Change Healthcare Inc.
Q1 2020 Earnings Call Transcript

Published: 14 Aug 2019

[Operator:]

Good day, ladies and gentlemen. Welcome to the Change Healthcare First Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to turn the conference over to Evan Smith, Senior Vice President, Investor Relations. Sir, you may begin.

[Evan Smith:]

Thank you, operator. Good morning, and welcome to Change Healthcare's earnings call for the first quarter of fiscal 2020 which ended on June 30, 2019. 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.Neil, first will provide a business update and then Fredrik will review the financial results for the quarter followed by closing remarks from Neil. After that, we'll open up the call for your questions. To enable everyone an opportunity to ask a question, please limit your questions to one question and one follow-up question.Before we begin, I would like to remind you that the comments included in today's conference call constitute forward-looking statements. Actual results may differ materially from the results suggested by these 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 of 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:]

Thank you, Evan. I'm pleased to report our first quarter Solutions revenue of $797 million and adjusted EBITDA of $281 million. During the quarter, we continue to execute on our strategic initiatives to deliver core growth across our leading franchises, the transformation of our RCM Services and Imaging businesses and operational excellence to improve margins and free cash flow.As most of you know, we successfully completed our IPO on July 1, with net proceeds of $888 million. This is another great milestone in Change Healthcare's history. It places us in a strong financial position to extend our market leadership and leverage our scale and breadth of Solutions to drive innovation, growth and increased value for our customers, partners and shareholders.In the two-plus years, since we first merged the McKesson Technology solutions assets with Change Healthcare, we have established a strong foundation for growth, creating the only independent scale provider in the industry, with deep capabilities in software and analytics, network solutions and technology-enabled services.With more than 30,000 customers and 700 channel partners, we play a central role in innovating the way healthcare is managed and delivered. We continue to hear from our payer and provider customers that our breadth of capabilities, data driven insights, and scale are essential to meet their increasingly complex and ever changing financial, administrative and clinical needs.Our focus on innovation continues, as we deliver solutions spanning the healthcare continuum from pre-care consumer engagement and eligibility to enabling the efficient and accurate processing of claims and other financial and clinical transactions, all the way to empowering consumers with the ability to review and pay their medical bills online.Our solution to enable new healthcare delivery models in areas like telemedicine, as well as new risk and value-based care models that reduce cost, enhance quality, and improve outcomes.When we completed the merger, we began executing against the short and long-term strategy, to ensure sustained success. We have accomplished a great deal in a short period, placing our company in a strong position, for accelerating growth.Initially, we focused on integration, establishing the team, systems and processes to support a diverse, multi-billion dollar enterprise. We put in place new ERP and HRIS systems, as well as a comprehensive approach to sales and account management.Additionally, we took a disciplined approach to reviewing the combined Solution portfolio. We are now successfully rationalizing solutions and contracts, where there is overlap or where they do not meet our business objectives for growth and profitability.We also began to make focused strategic growth investments, in areas like artificial intelligence, robotic process automation and Blockchain that are now embedded across our platform, to drive innovation.After all this foundational progress, we are now in the build phase. And we have already seen the benefits of our efforts with improved margins and underlying growth potential.We are executing on several initiatives to further expand and enhance our intelligent healthcare platform, to support the growth of our core solutions. And I'll provide a few examples in a moment.We continue to deliberately reposition our RCM Services and Imaging businesses. We are seeing early signs of success as we pivot to higher growth segments of the market and drive operating performance.We continue to build our enterprise sales and account management capabilities, and are creating broader, deeper, and more strategic relationships with our customers.So we remain confident, that all the initiatives and investments in practical innovation, our people, and our processes can deliver accelerated, sustainable growth across the Company, over the coming years.Now let me provide you with some insights, on how we're executing our growth initiatives and embedding innovation across our platform. As a leader of payment accuracy, we are taking one of the largest payers, from an on-premise solution environment to the Cloud.Our Cloud solutions enable this payer to use advanced analytical capabilities, with the latest claims editing content, while leveraging the customer's existing, on-premise solution.So why did they choose Change Healthcare? They chose Change Healthcare, because our solution and our implementation strategy provide substantial return on investment, quickly, while avoiding operational disruption.By moving advanced analytics earlier in the adjudication process, we leverage our intelligent healthcare network, while increasing the customer's ROI and increasing provider satisfaction.By providing Cloud-based deployment of our industry-leading prepayment editing content, we further extend our leadership and accelerate our growth in this market, our solution truly future proof their processes.In RCM Services, we are seeing initial success as we pivot, towards faster growing segments. During the quarter, we signed several health system and hospital customers, as well as a number of large scale practices in diverse specialties, including pathology and diagnostic imaging.These contracts will be implemented over the next several quarters, thereby providing support for our transition to growth for our RCM Services business, in FY '21. In Enterprise Imaging, we currently have 3,300 hospitals leveraging our imaging software. During the quarter, we launched our new Enterprise Viewer. This product is a scalable, enterprise-level clinical viewer platform for providers that want anytime, anywhere, access to relevant imaging data, thereby enabling a unified view of patient history to the entire care team.While early, we're seeing a positive reception to our Enterprise Imaging platform in the market, including the recent signing of a five-year Enterprise Imaging contract with a large regional health system that includes our Enterprise Viewer as well as our Cloud-based Vendor Neutral Archive or VNA and our Cloud-based analytics suite, which are expected to be generally available by the end of the current fiscal year.I'd also like to provide you with a few recent examples of how we are extending our leadership position by bringing additional innovation to existing and new customers. In the area of Denial Prevention for providers, we have applied our Claims Lifecycle Artificial Intelligence technology across our complete claims management suite. The AI infused in these applications help providers of any size identify problem claims that could result in denials and remediate potential issues before the claims are filed.This AI technology is seamlessly integrated into our existing claims management suite. So providers don't need to purchase additional applications, undergo training or change billing solutions. To provide a bit of context around the value provided by this solution, the average cost to file a claim is $6.50 with the cost to resubmit a denied claim as high as $25 to $118, making the total cost to submit, correct and resubmit a claim five times to 20 times the cost of the original claims submittal.Providers typically experience 5% to 15% of their claims being denied before they work them to eventually get paid. By reducing the number of denied claims, we estimate that we can save the average 20-physician practice at least $200,000 annually. For the average 500-bed hospital, we estimate that we can save then $2.5 million or more annually. So as you can see, applying our Claims Lifecycle Artificial Intelligence can drive significant value for our customers and for Change Healthcare.Also during the first quarter, we unveiled Change Healthcare's InterQual 2019, our latest edition of the industry's flagship clinical decision support solution. Among the new features is support for Hospital in the Home programs, which have gained traction as an alternative option to acute inpatient stays and have demonstrated significant cost savings, fewer re-admissions, and increased patient satisfaction.InterQual 2019 is also notable for the addition of Day One Review to the InterQual AutoReview product. This enables automatic completion of InterQual criteria through integration with the EHR, driving administrative efficiency and freeing up case managers to focus on clinical care. We provide continuous updates of the clinical data from the EHR over the first 24 hours to present a more complete picture of an admitted patient while significantly reducing the time spent on manual entry or eliminating manual entry altogether.During the quarter, we also introduced the industry's first patient liability solution that helps to improve the entire patient journey. Patient liability is an increasing burden on health systems as out-of-pocket costs continue to rise and poor patient experiences lead to dissatisfaction as well as reduced or delayed payments.Our suite of patient liability management solutions is designed to address these challenges and provide a synchronized patient experience that improves provider patient relationships and enables greater revenue collection. Gaps in the current system including outdated or invalid coverage information means hospital staff often cannot request upfront payment. Providers often collect as little as 30% of patient payments in dollar terms after discharge.Our patient liability management suite eliminates this problem by accessing real time eligibility and obtaining preauthorization prior to service to generate an accurate, upfront out-of-pocket cost, thereby increasing payment collections prior to care to as much as 70% of the time and reducing the risk of patient bad debt.Lastly, we were awarded a six year extension of our contract with the Commonwealth Health Alliance, further advancing our reach and connectivity. Under this contract, we will continue to provide clinical interoperability services, including patient identification, record locator services and document retrieval to improve patient access and care delivery. The Commonwealth Health Alliance includes companies improving patient care and more than 20 care settings, including acute ambulatory and post acute care through patient portals and even through emergency services.We enable Commonweal to connect more than 13,000 provider sites, which have records for more than 50 million unique individuals. Supporting the interoperable exchange of clinical health care information helps move the needle forward on the business case for value based care and reimbursement as well as supporting the goals stated in the 21st Century Cures Act.So, in closing, the recent wins across our platform, the introduction of new solutions based investments in advanced technology and the execution of our strategic growth initiatives provides us with confidence in our fiscal year 2020 outlook of adjusted EBITDA growth in the range of 6% to 8%.Now, let me turn the call over to Fredrik, who will review our financial performance for the quarter and provide you with more detail on our financial outlook for the year. Fredrik?

