Convey Health Solutions Holdings, Inc.

Good afternoon and welcome to Convey Holdings Parent Inc's second quarter 2021 earnings conference call and webcast. All participants will be in a listen-only mode throughout the presentation, but after the presentation has concluded, there will be an opportunity to ask questions. If you'd like to register a question, please press star followed by one on your telephone keypad. Please note this event is being recorded. Leading the call today is Stephen Farrell, Chief Executive Officer, and Tim Fairbanks, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call, including during the Q&A, will be forward-looking statements pursuant to the safe harbour provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to known and unknown risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes may differ materially from those made in or suggested by such forward-looking statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include those in the risk factors section of the financial prospectus for the company's IPO filed with the SEC on June 17, 2021, and its other filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, please note that the company will be discussing certain non-GAAP financial measures that it believes supplement investors' and other readers' understanding and assessment of the financial performance of the company. More information on these non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, can be found in the press release that is posted on the company's website or furnished on Form 8K with the SEC. With that, I'd like to turn the call over to Convey's CEO, Stephen Farrell. Please go ahead, Stephen.

Thank you. I'd like to welcome you to our first earnings call as a public company to discuss our second quarter 2021 financial results. Although we are disappointed with the stock performance since the IPO, we believe that revenue and adjusted EBITDA growth will eventually be rewarded by the public markets. Let me start with what we've been doing since the IPO. First and foremost, we are focused on increasing revenues and adjusted EBITDA, and the excellent results we achieved in the second quarter of 2021 highlight that commitment. As you know, management elected to purchase almost $2 million in stock shortly after the IPO. So we are committed, and we have put our personal capital to work. Third, we will be meeting over the next two weeks with potential new investors. Our story is complex, and we plan to work hard to make sure investors know and understand the story. Fourth, we intend to participate in the Morgan Stanley Conference next month. I want you to know that we appreciate your patience and we are working hard to create value for shareholders and customers. I'm joined today by Tim Fairbanks, our Chief Financial Officer, and John Steele, our Executive Vice President of Technology. While we had the opportunity to meet with many of you over the last several months, I thought we should start the call by providing some background on Convey, as well as some high-level thoughts on our quarterly performance, our growth strategy, and our 2021 guidance. Tim will provide more details on our financial results before we open the call for questions. So who are we? We're a specialized healthcare technology and services company that helps Medicare Advantage plans increase their revenue and reduce expenses. We improve health plan operations through our technology that both streamlines complex processes and improves member engagement. We sit at the intersection of the health plan and the health plan member. We help the member access their benefits and help the health plan administer benefits to the member. Our clients include eight of the top 10 health insurance plans with an average relationship of over eight years, and we address 19% of the Medicare Advantage population. Our team helps millions of health plan members navigate the complexity of Medicare Advantage and Medicare Part D. We believe we have an entrenched client base, an established leadership position in Medicare Advantage, and a recurring revenue model that gives us great insight into future revenue and earnings. We operate in large and growing markets, and when our clients grow, we are the beneficiaries of that growth. We believe that the Medicare Advantage market will grow at a 7% rate annually for the next four years. We serve approximately 160 clients, including most of the market leaders, and the demand for our technologies is strong. The average age of the U.S. population is increasing, and value-based systems like Medicare Advantage are growing in popularity. We think there will be more government involvement in healthcare over time, and that will lead to expansion of Medicare Advantage programs. The microeconomic and macroeconomic tailwinds in our business are excellent, and we expect to grow our business in excess of market growth over the long term. We believe we have a $7 billion white space opportunity for our existing technologies in our existing clients. If we did not add new technologies or new customers, we could still grow to more than 25 times our existing size. This is our sweet spot for the next few years. Of course, our intent is to add additional technologies and additional services to our platform. As we do that, our total addressable market expands to $77 billion. Expanding into Medicaid