leading the call today is Dr. Ali Parsa. Founder and Chief Executive Officer, and Charlie Steele, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current expectations based on our beliefs, assumptions, and information currently available to us and are subject to various risks and uncertainties that could cause actual results to differ materially. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements can be found in the Risk Factors section on the company's registration statement on Form F-1, filed on November 9, 2021, and its other filings with the Securities and Exchange Commission. In addition, please note that the company will be discussing certain non-IFRS financial measures that they believe are important in evaluating performance. Details on the relationship between these non-IFRS measures to the most comparable IFRS measures and reconciliation of historical non-IFRS financial measures can be found at the end of the press release as posted on the company's website. With that, I'd like to turn the call over to Babylon's CEO, Dr. Ali Parsa. Please go ahead.

Thank you. I would like to welcome everyone and thank you for your time and interest in Babylon. This is our first earning call as a public company to review our third quarter 2021 financial results. I'm joined today by Charlie Steele, our Chief Financial Officer. While we had an opportunity to meet with many of you during conferences and our investor education meetings over the last few months, I wanted to start the call by providing more for some color about Babylon, including what we do and how we are working towards reengineering every touchpoint in the healthcare continuum in time for the global population. I'll then provide some high-level tools on our quarterly results, new contracts, and growth strategy, and our mission to make healthcare accessible and affordable for all. Charlie will then provide more details on actual results and our outlook before we open the call for your question. I'm happy to report on the successful D-SPAC merger transaction with Alkuri, which closed just three short weeks ago with Babylon Shares initiating trading on the New York Stock Exchange on Friday, October 22nd. This milestone for our company puts us on a position to finance our continued growth trajectory. But before I focus on that growth, I wanted to take this opportunity to tell you a little bit more about Babylon as a company and about our philosophy. We believe the healthcare sector is misnamed. It is really secure. It is primarily designed to react to emergencies and crisis. In a sector where some 70% of expenses reportedly are predictable and often preventable, this is as senseless as it is harmful for members and expensive for payers. Instead, we believe by managing members proactively, we can avoid unnecessary crisis and cost and improve members' experience and health. So while most companies are incrementally tinkering on the edges of sick care, Babylon has a long-term view to transform this reactive, sick care model that is focused on managing crisis and emergencies to a proactive health care service designed to keep people as healthy for as long as possible. By harnessing the ubiquity of the digital devices around the globe and combining cutting-edge technology with best-in-class medical expertise, we have demonstrated that we can materially improve access to quality and affordability of healthcare regardless of geographic location. Babylon is contracted to serve 24 million people in 15 countries across four continents. and has facilitated 13 million virtual consultations and interactions worldwide. At Babylon, employees joined us for our mission to make high-quality healthcare accessible and affordable for everyone on Earth. Our business model gives us a structural advantage. Advances in technology have made it possible to truly reimagine service experience and standardize clinical quality in healthcare at scale. In a sector where a significant amount of costs are people-related and is spent on predictable and preventable ailments, technology can also be a powerful engine for automation and prediction. A brick-and-mortar model does not benefit from the applications of Moore's Law and therefore has a structural disadvantage, no matter how brilliant the management or how hardworking their team is. By utilizing a digital first model, we are the beneficiaries of accelerating advances in computing power, bandwidth, data collection, prescriptive analytics, artificial intelligence, robotic processing, virtual interfaces, remote monitoring, and so much more. In time, our cumulative compounding advantages will create an unsurpassable moat. As our physical world transforms into a digital one, we believe that the leaders in healthcare will be those who