[Fredrik Eliasson:]

Thank you, Neil. Good morning, everyone. Before we move into the financial discussion, I just want to mention how gratifying it is that successfully completed the IPO on July 1st and the support we've already seen from our investors. As Neil stated, this is a key milestone in our Company's history at a point where we see significant potential to leverage the strengths of our integrated and scalable platform to accelerate growth and enhance our performance.Our financial and business objectives are threefold. First, driving continued revenue growth across the portfolio through continued innovation and expanded enterprise sales initiatives. Second, execution on our Enterprise Imaging and RCM Service transformation initiatives; and third, continued cost discipline to improve our operating performance with a focus on cost optimization and automation.Now, let me review our financial results for the quarter and then provide guidance for both the second quarter and the full fiscal year. As you can see here on slide 8, Change Healthcare adopted a new revenue recognition accounting standard, ASC 606 effective April 1st, 2019 on a modified retrospective basis. Our financial results from April 1st this year and going forward, we'll use the new revenue recognition standard. Historical financial results for reporting periods prior to the fiscal year 2020 are presented in conformity with the prior revenue recognition standard ASC 605. For fiscal year 2020, however, we will provide a bridge to ASC 605 results for comparative purposes.For the first quarter of fiscal 2020, under ASC 606, Solutions revenue was $797 million. The impact from the change in accounting standard was a $42 million increase in revenue. This comes from the new accounting standard, where more of our revenue, primarily related to our decision support solutions, is recognized in the first quarter, which aligns with the annual delivery of certain products and services.Revenue related to these products and services was recognized over time throughout the year under the prior revenue recognition standard. So the change in standard had a material impact on the first quarter. It will not have a material impact on the full year as it was merely an acceleration of revenue from the remaining three quarters of the year.Adjusted EBITDA was $281 million for the quarter. In addition to the impact from the acceleration of revenue from ASC 606, expenses were also favorably impacted by $6 million from the new accounting standard. This is caused by lower commission expense driven by the extension of the amortization period.For the full year, we expect that impact to be about $18 million. As a result of both the revenue acceleration and the longer amortization period for commission expense, adjusted EBITDA improved by $48 million versus the prior accounting standard in the first quarter. Adjusted net income of $142 million improved by $45 million, and adjusted net income per unit of $0.56 improved by $0.18 versus the $0.38 in the prior accounting standard.I also want to point out that following our Initial Public Offering, the Securities and Exchange Commission provided us with updated feedback regarding the calculation of adjusted net income. As a result, we will now report adjusted net income as net income before amortization expense only from acquired intangible assets as adjusted to exclude the impact of certain items that are not reflective of our core operations and the tax effects of the foregoing adjustments. Previous guidance did not permit us to distinguish between amortization resulting from acquired intangible assets and amortization attributable to developed software.Now moving to our results under ASC 605, for comparative purposes, on slide 9, for the first fiscal quarter of 2020 under ASC 605, total revenue was $814 million compared to $823 million in the same period of the prior year. Solutions revenue was $756 million compared to $758 million for the first fiscal quarter of 2019. We will focus our presentations on Solutions revenue as it excludes Postage revenue, which is merely a pass-through.Growth in both Software & Analytics and Networks Solutions businesses was more than offset by an unfavorable impact of $9 million from the divestiture of extended care in the prior year. $10 million from planned contract eliminations in our technology-enabled services business, and the year-over-year impact related to optimization of our Connected Analytics Solutions business.Adjusted EBITDA for the first fiscal quarter of 2020 was $234 million, compared with $228 million in the same period of the prior year. Adjusted EBITDA margin as a percent of Solutions revenue for the first quarter of fiscal 2020 was 30.9% compared with 30.1% in the same period of the prior year.The favorable impact of productivity improvements and growth across our Software & Analytics and Networks segments more than offset the aforementioned unfavorable impact from divestitures and timing related to the elimination of cost associated with the planned contract eliminations.Net income for the first fiscal quarter of 2020 was $27 million, resulting in net income of $0.11 per diluted unit, compared with net income of $13 million and net income of $0.05 per diluted unit respectively for the first fiscal quarter of 2019. Adjusted net income for the first fiscal quarter of 2020 was $96 million, resulting in adjusted net income of $0.38 per diluted unit compared with adjusted net income of $98 million or $0.39 per diluted unit respectively for the first fiscal quarter of 2019. Adjusted net income reflects items noted above and $7 million reduction of strategic and integration-related expenses.Now let's take a look in more detail at our performance of our segments on slide 10. Once again, we are using the prior accounting standard ASC 605 to provide a more meaningful year-over-year comparison. Starting with revenue, the Software & Analytics segment was essentially flat year-over-year. Adjusting for the impact of the divestiture of extended care, the growth would have been 2.2%.While our core Software & Analytics solution showed strong growth, they were partially offset by our continued strategic assessment and optimization of our connected analytics solution and the impact of our investments and transition in our Imaging business to a cloud-based enterprise imaging solutions.Our Network