or commercial insurance would increase our addressable market opportunity to over $200 billion. We've already identified meaningful cross-sell opportunities across our tech-enabled solutions and advisory services businesses, and we have a proven track record of driving greater efficiencies than our competitors. We have purpose-built technology, which is designed to be used in the Medicare Advantage and PDP markets. We have developed technology for the government sector. We haven't refit commercial technologies to work in the more complex and highly regulated government sector. As a result, we think we are able to produce a higher quality result for health plans at a significantly lower total cost of ownership. Since we have purpose-built technology, we should have a competitive advantage as it allows us to deliver high quality at a lower total cost. We operate our business in two segments, technology-enabled solutions and advisory services. Both are growing nicely and are meaningful contributors to our top and bottom line growth. Our advisory practice is the tip of the spear for us, keeping us close to market trends, identifying new technology opportunities, making introductions for our technology team, and closing technology sales. Our technology segment, which is over 80% of our net revenues to date, streamlines the administration of Medicare Advantage and PDP plans, improves member engagement and clinical outcomes, and identifies gaps in quality of health plans so that health plans can optimize revenue and data integrity. We have good line of sight on future revenue and strong retention rates, so it's a powerful business combination. We have great technology, great people, a growing market, and a strong recurring revenue model. We think we have good line of sight on future revenue and strong retention rates, and that dramatically improves our ability to grow and to forecast. We believe that our business model is strong and predictable because we have long-term relationships with clients and strong recurring revenue. This is a complicated business, but one we intend to help investors understand. How do we compete in the marketplace? Let's talk about sustainable competitive advantages. First, as I mentioned already, we have purpose-built technology designed for the government sector. Second, we have a history of showing our clients that we add value and we have great solutions for them. We're a trusted partner, as evidenced by our eight-year average tenure with our top ten clients. Third, we have managed to combine the cultures of an advisory team and a technical operating team in a manner that yields excellent outcomes for clients. Finally, we have a strong and dedicated team that is committed to our clients. So what are our building blocks for sustainable growth? First, we believe that the Medicare Advantage market will grow at a 7% rate for each of the next four years. Second, we believe we have a $7 billion white space opportunity with existing solutions and existing clients. We are only scratching the surface of what our clients could purchase from us. Third, we are bringing new products and offerings to the market through internally developed solutions and expansion of existing solutions. We think the larger providers, like us, will win over time because health plans want to consolidate vendors and simplify their go-to-market strategy. The more we can offer, the better. Fourth, we are beginning to sell into adjacent markets like managed Medicaid and commercial. Fifth, we will consider adding additional capabilities to supplement our internally developed solutions. Our M&A pipeline remains active. We have a history of accretive acquisitions, having acquired three businesses over the past four years. We have a great team and great products and a growing market, so we will be disciplined regarding our M&A approach and strategy. However, I know that our clients look to convey for value-added technology solutions, so it makes sense to both build out those capabilities internally and to acquire solid and profitable solutions to support our organic growth. Our approach to the market is paying off. We have had a great first half of the year, achieving net revenues of $157.9 million and adjusted EBITDA of $31.1 million. For the full year, we expect net revenues to be in the range of $330 million to $340 million and adjusted EBITDA to be in the range of $66 million to $68 million. The midpoint of our revenue and adjusted EBITDA guidance ranges for the full year of 2021 represent year-over-year growth of approximately 18% and 30%, respectively. Tim Fairbanks, our Chief Financial Officer. John Steele, who is also with us today and who runs our technology segment. Kyle Stern, who runs our advisory practice, and I have been with Convey or a subsidiary for more than 50 years combined, so we know the company. We're supported by an advisory team plus an outstanding team of operating and technology leaders, so we know the market. We have extensive public company experience, and we're fortunate to have a business model that we believe yields consistent growth and predictable results. Before I turn the call over to Tim to review our financial results, I want to thank our employees for their hard work and dedication. I'm proud of our accomplishments and the great technology platform we've built, and I think we have a bright future.

