Babylon Holdings Limited
Q3 2022 Earnings Call Transcript

Published: 13 Nov 2022

[Operator:]

Good morning and welcome to Babylon’s Third Quarter 2022 Earnings Conference Call and Webcast. Leading the call today is Dr. Ali Parsa, Founder and Chief Executive Officer and David Humphreys, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and as further described at the end of the press release as posted on the company’s website. These forward-looking statements reflect Babylon’s current expectations based on the company’s beliefs, assumptions and information currently available to the company and are subject to various risks and uncertainties that could cause actual results to differ materially. Although Babylon believes these expectations are reasonable, the company undertakes no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements can be found in the Risk Factors section on the company’s annual report on Form 20-F filed on March 30, 2022 and as other filings with the Securities and Exchange Commission. In addition, please note that the company will be discussing certain non-IFRS financial measures that they believe are important in evaluating performance. Details on the relationship between these non-IFRS measures to the most comparable IFRS measures and reconciliation of historical non-IFRS financial measures can be found at the end of the press release that is posted on the company’s website. The presentation slides for today’s call are also available on the company’s website. With that, I’d like to turn the call over to Babylon’s CEO, Dr. Ali Parsa. Please go ahead.

[Ali Parsa:]

I would like to welcome everyone to Babylon’s third quarter earnings call. Thank you for your time and interest in Babylon. I am joined today by David Humphreys, our Chief Financial Officer. I will share an update on our progress in the most recent quarter before passing the call to David to provide more details on our financial results. And then we will open the call for questions. I would like to focus on three key themes

[David Humphreys:]

Thank you, Ali. And thank you to everyone for joining the call. Today, I would like to share further comments on the trends we’ve seen across our third quarter financial results and update you on our funding. I will discuss our financial performance, focusing particularly on our path to profitability as a result of our continued focus on revenue mix, driving improvements in Medical Margin, and execution of our previously announced cost reduction actions. I’ll also provide an update on our financial guidance for full year 2022. As Ali mentioned we’ve had another strong quarter of financial performance. We reported revenue of $289 million, which represents almost 4x year-on-year revenue growth and exceed consensus estimates. As a result, we’re raising our revenue guidance for FY ‘22 from over $1 billion to range of $1.05 billion to $1.1 billion. From a profitability standpoint, we also delivered an adjusted EBITDA loss of $54 million for the third quarter, which equates to an adjusted EBITDA margin of negative 18.8% beating consensus estimates by over $10 million. This is equivalent to $18 million adjusted EBITDA loss per month during the quarter, positioning us well to execute on our previously announced forecasted December 2022 adjusted EBITDA loss of $18 million or less and to meet our guidance through the year of $270 million or less. This result is a reflection of our continued focus on revenue mix, medical margin initiatives, operational leverage benefits as we scale our business, and the discipline with which we’ve executed our previously announced cost reduction actions. From our funding standpoint, in early November, we completed our $18 million private placement, and we continue to move forwards with our proposed sale of the IPA business. I’d also like to briefly comment on the current macroeconomic situation. We continue to monitor the impact of factors such as inflation, and foreign exchange conditions on our business. We expect the impact inflation to be largely mitigated by the digital first nature of business model, and the pricing structure our value-based care arrangements. Furthermore, our cash flow has benefited from the impacts of a strong U.S. dollar. Given our recent private placement was in U.S. dollars, and a significant amount of our headcount and other expenditures are in GDP. We need to look at our financial results in more detail. As mentioned earlier, our revenue this quarter was $289 million, which is a 4x increase on the revenue we generated it in the third quarter of 2021. Top line revenue growth was again driven by our value-based care segment, which is almost 5x the VBC revenue we generated in the third quarter of 2021. VBC and related revenue increased by $212 million, quarter-over-quarter, for total $268 million for the third quarter, and accounts for 93% of Q3 revenue. This has been driven by significant increases in our VBC membership base from 100,000 in Q3 2021 to 271,000 U.S. VBC members this quarter. We continue to focus on diversifying our VBC member mix by increasing our proportion of higher PMPM and easier to engage digital first Medicare and Commercial populations. These two populations grew from 27,000 members in Q3 2021, to 60,000 members in Q3 2022 and made up 44% VBC revenue in Q3 2022, which was an increase in 40% in Q2. This quarter, we launched a new contract in New Mexico to cover 10,000 Medicare advantage members. We expect this focus on digital first Medicare and Commercial populations to continue to be reflected in our revenue pipeline for FY ‘23 and beyond. Licensing revenue this quarter was $7 million, a decrease of 10% from $8 million in Q3 2021. This reduction was largely driven by FX headwinds in our licensing contracts, which are denominated in pound sterling, and would have been roughly flat on a constant currency basis. Clinical Services revenue, which includes our clinical services delivered in the UK and Rwanda, as well as our U.S. fee service business was $14 million during the third quarter of 2022, which is an increase of 30% from $11 million in the third quarter of 2021, driven by increased virtual consultation volumes in both the U.S. and the UK. Now to the cost of care delivery, we break this down into two components