Solutions revenue increased by 3.7% year-over-year, primarily due to strong growth in our data and B2B payment solutions. We continue to make progress on adding new opportunities for growth in areas like attachments, new market expansions for data use cases for healthcare marketing and payer data services, including areas like health savings and flexible spending accounts.And in our Technology Enabled Service segment, core growth of $5 million were more than offset by the $10 million of planned contract eliminations. We have seen early wins in the health system and aggregator market and continue to see more opportunities ahead of us.Turning to Adjusted EBITDA, Software & Analytics grew 9.6% year-over-year. Strong productivity from our offshoring initiatives, synergy realization and growth in core solutions more than offset the impact of the extended care divestiture. Network Solutions adjusted EBITDA increased almost 3% in the quarter, driven again by the growth in the data and B2B payment solutions.In Technology Enable Services, adjusted EBITDA declined $6 million due to the repositioning of our revenue cycle business and the communication and payment solutions. Margins improved on a sequential basis and we expect that as we move throughout the year, we will see more improved productivity through both our real estate strategy, our robotic process automation and artificial intelligence initiatives. As a result, we expect this segment will grow adjusted EBITDA for the full year.Moving on to cash flow and our balance sheet on slide 11. Free cash flow was $17 million for the three months ended June 30th, fiscal year 2020, compared to $126 million for the same three months in the prior year. Adjusted free cash flow was $61 million, compared to $199 million in the prior year. The decrease in free cash flow and adjusted free cash flow primarily resulted from the inclusion of $155 million of pass-through funds in the three months ended June 30, 2018 as compared to only $12 million for the three months ended June 30, 2019. Netting out the impact of pass-through, our adjusted free cash flow improved $4 million year-over-year.Cash flow in the first quarter is historically lower than the remaining quarters as a result of seasonality in our working capital and employee performance-based compensation payouts. We continue to expect our free cash flow to improve year-over-year to earnings growth, improved working capital, reduced strategic and integration expenses, and reduced integration related CapEx compared with the prior year.Total long-term debt, including the short-term portion, was approximately $5.8 billion, excluding the impact of the IPO proceeds. The pro forma net debt, given effect of the $888 million net proceeds from initial public offering of common stock and a concurrent offering of tangible equity units as well as the redemption of $805 million in term loan facility obligations, it's approximately $5 billion. This reduces our credit agreement net leverage ratio to 4.9.Our liquidity remained strong, ending the quarter with over $27 million of cash and cash equivalents and a fully undrawn revolver, which we recently amended, increasing it to $785 million and extending the maturity to July of 2024. Our objective is to reduce leverage by approximately half a turn a year including debt pay down and improved operating performance.Now moving on to our financial guidance and key assumptions on slide 12. Change Healthcare expects full year fiscal 2020 revenue growth of 1% to 2% as revenue growth will be subdued due to the strategic repositioning of our Imaging and RCM Services business and the strategic assessment process of our connected analytics business.Even with the subdued revenue performance, we expect adjusted EBITDA growth of 6% to 8% due to the strong pipeline of productivity initiatives across our company. We also expect 9% to 11% adjusted net income growth this year. This growth is based on fiscal year 2019 adjusted net income of $410 million where, consistent with the new definition of adjusted net income, we only add back acquired intangible amortization of $147 million versus all of the amortization under the prior methodology.We also expect free cash flow to be in the range of $250 million to $300 million for this full year with adjusted free cash flow that excludes our temporary integration CapEx and operating expenses to be well above $400 million.For fiscal year 2021, the company expects revenue growth of 4% to 6% as we see the business that we’re repositioning this year returning to growth and we expect adjusted EBITDA growth of 6% to 8% next year as well.As I mentioned earlier, while first quarter revenue increased as a result of ASC 606 implementation, full year revenue is not expected to differ materially between the two accounting standards. The impact from extended recognition periods for commission expense is expected to be favorable about $4 million per quarter for the remainder of the fiscal year for a total of $18 million for the full year.While our intend longer-term is not to provide quarterly guidance, we felt that this year due to the impact of ASC 606 and this being our first year as a public company, it’s important for our investors to get a clear view of our quarterly expectations. As such, our expectations for our second fiscal quarter this year is for solutions revenue to be in the range of $710 million to $730 million, and adjusted EBITDA to be in the range of $210 million to $220 million.In addition, we expect adjusted net income to be in the range of $80 million to $90 million. As a reminder, again, our guidance is based on ASC 606 and its not comparable to our prior year reported results in ASC 605 as a result of the aforementioned acceleration of certain revenue recognized in the first quarter.To provide even further transparency for investors, I would like to highlight the following key assumptions for the full fiscal year that support this guidance; interest expense in the range of $290 million to $295 million; integration-related expense of $100 million to $120 million; adjusted effective tax rate for the fiscal year of 12% to 13%; CapEx of approximately 7% of solutions revenue, excluding integration CapEx of approximately $25 million to $30 million; and then basic units outstanding of 319.2 million units.Now with that, let me turn it over to Neil for his closing comments.

