Convey Health Solutions Holdings, Inc.

Good afternoon, and welcome to Convey Health Solutions' fourth quarter and year-end 2021 earnings conference call and webcast. All participants will be in a listen-only mode for the duration of the presentation. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, please press star 1 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. John Steele, Conveys Executive Vice President of Technology, is also joining the call. 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 harbor 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 company's Form 10-Q for the period ended September 30, 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. Additional information will also be set forth in Convey Health Solutions' annual report on Form 10-K for the year ended December 31, 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 Convey Health Solutions CEO, Stephen Farrell. Stephen, please go ahead.

I'd like to thank you for joining us for our fourth quarter in year-end 2021 earnings call. I'm joined today by Tim Fairbanks, our Chief Financial Officer, and John Steele, our Executive Vice President of Technology. I would like to start by thanking our team members and then our investors. We had an excellent first three quarters as a public company, partly because we have excellent technology, partly because we have an excellent team committed to our clients and their members, and partly because we have a highly predictable and recurring business model with dependable revenue and adjusted EBITDA. Taking a company public is a massive endeavor, and the entire team managed to get there without missing a beat operationally. I know you are all disappointed with the stock price and valuation. No one is more disappointed than the management team, which has met or exceeded the operating and financial targets presented during the IPO. Many of our investors have held the stock despite the downturn. Thank you for your long-term investment horizon. I believe that our investors will be rewarded in the end as we continue to grow revenue, adjusted EBITDA and cash flow, and demonstrate the strength of our technology platform. Today we reported net revenues of $337.6 million for 2021, an increase of 19% over last year. And we provided net revenue guidance for 2022 of $390 million to $410 million, which at the midpoint represents 18% year-over-year growth. When we first announced our adjusted EBITDA guidance for the year ended December 2021, last summer after our IPO, we provided adjusted EBITDA guidance of $66 million to $68 million. We adjusted that guidance in November to $67 million to $69 million. And today we announced that we exceeded the upper end of that adjusted EBITDA guidance by reporting $69.2 million in adjusted EBITDA. Today, we also reported adjusted EBITDA guidance for 2022 of $80 million to $84 million, which also represents 18% year-over-year growth at the midpoint. We believe the recurring nature of our business makes our revenue adjusted EBITDA, and cash flow generation predictable. We continue to drive revenue and adjusted EBITDA growth, and we believe we are operating in great markets with great tailwinds. Let me provide a bit of color on guidance. Unlike in many prior years, on average, our customers grew less than the market for 2022. which somewhat impacts our year-over-year growth rate, although we believe, as our guidance demonstrates, that we can more than overcome that shortfall through a combination of new client wins and cross-sell and up-sell to our existing client base. Although we are not providing guidance on convey without the HealthSmart acquisition, we believe it is fair to say that after all the puts and takes, we would expect to achieve solid double-digit growth in 2022 over 2021 in both revenue and adjusted EBITDA, even without the HealthSmart acquisition. During 2021, we continued to improve our technology business model and prospects in three critical ways. First, our retail partnership with Income, a leading fintech company, significantly strengthened our value proposition for health plans. We are now providing what we believe is the best-in-class, over-the-counter solution because we are able to offer a health plan option of allowing its members to access their supplemental benefits through the retail setting using a single cash card or through the home delivery channel or a combination of the two. We believe this differentiated hybrid offering at scale extends our leadership in the OTC benefits market. Second, as we mentioned last quarter, we have also strengthened the value proposition of our supplemental benefits business by leveraging the data analytics capabilities of our value-based payment assurance team. Our three-year longitudinal analysis of medical claims data and usage of our over-the-counter benefit found a strong correlation between users of our OTC supplemental benefit program and lower medical costs. And we're using this data to position our supplemental benefits business from solely a marketing tool for health plans to a combined marketing and clinical program. As we mentioned in our press releases, The marketing strength of the program is evident as health plans that had this benefit grew 11% and those that did not shrank 6% in this year alone. Third, on February 1st of this year, we acquired HealthSmart International, which we are tucking into our supplemental benefits business as our primary logistics and supply chain channel. HealthSmart provides a diverse portfolio of health, wellness, and diagnostic products centered on home-based care outcomes, and we intend to leverage their supply chain and logistics expertise to get high-quality products to members faster and at a lower cost. It is good to officially welcome the