[Operator:]

Thank you. Our first question is from the line of David Larsen with BTIG. Please proceed with your questions.

[David Larsen:]

Hi, congratulations on the very good quarter. Can you talk a little bit about the Ambetter contract, it looks to me that may have been a commercial contract, you highlighted a digital first solution? Are you – are your planned customers seeking to develop digital first platforms that they are going to market with? And are you maybe being included in RFPs with your planned clients to actually be the digital first solution for plans? Thanks very much.

[Ali Parsa:]

David, thank you for the question, this is Ali. The answer to all of those is yes. We believe that the – as I described David, that the current model that relies on all these brick-and-mortar solutions that are unscalable. And trying to get people to go to them in order to manage their health over a long period of time, is not very effective. So we’ve been working with our customers trying to persuade them that digital first distributed always on doctor, nurses primary care in your pocket is a better way to go to market. We’re delighted that Ambetter has already launched that product. And they are now signing members into it. We think that this will be a very good way to go to market. So, we are being included both in RFPs and in new launches with various partners, whereby the go-to-market for those partners with their members, or a virtual first entry into the healthcare solution. And we think we feel very positive about that.

[David Larsen:]

Can you talk a little bit about how you are approaching pricing? And the gross margin profile of these contracts? I can see the mix of membership has improved. You have got a greater Medicare and commercial mix. Are you able to with your increased scale? Perhaps I guess negotiate for a – we will call it a higher quality mix of lives for new contracts. Just any thoughts on how you think about gross margin as you enter into these deals in year one, year two, year three, post signing?

[Ali Parsa:]

David, would you like to take that or?

[David Humphreys:]

Yes. David, so from our perspective, you are exactly right. We look ahead to our revenue mix. We have very much focused on increasing the contribution coming through from Medicare and commercial contracts where we are seeing higher PMPM and greater profitability opportunities going forward. It doesn’t mean that we won’t continue to explore Medicaid, we certainly see a strong pipeline there. But for those deals, we are really going to be focused on the ones where, with our leverage, with our learning today, we can strike the right balance between the revenue contribution that they will bring, and the contribution they will make to us hitting our profitability targets.

[David Larsen:]

Okay. And then just related to that, I think the PMPM rate increased to like $329, which compares to around $300 bucks in Q2, I think the PMPM rate was like, up around 100 – maybe 50% year-over-year. Is that accurate? Does it sound reasonable and what drove that increase?

[David Humphreys:]

Yes, they have been. So, the key driver of that increase in Q3 was the fact that we have audit – added around 10,000 Medicare live in New Mexico, and arrangement that went live July 1.

[David Larsen:]

Okay. That’s very helpful. And then just quickly, any updates on the sale of the IPA business? How much cash would you expect to collect from that? Any sauce there will be great. Thank you.

[David Humphreys:]

Yes. So, look, everything is on track and going to plan relating to the IPA. So, we are working very closely with a top tier investment bank, on that transaction. And we have been really encouraged by the level of interest that’s come in, frankly, it’s exceeded our internal expectations at this stage. So, from our perspective, given the valuation ranges we have seen from multiple sources, we are confident moving forward here and looking forward to executing a transaction early 2023. It gives us the funding that we need to get through to profitability.