[Neil de Crescenzo:]

Thank you, Fredrik. On the heels of a successful IPO, we are off to a great start to the year. We're excited by the opportunity to extend our leadership position and drive value for our more than 30,000 customers and 700 channel partners through continued innovation as we work to inspire a better healthcare system.Looking out longer-term, we will continue to execute our innovation and operational improvement strategy to drive accelerated performance. I would like to thank our 14,000 team members for their hard work and dedication to our customers' success combined with the support of our customers and partners. They are the reason Change Healthcare is the partner of choice in the industry.As our first quarter as a public company demonstrated, we can create value for providers, payers and consumers and in doing so, create value for the broader healthcare system and for our shareholders.Now I'll turn the call over to the operator to take questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Robert Jones with Goldman Sachs. Your line is open.

[Robert Jones:]

Great. Good morning. Thanks for the questions, I guess just I had one on Network Solutions, margins in that segment came in better than we expected. Was hoping maybe you could talk a little bit about any impact you might have seen from re-contracting from customer consolidation in that segment. And then, curious if you were able to offset that if there were any impacts from those renegotiations on those --on that re-contracting, if you're able to offset if there were any impacts from those renegotiations on that re-contracting -- if you're able to offset that with any new products or if it was just better performance than expected?

[Neil de Crescenzo:]

Thanks for the question. So, we have continued to do that as we have in past years, namely look back continue to expand our business with customers when we're in contract renegotiations, then of course, adding new solutions in that space, either new transaction types such as electronic attachments and other capabilities, and also of course, in the overall segment, growing the Data Solutions and Payments businesses that are part of the Network Solutions segment.

[Robert Jones:]

Great. And then I guess if I could just sneak one more in on the TS segment, Fredrik, I believe you said there was a $10 million impact from an RCM contract exiting the quarter, just wondering how we should think about any other impacts from contract exits over the balance of the year there?

