Convey Health Solutions Holdings, Inc.

Good afternoon and welcome to the Convey Health Solutions third quarter 2021 earnings conference call and webcast. All participants will be on a listen only mode throughout the duration of today's presentation. After today's presentation there will be an opportunity to ask questions and if you do wish to ask a question it's simply 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 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 the 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 risk factors section of the company's form 10Q for the period ended June 30th 2021 and its other filings for 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. Additional information will also be set forth in Convey Health Solutions' quarterly report, Form 10-Q, for the period ended September 30th, 2021, which is expected to be filed later today. In addition, please note that the company will be discussing certain non-GAAP financial measures that it believes are important in understanding and assessing its financial performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website. With that, I'd like to turn the call over to Convoy Health Solutions CEO, Steven Farrell. Please go ahead.

Thank you, operator. I'd like to thank you all for joining us for our third quarter 2021 earnings call. I'm joined today by Tim Fairbanks, our Chief Financial Officer, and John Steele, our Executive Vice President of Technology. Today, I'm going to provide some high-level thoughts on our quarterly performance, and then I'll provide an update on what's new since our last call. I'll also provide an update on our operations and other development activity before I turn the call over to Tim, who will provide more details on our third quarter financial results and updated guidance. Finally, we'll open the call to questions. We achieved outstanding third quarter operating and financial results, and now have two solid quarters under our belt as a public company. Let me start with the financial highlights, which were excellent. Net revenue for the quarter of $82.4 million, up 19% compared to last year. Adjusted earnings before interest, taxes, depreciation, and amortization, adjusted EBITDA of $18.3 million, up 21% compared to last year. And we now expect for the full year to achieve net revenue of $335 million to $340 million and adjusted EBITDA of $67 million to $69 million. As a reminder, we are a specialized healthcare technology and services company that helps health plans increase their revenue and reduce expenses. We improve health plan operations through our technology that streamlines complex processes and improves member engagement. We help members access their benefits and help health plans administer benefits to those members. Our clients now include nine of the top ten health insurance plans. And while we're critical to the core operations of our clients, We believe we're just scratching the surface of the amount of work we could be doing with each client. We operate our business in two segments, technology-enabled solutions and advisory services. Our technology-enabled solution segment is currently almost 85% of our consolidated revenue. We're actively engaged in M&A that will either strengthen an existing technology or expand our technology offerings in the health plan space. Despite our outstanding performance, including our third quarter growing 19% on the top line over last year and the adjusted EBITDA line growing 21% over last year, our stock performance continues to be disappointing. I think the combination of being a small business, having a small float, and being a very complicated business has been challenging for the investment community to understand. Of course, I make no apology for the complexity of our business. The complexity of our business is why large, sophisticated health plans use our technology, because it is difficult and complicated to do what we do. So how do we work our way out of this small and complicated dilemma? We intend to fix this dilemma by consistently increasing revenue and earnings through a combination of organic growth and strategic acquisition. I believe that the track record that we are establishing by increasing revenue and earnings will eventually convince investors, even those who don't really understand the complexity of our business, that they should be owners of Convey stock. We are seeing success in our advisory business as health plans have really opened up since COVID-19 has recently started to become less of a threat. And our technology team is busy onboarding new members during the Medicare annual election period that extends until December 7th. As you may recall, most of the expenses for the onboarding of new members and new plans takes place during the fourth quarter. And almost all of the benefit for us comes in the following year or years. As I mentioned, and Tim will discuss in detail, we performed very well from a financial perspective in Q3. We also performed well from an operating perspective during the quarter as we made several moves to strengthen the value proposition of our supplemental benefits business. We believe that our retail partnership with a leading fintech company has dramatically strengthened our value proposition for health plans. We can now provide what we believe is the best in class OTC solution because we were able to offer a health plan, the option of allowing members to access their supplemental benefits through the retail setting using a single cash card through the home delivery channel or through a combination of the two, which is sometimes a good solution to maintain quality for the plan and flexibility for the member. It's important to remember that the