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Change Healthcare inc (CHNG)
Q2 2022 Earnings Call
Nov 4, 2021, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and thank you for standing by. Welcome to the Change Healthcare Second Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, David Elliott, Senior Director of M&A and Investor Relations. Please go ahead.

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David Elliott -- Senior Director, Corporate Development

Thank you, operator. Good morning, and welcome to Change Healthcare's earnings call for the second quarter of fiscal 2022 which ended on September 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 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 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 in 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, David. Good morning, everyone, and thank you for joining us. Our results this quarter continue to demonstrate solid execution of our growth strategy and the underlying strength and momentum in our business. We continue to create value for our payer, provider and consumer customers by delivering innovative and transformative solutions. Along with our customers, we remain focused on lowering costs, enhancing access and improving outcomes for the benefit of everyone in the healthcare system.

Now let me provide you with some financial highlights for the quarter and insight into our continuing success as we advance our platform to deliver increased value for all healthcare stakeholders. First, a quick review of the quarter. Solutions revenue, adjusted EBITDA and free cash flow were $774 million, $246 million and $90 million respectively. Our performance results from continued positive momentum from customers expanding their business with Change Healthcare, new product introductions and new business initiatives, supported by improved healthcare utilization trends as pandemic impacts recede.

We remain confident in our ability to continue to deliver strong performance as we move through the remainder of our fiscal year, while continuing to make significant investments across our platform and executing on the transformation initiatives in our TES segment. Fredrik will provide more details on our financial performance shortly.

In regards to the pending transaction with UHG, I am pleased with the team's efforts progressing the regulatory review and developing plans for a successful integration. We look forward to continuing to work diligently in coordination with UHG to continue to provide the necessary information requested by the DOJ and complete the transaction in the first part of 2022.

Now let me provide an update on our success across our segments. First, touching upon our Software and 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 payment accuracy, risk adjustment in quality and RCM technology solutions, we continue to expand our relationships with a broad range of customers, including some of the largest payers and providers in the country.

In payment accuracy, we moved a premier payer customers' primary editing over to our cloud solution and are now surrounding the primary editing with our complementary capabilities in secondary editing. This innovative approach to perform claims processing automation in the claim workflow results in more claims billed and paid accurately the first time, promoting transparency and eliminating costly rework and administrative waste per payers and providers.

We also signed a multi-million dollar contract to provide our pre-payment insight and review product to an existing health plan customer with over 2 million covered lives. With prepayment insight and review, we help customers reduce waste in the payment process by identifying improper payments before they are paid. This enterprise sale demonstrates the value to customers of our end-to-end payment accuracy solutions set and our continued success cross-selling our solutions.

Our risk adjustment and quality solutions help customers close gaps in care more rapidly to improve health outcomes and lower costs. For one large and well known leading healthcare customer, we implemented Risk View, Dual Enrollment Advocate, Research Complete, Part D Complete & Community Advocate, our innovative social determinants of health solution. This customer views integrating Risk View Risk Analytics with a dual enrollment and recertification program as critical to their long-term risk adjustment strategy. Through this integrated approach, we were able to demonstrate a 10 to 1 ROI for this customer. And by integrating our social determinants of health asset into our dual enrollment approach, the customer is able to significantly improve their members' experience.

In Enterprise Imaging, we again signed multiple multi-million dollar contracts in the quarter, including another example of replacing a large competitor. As evidenced by our continuing new contract wins, the market is embracing our vision of a cloud-native AI-driven Enterprise Imaging platform. In Q2, we introduced Change Healthcare's Stratus Imaging PACS, our new comprehensive native cloud solution, which is now in production with stand-alone radiology groups and where we have contracts in place to deploy in hospital-affiliated practices in 2022. We continue to see ever more interest from customers and prospects in this new cloud native PACS architecture for the industry leading to a robust number of meetings and demos at the RSNA event later this month.

Our electronic prior authorization offering in our RCM tech business continues to gain traction. This solution creates transparency between payers and providers by automating and optimizing this often complex and inefficient process. We use AI in our solution to better help the industry deliver the right care in the right place and at the right time in a transparent manner.

We have invested for decades in our portfolio of clinical decision support solutions that provide clinicians real-time evidence-based guidance as they serve patients. In the quarter, we signed multiple clinical decision support contracts, including our first InterQual sale through the Change Healthcare marketplace. Through the marketplace, we completed all contracting and closed the deal in one day.

Moving on to our Network segment. Our medical network had solid volumes in the quarter as healthcare utilization has normalized and we continue to help providers and channel partners increase their efficiency and reduce processing and administrative costs. We introduced our attachments capability in our Network segment a couple of years ago. We're pleased with the consistent growth of that new offering, and in Q2, we signed a contract for this network service with one of the five largest healthcare payers in the country. Also in the Network segment, we are maintaining double-digit growth in our payments business as more payers and providers adopt our electronic payment solutions to streamline their workflows and provide a better experience for their members and patients.

We also continue to expand our data solutions business. Over the past year, we've established more than 75 data solutions partnerships with major academic medical centers. With these partners, we are addressing opportunities to improve health equity, including through our Data Science as a Service or DSaaS offering. DSaaS enables customers of all sizes to use a secure, easy to access and experiment with and comprehensive approach for understanding risks to health outcomes and possible solutions to case specific healthcare and social determinants data.

During Q2, we tripled our API-related transaction volume year-over-year. We added 118 new products to our Change Healthcare marketplace this quarter, bringing the total to 198 APIs software and hardware products from across our portfolio available in the Change Healthcare marketplace as well as other storefronts such as the AWS marketplace and Microsoft Azure marketplace. Our leadership in providing micro services and API-based solutions for the healthcare industry along with payments and data solutions is fueling the continued growth of our Network segment beyond the underlying transaction volume growth.