Tim? Thank you, Steve, and thanks to everyone for joining the call today. I want to provide some highlights from our IPO, review our second quarter financial performance, and then provide details regarding our newly issued 2021 financial guidance. We completed our initial public offering on June 18th, where we raised gross proceeds of approximately $163.3 million through our primary offering of 11.7 million shares. The aggregate net proceeds to us were approximately $146.1 million after deducting underwriting discounts, commissions and other offering expenses. We used $131.5 million of the net proceeds to repay outstanding debt. Following our IPO, we had $21.4 million in cash and cash equivalents and $39.5 million available on our credit facility. Our total debt was $192.6 million, excluding unamortized costs of $3.3 million. Moving to our second quarter 2021 financial performance, we produced strong financial results. Our net revenues were $75.2 million, an increase of 22% over the second quarter of 2020. Technology-enabled solution segment revenue was $61.4 million during the second quarter, an increase of approximately 18% from $52.1 million during the prior year's quarter. Primary drivers of growth were 19% and 22% revenue growth in health plan management and data analytics, respectively. Advisory services segment revenue was 13.9 million during the second quarter, an increase of approximately 47% from 9.5 million in the second quarter of 2020. We remain encouraged by the strong growth in advisory services as many of our clients have reengaged since last year's COVID-19 lockdown. Net loss was 13.1 million compared to a net loss of six million for the second quarter of 2020. However, the net loss in 2021 included $15.2 million of costs in connection with our IPO. These costs included $7.9 million for a prior act's D&O insurance premium, $5 million of expense related to the June 21 extinguishment of debt, and $2.3 million related to the one-time termination of a management services agreement with TPG. Adjusted EBITDA was $15.2 million for the second quarter of 2021, a 63% increase from $9.3 million in the second quarter of 2020. Adjusted EBITDA margin improved over 500 basis points year over year to 20%, driven by improved operating leverage in our technology segment and high utilization in our advisory segment. Second quarter interest expense was $6.4 million as compared to $4.6 million in the prior year period. The increase was mainly attributable to the incremental term loans in April of 2020 and February of 2021. We recorded a tax benefit of $5.2 million as compared to a $1.5 million tax benefit for the prior year period. Our effective tax rate before non-recurring items was approximately 27.8%. The non-recurring item relates to the creation of foreign tax credits. On a year-to-date basis, consolidated revenue was 157.9 million, representing a 25% growth over the first six months of 2020. On a year-to-date basis, adjusted EBITDA was 31.1 million, representing an 81% increase over the first six months of 2020. This significant year-over-year profitability increase was driven by a recurring revenue model, high customer retention, and better-than-expected operating leverage. These adjusted EBITDA growth rates will be impacted in the second half of the year by implementation costs related to a significant client upsell, which we won last year, and will begin producing revenue in January of 22. In addition, we have incremental public company costs this year that were not included during 2020. However, the midpoint of our adjusted EBITDA guidance range represents 30% growth over full year 2020. Moving to balance sheet and cash flow items. As of June 30, 2021, cash and cash equivalents totaled $21.4 million, and we had $39.5 million available on our revolver. Total debt, excluding unamortized costs of $3.3 million, was $192.6 million, while net debt was $171.3 million. Net cash used in operations during the six months ended June 30, 2021, was $21.1 million. Our use of cash was mainly driven by a $7.9 million non-recurring three-year prepayment of D&O insurance, $10.3 million for the final contingent payment related to the TPG acquisition, and $1.6 million of public company readiness costs. Cash used for capital expenditures and capitalization of software development costs were $6.3 million combined for the first six months of 2021. Cash received from financing was $3.3 million. Aside from the net IPO proceeds and pay down of the term loans, we paid the final earn out due to the previous shareholders of Healthscape Advisors LLC as outlined in the acquisition agreement. Lastly, on July 12th, we amended our credit agreement reducing the applicable rate as defined in the credit agreement for Eurodollar rate loans from 525 to 475 basis points and reducing the floor for the Eurodollar rate from 100 to 75 basis points. These changes represent a 75 basis point decrease in our interest rate moving forward. To close our remarks today, we are proud to have reported 63% year-over-year adjusted EBITDA growth in our first quarter as a public company. As Steve mentioned, we expect net revenues for 2021 to be between $330 and $340 million and adjusted EBITDA to be between $66 and $68 million. At the midpoint of these ranges, this would represent an 18% increase in revenue and a 30% increase in adjusted EBITDA over 2020. Finally, I want to thank all of our employees for their hard work and dedication to Convey. Operator, we're ready to open the call to questions.