utilization, that is the percentage of the total benefit that is actually used by members, is only 35% or so. That means there's plenty of upside in both the home delivery and the retail channel. Of course, we continue to believe that the home delivery channel is the superior channel from a quality and member engagement perspective. And we think over time that health plans will better understand the value of the home delivery channel. In the meantime, we now have what we believe is the best combined solution for the Medicare Advantage market. We are seeing early dividends from that FinTech partnership and expect even greater returns as we begin the 2023 selling season in the next few months. We've also strengthened the value proposition of our supplemental benefits business by leveraging the data analytics capabilities of our value-based payment assurance team. Utilizing our 28 million member big data set allows us to provide health plans with intelligence that can be transformed into actionable steps that improve clinical outcomes through our OTC supplemental benefits business. For example, we analyzed medical claims data and usage of our over-the-counter benefit for over 250,000 members over a three-year period of time to better understand the connection between usage of the OTC program and the clinical outcomes of these members. We found the correlation to be very strong as users of our OTC supplemental benefit program who had diabetes had an 8% lower medical cost trend over the three-year period than non-users. We also found that users of our OTC supplemental benefit program who had cardiovascular disease had a 7% lower medical cost trend than non-users. And we found that users of our OTC supplemental benefit program who had a history of slip and falls had a 6% lower medical cost trend than non-users. In addition, we determined that users of our OTC supplemental benefit program who had serious burns had a 15% reduction in subsequent ER visits compared to non-users. Although the correlation between usage of our OTC program and reduced costs is very clear, the cause and effect is a bit harder to determine. it stands to reason that there is some meaningful cause and effect as our engagement with members naturally makes them more proactive with their health which in turn improve outcomes if we are able to provide topical antibiotics and bandages for the person with diabetes or with a burn we believe they are less likely to have complications and readmissions we believe If we were able to provide canes, walkers, handrails, and other safety devices for a person who has a history of slip and falls, they are less likely to have a subsequent slip and fall episode. So the short story here is that we think there is strong empirical evidence of the effectiveness of our OTC program to improve outcomes for members who utilize their benefits. We believe that this strengthens our value proposition for this program as it continues to evolve from a program that was simply designed to attract new members to a program that's designed also to retain members and improve outcomes. Why is this gradual shift by the health plans from solely attracting new members to also retaining members and improving outcomes important to our business. With a plan that is solely focused on attracting new members, they would like to advertise a very high benefit and then hope that members do not use that benefit. As a reminder, only about 35% of the dollars available are currently being utilized. So we have meaningful upside in utilization and consequently, in our business growth. An unused benefit has no retentive or clinical value. So we expect plans to begin to embrace higher utilization. An unused benefit can't yield the improved outcomes that we think our 250,000-member study demonstrated. We believe that the combination of our value-based analytics and supplemental benefit management programs will help us to drive significant improvements in star ratings, quality of care, and health outcomes. Moving to other topics, like many companies in the United States, we are experiencing some labor cost pressure and supply chain challenges. We are confident that we will be able to manage the supply chain challenges, and we expect to be able to effectively manage our labor challenges by leveraging our global footprint, including resources in the Philippines and in Puerto Rico. So we have a bit of headwind due to labor challenges, but we think it's manageable. Our team continues to execute and operate at a high level and our customer relationships remain strong. We've driven excellent financial results year to date, which is reflected in our updated guidance, and I remain confident in our growth prospects for the next several years. While we are relatively new to the public markets, we have a long operating history with proven results. We understand our business model is a little complicated and difficult to understand since we don't have a pure comp. That being said, we continue to believe our stock is undervalued and we intend to continue to deliver top line and adjusted EBITDA growth as well as cash flow. Some of you may have seen last week that we changed our name from Convey Holding Parents to Convey Health Solutions Holdings Inc. It isn't a big deal, but we thought it could help eliminate some investor confusion by including the full name used in our go-to-market materials. In closing, I'd like to thank our team for their hard work and dedication. They have done a great job executing to build a terrific business, and I believe we are well positioned for the future. Now I'd like to turn the call over to Tim, who will review our third quarter 2021 financial results. and provide an update to our full year outlook.