[David Larsen:]

Okay. I will hop back in the queue. Congrats on a good quarter.

[David Humphreys:]

Right. Thanks David.

[Operator:]

Our next question is from the line of Dev Weerasuriya with Berenberg Capital. Please proceed with your question.

[Dev Weerasuriya:]

Hey, good morning. Thanks for taking my questions and congrats on a solid quarter. I just want to dig in first year around the medical margins, which obviously are critical. I am trying to get an understanding of the line of sight you have there in terms of claim expenses, if any, and to how you expect the medical margin, the cadence of that to change for a particular cohort, let’s say, to the first six months to a year, year two, year three, the Senate internal expectations that you have around that will be helpful. Thanks.

[David Humphreys:]

Yes. Sure. So, we have seen good movement in our Q3 claims margin, increasing ahead of what we recorded in the six months to-date. But we always caution a little bit about those near-term analysis courtroom claims margin, given the average tenure of VBC contracts is running at less than 12 months. Having said that, what we have seen in Q3 is really good momentum in our 2021 digital first cohort contract. So, we included a graph actually, and Page 7, our presentation materials that talk to the evolution of the margin that we have seen in those contracts over the last 12 months. So, I would certainly refer you to that. And you will see we are up to about 7.6% of contribution from that cohort to our Q3 numbers.

[Dev Weerasuriya:]

Okay. Great. And then I guess is there may be a difference in that margin cadence across the Medicare, commercial and Medicaid populations? And then I want follow-up. Thanks.

[David Humphreys:]

Yes. So, we see the margin evolution opportunity being stronger in the commercial and Medicare populations. In addition, where we are seeing the most beneficial claims margin improvements is with those populations, where our data strategy is the most effective in identifying the high risk members. And we are engaging successfully those high risk members with both our clinical and technology initiatives and we see that coming through in some of our operational metric data. For example, where we are seeing great improvements in inpatient and emergency services levels, which are great indicators for us in terms of what will come through into court and the financial margin evolution.

[Dev Weerasuriya:]

Okay. Great. And then, Ambetter has about 2 million members, just curious within the six states that you guys are launching on, if there is, what percentage of that members are operating in those six states? And then just lastly, you guys have about $190 million in cash, about $90 million in operating and investing cash out for this quarter, I know you are expecting about, $80 million adjusted EBITDA loss run rate at the end of this year. But how are you thinking about kind of the cash you have on hand and membership growth. Are you guys thinking about maybe limiting some of that membership growth until that IPA sale is confirmed? Are you guys comfortable with bringing on new contracts early next year? That’s it for me. Thanks.

[Ali Parsa:]

So, you are absolutely right, that the number of Ambetter members that we are taking a business stage is a tiny fraction of the entirety of the Ambetter members. We are delighted we take that contract. As we know this is our first Ambetter contract in primary care. There was that relationship with what was with another supplier, we managed to now become a partner with Ambetter. And we hope that as these contract start performing well and demonstrate the value of a distributed, scalable, digital first solution, we can do more of those. On our cash situation David, would you like to take that?

[David Humphreys:]

Yes. Sure. So, from a cash situation, as you mentioned, when our pipe process, it takes us to the equivalent of $190 million bucks since September. I think the key thing to point out here is the success we have had in our cost reduction program. So, as we see for Q3, we are already at a $54 million adjusted EBITDA loss, which equates to an $18 million monthly run rate. And that’s without getting the full benefit of our cost savings program coming through. So, as we look ahead to Q4, we clearly feel that we are in a good place to exit December with an adjusted EBITDA loss run rate that is lower than the $80 million that we previously communicated as a target. I think there was a part two there just also around a question on the revenue growth. So, from our perspective, we are so focused on significant revenue growth, right. We see really good operational leverage coming through and our digital first model is extremely scalable. However, when I think about the revenue growth, you are right, in terms of us making sure it’s the right revenue growth. We talked about continuing that push on Medicare commercial mix that is important. And making sure we are striking the right balance on new Medicaid deals.

[Dev Weerasuriya:]

Great. Thank you. I will hop back on queue.

[Ali Parsa:]

Thank you.

[Operator:]

The next question is from the line of Daniel Grosslight with Citi. Please proceed with your questions.

