Babylon Holdings Limited

Good morning and welcome to Babylon's third quarter 2022 earnings conference column webcast. All participants will be in listen-only mode. If anyone should require operator assistance during the event, please press star zero from your telephone keypad. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Leading the call today is Dr. Ali Parsa, Founder and Chief Executive Officer and David Humphreys, 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 and as further described at the end of the press release that is posted on the company's website. These forward-looking statements reflect Babylon's current expectations based on the company's beliefs, assumptions, and information currently available to the company and are subject to various risks and uncertainties that could cause actual results to differ materially. Although Babylon believes these expectations are reasonable, the company undertakes 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 Factor section on the company's annual report on Form 20F filed on March 30, 2022, 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 that is posted on the company's website. The presentation slides for today's call are also available 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.

I would like to welcome everyone to Babylon's third quarter earnings call. Thank you for your time and interest in Babylon. I'm joined today by David Humphries, our chief financial officer. I will share an update on our progress in the most recent quarter before passing the call to David to provide more details on our financial results. And then we will open the call for questions. I would like to focus on three key teams. Firstly, an update on our expected capital needs to profitability, as well as our capital structure. Secondly, a progress on delivering our core mission. And thirdly, our continued delivery this quarter across key financials and operational metrics. including discussing some of the key clinical and technology initiatives which are helping us to deliver margin improvements. As most of you are aware, funding our future business to the point of profitability has been an area of interest for everyone. In October, we announced our intention to sell our California IPA business in early 2023. And on November 3rd, we completed an $80 million capital fundraise for the company. We believe the Meritage sale will provide sufficient capital for Babylon's funding requirements through profitability and that the recent capital raise provides us with flexibility around the timing to complete the sale of the IPA. There is no change to our previous guidance on Babylon's projected time to profitability. We have also undertaken some important initiatives beyond the capital raise that I want to highlight. We eliminated our public and private warrants that were the result of our SPAC transaction to simplify our overall capital structure. Additionally, our Class B shares were converted to Class A shares so that the Class A shares are now the only class of shares outstanding. We have also received shareholder and board approval to implement a reverse share split at a 25 to 1 ratio. This was done for two reasons, to address the minimum share price requirements of the NYSE and to make our shares more attractive to institutional investors, as many are not allowed to hold shares that trade below the specified minimum price points. Our focus is to ensure that Babylon emerges strongly out of the current market downturn. We believe the significant increase we are all witnessing in the cost of capital will inevitably result in the unfortunate weakening or disappearance of some of the innovative solutions needed to tackle the current challenges facing the healthcare sector. We are already observing this through the closure or acquisition of some of the newer providers or innovative projects or divisions within the incumbents. Meanwhile, the macroeconomic challenges across the developed economies will only amplify the structural challenges of accessibility and affordability of the current models of the healthcare delivery. We recently concluded a comprehensive survey of 5,000 American customers of health care covering our two key focal points, accessibility and affordability. With inflation remaining persistently high, most adult survey stated they are struggling with health care costs, including health care maintenance, emergency needs, and private health insurance costs. Nearly half of all those surveyed have been put in debt from the health care bills that required out-of-pocket costs. While our survey showed affordability of health care is of increasing concern among the population, other recent surveys published by AAMC, MedSpace, and Definitive Health Care demonstrated the accelerating challenges of accessibility. They revealed that approximately 117,000 physicians left the workplace in Q4 2021. Meanwhile, 45% of the remaining physicians are older than 55, and some specialties in the US are reporting burnout rates of up to 60%. As Albert Einstein observed almost a century ago, We cannot solve our problems with the same thinking we used when we created them. In Babylon, we remain convinced that the existing, unscalable, clinic, hospital-centric, reactive model of sick care will not be able to provide a credible long-term solution to the current challenges. We therefore remain focused on building a data-centric, predictive, proactive, and integrated digital first primary care platform that can manage population health at scale. This means we will continue to narrow our focus on building and delivering the technology and services that are core to our differentiated offering. We plan to invest the funding to be provided by our IPSA and already provided by our capital raise to further build out our digital first product and to demonstrate our ability to scale this service to manage population health for our clients. In 2023, you will see the extent of digital first offering further across our Medicare and commercial customer contracts. In time, we believe this will provide a more cost-efficient solution that can bring down the individual costs and dramatically improve access to healthcare. And lastly, turning to discuss our financial results for the quarter, we are pleased to announce that we have once again delivered on our guidance and beaten consensus expectations across key metrics, including both revenue and adjusted EBITDA. Our revenue for the quarter came in at $289 million, which was driven primarily by growth in our value-based care VVC contracts. This represents almost four times revenue growth since Q3 2021, and is a beat on consensus estimates. As a result of our continued strong revenue growth, we are increasing our revenue guidance for the full year of 2022 from over $1 billion to $1.05 to $1.1 billion. While our focus is increasingly on driving improved margins in our populations, we remain convinced that our continued record of extraordinary growth is a testament to the scalability of our platform, which