Tim? Thank you, Steve, and thanks to everyone for joining the call today. I will review our third quarter and year-to-date financial performance and update our 2021 guidance. We generated strong third quarter 2021 financial results with net revenues of $82.4 million, a 19% increase from $69.5 million in the third quarter of 2020. Technology-enabled solutions segment revenue was $69.2 million for the third quarter of 2021, an increase of 15% from $60.1 million during the prior year's quarter. The increase in revenue was primarily driven by 22% growth in data analytics revenue, as well as 18% growth in product revenue and 13% growth in health plan management. Advisory services segment revenue was approximately $13.2 million during the third quarter of 2021, an increase of 39% from $9.5 million from the third quarter of 2020. We remain encouraged by the strong growth in advisory services as many of our clients continue to re-engage post-COVID-19 lockdown last year. During the third quarter, we generated positive net income of $3.7 million compared to a net loss of approximately $1.6 million for the third quarter of 2020, a $5.3 million improvement, mainly driven by revenue growth, improved operating margins, lower interest rate costs, and lower COVID-19 related costs. Adjusted EBITDA was $18.3 million for the third quarter of 2021, a 21% increase from $15 million in the third quarter of 2020. Last third quarter 2021 adjusted EBITDA margin improved 53 basis points to just over 22%. Interest expense was $3.3 million as compared to $4.6 million for the third quarter of 2020. This decrease reflects lower term loan balances following the Q2 pay down using IPO proceeds. In addition, in July we amended our credit agreement to reduce our effective interest rate approximately 75 basis points. Income tax expense was $1.1 million for the quarter versus a tax benefit of $0.5 million in the third quarter of last year. Moving to our year-to-date results, consolidated revenue was $240.3 million, representing a 23% increase over the first nine months of 2020. For the nine months ended September 30th, 2021, we reported a net loss of $10.4 million. However, $18 million of that loss was driven by IPO-related items. These costs included $7.9 million for prior act B&O insurance premium, $5 million expense related to the June 2021 extinguishment of debt, $2.8 million of public company readiness costs, and $2.3 million related to the one-time termination of the management services agreement with TPG. September year-to-date adjusted EBITDA was $49.3 million, an increase of 53% versus the first nine months of 2020. This increase is driven by a recurring revenue model, high customer retention, and better than expected operating leverage. Moving to equity balance sheet and cash flow items. Total shares outstanding was 73,194,171 at quarter end. As of September 30th, 2021, cash and cash equivalents totaled approximately 36.4 million, and we had 39.5 million available on our revolver. Total debt excluding unamortized costs of $3.1 million was $192.6 million, while net debt was $156.2 million. Net cash provided by operating activities during the third quarter 2021 was approximately $16.3 million versus an $8.4 million use of cash during the second quarter of 2021, which is impacted by $13 million of one-time costs related to the D&O policy, public readiness costs, termination of the TPG Management Services Agreement, as well as $10.3 million for the final contingent payment related to the TPG acquisition. On a year-to-date basis, our net cash used in operating activities was $4.8 million. Adjusting for the one-time items listed above, adjusted net cash provided by operating activities was $18.5 million. Capital expenditures and capitalization of software development costs were $0.9 million and $1.7 million during the third quarter, respectively. To summarize these balance sheet and cash flow items, we believe our cash balances, credit availability, positive cash flow, and modest levels of debt position as well for both new product development and strategic M&A initiatives. Additionally, Q3 was our first quarter without incurring one-time costs related to our IPO, and we were able to combine 19% year-over-year revenue growth with $18.3 million of adjusted EBITDA, $16.3 million of net cash provided by operating activities, and $3.7 million of net income. As we look forward to our full year 2021 operating results, we recognize our fourth quarter results will be impacted by the expected client implementation expenses we've discussed on last quarter's call. However, despite these additional costs, we are increasing the midpoints of our 2021 annual guidance and now expect net revenues to be between $335 and $340 million and adjusted EBITDA to be between $67 and $69 million. At the midpoint of these ranges, This would represent a 19% increase in revenue and a 32% increase in adjusted EBITDA over full year 2020. In closing, we delivered another strong quarter and have continued to execute upon our business plan since our June IPO. We'll be finalizing our 2022 selling season over the next 60 days and are currently managing the annual election period for select clients, which will help identify trends and volume that will allow us to provide financial guidance for 2022. I'd like to thank all of our employees for their hard work and dedication, which help us deliver these strong results. Operator, we are now ready to open the call to questions.