CHANGE HEALTHCARE INC (CHNG) Q4 2021 Earnings Call Transcript

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CHANGE HEALTHCARE INC (CHNG)
Q4 2021 Earnings Call
May 27, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Change Healthcare Fourth Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode.

I would now like to hand the conference over to your speaker today, Evan Smith, Senior Vice President of Investor Relations. Please go ahead.

Evan Smith -- Senior Vice President, Investor Relations

Thank you, operator. Good morning, and welcome to Change Healthcare's earnings call for the fourth quarter of fiscal 2021, which ended on March 31st, 2021.

I'm joined today by Neil de Crescenzo, Change Healthcare's President and CEO and Fredrik Eliasson, Change Healthcare's Executive Vice President and Chief Financial Officer. First, Neil will provide a business update, and then Fredrik will review the financial results for the quarter, followed by closing remarks from Neil. Given the pending transaction with OptumInsight, we will not be taking questions or providing financial guidance.

Before we begin, I would like to remind you that the comments included in today's conference call include forward-looking statements. Actual results may differ materially from the results suggested by the comments for several reasons which are discussed in more detail in the Company's SEC filings. Except as required by law, Change Healthcare assumes no obligation to update any forward-looking statements or information.

Please also note that where appropriate, we'll refer to non-GAAP financial measures which evaluate our business. Reconciliations for non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix of the supplemental slides accompanying this presentation.

I want to remind everyone that copies of our earnings release and the supplemental slides accompanying this conference call are available on the Investor Relations section of our website at www.changehealthcare.com.

With that, I'll turn the call over to Neil. Neil?

Neil de Crescenzo -- President and Chief Executive Officer

Thank you, Evan. Good morning, everyone. I want to take a moment to recap a year that demonstrated the resiliency of our Company and the healthcare system as a whole. Headed into the fiscal year, we quickly responded to COVID-19, pivoting our working model and business to support our customers' needs.

Change Healthcare's experience, scale and insight allowed us to contribute to dozens of research, disease tracking and virtual care efforts that were caused or accelerated by the COVID-19 pandemic. Despite the hardships facing our communities, our team continued to plan for the future while navigating the present.

We delivered on our strategy, quickly developing new solutions to support our customers as they accelerated their virtual health, interoperability and other key initiatives throughout the year, while continuing to focus on our long-term investments.

As a company, we make critical decisions on a timely basis and offered new resources to support our team members, customers and partners in order to enable everyone to effectively execute their goals, while improving access and efficiency in the healthcare system for consumers.

We developed disruptive solutions to improve healthcare, including our industry-leading Data Science as a Service or DSaaS offering. DSaaS drives improved outcomes and healthcare economics for vulnerable health populations. We also advanced our e-commerce Shop, Book and Pay solution and Clearance Estimator Patient Direct solution to help providers comply with the CMS price transparency rule and enhanced patient or member engagement.

Finally, we completed strategic acquisitions to expand our capabilities in major markets such as pharmacy and accelerated our product roadmaps in Enterprise Imaging and value-based care. We will continue to make significant investments in FY '22 across the platform to drive innovation and increased value for all healthcare stakeholders, including payers, providers, partners and consumers.

In a year filled with unexpected and unprecedented challenges, I am proud of what we were able to achieve as a team and as a company. We now turn our focus to the fiscal year ahead, fiscal '22, a year full of promise and opportunity, including the expectation of becoming part of UnitedHealth Group's OptumInsight organization, which we believe will position us to make an even bigger impact on improving healthcare for all participants in the health system.

Before I get into the details of the quarter, let me provide you with a brief update on the pending combination of Change Healthcare and OptumInsight. In April, we were pleased with the strong support of our shareholders who overwhelmingly voted in favor of the transaction. This is an important milestone toward closing the transaction and pursuing our common vision with UnitedHealth Group of enhancing the healthcare system. The transaction remains subject to the satisfaction of the regulatory and remaining closing conditions.

As disclosed in March, we received a second request from the DoJ for additional information in connection with their review of the transaction. We are working diligently in coordination with UHG, as well as working cooperatively with the DoJ to respond to their requests and no material change has occurred in terms of our timing expectations for closing.

