Change Healthcare Inc.
Q2 2020 Earnings Call Transcript

Published: 14 Nov 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Change Healthcare Second Quarter Fiscal Year 2020 Conference Call. At this time, all participants are in a listen-only mode. Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to Evan Smith. Please go ahead.

[Evan Smith:]

Thank you, operator. Good morning, and welcome to Change Healthcare's earnings call for the second quarter of fiscal 2020 which ended on September 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.First, Neil 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 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 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. Good morning, everyone. I'm pleased to report second quarter Solutions revenue of $739 million and adjusted EBITDA of $218 million. During the quarter, 14,000 team members of Change Healthcare continued to execute on our strategic initiatives to deliver core growth across our leading franchises, transform, our RCM services and imaging businesses and focus on operational excellence to further improve margins and free cash flow.To underscore the importance of the work we do here at Change Healthcare, you may have seen a recent JAMA study appropriately titled Waste in the US Healthcare System, which identified almost $1 trillion in waste in US healthcare. Hundreds of billions of dollars in waste were attributed to the specific areas of administrative complexity, fraud waste and abuse and uncoordinated care. At Change Healthcare, we are laser focused on addressing these challenges. We invest in innovation and deliver integrated end-to-end solutions and services to both payers and providers.We help our customers reduce costs, improve quality and enhance consumer engagement. In a moment, I'll provide some tangible examples of both innovation and execution, reflecting the markets take-up of our solutions while we continue to obtain the financial trajectory we have communicated to investors.As we continue to see growth across our core franchises, we are moving decisively on the transformation of our RCM Services and imaging businesses and as a result, winning new business. We continue to advance our enterprise sales and account management capabilities, which will create broader, deeper and more strategic relationships with our customers.Now, let me provide you with some insights and how we're executing our growth initiatives and embedding innovation across our platform. Our enterprise sales efforts leverage the breadth, depth and quality of our product portfolio to large customers. For example, we had a significant contract win that expanded our relationship with one of the leading National Cancer Institute designated comprehensive cancer centers in the United States, establishing Change Healthcare as their revenue cycle management or RCM vendor of choice. At this customer, we provide an integrated RCM software, analytics and services solution to accelerate payments, leading the customer to target a reduction in accounts receivable of approximately $150 million by working with Change Healthcare.In RCM Services within our Technology-enabled Services division, we use our data and analytics to uncover performance improvement opportunities as well as new growth prospects for our customers. Our comprehensive approach enables us to improve patient access and experience, optimize reimbursement management as we administer daily revenue cycle and business operations more effectively, as well as provide optimal payment solutions. Our strategic approach combined with our increased sales efforts focused on hospitals and physician aggregators continues to drive new opportunities for growth.In the first half of the year in RCM Services, we have seen a double-digit year-over-year increase in our bookings and a solid increase in the average size of our contract wins. This is indicative of our initial success as we transform this business over the next couple of years. A notable RCM Services win in Q2 that I'd like to highlight is a nearly $10 million in annual revenue contract with one of the largest hospital systems in the country to provide patient access solutions. This contract illustrates how our cross-selling initiatives is expanding our relationships with customers like this who already buys a great deal of our Software & Analytics solutions, and this relationship also provides additional opportunity to extend our services beyond this initial mandate.Shifting to our Imaging business, we continue to execute on our strategic initiatives there. 10 years ago, the health service leaders and Government of Ireland wanted to transform how diagnostic services are delivered to their citizens. Their vision was to build a national diagnostic imaging system that would allow clinicians to have full access to a patient's diagnostic images and reports wherever in the country they were acquired. Change Healthcare was selected to partner with Ireland to deliver this vision. Today, Ireland has one of the largest single imaging systems in the world, supporting over 40,000 clinicians and the almost 5 million citizens of Ireland. Our customer, Ireland's Health Service Executive and Change Healthcare delivered on that vision.As a vote of confidence in the special partnership and in Change Healthcare's abilities, we are pleased to announce that this quarter, we signed a deal with Ireland's Health Service Executive to extend our contract until 2026 and provide a full enterprise imaging platform delivering advanced diagnostic capabilities and technologies. This landmark investment in enterprise imaging covers the acquisition of all digital imaging in the country