[Fredrik Eliasson:]

Yes, there were actually two that constituted a $10 million and as I think about the year, I would model essentially the same sort of run rate for the rest of the year. Essentially they both end at the end of the fiscal year. There's a little bit of overlap, but generally, I would just keep it at about the same rate.

[Robert Jones:]

Great. Thanks so much.

[Operator:]

Thank you. Our next question comes from Lisa Gill with JPMorgan. Your line is open.

[Lisa Gill:]

Thanks very much. Good morning. I just wanted to follow-up on some of your recent business highlights and just understand a couple of things, Neil. First, when we think about some of these. Can you talk about the impact that it will have on 2020 and what you're seeing for new versus existing customers?And then just maybe more broadly, how do we think about the current competitive landscape, we get a lot of questions around new entrants that are coming into the market, especially, around the analytic side of the business.

[Neil de Crescenzo:]

Okay, great. Thanks, Lisa. So, in terms of some of the new areas that I mentioned, what we're seeing is the ability for us to extend the business we have with a very large, as you know, current customer base as well as with new customers.So, given for example in the imaging business, as I mentioned, the relationships we've had with multiple thousands of customers over many years, when we have the kind of innovation, we're now bringing to market, which is pretty unique with this native cloud-based AI-based data, analytical platform in conjunction with Google, we're able to leverage those relationships to expand with the customers, what they do with us and we're seeing that really across our segments with the kind of innovation that I described in my remarks that you were referencing.In terms of new entrants, one of the things that's great about the relationships we have with our customers and our ability to work with channel partners is we can often work with a lot of these new entrants to help with our distribution in the industry and be very complementary.You may have seen announcements we made with companies like Health Fidelity, a natural language processing for payers or MDsave around consumer payment platforms in the provider market. So, we pay careful attention to the new innovations from these new entrants, but often we're able to partner with them and learn more about what they can do and eventually perhaps work with them commercially or ultimately, perhaps even in an acquisition.

[Lisa Gill:]

That's helpful. And then just on the synergy capture side, can you just tell us Fredrik what's in your guidance for 2020? Thank you.

[Fredrik Eliasson:]

Yes, so beginning this fiscal year, we had about $86 million, $87 million left. We've had I think captured by five or six this quarter. So, we expect we're going to accelerate a little bit throughout the rest of the year and we will capture about half of that $86 million $87 million for the full year, that's the current run rate we're on and consistent with what we had expected.

[Lisa Gill:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is open.

[Manav Patnaik:]

Thank you. Good morning, gentlemen. My first question is just in the Software and analytics business, is clearly a lot of good stuff going on and I was wondering if you could just help segregate the growth of that core stuff and analytics business versus what the headwind is from connected analytics and then imaging separately?

[Neil de Crescenzo:]

Great. Well, as we've talked about it clear with investors in recent months, the full core growth that where you have defined as the Software & Analytics business excluding the connected analytics solution as well as the network solutions business, we still see growing at 5% this year. As you may remember, that part of our business, which is about 80% of our EBITDA last year, we see is continuing to deliver strong results, while we reposition and test business for growth in FY 2021.

[Fredrik Eliasson:]

Yeah. And then obviously also that 5% includes the imaging business that we are seeing some had been short term, but as we expect fully to expect to return to growth as we move forward. And then specifically to your question about connected analytics this quarter is about $4 million to $5 million drag on the topline.

[Manav Patnaik:]

Got it. And then just as a follow-up on the RCM repositioning. I mean, it's -- I guess the -- it sounds like your backlog is building. I was just curious if you could help us understand what the pitches from change's perspective that's getting these customer to, I presume switch from another provider to you guys?

[Neil de Crescenzo:]

Well, offer or not just to be clear they are looking at us helping them kind of future proof their imaging strategy by going from the on-premise solutions out of just historically to a cloud native solution and on the imaging side. On the RCM side, it's really going to market with a comprehensive solution that is based on this business process as a service that allows us to take technology, services and the expertise -- the domain expertise we have and allow us to differentiate from others in the market, particularly the smaller players.

[Manav Patnaik:]

Okay. Thank you guys.

[Operator:]

Thank you. Our next question comes from Michael Cherny with Bank of America Merrill Lynch. Your line is open.

[Michael Cherny:]

Good morning, and thanks for all the color so far. Neil, you had talked a bit about your Artificial Intelligence applications and how it's working way through your business. Maybe as you think about that as a premise for some of your other R&D priorities, what do you see as the biggest opportunities as we bridge that higher growth rate about what drives new product innovation aside from what you're doing right now, and where are the elements that you're spending money to drive returns. And I guess also along those lines, how do you think about the ROI on your R&D spend?

[Neil de Crescenzo:]

Well, I mean, we look at the areas that we think are going to be critical to our customers' success and certainly, it's around artificial intelligence. And when you ask about where we're spending our money, leveraging the data and understanding we have of our customers' business and really co-creating with them is a big part of our R&D spend. Because of the connectivity we have, the data we have and how we're embedded in the workflow of our customers, we can not only provide AI solutions because of the core technology, but actually provide the value from them faster and more broadly than many people in the industry, because of where we sit in the value chain of our customers.The other area that we'll continue to see is important will be operational improvement in our own services including through technologies like RPA, our blockchain, we process more than 20 million blockchain transactions every day in our network and it provides us a much lower cost, highly secure approach to -- helping our customers get more value from our solutions.