will ultimately allow us to deliver savings and improve members' health at scale. Additionally, this quarter we added 10,000 VPC members through the launch of a new Medicare contract in New Mexico. This is part of our continued goal to diversify our revenue by moving away from primarily a Medicaid membership to increase our commercial and Medicare members, which bring in more revenue per member and have higher potential to improve margins. Already this quarter, 44% of our VBC revenue came from commercial and Medicare population, and we plan to increase this further in 2023. We are also excited to share that last week, our partner Ambetter announced open enrollment and expansion of its virtual first commercial exchange product, Ambetter Health Virtual Access, powered by Babylon in five U.S. states. This will enable Babylon to be a primary care gatekeeper, providing value-based care service to a commercial population of members through a digital first product that we launched in January 2023. In addition, we've continued to expand key partnerships across the UK, Rwanda, and APAC. In the UK, we extended our partnership with Bupa in September for an additional three years to deliver digital health services to 2.3 million Bupa UK health insurance customers. In Rwanda, we launched an AI triage symptom checker pilot in five public health centers with over 26,000 successful digital first checking. Finally, in partnership with the Population Services International, we announced a digital health service in Vietnam to help low-income communities make informed decisions about their health and efficiently navigate to the healthcare system. Turning to look at our medical margin, we are also pleased to report a medical margin across all our cohorts this quarter of 1.3%, which is an improvement from our results in the first half of the year of 0.9%. This should be seen in the context that the majority of our revenue is still less than one year old, and much of the intervention that we plan with our population is not reflected in our numbers yet. I'd like to give you some more information about the programs and the initiatives that we have implemented or are in the process of implementing to drive medical margin improvements. Firstly, we have continued to see progress this quarter in our operational metrics indicating future margin improvements. We continue to sign up patients more quickly than ever before in our newest deals with sign-up rates which are three to four times higher than our patients' sign-up rates at the same stage of our older deals. Secondly, across our deals, we are targeting specific areas of high claims expenses. One way we do this is through Health IQ, our emerging advanced risk prediction and insights platform, which leverages AI to evaluate the medical history and current conditions of every member to predict which ones are at risk for a specific condition and which ones will generate rising costs. It considers a number of factors which are not included in a standard risk prediction model, such as members' knowledge, skills, and attitude towards their own health, which is a key predictor of health outcomes. Over 25% of the members we deem high risk would not have been detected by typical risk prevention models. We then outreach to these members, targeting in particular those who are expected to generate high costs if not actively managed. For example, depression and anxiety are among the top spend drivers across all our cohorts. Therefore, we have integrated behavioral health services with physical health care across all our populations, providing easy to access mental health appointments within less than five days of outreach, and have already seen more than 50% reduction in depression and anxiety burden as measured by industry and standard rating scales which is a leading indicator for an overall reduction in claims spending across both medical and behavioral health costs. We also ensure that our service is highly accessible to members throughout the healthcare continuum. For example, through partnerships with these community-based health workers, which launched this quarter in Georgia, Iowa, and California, We help navigate patients to services provided by local community-based organizations, meet patients in the hospitals to smooth their transition back home, and bring technology into the home to encourage the patient to engage with our comprehensive digital service. We are already seeing a strong engagement with this program. and are expanding to further cohorts and states in Q4 before expanding to cover all our U.S. members in 2023. Throughout all of our services, we retain our focus on digital first care. We are constantly developing our technology platform to ensure we are engaging members in the most accessible ways. For example, this quarter launched a web version of our solution in the U.S. allowing members to schedule virtual primary or speciality care visits from any web-enabled device. And we also launched the ability for our members to asynchronously message with our care teams at any time as fast, convenient, and lower cost alternatives to receive basic care. This quarter, the vast majority of our specialist referrals were handled through our e-consult platform rather than needing to refer members to a brick-and-mortar specialist. Turning now to consider our adjusted EBITDA results, we delivered an adjusted EBITDA loss for the quarter of $54 million, which is once again a strong beat of consensus expectations. It also represents solid year-on-year improvement from an adjusted EBITDA margin of negative 64% in Q3 last year to a margin of negative 19% this year. These improvements are partly due to these programs and initiatives we have implemented to drive medical margin improvement, the efficiencies which come with our scalable model, as well as due to the successful implementation of our previously announced cost-cutting initiatives, which we expected to deliver savings of up to $100 million a year. Based on these results, we continue to be confident that we will deliver on our 2022 adjusted EBITDA loss guidance of $270 million or less. Before handing the call over to David, I would like to thank the entire Babylon team for their hard work and the relentless commitment they have shown once again this quarter. They have continued to deliver every day to drive us forward on our world-changing mission to provide high-quality, accessible, and affordable healthcare to everybody on Earth, and I am truly fortunate to work with such a wonderful group. I would also like to thank all our investors for their continued support. I am confident that with our recent recapitalized balance sheet, simplified equity structure, and with our increased focus on our core digital first primary care business model, we now have everything we need in place to deliver our mission to build a digital first primary care service that can be scaled to cover everyone. With that, I pass the call over to David to provide more detail about our financial results. David?