[Fredrik Eliasson:]

Well, thank you Neil. And good morning, everyone. Before I discuss the quarter, I want to reiterate our financial and business objectives which are threefold. First, driving continued revenue growth across the portfolio through continued innovation and expanded enterprise sales initiative. Second, execution on our enterprise imaging and RCM service transformation initiatives. And third, operational excellence to improve our operating performance with a focus on cost optimization and automation. We remain on target to execute on all of these core objectives for the full year.And now let me review our financial results for the quarter and then provide guidance for both the third quarter and the full fiscal year. As you can see here on slide 6, and as I outlined last quarter Change Healthcare adopted a new revenue recognition accounting standard ASC-606 effective April 1st, 2019 on a modified retrospective basis. In our financial results for April 1st this year and going forward, we will 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 second of fiscal 2020 under ASC-606, solutions revenue was $739 million. Revenue was ahead of our expectation given strong performance in our network solutions and technology enabled services segment during the quarter. These results included $10 million decrease in revenue as a result of the change in accounting standard. This comes from the new accounting standard where more of our revenue primarily related to our decision support solutions in our software and analytics segment was recognized in the first quarter which aligned with the annual delivery of certain product and services.As in the current quarter, ASC-606 will also negative impact our results when compared to ASC-605 in Q3 and Q4 of fiscal 2020, although it is not expected to have a material impact on the full year results.Adjusted EBITDA was $218 million for the second quarter in line with our expectation placing us in a solid position to meet our full year financial objectives. Adjusted EBITDA was negatively impacted by the previously mentioned revenue impact from ASC-606 primarily in our software and analytic segment, an additional investment to support the growth of our data solutions and network businesses. This is partially offset by $6 million favorable impact on commissions and new contract set up cost as a result of the new accounting standard.For the full year, we expect the positive impact on commission expense to be about $18 million or approximately $3 million per quarter for the second half of the year. Adjusted net income was $87 million and adjusted net income per diluted unit was $0.27.Now moving to our results under ASC-605 for comparative purposes on slide 7. For the second quarter of fiscal 2020 under ASC-605, total revenue was $806million, compared to $800 million in the same period of the prior year. Solutions revenue was $749 million compared to $738 million for the second fiscal quarter of 2019. We will focus our presentations on solutions revenue as it excludes postage revenue which is merely a pass-through.Overall growth in the second quarter revenue was 1.5% which included $15 million from planned contract eliminations in a technology naval services business, the year-over-year impact related to optimization of a connected Linux solutions business and effect of prior year one-time non-recurring revenue of $6 million in our imaging business.Adjusted EBITDA for the second fiscal quarter of 2020 was $222 million compared with $216 million in the same period of the prior year. Adjusted EBITDA margin as a percent of solutions revenue for the second quarter of fiscal 2020 was 29.7% compared to 29.3% in the same period of the prior year.Net income for the second fiscal quarter of 2020 was $4 million resulting in net income of $0.01 per diluted unit compared with net income of a $113 million and net income of $0.45 per diluted units respectively for the second fiscal quarter of 2019. Note that net income in the prior year period included an after-tax gain of approximately $111 million or $0.44 per diluted unit for the sale of the extended care business. Adjusted net income for the second fiscal quarter of 2020 was $91 million, resulting in adjusted net income of $0.28 per diluted unit compared with adjusted income of $90 million or $0.35 per diluted units respectively for the second fiscal quarter of 2019.Adjusted net income reflects improved margin including a $10 million reduction in our strategic and integration and expenses which were more than offset by higher amortization expense related to strategic and integration CapEx and higher income tax expense in the current period. The per-unit results also give effect at IPO with $324 million fully diluted units outstanding in the second quarter of fiscal 2020 compared to $253 million fully diluted units in the same period of the prior year.Now let's take a look in more detail at our performance of our segments on the next slide. Once again, we're using the prior accounting standard ASC 605 to provide a more meaningful year-over-year comparison, starting with revenue the software analytics segment grew 1.5% year-over-year. Growth in our software analytics segment was in line with expectations including strong performance in our leading franchises like payment accuracy and decision support.Results were partially impacted by a previously disclosed strategic assessment and optimization of our connected analytic solution and the impact of our investments and transition in an imaging business through cloud-based enterprise imaging solution. Our network solutions revenue increased 5.8% year-over-year. Key drivers were volume growth across the network including increased market penetration in a medical network and dental network, continued growth in our data solutions and B2B payment solutions and inclusion of one additional business day.In addition, we continue to make progress and adding new opportunities for growth in areas like payment, e-prior authorizations, new market expansions for data use cases for healthcare marketing and payer data services, including areas like health savings and flexible spending accounts. In our technology enable services segment, overall revenue declined 1%. This includes $15 million of planned contract eliminations. Excluding this plan attrition revenue growth was 3.7% and as you mentioned we continue to drive additional wins and expand our discussions in the Health