Now I'll briefly highlight our financial performance for the quarter. The quarter reflected improvement in utilization and new business implementations as well as continued strength in our core franchises, sales into a broad spectrum of customer and partner segments and the continued expansion of our business within our extensive customer base. Our team produced solutions revenue of $804 million, adjusted EBITDA of $272 million, adjusted earnings per share of $0.42 per diluted share and free cash flow of $36 million during the quarter.

During the quarter, we also repaid $50 million of our term loan B. Fredrik will provide more detail on our financial performance following my remarks. In addition to the improvement in utilization, we saw increased customer and partner bookings and underlying demand across all three business segments. This growth demonstrates the belief our customers and prospects have in the value we deliver to them today and will in the future, driven by our focused investments over many years and capabilities aligned with healthcare's evolution.

Our fourth quarter results demonstrate the positive impact of our investments in enterprise sales and innovation across our platform, while we simultaneously continued to optimize our cost structure to accelerate growth and performance going forward. While there remains some uncertainty due to unemployment levels, healthcare utilization and payer mix as we view FY '22, the underlying market trends for our business remain positive on multiple fronts, including increased requirements for interoperability, advances in virtual health initiatives, increased need for data and analytics to help clients reduce administrative costs, and improved performance under value-based care models. All these trends are aligned with our long-term focus and investments on improving outcomes, reducing costs, and simplifying the consumer experience.

Now, let me provide an update on our success on the new business front. Within our network segment, we continue to see increased volumes resulting from new business, continued growth in our API-related transaction volumes and from our all payer electronic attachment service as well as increased traction from new high value-added solutions like our Connected Consumer Health e-commerce suite.

During the quarter, we launched a number of new products in the Change Healthcare marketplace, spanning medical network, decision support, data solutions and interoperability solutions to help payers comply with the CMS patient access and interoperability rule. The Change Healthcare marketplace now offers 71 API and SaaS products, providing solutions to power revenue cycle management, payments and medical network workflows. We processed approximately 170 million API transactions in the fourth quarter and are now processing an average over 50 million API transactions per month, and the volume continues to grow.

Moving to our Software & Analytics segment, we continue to see opportunities across the segment as payers and providers take advantage of Change Healthcare's high ROI solutions that leverage our unique data, AI models and workflow capabilities. In Enterprise Imaging, our end-to-end cloud-native enterprise imaging solution continues to drive new sales. In our payment accuracy, risk adjustment and quality and clinical decision support solutions, we continue to expand our relationships with a broad range of customers, including some of the largest payers in the country as well as leading healthcare technology providers as part of our partner community.

Now moving to our Technology-Enabled Services segment. In our RCM Services business, our comprehensive approach enables us to improve patient access and experience, optimize reimbursement management as well as provide optimal payment solutions. As a result, we continue to expand our pipeline and grow bookings with continued positive trends in average deal size, win rates and ongoing success closing million dollar deals.

Our new contracts in this segment included the expansion of several existing customers as well as the number of new customers looking to leverage Change Healthcare's breadth of capabilities. Some examples are a large county in New York contracting for RCM capabilities for its emergency ambulance service, a large COVID-19 testing and vaccine administration company needing a proven partner who could support third-party billing at scale, as well as several regional hospitals systems needing a strong partner with diverse and integrated capabilities across multiple specialties and EMR systems.

We are also strengthening our Communication and Payment Services or CPS business, as well as our Consulting business. Within CPS, we are in the process of rolling out our digital-first initiative, which will provide bottom line savings to our payer and provider clients as well as unlock additional value in the form of increased contact point and patient engagement.

And in our Consulting business, we were recently awarded Best in KLAS for Payer IT Consulting Services, underscoring the value we bring to payers by helping them overcome technical challenges and optimize business performance. More specifically, our interoperability engagements continue to deliver value to our client base and have been a tremendous growth opportunity for us.

During the quarter, we executed on initiatives to strengthen our business and accelerate our growth and performance. First, we continued to enhance our existing software solutions to support continued improvements in outcomes and efficiency for our customers. And second, we launched new innovative network solutions to support both immediate COVID-19-related needs and the future needs of customers and consumers.