[Michael Cherny:]

Thanks. And then just a quick follow-up maybe for Fredrik, you talked about the priorities and the delevering of half a turn annually give or take. That being said, this is a business that was put together through a number of acquisitions. So as you think going forward, how prevalent will M&A and bolt-on M&A be in your priorities and how do you think about priorities in terms of what you want to target relative to what you want to build out?

[Neil de Crescenzo:]

Yeah. I mean, I think that's exactly how we look at it. We look at our M&A strategy by the lens on, are there nice tuck-ins that can add to growth or are there capabilities that are more suitable to buying versus developing ourselves. And so in terms of M&A going forward, there is no doubt that deleveraging is our number one priority, but it won't be necessarily a 100% linear. There will be opportunities to acquire small things or medium things along the way. We will certainly do that. That makes sense for our shareholders and enhances our growth profile.We did a couple of small ones last year, and I think if you continue to expect us to always look at new opportunities. And also if there are opportunities to where -- in Solution area is more valuable to somebody else than to us, we will of course look at divestitures as well.

[Michael Cherny:]

Excellent. Thanks.

[Operator:]

Thank you. Our next question comes from Stephanie Demko with Citi. Your line is open.

[Stephanie Demko:]

Hey, guys. Thank you for taking my questions. Congrats on a great first quarter.

[Neil de Crescenzo:]

Thank you.

[Fredrik Eliasson:]

Thanks.

[Stephanie Demko:]

Could you tell us more about the -- yeah, appreciate it. Well, can you tell us more about your network business' defensibility against some of the larger financial institution and FinTech players, just given some of the recent M&A in the healthcare payment space?

[Neil de Crescenzo:]

Sure, Stephanie. Well, first of all, it's not surprising that some of these very large merchant services companies like JPM or Global Payments are investing and looking to get more understanding of the large healthcare market. We work with a variety and multiple merchant service companies, and we'll continue to do so, on whatever behalf, best advantages our customers.And we'll continue to partner with companies like, for example, AdvancedMD continues to be a customer of ours, after their acquisition by Global Payments. They have a very innovative management team. We recently extended our network services contract with them and are now engaged in discussions with them around some of the new innovative solutions that I mentioned. We like to co-create with customers. So we certainly appreciate the increased focus on the payments innovations that are a big potential for us in health care.

[Stephanie Demko:]

In that line of thought, could you talk to more of some of your innovation in the consumer-facing portion of your payments business? And is there any an opportunity in kind of marrying this with your growing hospital facing Rev-Cycle solutions?

[Neil de Crescenzo:]

Yes. So I think, in fact one of the things that's a big advantage for us is the way that we facilitate payments, not only for consumers, whether through co-pays or people paying their medical bills. But then of course, all the work we do around payments from payers to providers in order to make sure that we facilitate payments at all stages that are in the value process.It actually allows us to differentiate, because we also have the clinical, administrative and other more industry-specific types of financial information that allows us to add to the raw payments, if you will, transaction key areas that enables payments like electronic attachments, electronic prior authorization and the data that's needed and needs to be maintained under the healthcare regulatory regimes in order to facilitate payments to make sure they're accurate and that the payment information is understood by consumers.

[Stephanie Demko:]

Okay. Thank you for taking my questions. Appreciate it guys.

[Neil de Crescenzo:]

Thanks.

[Operator:]

Thank you. Our next question comes from Jailendra Singh with Credit Suisse. Your line is open.

[Jailendra Singh:]

Thanks a lot. First, just a quick clarification on your FY 2020 EBITDA growth guidance of 6% to 8%, is it fair to say that it includes slightly less than 2% benefit from -- $18 million benefit from this ASC 606 adoption this year?

[Fredrik Eliasson:]

It includes some benefits from that as well. That's correct.

[Jailendra Singh:]

Okay. Then moving onto FY 2021, thanks for the color on that. Can you help us understand how much of that revenue growth acceleration you expect in FY 2021 is driven by acceleration in core growth market share gains or versus some of the headwinds you're facing this year going away in FY 2021? Give us some flavor, like how much new market gains or market projects can you expect next year?

[Fredrik Eliasson:]

Okay. Clearly, the acceleration itself is, to largely degree, driven by what we are expecting to see out of our RCM and Imaging business going forward. Our core growth as we said here that we defined as our Software and Network business ex-Connect Analytics business, as Neil said earlier, around 5% is what we're expecting here. We like to see that accelerate as well, but the key driver is really returning those two businesses to growth as we're getting into FY 2021.

[Jailendra Singh:]

Okay. And then last one, I just want to get your thoughts around the implications of the current political environment. Are you seeing clients putting any kind of projects on hold as we enter the election year next year or maybe because of the uncertainty around ACA focus on price transparency and other potential reforms coming out of DC?

