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Change Healthcare inc (NASDAQ:CHNG)
Q1 2022 Earnings Call
Aug 5, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Evan Smith, CFA -- Senior Vice President, Investor Relations

Good morning, and welcome to Change Healthcare's earnings call for the first quarter of fiscal 2022, which ended on June 30, 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 any 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 will refer to non-GAAP financial measures to evaluate our business. Reconciliations for non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix to 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 E. de Crescenzo -- Chief Executive Officer and Director

Thank you, Evan. Good morning, everyone. We are off to a strong start for the year as a result of the increased activity across the healthcare system and the continued success with our enterprise sales initiatives, new product introductions and new business implementations. I am also proud that we continue to be recognized for our innovation and collaboration, having recently been selected as Google Cloud's Health Care Industry Solutions Partner of the Year.

Now let me provide you with some financial highlights for the quarter and insights into our continued success advancing our platform to deliver increased value for all healthcare stakeholders, including payers, providers, partners and consumers. First, a quick review of the quarter. Solutions revenue and adjusted EBITDA were $817 million and $283 million, respectively. This strong performance reflects improved healthcare market utilization as well as continued positive momentum in our customers expanding their business with Change Healthcare, new product introductions and new business initiatives.

We remain confident in our ability to deliver strong performance as we move through the remainder of the year while continuing to make significant investments across the platform and executing on our transformation initiatives in our test segment. Fredrik will provide more color on financial performance in a moment. In regards to the pending transaction with UHG, I am pleased with the efforts of the teams on progressing the regulatory review and developing plans for a successful integration.

We look forward to continuing to work diligently in coordination with UHG to provide the necessary information requested by the DOJ and concluding the transaction. Now let me provide an update on our success across our segments. Within our Network segment, we saw increased volumes resulting from improved underlying healthcare utilization, new business wins, continued growth in our API-related transaction volumes and double-digit growth in both our B2B payments and data solutions businesses.

Furthermore, we continue to see opportunities for growth as evidenced by the signing of multimillion dollar contracts in both our medical network and payment solutions businesses. One area I would like to focus on is our pharmacy solutions business, including the eRx and PDX acquisitions we closed last year, which are both exceeding our expectations. Our comprehensive pharmacy solutions suite includes network and data solutions capabilities as well as pharmacy management software and RCM solutions. Last year, we introduced the MedRx claims billing and consumer engagement solution for pharmacies. This enables pharmacies to easily process and receive reimbursement for COVID-19 test within their regular workflow as easily as they bill for prescriptions and flu shots.

As expected, we have and will continue to see significant volumes from this solution. Furthermore, we are seeing additional opportunities for our Rx Assist solution, which addresses critical needs of both pharmacies and patients. Rx Assist is a dynamic co-pay assistance and messaging platform helping deliver real-time prescription savings and educational messaging to patients which drives initial prescriptions, increased long-term medication adherence and brand loyalty. We continue to innovate and expand our capabilities in our pharmacy business which will support further demand and growth.

During the quarter, we also advanced the Change Healthcare Marketplace, spanning medical network, physician support, data solutions and interoperability solutions to help payers comply with the CMS patient access and interoperability rule. The Change Healthcare Marketplace now offers 82 API and marketplace products, providing solutions to power revenue cycle management, payment and medical network workflows. We processed approximately 250 million API transactions in the first quarter and are now processing over 80 million API transactions per month. Moving to our Software and Analytics segment. We are seeing opportunities across the segment as payers and providers take advantage of Change Healthcare's high ROI solutions that leverage our unique insights, AI models and workflow capabilities.

For example, in Enterprise Imaging, during the quarter, we signed several multimillion dollar contracts, including one of the largest in the company's history, a contract in excess of $10 million in annual revenue, winning this customer's confidence versus the largest vendors in the industry, including this customer's incumbent vendor. Let me provide some color on a notable win that demonstrates the strength of our solutions, the enormous untapped cross-selling opportunity that exists in our current client base and the value being created by our enterprise sales team.

With one of the largest payers in the country, we won several million dollar plus annual contract value deals for a number of our solutions, including: Dx Gap Advisor, a decision analytics solution, which helps prospectively close risk gap supporting higher planned risk scores, reimbursements and revenue; Risk View, our risk adjustment software platform used to understand risk score trends and opportunities, which helps drive financial results and optimize its targets for appropriate risk-adjusted reimbursement; chart retrieval and clinical review, our one-stop solution for medical record retrieval, coding and abstraction for healthcare payers that want to increase incremental revenue and quality ratings. The customer noted that our service's NLP capabilities service quality was well beyond -- above others. And in payment accuracy, this customer expanded our coordination of benefits offering into a new large regional market.

Now moving to our Technology-Enabled Services segment. In our RCM Services business, as we have stated before, our 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 both average deal size and win rates and ongoing success with independent and hospital-based physician practice groups. We continue to expand existing customer relationships as well as sign new customers looking to leverage Change Healthcare's breadth capabilities.

In addition, as investors who have followed us know well, we remain focused on transforming our RCM business to add greater value for our customers as well as significantly improving our profitability to drive value for our investors. As Fredrik will discuss in greater detail, we remain on track with our $60 million transformation initiative and expect test profitability to continue to improve sequentially as we progress through the fiscal year. In our communications and payment services or CPS business, our focus and commitment to innovation and excellence, including our ongoing rollout of our digital first initiative, enabled us to secure a multimillion-dollar contract with one of the largest payers in the country.