[Ali Parsa:]

Hey Daniel.

[Operator:]

Mr. Grosslight, your line is open for questions.

[Daniel Grosslight:]

Sorry, I was muted. Thanks for taking the question. You don’t get when you are selling your California IPA, I am curious to get an update on how you are thinking about the commercial market. And in 2023, once those assets are divested. Can you provide any color on right now, what percent of your commercial membership is in the California IPA? Is that going to be able – are you going to be able to offset that with the Ambetter launch next year? And then just given commercial MLRs are much better than overall MLRs? Do you anticipate you will see an increase in MLRs once those IPA assets are divested?

[Ali Parsa:]

Danielle, I think that the two things happened here. One is that you are absolutely right. The Ambetter deal more than compensates for what we will be losing on the commercial in California commercial deal. But the second or more important in that Daniel, is that we – the model that we now have with Ambetter, members will be allocated and will agree to go through Babylon system. In most cases, in order to access healthcare as a whole, so that we can navigate, and we can help them to get to the right results. So, we will significantly increase accessibility and availability of care for those members. What we have seen in our contracts in UK is when that happens, the cost savings are significantly more than when members just directly go and access healthcare themselves. I mean our own contracts, where we see that those cohorts of members who we activate who access healthcare to us versus those who don’t, we see the margin improvement is much better. Therefore, we are very hopeful that the amateur contract not only will compensate for what we will lose in the commercial, but they will be a qualitatively better cohorts for us.

[Daniel Grosslight:]

Got it. Okay. So, is it safe to say that even with the divestiture of the IPA in 2023, you re going to see growth in commercial membership in 2023?

[Ali Parsa:]

Absolutely, and the contract that we just announced is not the only contract, obviously, we will have to add the 2023. We will be looking at building on this.

[Daniel Grosslight:]

Okay. And I am just curious to hear your thoughts on the ACO REACH program, some of your peers have retrenched from the program. Any thoughts on how you are going to attack that market in 2023?

[Ali Parsa:]

Yes. Daniel, from our perspective, the contracts we currently have with that program is actually part of our IPA business. So, although we will continue to keep our eyes open for opportunities in that space, that, we view as being incremental to our path to profitability. My expectation at this stage is our near-term focus on our final is on opportunities outside of that program.

[Daniel Grosslight:]

Okay. So, we should expect Medicare PMPMs to drop a little bit after the divestiture of the IPAs. And as you kind of focus on Medicare advantage over ACO REACH.

[David Humphreys:]

That’s right. Obviously, we will get the full benefit in FY ‘23, the new Medicare transaction that went live on July 1 as well.

[Daniel Grosslight:]

Got it. Okay. Thank you.

[Operator:]

Thank you. At this time, I will turn the floor back to Dr. Parsa, for closing remarks.

[Ali Parsa:]

Just to thank everybody for your time today and attending our session, which I am very grateful to everyone for doing so. I think what we are describing here is that we have been listening to the market carefully. We can see what the conditions in the capital markets have fundamentally changed. We are readjusting our business in order to focus on that. We know that where we are strong, and that is in the provision of a digital first primary care solution that can manage population health at scale. We are going to double down on that, we see that maybe one consequence of the current capital markets and cost of capital. And we are already seeing that is going to be that many will exit the market either through M&A activities, or by just shutting down the renovation or the digital departments. We saw that movie again – before around 2001 period. The consequence of that would be that why the demand that those services were serving is not growing anywhere. And as you show in some of the statistics, I shared the number of primary care physicians are significantly falling across the country, the demand is increasing. And that’s why we are seeing that in the traditional primary care acquisitions that are happening right now. You see the valuations that are being achieved. We think that as we go ahead and build a very substantial scalable primary care network across United States, and the technologies necessary to make that primary care net for highly effective and more scalable than already exist. We will get the fruits of that back in time in our valuation, but also in our appeal to our clients. That’s going to be our focus going forward. It will take us time, but I think that as long as we continue to make progress quarter-after-quarter, we want – we are pretty confident that we will eventually get there. Thank you so much for your time and we look forward to following up with you in due course.

[Operator:]

Thank you. This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.