[Neil de Crescenzo:]

Well, actually less than seeing people put things on hold, we're seeing people ask more questions about how they're going to grapple with some of these new changes or potential changes in reimbursement models. I think the focus that we've had on healthcare consumerism, both in our own offerings in joint efforts we've done with Adobe and Microsoft around patient experience, in our partnership with MDsave have really made us a destination among the different player as they deal with -- to help them try to determine how to react to some of these changes that you reference.Also when you look at some of the new reimbursement models, they all focus on reducing cost, improving access and having a more value-based healthcare system. So the investments we've now made in many years to have -- over many years to have leadership role in those segments has really caused us to be very meaningfully engage with our customers to see how we can help them with any of the changes that we'll see due to reimbursement changes.

[Jailendra Singh:]

Okay, thanks a lot.

[Operator:]

Thank you. Our next question comes from Sean Wieland with Piper Jaffray. Your line is open.

[Sean Wieland:]

Thank you. Good morning. On your CommonWell renewal, aside from the extension in time, can you tell us maybe how that renewal is different in terms of what you're bringing to that organization from a technology or services capability?

[Neil de Crescenzo:]

Yeah, absolutely. Thanks, Sean. So first of all, as we've mentioned, our network capabilities in conjunction with AWS has really become second to none, both because of the integration of technologies like Blockchain, but also the scale and the cost efficiencies in security we've been able to design into the network over recent years. So it's really become a capability that's second to none in the industry.In addition, I'd say, some of the evolution of our relationship with CommonWell and really CommonWell's continued growth in the industry has focused on new capabilities such as document retrieval and others that weren't really practical until you achieve the level of pervasiveness that they've now achieved. So it's a case technology capability that's really improved dramatically in recent years due to the investments we've made, plus new use cases, if you will, that are enabled by the ubiquity of the connectivity that we have in the market.

[Sean Wieland:]

Great, thank you. And Fredrik a quick one on FY 2021. I also appreciate the sneak peek on the guidance, but what -- how do you think about operating leverage in FY 2021?

[Fredrik Eliasson:]

Well, I think we continue to see opportunities to drive operating leverage going forward. It is not the focus of our guidance, because we have such a disparity between our business units of segment in terms of the margin. So, depending on which one goes faster, it could vary the margin improvement. But clearly, as we move forward, just since we see this year, we're going to continue to drive margin expansion.

[Sean Wieland:]

I understand. Thank you.

[Operator:]

Thank you. Our next question comes from Daniel Grosslight with SBV Leerink. Your line is open.

[Daniel Grosslight:]

Thanks guys for taking my question and congrats on a solid quarter here. I just wanted to dig into the return to growth in RCM Services in 2021, a little bit. So after the outsized attrition rolls off this year, where do you think attrition normalizes in 2021 and beyond? And how should we think about same-store sales growth going forward in 2021 and beyond? Should it grow at generally the same rate as healthcare spend?

[Neil de Crescenzo:]

Yeah. I think overall, if you look at that market depending specific on the comparables that you use, but from our perspective, that's a market that can grow 4% to 6% to 7% to 8%. I mean, it really depends on the specific focus area. But from our perspective, that's a good range to think about our overall business. We already see attrition normalizing, when you strip out those $10 million of impact that you saw this quarter and we expect to stabilize that as we continue to improve the value proposition for our customers. So we think the same-store sales growth opportunity is good. We think that market opportunity is good, and as we get this attrition both on the brand side, but also just general attrition to a lower level, which we're seeing already, we think the growth rate going forward is going to be very attractive.

[Fredrik Eliasson:]

And the only thing I'd add to that, we continue to see consolidation in the market, including on the aggregator side. And so we're finding, whether it's concerns about being able to operate at scale, information security, bringing innovation like AI and RPA to bear. The customers are increasingly more demanding, especially the larger ones to come to scaled providers like ourselves.

[Daniel Grosslight:]

Got it, thanks. And then just on the imaging side for 2020. Are we still thinking about kind of flat to slightly down-ish growth returning to kind of 1% to 2% growth in 2021?

[Neil de Crescenzo:]

Yeah, I think that's a reasonable place to be.

[Daniel Grosslight:]

Okay, great. Thanks guys.

[Operator:]

Thank you. Our next question comes from Eric Percher with Nephron Research. Your line is open.

[Eric Percher:]

Thank you. I'll continue with Imaging, this is important part of the story moving forward. As we don't have a bookings number, it would seem that you'll have a feel for how this business or how the market is responding to what you're offering well before we see it in revenue. Can you give us a little bit more on what the mile markers are you'll be looking for and how you might communicate when you do see new wins or adoption?

[Neil de Crescenzo:]

Well, I think first of all just going back to Eric, we really look at the excitement we're seeing among customers in the market. So we continue to have an increased number of active discussions with anywhere from small to mid to large integrated delivery networks, especially now as we're producing the modules in the market that people can get their hands on them and really see the benefits practically among their users.In addition, we go into most of these on-premise implementation, we can typically see a benefit on their operating expense applied to Imaging of at least 20%. So in the increase -- increasingly cost conscious environment many of these IDNs are operating in, that's very attractive. So the combination of having this really the only native-Cloud AI-first platform being developed in the market plus the operational cost benefit is continuing to help us build a pipeline.

[Eric Percher:]

And maybe a follow-up on a separate topic on the net income Fredrik, I want to make sure I'm just crystal clear here. So we have, at the net income line this year a benefit of $18 million. How do you think about that moving forward? Do you expect that that commission expense remain steady or does it become a headwind and how might that impact net income going forward?