This further solidified our relationship with this customer by providing our unique innovative solution at scale and enabling them to improve efficiency, enhance quality and reduce costs. In closing, we continue to execute on our strategic, operational and financial objectives. Through continued innovation, we are providing greater value by leveraging technology and insights to reduce administrative waste, streamline and accelerate payments and enhance consumer engagement to 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 & Chief Financial Officer

Thank you, Neil, and good morning, everyone. The first quarter results demonstrate the underlying strength of our business and continued investment across the platform to support future growth and improve our operating performance. Starting with Slide 6. For the first quarter, Solutions revenue was $817 million, including a deferred revenue adjustment of $4 million as part of the fair value adjustment associated with the McKesson exit compared to $648 million in the same period of the prior fiscal year, which included a $55 million fair value adjustment. We continue to see positive momentum in our business in both bookings and pipeline activity across all three segments. Solutions revenue for the current period reflects a $6.5 million net favorable impact from acquisitions and divestitures when compared to the first quarter of fiscal 2021.

The quarter was positively impacted by volume recovery and 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 16.6%, a solid foundation as we start fiscal 2022. Net loss for the quarter was $4 million, resulting in a net loss of $0.01 per diluted share compared with net loss of $59 million or $0.18 per diluted share for the same period of the prior fiscal year. Adjusted EBITDA for the quarter was $283 million compared to $197 million in the same period of the prior fiscal year.

Adjusted EBITDA reflects the items I outlined related to the revenue as well as the continued optimization of our cost structure. Adjusted net income was $133 million, resulting in adjusted net income of $0.41 per diluted share compared with adjusted net income of $81 million or $0.25 per diluted share for the first fiscal quarter of the prior year. There were 323 million diluted shares in the first quarter of fiscal '22 compared to 320 million diluted shares 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 seven, starting with revenue. The Software Analytics segment increased by 7.3% year-over-year. However, adjusting for the $50 million impact of the Connected Analytics and capacity management divestitures, revenue in our Software Analytics segment increased 11.7% over the prior year. Our Network Solutions revenue increased 46.7% year-over-year, which includes $22 million in revenue from acquisitions. Excluding the impact of acquisitions, Network revenue grew 35.8% in the quarter.

Key drivers include the return to normal health utilization, growth from implementation of new customers and continued double-digit growth in our data solutions and B2B payment businesses. We also benefited from increased API-driven volumes as well as COVID-19 vaccine-related volume. In our Technology-Enabled Services segment, overall revenue increased 20.1% year-over-year primarily as a result of volume recovery and new sales. The RCM Services business continues to be strong, with revenue increasing from prior year levels. Underlying growth also includes new business and 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 increased 11.4% year-over-year, including the impact of the divestitures. We continue to effectively manage our cost to drive productivity and to offset the impact of divestitures. Network Solutions adjusted EBITDA increased 55.3% 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 underway.

In Technology-Enabled Services, adjusted EBITDA growth in the quarter was driven primarily by revenue growth and continued optimization of our cost structure. 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. As we indicated last quarter, this value creation initiative 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 eight. Free cash flow for the quarter was $44 million compared to $102 million in the same period of the prior fiscal year. As a reminder, the prior year quarter includes the positive impact of deferring approximately $36 million of interest and payroll tax payments, which we had previously disclosed.

In addition, the current period reflects more normalized working capital relative to the prior year as healthcare utilization rebounded. Our liquidity remained strong, ending the quarter with $109 million of cash and cash equivalents and $779 million in undrawn revolver capacity. Total long-term debt, net of cash at end of quarter was under $4.7 billion. Net leverage ratio was 4.7 at quarter end. Subsequent to the end of the quarter, the company repaid an additional $30 million in loan facility obligations.

As noted in the press release, due to the pending transaction, we will not be providing financial guidance. With that said, I wanted to provide some color on the expected cadence for the remainder of fiscal '22, given the year-over-year impact from COVID, M&A activity and the previously disclosed large contract contraction in TES. As in previous years, Q2 is anticipated to be the trough quarter for the year in terms of both revenue and adjusted EBITDA. As a reminder, in S&A, the timing of annual delivery under certain multiyear contracts positively impact revenue in Q1.

In addition, we will continue to be impacted by the sale of capacity management in Q3 of the prior year. In TES, we will still be impacted by the large contract contraction, which will anniversary in the second quarter of this year. And in Network, we are anticipating some trail-off of vaccine-related revenue in Q2 and the remainder of the year, which benefited our Q1 fiscal '22 results.

Overall, for the remainder of the year, we expect strong sequential improvement over Q2, benefiting from underlying new business trends and implementations and the impact from a test transformation initiative.

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

Neil E. de Crescenzo -- Chief Executive Officer and Director

Thank you, Fredrik. In closing, Change Healthcare remains focused on developing and delivering innovative and transformative solutions for care providers, healthcare payers, our channel partners and consumers to improve clinical, financial and care outcomes.

As I have stated previously, our goal is to deliver on three key objectives for our stakeholders: first, we will deliver superior consumer experiences; second, we will drive increased efficiency and accuracy for financial transactions in healthcare; and third, we will deliver solutions that optimize decision-making for our customers on their journey to value-based care.

The strength of our financial performance and the ability to continue to deliver innovative, value-added solutions to our customers is a testament to the commitment, dedication and forward thinking of our employees across the organization. We will continue to partner with our customers to help them lower costs, enhance access and improve outcomes, creating value for everyone in the healthcare system.

Questions and Answers:

Duration: 20 minutes

Call participants:

Evan Smith, CFA -- Senior Vice President, Investor Relations

Neil E. de Crescenzo -- Chief Executive Officer and Director

Fredrik Eliasson -- Executive Vice President & Chief Financial Officer

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