Thank you, Ali, and thank you to everyone for joining the call. Today, I would like to share further comments on the trends we've seen across our third quarter financial results and update you on our funding. I will discuss our financial performance, focusing particularly on our path to profitability as a result of our continued focus on revenue mix, driving improvements in medical margin, and execution of our previously announced cost reduction actions. I'll also provide an update on our financial guidance for fall year 2022. As Annie mentioned, we've had another strong quarter of financial performance. We reported revenue of $289 million, which represents almost 4x year-on-year revenue growth and exceeds consensus estimates. As a result, we're raising our revenue guidance for FY22 from over $1 billion to a range of $1.05 billion to $1.1 billion. From a profitability standpoint, we also delivered an adjusted EBITDA loss of $54 million for the third quarter, which equates to an adjusted EBITDA margin of negative 18.8%, beating consensus estimates by over $10 million. This is equivalent to $18 million adjusted EBITDA loss per month during the quarter. positioning us well to execute on our previously announced forecasted December 2022 adjusted EBITDA loss of $18 million or less, and to meet our guidance for the year of $270 million or less. This result is a reflection of our continued focus on revenue mix, medical margin initiatives, operational leverage benefits as we scale our business, and the discipline with which we've executed our previously announced cost reduction actions. From a funding standpoint, in early November, we completed our $80 million private placement, and we continue to move forwards with our proposed sale of the IPA business. I'd also like to briefly comment on the current macroeconomic situation. We continue to monitor the impact of factors such as inflation and foreign exchange conditions on our business. We expect the impacts of inflation to be largely mitigated by the digital first nature of our business model and the pricing structure of our value-based care arrangements. Furthermore, our cash flow has benefited from the impacts of a strong US dollar, given our recent private placement was in US dollars and a significant amount of our headcount and other expenditures are in GBP. If I need to look at our financial results in more detail, As mentioned earlier, our revenue this quarter was $289 million, which is a four times increase on the revenue we generated in the third quarter of 2021. Top line revenue growth was again driven by our value-based care segment, which is almost five times the VBC revenue we generated in the third quarter of 2021. VBC and related revenue increased by $212 million quarter over quarter. It's a total of $268 million for the third quarter and accounts for 93% of Q3 revenue. This has been driven by significant increases in our VBC membership base from 100,000 in Q3 2021 to 271,000 US VBC members this quarter. We continue to focus on diversifying our VBC member mix by increasing our proportion of higher PMPM and easier to engage digital first Medicare and commercial populations. These two populations grew from 27,000 members in Q3 2021 to 60,000 members in Q3 2022, and made up 44% of our VBC revenue in Q3 2022, which was an increase from 40% in Q2. Just this quarter, we launched a new contract in New Mexico to cover 10,000 medical advantage members We expect this focus on digital first Medicare and commercial populations to continue to be reflected in our revenue pipeline for FY23 and beyond. Licensing revenue this quarter was $7 million, a decrease of 10% from $8 million in Q3 2021. This reduction was largely driven by FX headwinds in our licensing contracts, which are denominated in pound sterling. and would have been roughly flat on a constant currency basis. Clinical services revenue, which includes our clinical services delivered in the UK and Rwanda, as well as our US fee for service business, was $14 million during the third quarter of 2022, which is an increase of 30% from 11 million in the third quarter of 2021, driven by increased virtual consultation volumes in both the US and the UK. Now to look at our cost of care delivery. We break this down into two components, a claims expense and clinical care delivery expense, which differentiates between our members' medical expenses and the costs incurred by Babylon in delivering our service offering. This quarter, our claims expense was $264 million, which was an increase from $51 million in Q3 2021 due to the addition of 171,000 new VBC members in the last year. Our medical margin, which we define as one minus claims expenses as a percentage of our VBC revenue, was 1.3% this quarter. This is an improvement from medical margin across the first half of 2022 of 0.9%, driven primarily by the performance of our FY21 digital first cohort contracts, and is taken within the context that the majority of our VBC contracts have an average tenure of less than one year. We expect our medical margins continue to improve based on the clinical and technology initiatives that are driving margin improvements, as Ali described earlier. Clinical care delivery expenses for the quarter was $19 million, which increased slightly from $17 million in Q3 2021. As the business scales, we're able to deliver care much more efficiently, and