[Fredrik Eliasson:]

Yeah, because of the extended amortization period, it's going to continue going forward. So it's not a headwind. I think we'll generally see as kind of a flat versus this year and next year. Eventually, unless you really accelerate growth, you eventually pay the piper as you amortize something over longer period of time. But we don't see that as being a headwind, and of course it's going to be part of our guidance going forward, but we don't see it as a headwind anywhere -- anytime soon.

[Eric Percher:]

Perfect, thank you.

[Operator:]

Thank you. Our next question comes from Charles Rhyee with Cowen. Your line is open.

[Charles Rhyee:]

Yeah. Thanks for taking the question. I don't think you guys really touched on it so far in the presentation. But your Data Solutions business, maybe give some color here on what you're seeing in sort of selling data into areas like the life science payer space, that seems to be an area of focus for other companies in this space and just wanted to get your -- get a sense on your positioning there and sort of what you're seeing in the market?

[Neil de Crescenzo:]

Yeah, great question, Charles. So we continue to make traction in expanding the use cases for our data and it does start, of course, continuing with the work we've done for many years in the existing payer and provider market. So things like patient referral patterns, comparative cost analytics, especially as we have the greater push at the federal, state and commercial level around price and cost transparency.But as you mentioned, we have hired up and are expanding and have more opportunities now in other markets, such as life sciences around patient recruitment, in financial services around data services for the people who operate HSAs and FSAs financial services companies, and also consumer and media and marketing companies that want to better target the information they provide to consumers.

[Charles Rhyee:]

That's helpful. And then maybe what do you think about the growth outlook then for this segment in terms of growth rates, and do you see this as an area where we could see overall growth start to accelerate?

[Neil de Crescenzo:]

Yeah, we'll continue to look at accelerating the growth of the segment, given we've got a very broad footprint. But as we've described previously, these new areas that are growing, far more rapidly such as payments and the Data Solutions business that you just mentioned. So, we're very happy about the balance we have between steady high-margin businesses that still exhibit growth tailwinds because of the growth of U.S. healthcare and these new innovative areas that we've begun over recent year.

[Charles Rhyee:]

Great. And if I could just sneak one more in. Did you guys -- I'm sorry, if I missed it. But did you -- can you kind of talk about sort of the benefit at all of any kind of cross selling you had in this quarter? And sort of, what do you kind of assume in the guidance for this year and then, your initial '21, outlook? Thanks.

[Neil de Crescenzo:]

Yeah. We certainly have included in our guidance the expectations we're seeing, due to not only cross selling, but really the deeper and more strategic relationships, we're developing with some of the larger players in the industry.So, as you see us continuing to accelerate growth. And as we've mentioned, the steady growth we're already seeing in our core businesses. We're benefiting from the cross-sell opportunity we have, given the breadth of our Solution portfolio, and frankly the size of our customer base.

[Charles Rhyee:]

Great, thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Matthew Gillmor with Robert Baird. Your line is open.

[Matthew Gillmor:]

Hey, thanks for the question. Maybe, following up on the RCM Services outlook, you quantified the contract exits at $10 million, which was helpful. Can you also quantify the revenue pickup that you may get from some of the sales that you mentioned, just so we can kind of understand the trend line over the next couple of quarters?

[Fredrik Eliasson:]

Yeah, I mean, I think, obviously, that is part of our embedded growth rate improvement, as we get to FY '21. We will try to continue to give you proof points along the way for that.And as I said, we are seeing a strong funnel of new deals that we're signing. And it gives us the clear visibility and confidence frankly, that we're going to be able to hit those numbers next year.

[Matthew Gillmor:]

Got it.

[Neil de Crescenzo:]

Yeah. And that's included in the guidance that Fredrik, has provided.

[Matthew Gillmor:]

Okay, fair enough. And then, the strategic assessment on the, Connected Analytics, I know there's probably not a lot you want to say on that topic. But can you maybe, just give us a sense for, where you stand on the process. Are you in the latter stages or early stages, and just sort of a range of potential outcomes, for that business?

[Neil de Crescenzo:]

Well, you know, I still think, we're just being thoughtful about thinking through that, and looking at the capabilities that we have, with those analytical assets. So we're really just in the midst of the process. And we'll continue to look at the core capabilities there. And the options we have for them.

[Fredrik Eliasson:]

Either way, in terms of the outcome, I mean, our guidance for next year will stand. And we're going through a very thoughtful process that have been. And will continue to make sure we optimize the value of those assets. There is some great assets in there we just want to make sure that it's in the right hands. And that we're utilizing it appropriately.

[Matthew Gillmor:]

Got it. Thank you.

[Operator:]

Thank you. And I'm showing no further questions, at this time. I'd like to turn the call back over to, Neil de Crescenzo, for closing remarks.

[Neil de Crescenzo:]

Well, we're very pleased all the questions that, we received on the call and the interest in our Company. We're also very excited on behalf of our customers, partners and our 14,000 employees, to have had such a strong quarter after our IPO.And we'll look forward to continuing our discussions with investors. And making sure we answer your questions. And are able to communicate the excitement we have over our accelerated growth and the potential for our Company in improving healthcare.So, thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for joining. And, everyone have a wonderful day.