System and aggregate a market and continue to see more opportunities ahead of us. Overall, the results across business continued support our ability to achieve our revenue goals for the year.Turning to adjusted EBITDA, software analytics grew 6.8% year-over-year. The results were driven by revenue growth, operational synergies and cost initiatives related to connect analytic solution partially offset by the decline in enterprise imaging. Network solutions adjusted EBITDA increased 3% in the quarter, driven again by the growth in data and B2B payment solutions and continued volume growth across the network, including increased market penetration in medical and dental network partially offset by increased investment to support the expansion our data solutions business into new market and expansion of a dental network.In technology enabled services, adjusted EBITDA improved approximately $2 million due to the repositioning of a revenue cycle services and the communication and payment solutions business. Margins improved on a year-over-year basis and we expect that as we move throughout the year, we will see more improved productivity as a result of a real-estate strategy as well as automation and artificial intelligence initiatives. As a result, we expected segments will show stronger year-over-year and sequential adjusted EBITDA and related margin improvement for the remainder of the year.Last corporate expense increased $7.5 million due to prior year indirect tax credit, increased public company expense combined with increased IT expense for company-wide initiatives. Moving on to cash flow and a balance sheet on slide 9.Free cash flow was $77 million for the three months ended September 30th fiscal year 2020, compared to negative $22 million for the same three months in the prior year. Year-to-date pre-tax was $94 million versus a $103 million in the prior year. Adjusted free cash flow was a $113 million compared to $34 million in the prior year and for fiscal year-to-date adjusted free cash flow was a $174 million versus $233 million in the prior year. And once again prior year-to-date fiscal 2019 includes the proceeds from the sale of extended care.We continue to expect free cash flow to improve year-over-year due to the earnings growth, improved working capital, reduce strategic and integration expenses and reduced integration related CapEx compared with the prior year. Total long-term debts include in the short term portion was slightly under $5 billion with credit agreement net leverage ratio of 4.9. During the quarter, we paid out $890 million in debt.Our liquidity remains strong ending the quarter with $73 million of cash and cash equivalents. And it's fully undrawn revolver. Our objective remains to reduce leverage by approximately half a turn a year including debt pay down and improve operating performance.Now moving on to our financial guidance and key assumptions on slide 10. As I stated last quarter, we do not intend longer-term to provide quarterly guidance but given the impact of ASC 606 and this being our first year as a public company, we felt it was important for investors to get a clear view of our quarterly expectations. Our expectation for the third fiscal quarter this year is for solutions revenue to be the range of $745 million to $760 million, which includes a greater impact from ASC 606 compared to the second quarter including approximately $5 million, anticipated 606 impact headwinds for TES in contrast to the $3 million benefit we had in second quarter.We also expect corporate eliminations to remain flat with the second quarter for the remainder of the year. Adjusted EBITDA is expected to be the range of $225 million to $235 million as a result of continued improvements in overall margins year-over-year and sequentially, partially offset by the ASC 606 revenue impact on TES that I already mentioned and $3 million lower benefit from permission deferrals.In addition, we expect adjusted net income to be the range of $98 million to $103 million. Moving on to a full-year guidance where we are reiterating our full year fiscal 2020 expectations including revenue growth of 1% to 2% which is previously stated will be subdued due to the strategic repositioning of our imaging and RCM services business and a strategic assessment process of the connect analytics business. Included in the guidance is the expectation that solutions revenue and software analytics segments in the fourth quarter will be in line with the prior year reported results due to the impact of ASC 606 and slower than expected timing relates the ramp up of a new contract, as well as improved year-over-year revenue in TES versus our prior expectation as a result of new customer wins.Even with subdues revenue performance, we expect adjusted EBITDA growth for the full year of 6% to 8% due to the strong pipeline of productivity initiatives across our company. We also expect 9% to 11% growth in adjusted net income this year. 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 a temporary integration CapEx and operating expenses to be above $400 million. Based on our bookings performance year-to-date, for our fiscal year 2021, the company continues to expect revenue growth of 4% to 6% as we see the business that we're repositioning this year returning to growth and we expect our adjusted EBITDA growth of 6% to 8% next year as well.As I mentioned earlier, while second quarter revenue decreased 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 by about $3 million per quarter for the remainder of the fiscal year, for a total of $18 million for the full year.To provide even further transparency for our investors, I would like to highlight the following key assumptions for the full fiscal year that supports 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 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. We delivered a strong first half and remain 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.Our continued investments in innovation and advancement of our operational improvement strategy will be the foundation to drive accelerated performance as we move forward. Our 14,000 team members are working diligently to deliver value for our customers day, helping them optimize financial performance eliminate administrative waste, improve clinical outcomes and enhance engagement and access to health care for consumers. Now I'll turn the call over to the operator to take questions, operator?