a clinical care delivery expense as a percentage of revenue this quarter continued to drop from 23% in the third quarter of 2021 to 6% this quarter due to the utilization of operating leverages across our network that comes with scale and continue to implement initiatives to increase efficiency across our clinical organization. For example, we progress well with implementing the multi-state licensing program for our clinicians that we outlined on previous earnings calls. The percentage of our clinicians who are licensed across multiple states has grown from 13% this past year to 50% at the end of Q3 and continues to grow every week. This has allowed us to increase our utilization and reduce staffing while simultaneously increasing employment volumes. Combining both claims expense and clinical care delivery expense, our cost of care delivery expenses for the quarter was $283 million, which is an increase from $68 million in Q3 2021 due to the increases in our value-based care membership. Quarter over quarter, cost of care delivery expense increased slightly by $22 million from $260 million, but on a percentage total revenue basis decreased from 98.1% to 97.9%. Turning to look at our operational costs, we're pleased to see both technology and SG&A expenses falling as a percentage of revenue this quarter, reflecting our digital scalability and operational leverage. Our technology expenses, which are comprised of platform and application expenses and research and development expenses, were $25 million in the third quarter of 2022, an increase of $2 million from Q3 2021. While our total technology expenses were greater as a result of increased R&D expense, due to the operational leverage of our technology, technology costs decreased significantly as a percentage of revenue from 36% in the third quarter of 2021 to just 8% this quarter. Similarly, our SG&E expenses, which increased to $57 million this quarter versus $42 million in Q3 2021, have also decreased as a percentage of revenue. SG&E expenses reduced to 20% of revenue this quarter compared to 57% in the third quarter of 2021. Moving on to discuss adjusted EBITDA, For the third quarter of 2022, our adjusted EBITDA loss was $54 million, an increase of $7 million from our adjusted EBITDA loss of $47 million in Q3 2021. We continue to see a trend of strong improvement this quarter when adjusted EBITDA loss margin of 19% in Q3 2022 compared to 64% in Q3 2021, which represents a 45% point improvement year on year. These significant profitability improvements reflect the operational leverages we've generated with scale and the successful execution of cost-cutting initiatives, which have begun to produce savings this quarter, and which we expect to deliver future savings from Q4 this year and into 2023. Moving to the balance sheet, cash and cash equivalents as of September 30, 2022, was $110 million. compared to $37 million as of September 30th, 2021. Additionally, we received $80 million in proceeds from our private placement, which were added to our balance sheet on November 3rd. When added to our cash balance on September 30th, this provides aggregate cash availability of $190 million. Looking forward to our future capital needs We expect the proceeds from our planned sale of the IPA business in California to provide sufficient capital for our funding requirements through profitability. And at this stage, there is no change to our previous guidance on our expected time to profitability on our adjusted EBITDA basis. From a capital structure standpoint, following the completion of the private placement transaction on November 3rd and the conversion of all outstanding Class B shares to Class A shares, we had just under 620 million Class A shares outstanding. I'd like to briefly address our transition from reporting as a foreign private issuer to reporting as a U.S. domestic issuer. This means our Q4 and fall year 2022, as well as our results for future periods, will be reported under U.S. GAAP. This transition will mean we're likely to capitalize and amortize less of our platform and application expenses, and that we'll need to reassess whether any premium deficiency reserves need to be recognized. as well as other adjustments for one-off transactions. These changes will have no impact on cash flow or cash requirements. I'd like to end by giving an update on our guidance for 2022. As I mentioned earlier, we're updating our revenue guidance for the full year of 2022 from over $1 billion to $1.05 billion to $1.1 billion. We're reiterating our adjusted EBITDA guidance, for the year of a loss of $270 million or less. Looking forward to 2023, we have a robust revenue pipeline and are focused on continuing to diversify our commercial Medicare Advantage portfolio. And, as Ali mentioned, we're incredibly excited about the launch of our Anbetta partnership on January 1, 2023. From an adjusted EBITDA standpoint, we expect to exit December 2022 with a monthly adjusted EBITDA loss of less than $18 million and continue to focus on our key drivers towards positive adjusted EBITDA and reducing 2023 monthly adjusted EBITDA loss. Specifically, our revenue margin mix, execution of our clinical and technology initiatives that are driving claims margin improvements, and a continued focus on driving operational leverage, including execution of current and future cost savings actions.