use accelerating digital capabilities to transform the healthcare experience and overhaul its cost structure. Everything we do at Babylon is focused on sequentially analyzing and reengineering every touchpoint in healthcare continuum in time. We're building a robust platform of data, products, and services to combine capabilities that create an integrated experience for our members. At the core of this platform is our world-class data infrastructure that will allow us to develop a holistic view of each individual's health condition. Our technology suite has positioned Babylon to deliver consistent, high-quality care to hundreds of thousands of our members. proven by our 95% user retention rate and five star rating from more than 90% of our users. Turning to our third quarter financial results, we continue to produce very strong financial performance and remain one of the fastest growing global digital healthcare companies in the world. Our third quarter revenue grew by 371% year over year We have also signed several initiatives that will expand our presence further significantly. As previously reported in late October 2021, we signed four new agreements to add approximately 80,000 value-based care members in the United States, which includes serving new Medicaid beneficiaries in Georgia and Mississippi and new Medicare beneficiaries in California as well as an additional 55,000 lives in the United Kingdom. We have already launched some of these contracts, while the RISE will be operational by the start of 2022. With these contracts, some 135,000 additional covered lives across the U.S. and U.K. will have access to the Babylon platform. This brings our global managed lives to 350,000, by the start of 2022, more than double the number at the beginning of 2021. With the launch of these four new contracts, Babylon will be generating total run rate revenue in excess of $16 million per month. Our track record puts Babylon as one of the fastest growing companies in the digital healthcare industry worldwide. For reasons I described earlier, I believe our momentum is structural rather than incidental, and this is just the beginning for us. We think exceptional growth is an early indicator of future market leadership. While ours may seem extraordinary in the healthcare universe, it is not unlike the level of many disruptive digital innovators in other sectors that have already been digitally transformed. The leaders in those sectors also showed triple-digit percentage growth in their takeoff years. Similar to what happened there, we believe we are witnessing the dawn of a structural digital overhaul in healthcare. To put this in context, let me share with you some data from our technology effort to demonstrate some early operational benefits. Today, 48% of all our member interactions are done purely through our technology platform with no human interaction. And 84% of our consultations are now entirely virtual. We have integrated over 100 data sources, resulting in excess of 80 billion data points that fuel our artificial intelligence, which we call the Babylon brain. While our technology costs comprised of platform and application expenses and R&D expenses, increased 18% during the first three quarters of 2021, we drove revenue growth of 430% during the same period, which resulted in significant leverage with technology costs as a percentage of revenue, decreasing from 144% to 32%. On October 18th, we announced a collaboration with Microsoft that will enable millions of people to access the Babylon platform through one click in the Microsoft Marketplace. Through this partnership, Babylon's digital health software solutions and Babylon's cloud services were made available on the Microsoft Azure Marketplace on October 12th, which currently reaches more than 4 million monthly active users across 140 geographies. But before I turn the call to Charlie to review third quarter financial results, I want to thank our team at Babylon for their hard work and dedication during these past few months and over the last several years. Companies don't deliver results, individuals do. Our employees are special people, strongly inspired by our purpose and mission. We have continued our growth alongside our merger and listing processes, and that is entirely a credit to the Babylon team and their unwavering dedication to dreaming big, building fast, and being brilliant. I'm proud of our accomplishments, and I couldn't be more excited about where we are going. This is just the start, and we now have greater access to capital and resources so we can deliver on our promise of reengineering every touchpoint in the healthcare continuum in time. With that, I'll turn the call over to Charlie, who will review our financial results in more detail.