HealthSmart team to Convey. Now that we have what we believe is a best-in-class retail solution to complement our home delivery OTC channel, and we have acquired logistics and supply chain expertise, and we have validated the clinical value of our supplemental benefits program, we are extremely well positioned for the future. On the advanced plan administration side, We completed the large technology implementation we discussed in our last two calls, which depressed Q4 adjusted EBITDA some. But we are on track with that long-term contract and expect a good payoff from that investment. Our value-based payment assurance technology is also off to a strong start in 2022, as clients are beginning to reopen their offices for face-to-face meetings, which should help that growth rate be even stronger. I would be remiss if I didn't spend a minute on our advisory team. They are bringing innovative solutions to the market, and helping our technology team develop new products and identify cross-sell opportunities. So a special thank you to that advisory team. Turning to COVID, hopefully for the last time. Although we operated at near full capacity through COVID, it did cause some internal challenges with work at home and inflationary pressures on both products and labor. COVID also made it difficult to sell new technology offerings because we couldn't meet face-to-face with clients. I'm pleased to report that we are now in front of most clients again, and the 2023 sales season is in full swing. So I hope that revenue challenge is behind us. On the cost side, like many other companies in the United States, we have experienced and are continuing to experience some labor cost pressure, inflation, and supply chain challenges, at least in part due to COVID. We believe we will be able to manage these supply chain challenges and that our HealthSmart acquisition should help us as we are now positioned to leverage their manufacturer relationships to deliver high-quality and cost-effective products on time. We are also leveraging our Philippines footprint and work at home skillset, which were accelerated by COVID as cost and inflation safety valves. So we will have some headwinds due to the labor inflation and supply chain challenges, but we think it will be manageable and it is incorporated into our 2022 guidance. In closing, we delivered another strong quarter, and ended 2021 with net revenues up 19% compared to last year and adjusted EBITDA up 34% in each case ahead of our initial forecast. We are improving the operations of our health plan clients as well as clinical outcomes for their members. So our value proposition is strong. And given our recurring business model, we believe we have a good line of sight into our business in 2022. Now, I will turn the call over to Tim, who will provide more details on fourth quarter and year-end financial results, as well as our 2022 guidance. Then we will open the call to questions.

Tim? Thank you, Steve, and thanks to everyone for joining the call today. I will review our fourth quarter and full-year 2021 financial results and discuss our 2022 guidance. We generated strong fourth quarter 2021 financial results with net revenues of $97.3 million compared to $87.1 million in the fourth quarter of 2020. Our technology enabled solution segment revenue was $84.4 million for the fourth quarter of 2021, an increase of 13% from $74.5 million during the prior year's quarter. The increase was primarily driven by 30% growth in health plan management revenue, which accounted for approximately $6.3 million of the $10 million year-over-year increase in revenue. Health plan management is a largely recurring revenue stream where we can leverage our proprietary technology and services to manage the Medicare Advantage and prescription drug plans of our clients. This technology coordinates member management and is critical to our clients as it connects the member to both the health plan and CMS and typically serves as a system of record for the health plan. Our advisory services segment revenue was approximately $12.9 million during the fourth quarter of 2021, compared to $12.6 million in the fourth quarter of 2020. While our advisory services business continues to grow nicely, the quarter-over-quarter comparison was impacted by a strong fourth quarter of 2020, which benefited from pent-up demand when our clients initially returned to their offices after pandemic lockdown. We generated net income of $0.4 million during the fourth quarter of 2021 compared to net income of approximately $8.1 million during the fourth quarter of 2020. From a comparison standpoint, Q4 2020 had benefited from a one-time $10.8 million increase related to the valuation of certain earn-out payments. Adjusted EBITDA was $19.9 million for the fourth quarter of 2021 compared to $19.3 million in the fourth quarter of 2020. While our fourth quarter adjusted EBITDA was ahead of plan, it was negatively impacted by the previously announced and expected one-time implementation costs of approximately $3 million related to a new client, which was included in the $19.9 million of adjusted EBITDA. This implementation is now successfully complete. Interest expense was $2.2 million for the fourth quarter of 2021 compared to $5.4 million for the fourth quarter of 2020. This decrease reflects lower term loan balances following the second quarter pay down using IPO proceeds. Also, in July, we amended our credit agreement, which reduced our effective interest rate by approximately 75 basis points. Moving to our annual results for 2021, consolidated revenue was $337.6 million, representing a 19% increase from $282.9 million in 2020. Our technology-enabled solution segment revenue was $284.6 million for the full year 2021, which is an 18% increase