Let me provide a little more color on these investments and their results. In our Clinical Decision Support business, we unveiled InterQual 2021, the latest edition of our clinical decision support solution. A new release features four new Medicare criteria modules in addition to a significant number of evidence-based content updates and enhancements, including new guidance on caring for COVID-19 patients, addressing social determinants of health and the appropriate use of virtual care services.

In our Network business, we announced the launch of our Vaccine Record Solution. This digital solution gives all Americans the ability to access a durable, secure and trusted record of their vaccinations and/or testing results to be used when and where they choose. Several organizations providing vaccines to millions of Americans are utilizing this service today.

In closing, we continue to execute on our strategic, operational and financial objectives. Through continued innovation, we are providing greater value every quarter to payers, providers and consumers. Let me reiterate our previous outlined focus areas; for care providers, we help reduce administrative burden and support the transition to value-based care; for healthcare payers, we enable a more comprehensive view of risk and network management and optimize payment processes to improve health outcomes and increase operational efficiency while reducing costs; and for patients, we drive better experiences and outcomes throughout the patient journey.

We remain confident that Change Healthcare's platform, which provides best-in-class connectivity, transaction management, insights and integrated experiences will continue to play a central role in helping our customers through the continuing transformation of healthcare.

Now, let me turn the call over to Fredrik, who will review our financial performance. Fredrik?

Fredrik Eliasson -- Executive Vice President and Chief Financial Officer

Thank you, Neil. Good morning, everyone. The fourth quarter and full-year results demonstrate the resiliency of our business and the underlying strength of our core franchises as we continue to make significant investments across the platform, deepen our relationships with customers and rollout new innovative solutions.

As we stated previously, we believe the recovery in activity levels was a result of the trend toward more normal underlying demand and some catch-up of previously deferred visits and procedures. As Neil also mentioned, we continue to see underlying strength in our sales efforts across the platform, including positive market reception for our newly introduced solutions.

Let me now move on to provide more details of our quarterly performance for the fourth quarter of fiscal 2021. Starting with Slide 6, for the fourth quarter, solutions revenue was $804 million, including a deferred revenue adjustment of $10 million as part of the fair value adjustments associated with the McKesson exit compared to $787 million in the same period of the prior fiscal year.

We continue to see momentum in our business with positive bookings and pipeline activity across all three segments. Solutions revenue for the current period reflects $10.7 million net favorable impact from acquisitions and divestitures. The quarter was positively impacted by new sales volume across all three segments. Net of the impact of deferred revenue and the net revenue related to acquisitions and divestitures in each period, solutions revenue increased 2.2%, a sequential improvement and solid foundation as we move into fiscal 2022.

Adjusted EBITDA for the quarter was $272 million compared to $264 million in the same period of the prior fiscal year. Adjusted EBITDA reflects the items I outlined related to revenue as well as incremental synergy realization of approximately $11 million in the quarter. Net loss for the quarter was $13 million resulting in net loss of $0.04 per diluted share compared with net loss of $109 million or $0.34 per diluted units for the same period of the prior fiscal year.

Adjusted net income was $134 million resulting in adjusted net income of $0.42 per diluted share compared with adjusted net income of $133 million or $0.42 per diluted unit for the fourth fiscal quarter of the prior year. There were 321 million diluted shares in the fourth quarter of fiscal 2021 compared to 320 million diluted units in the same period of the prior fiscal year.

Now let's take a look in more detail at the performance of our segments on Slide 7. Starting with revenue, the Software & Analytics segment declined 0.6% year-over-year. However, adjusting for the $25 million impact of the Connected Analytics and Capacity Management divestitures, revenue in our Software & Analytics segment increased 5.7% over the prior year.

Our Network Solutions revenue increased 30.3% year-over-year, which includes $36 million in revenue from acquisitions. Excluding the impact of acquisitions, network revenue grew 6.8% in the quarter. Key drivers include growth from implementation of new customers in our data solutions and B2B payments business, both growing double digits. We also benefited from increased volumes from existing and new customers and market expansion opportunities for our network resulting from new solutions and increased API-driven volumes.