Thank you, Ali, and thanks everyone for joining the call today. We appreciate your time and interest in Babylon. Today, I plan to provide some details about our recent SPAC merger and review our third quarter 2021 financial performance. Earlier this year, on June 3rd, we announced our plan to become a public company to a definitive merger agreement with Alkuri Global Acquisition Corp, implying an equity value of $4.2 billion for Babylon. We succeeded in raising $460 million in gross proceeds through a combination of financing of $224 million, a sustainability-focused debt financing of $200 million from Albuquerque Capital Group, with the balance being Alkuri Cash & Trust. Proceeds for the transaction were used to repay outstanding debt and transaction fees, and the remainder will be used to fund the continued growth in our business operations. As Ali mentioned, we closed the merger with Alkuri Global last month on October 21st, and our stock initiated trading on the New York Stock Exchange three weeks ago today on October 22nd under the ticker symbol BBLN. Following completion of the D-SPAC transaction, Albuquerque Debt Financing, in conjunction with the settlement of transaction fees and repayment to short-term debt, we had approximately $360 million in cash and $200 million in five-year notes. Babylon has 410 million shares issued and outstanding, followed completion of the merger, comprising Class A shares that trade on the New York Stock Exchange and Class B shares held by the founder. Further details around our share ownership and equity structure are included in our Form F1 registration filed with the SEC earlier this week. As of September 30, 2021, we provided services to around 100,000 value-based care members in the U.S. and 106,000 GP at hand members in the UK. Our USVBC members are covered by numerous health plans, managing a mix of Medicaid, Medicare, and commercial lives. And revenue associated with these USVBC members is captured in the value care revenue line. We manage care for our GP at hand members through our own network of clinics and other providers in the UK. This revenue, along with our fee-for-service virtual consultation, is captured in the clinical services revenue line. Moving on to our third quarter financial performance, I'm happy to report that we've produced strong financial results. Our third quarter revenue is $74.5 million, an increase of 371% year over year. Strong top-line revenue growth was driven by our value-based care segment, which accounted for 75% of total revenue in the third quarter of 2021. We ended into the value-based care segment in the fourth quarter of 2020, so the comparison quarter over quarter provides an entirely new revenue stream which is growing very quickly for us. Year to date, we've continually added to our value-based care business, initiating a new contract on July 1st for 15,000 New York Medicaid members and further signing of new contracts and members in the second half of the year. During the first nine months of 2021, we generated $52.2 million of software licensing revenue, of which $26 million was recognized upfront in January 2021. Clinical services revenue was $10.8 million during the third quarter of 2021, an increase of 42% from $7.6 million in the third quarter of 2020. For the first nine months of 2021, clinical services revenue was $28.9 million. Value-based care revenue is $55.7 million during the third quarter of 2021, featuring initiation of a new contract in New York State, covering 15,000 Medicaid members in 60 counties. Entry into the VBC segment commenced in October 2020, and as of September 30th, 2021, comprised multiple VBC contracts, as well as operations of two independent physician associations in California. Growth in VBC revenue is demonstrated by the high third-quarter revenue contribution of the VBC segment, representing 46% of year-to-date value-based care revenue of $122.1 million. Overall, we are pleased with our year-to-date revenue performance and are encouraged by the impact that value-based care revenue has made in the first full year as part of the Babylon suite of services. Subsequent September 30th, we started launching new contracts in the US and UK, they're expected to add 135,000 new lives by the start of 2022. Following from Ali's comments, I want to provide a bit more perspective on the membership growth under the Global Managed Lives contracts as follows. At the beginning of October 2021, we began rolling out Babylon's value-based care service to 55,000 people across Wolverhampton in England with the aim of introducing an integrated and accessible digital-first healthcare experience to these residents. We also launched a contract in October 1st to support 63,000 value-based care members who are Medicaid recipients in Georgia and Mississippi. At the beginning of 2022, we'll be adding 17,000 VBC members in California who are covered through Medicare. We are undertaking efforts to onboard these new VBC members to provide 24-7 access to primary care doctors and nurses and to manage overall end-to-end care with the aim of better health outcomes at lower cost. Increases primarily resulting from new contract launches results in an increase in monthly run rate revenue to around $38 million in October 2021. During the third quarter of 2021, the cost of care delivery margin, which we define as revenue