I'm especially pleased that we've further expanded our partner ecosystem, adding 31 new partners in the quarter, including a remote patient monitoring company that just raised a large Series B, a growth stage healthcare analytics company working to accelerate adoption of value-based care and a diagnostic start-up using AI to provide a holistic picture of patient well being. We sell to, sell through and sell with our extensive and growing partner network, which is why it represents an important plank in our growth strategy.

Now moving to our Technology-Enabled Services segment. As we have stated before, our Technology-Enabled Services segment exemplifies Change Healthcare's tech-forward approach. For example, in our RCM Services business, we are implementing AI-enabled workflow tools that cover denials receivables, billing holds, clearinghouse edits, credit balance and AR follow-up to drive best-in-class collection results. We've installed reactive denials with about 94% of our customer base, saving those customers in total an estimated $70 million annually.

We are also flexible and creative and packaging our expertise along with our innovative products and performance. As one example, we recently partnered with a large anesthesia services customer using our RCM services and operational expertise, while incorporating our technology tools, including Coverage Discovery, Smart Pay and Business Performance Insight Reporting. The client previously worked with the billing company that could no longer scale or innovate to support their growth, but Change Healthcare's extensive knowledge of RCM processes and anesthesiology and our technology prowess made us a great partner for them.

Our tech-forward approach is being validated in the market by our expanding pipeline, growing bookings and positive trends in both deal size and win rates in our TES segment. As Fredrik will discuss momentarily, our RCM turnaround efforts remain on track, and we remain focused on achieving our profitability goals in that business.

So 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

Well, thank you, Neil. Good morning, everyone. The second quarter results demonstrate the underlying strength and momentum in our business and the continued execution of our growth strategy. Starting with Slide 6, for the second quarter, solutions revenue was $774 million including a deferred revenue adjustment of $3 million as part of the fair value adjustments associated with the McKesson exit compared to $706 million in the same period of the prior fiscal year, which included a $39 million fair value adjustment.

We continue to see positive momentum in our business in both bookings and pipeline activity across all three segments. The quarter was positively impacted by volume recovery and new sales volumes 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 5.2% year-over-year.

Net loss for the quarter was $36 million, resulting in a net loss of $0.11 per diluted share compared with net loss of $43 million or $0.13 per diluted share for the same period of the prior fiscal year. Adjusted EBITDA for the quarter was $246 million, an increase of 6.3% over the same period of the prior fiscal year. Adjusted EBITDA reflects the items I outlined related to revenue, partially offset by investment to support business initiatives, including new product launches and the market expansion opportunities.

Adjusted net income was $114 million, resulting in adjusted net income of $0.35 per diluted share compared with adjusted net income of $104 million or $0.32 per diluted share for the second fiscal quarter of the prior year. There were 324 million diluted shares in the second quarter of fiscal '22 compared to 321 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 7. Starting with revenue, the Software and Analytics segment increased by 2.4% year-over-year. However, adjusting for the $6 million impact of the Capacity Management divestiture, revenue in our Software and Analytics segment increased 4.2% over the prior year. Our Network Solutions revenue increased 17.1% year-over-year. Key drivers include a return to more normal health utilization, incremental revenue for COVID-19 vaccines, growth from implementation of new customers and continued double-digit growth in the data solutions and B2B payments businesses.

In our Technology-Enabled Services segment, overall revenue increased 0.1% year-over-year, primarily as a result of volume recovery and new sales, partially offset by customer attrition. 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 and Analytics decreased 4.3% year-over-year, driven by the impact of the divestiture and increased product investment. Network Solutions adjusted EBITDA increased 19.6% year-over-year, driven primarily by continued growth across the segments and COVID-19 vaccine-related revenue. Results also include our continued investments to support a significant number of new product launches and market expansion initiatives we have underway. In Technology-Enabled Services, adjusted EBITDA increased 6.3% year-over-year, driven by the same factors that impacted revenue as well as the continued optimization of our cost structure.

Moving on to cash flow and our balance sheet on Slide 8. Free cash flow for the quarter was $90 million compared to $68 million in the same period of the prior fiscal year. Our liquidity remained strong, ending the quarter with $80 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 $4.6 billion, net leverage ratio was 4.4 times at quarter end. During the quarter, the company repaid $100 million internal facility obligation. And subsequent to the end of the quarter, repaid an additional $60 million on the term loan.

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 vaccine impact, M&A activity and the ongoing transformation of TES. As in previous years, in our S&A business, we anticipate sequential improvement in revenue and adjusted EBITDA as we move through the rest of the fiscal year. In addition, we continue to be impacted by the sale of Capacity Management, which occurred in the third fiscal quarter of the prior year.

In TES, we expect to have a stable to slightly improving performance in both revenue and adjusted EBITDA year-over-year as we move into the second half of the year with majority of the transformation benefit positively impacting the fourth quarter. As I previously indicated, our Network business had a materially positive impact from COVID-related vaccine volume in the first half. We anticipate vaccine-related revenue to trail off in the remainder of the year. And as a result, we expect the second half Network revenue to be slightly lower than the first half.

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. In closing, Change Healthcare remains focused on developing and delivering innovative and transformative solutions for healthcare providers, payers 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 to-date and ability to continue to deliver innovative, value-added solutions to our customers is a testament to our employees' commitment, dedication and innovation. We will continue to partner with our customers to help them lower cost, enhance access and improve outcomes, creating value for everyone in the healthcare system.

Thank you very much for your time joining us today.


[Operator Closing Remarks]

Questions and Answers:

Duration: 22 minutes

Call participants:

David Elliott -- Senior Director, Corporate Development

Neil de Crescenzo -- President and Chief Executive Officer

Fredrik Eliasson -- Executive Vice President & Chief Financial Officer

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