In our Technology-Enabled Services segment, overall revenue declined 6.2% year-over-year, primarily as a result of the impact of the previously disclosed customer that reduced certain RCM Services activities with Change Healthcare. Excluding the impact of this one customer, we saw the RCM Services business activity improving sequentially, with revenue slightly increasing from prior year levels. Underlying growth also includes new business implementations across our service portfolio. Our RCM turnaround efforts remain on track and we continue to see positive long-term trends in both RCM win rates and deal size.

Turning to adjusted EBITDA. Software & Analytics decreased 4.2% year-over-year including the impact of the divestitures. While continuing to make investments to support our AI initiatives and Enterprise Imaging transformation, we were able to effectively manage our cost to partially offset divestitures.

Network Solutions' adjusted EBITDA increased 26.7% in the quarter, driven primarily by underlying growth across the network and the acquisition of eRx and PDX. Results also include our continued investment to support the significant number of new product launches and market expansion initiatives we have under way.

In Technology-Enabled Services, adjusted EBITDA declined 30.7% in the quarter, driven primarily by the impact of the contraction of business from the previously disclosed customer. In addition, we continue to make solid progress on our RCM Services transformation and the implementation of our accelerated and enhanced transformation program we announced last year.

We anticipate cost savings of approximately $60 million on a run rate basis over the next 24 months from this program. As we indicated last quarter, this value-creation initiatives will allow us to continue increasing customer innovation, while driving productivity and fixed cost efficiencies.

Moving on to cash flow and our balance sheet on Slide 8. Free cash flow for the quarter was $36 million compared to $121 million in the same period of the prior fiscal year. For the full fiscal year '21, we delivered $340 million of free cash flow, well above our previous guidance of $250 million to $300 million. While we continue to make significant investments in capex, overall improved business performance and working capital management enabled us to deliver strong free cash flow this past fiscal year.

Our liquidity remained strong, ending the quarter with $130 million of cash and cash equivalents and $779 million in undrawn revolver capacity. Total long-term debt, net of cash at quarter end was under $4.7 billion, which includes the repayment of $50 million in term loan obligations during the quarter. Net leverage ratio was 5.1 at quarter end.

As noted in the press release, due to the pending transaction, we will not be providing financial guidance. With that said, with positive trends in both bookings and pipeline, we remain confident in our ability to accelerate our growth and improve our financial performance as we move through fiscal '22.

We will continue to invest in R&D to support our innovation, expand our capabilities and improve our operating performance, including the transformation initiatives in our RCM Services business. We are also continuing our efforts around facility rationalization in response to more flexible work environment and continued focus on cost optimization across all segments.

While the first half of fiscal '22 will continue to be impacted by the large contraction in our RCM Services business we outlined in fiscal '21 and some uncertainty as to payer mix and acuity level, we see our cash flow continuing to drive new revenue opportunities through innovation and execution as we meet the increased demand from our customers.

Now with that, let me turn it back over to Neil for his closing comments.

Neil de Crescenzo -- President and Chief Executive Officer

Thank you, Fredrik. Over the past several years, Change Healthcare has developed and delivered innovative and transformative solutions for care providers, healthcare payers and consumers to improve clinical, financial and care outcomes so that everyone in the healthcare system can thrive.

We remain focused on three outcomes for our stakeholders. First, we will deliver superior consumer experiences and make the healthcare experience as positive as possible for everyone. Second, we will drive increased efficiency and accuracy for financial transactions in the healthcare industry.

We will help our customers make payments and help them get paid quickly and correctly. And third, we will deliver solutions that optimize decision making for our customers on their journey to value-based care. We will help our customers navigate the changing healthcare landscape more easily and effectively.

I remain incredibly proud of what our company has accomplished and I am grateful to our employees for their hard work, dedication and contributions. Thanks to the dedication of the Change Healthcare team members, I remain confident that we will continue to deliver innovation and value to our customers and the communities we serve, helping them navigate the current market environment and future opportunities to lower cost, enhanced access and improved outcomes.

Thank you for attending our earnings call today.

Questions and Answers:

Duration: 25 minutes

Call participants:

Evan Smith -- Senior Vice President, Investor Relations

Neil de Crescenzo -- President and Chief Executive Officer

Fredrik Eliasson -- Executive Vice President and Chief Financial Officer

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