over $241.3 million in 2020. The year-over-year increase reflects solid double-digit growth in all of our technology business units, which was driven by high client retention, technology cross-sell and up-sell, as well as the general Medicare Advantage market growth. Our advisory services segment revenue increased 27% in 2021 to approximately 53 million, compared to 41.6 million in 2020. It's encouraging to see this strong rebound after the pandemic impacted our 2020 results, and we continue to experience demand from both new and existing clients. For the year, we reported a net loss of approximately 10 million. However, 18 million of that loss was driven by IPO-related items. These costs included $7.9 million for the prior act's D&O insurance premium, $5 million in expenses related to the June 2021 extinguishment of debt, $2.8 million in public company readiness costs, and $2.3 million related to the termination of our management service agreement with TPG. Without the impact of these one-time IPO expenses, our net income would have been $8 million. Our 2021 adjusted EBITDA was $69.2 million, which is an increase of 34% over $51.5 million in 2020. This increase was driven by a recurring revenue model, high customer retention, and better than expected operating leverage. Our adjusted EBITDA margin expanded from 18% in 2020 to 21% in 2021, primarily due to strong revenue growth and operating cost leverage. Moving to balance sheet and cash flow items. As of December 31st, 2021, cash and cash equivalents totaled approximately $38.8 million, and we had $39.4 million available on our revolver. Total debt excluding unamortized costs of $3 million was $192.6 million. Net cash provided by operating activities during the fourth quarter of 2021 was $2.5 million, while capital expenditures were $1.7 million and capitalized development costs were $1.8 million. For the year, net cash used by operating activities was $2.3 million and capital expenditures were approximately $6.4 million and capitalized development costs were $5.9 million. As a reminder, our operating cash flow was impacted by $13 million of one-time costs related to the DNO policy, public readiness costs, and the termination fee of the TPG Management Services Agreement. We also made a one-time $10.3 million payment, which was the final contingent payment related to the TPG acquisition. Adjusting for the one-time items listed above, adjusted net cash provided by operating activities is $21 million during 2021. Before I shift to our 2022 outlook, I want to discuss the HealthSmart acquisition, which closed February 1st. The transaction is included in our 2022 guidance, and we expect it will be accreted to earnings in 2022, and the incremental debt will not change our targeted long-term net debt leverage ratio. Overall, we think this is a valuable asset that will enhance our supplemental benefit product offering to both health plans and their members. As we conclude the end of our first year as a public company, I'd like to reflect on and summarize three key financial measures and discuss our 2022 financial guidance. Number one, revenue growth. We reported 19% growth in net revenues in 2021. This revenue growth was driven by a strong recurring revenue stream, long-term contracts and client relationships, a growing marketplace, and a best-in-class technology that represents an excellent value proposition to our clients. We see those trends continuing and have provided 2022 revenue guidance of $390 to $410 million, representing 18% growth over 21 at the midpoint. The fourth quarter is historically our largest quarter due to seasonality. Our fourth quarter of 2022 will be a slightly larger percentage of total revenue than it was in 2021 due to certain supplemental benefit plan design changes and new client revenue growth during the year. Number two, adjusted EBITDA. We reported 34% growth in 2021 compared to 2020, while simultaneously exceeding our adjusted EBITDA margin target of 20%. We expect 2022 to be another strong year, and it provided 2022 EBITDA guidance of 80 to 84 million, representing 18% growth over 2021 at the midpoint. Our margin at the midpoint is 21%, but expect the first quarter to be below and the fourth quarter to be above this annual average. The first quarter will be negatively impacted by new client and HealthSmart integration expenses, and the fourth quarter will benefit from volume and economies of scale. Number three, cash flow and liquidity. We generate strong cash flow and carry modest debt levels. This liquidity and strong balance sheet allows us to be, A, opportunistic in the market from a strategic M&A perspective, and, B, continue to organically develop additional technology products for our existing client base. To summarize, Conveya is a revenue growth rate in high teens, and we've consistently demonstrated our ability to continue growing over the past decade. Our 21% adjusted EBITDA margins reflect the relative premium our clients place on our technology. We combine that with strong cash flow, long-term contracts and clients, high recurring revenue, and a differentiated technology anchored to the growing Medicare Advantage market. We think this is a very attractive and underappreciated financial profile. In addition to the operating and financial updates we discussed today, we look forward to speaking with investors during 2022 and making sure our story is more widely known. Steve and I think we have a great story that's not yet fully recognized, and we'd certainly like to change that. We look forward to seeing and speaking with many of you over the next several months. Finally, I'd like to thank our employees and their hard work that produced such an exceptional year. Operator, we are now ready to open the call to questions.