less cost of care delivery, was $6.1 million or 8.2% of total revenue compared to $7.7 million or 49% of total revenue for Q3 2020. As we increase the revenue contribution from the value-based care segment, which has a lower initial margin than our other business lines, you should expect to see a decline in the blended cost of care delivery margin percentage as we add new contracts. Once we engage with members and manage them to our digital first approach, we expect that margin improvement to take place over time. Year-to-date through September 30th, 2021, cost of care delivery margin was $42.8 million, or 21% of total revenue, an increase of $31.3 million year-over-year. In January 2021, we recognized additional licensing revenue of $26 million for that nine-month period. We continue to pursue software licensing deals, provide our service to a broader member base, and believe that this product offering is a differentiator for us. I want to touch a bit further on our cost of care delivery margin contribution. We are seeing several factors lead to an increased cost of care delivery expense, including cost and inflation, and an increase in medical expenses following COVID. Whilst virtual engagement has become more commonly accepted by members, we have started to see a transition to pre-COVID utilization levels for traditional medical expenses in conjunction with pressures and shortages of qualified medical providers, which has further narrowed our initial cost of care delivery margins. This has meant that our improvements to data started from a lower baseline, but we are seeing cost improvements. Adjusted EBITDA for this quarter was a loss of $47.5 million compared to a loss of $32.6 million in the third quarter of 2020. Our model substantially leverages fixed costs as our revenue continues to grow at a triple-digit percentage rate. Given our significant revenue growth, we drove meaningful leverage for certain operating costs. Platform and application expenses were $7.1 million for the third quarter of 2021, compared to $10.9 million in the third quarter of 2020. As a percentage of revenue, platform and application costs were 9.6% compared to 69.1% a year ago. Research and development expenses were $19.3 million during the third quarter of 2021, compared to $10.4 million in the third quarter of 2020. As a percentage of revenue, R&D costs were 26% compared to 65.7% a year ago. Sales general administrative expenses were $42.2 million third quarter 2021, up from $23.7 million in the third quarter of 2020. As a percentage of revenue, SG&A expense was 56.6% compared to nearly 150% in Q3 2020. Our adjusted EBITDA was a loss of $101.6 million. So the nine months ended September 30th, 2021, an improvement of 7.2 million dollars over the prior year period. Our balance sheet from September 30th, 2021 was essentially recalculized with the Alkuri transaction closing three weeks after the quarter ended. So I'll provide the most relevant balance sheet and cash flow position and some context on the changes. As of September 30th, 2021, cash and cash equivalents totaled 37.1 million dollars. With the proceeds from the transaction closing and debt financing, net of fees and debt repayment, our cash balance has increased to approximately $360 million. Total debt at the end of the third quarter 2021 was $47.8 million. We did borrow to support working capital needs prior to the closing of the transaction with Alcury, but all short-term loans were repaid with proceeds from the transaction. In early October 2021, we secured $200 million of debt financing through a sustainability-linked investment from Albuquerque Capital Group, which focuses on ESG investments. This additional capital will help us fuel our rapid growth plans over the next few years. The debt instrument is a five-year unsecured note with 0.5% penny warrants, caps at $15 per share, with an interest rate of 8% that increases to 12% over the term of the loan, up to a 50% pick at our discretion. The Albuquerque notes are the only debt outstanding at this time. Net cash used in operating activities during the first nine months of 2021 was $60.4 million, an improvement from $120.9 million during the nine months ending September 30th, 2020. I now would like to move on to guidance. Babylon reiterates its previously provided public guidance and continues to expect revenues of $321 million for 2021. For 2022, we assign new contracts which result in an excess of $60 million of monthly run rate revenue once fully launched. Our guidance on full year 2021 adjusted EBITDA is now in a range of $165 million loss to $175 million loss, which reflects the impact of incremental costs relating to investments in resources to support new contracts, public company operations, wage inflation, and cost of care delivery expenses. Increased investments in resources for supporting signing and operationalising new contracts is expected to position the company for dynamic growth in 2022. To close our prepared remarks today, I'd like to reiterate Ali's sentiment that we'd not be where we are today without the extraordinary dedication of the Babylon team. I want to thank all of our employees for their hard work and dedication, providing the highest quality care to our patients and for helping us deliver our strong financial results. Operator, we're now ready to open the call to questions.