[Operator:]

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

[RobertJones:]

Great, thanks. Thanks for taking the questions. Neil, you said that bookings doubled in the quarter, if I heard you correctly, was just looking to get a little bit more context on some of the wins in the quarter that you highlighted. It sounds like a number of positive wins in RCM, a couple in imaging, the payment accuracy contract you mentioned risk adjustment behavior. Just a number of things you highlighted there. I guess the real question is how would you characterize these wins relative to kind of normal course of business and was any of them really truly big and sizable and incremental to where you guys were pacing previously across any of these segments?

[NeildeCrescenzo:]

Sure, Bob, just to be perfectly accurate what I talked about was the bookings growth in TES; it said that it was a double-digit rate relative to the previous half year for the first half of this year. So doubling bookings would be good too but just wanted to be accurate there. In terms of the deals that I mentioned, including ones as you mentioned across really the whole portfolio, RCM, imaging, RCM services, risk adjustment, payment accuracy, our InterQual business our payments business. I'd say the thing as you sort of asked above trend is really our ability to build on the relationship we already have with these customers.Every single one of these other than the new logo. I mentioned that imaging where we displaced the very significant competitor essentially an example of beginnings of seeing our enterprise strategies and cross-sell activities pay off. And so I think that's important point to note, as we've talked about that previously.

[RobertJones:]

Great, that's helpful. And then I guess, Fredrik, maybe just to follow up on the back half cadence, it sounded like you pointed out, a $3 million, 606 expense benefit over the back half. But if I heard you correctly, you're expecting $5 million 606 headwind in 3Q. So should we expect $11 million 606 benefit in 4Q? Just want to make sure I understand the moving pieces around what could cause the cadence in the back half to look a little different than maybe what folks were thinking previously.

[FredrikEliasson:]

Yes, sure. So the third quarter will be the quarter we have the most headwind from 606 and we've said that obviously the biggest piece is an S&A but we also have a negative impact of about $5 million in TES in the third quarter as well. So we had a $3 million benefit this quarter, we are going to go to a $5 million negative there that's about a $8 million swing in addition to that, so that's on the revenue line. And then on - in addition to that, and on the expense side, we had about $6 million commission deferral benefit this quarter, it will go down to $3 million a quarter for the remainder of the year. So that's part of the reason why you're seeing a sequential change from what you saw in the second quarter.

[RobertJones:]

Got it, okay. And then the fourth quarter, you would see kind of the catch-up of some of those items?

[FredrikEliasson:]

Well, as you remember, first quarter we pull through a lot of revenue year-over-year. And so the S&A impact is about $13 million, $14 million, $15 million a quarter between the second, third and fourth. The fourth quarter is the one we see the most headwinds in S&A specifically, but we have a little bit of pickup and positives on TES the quarter, but overall the basic implementation of 606 full revenue forward into the first quarter and then we're seeing to offsets on the revenue side. For the second, third and the fourth. And I would say overall as we think about the third quarter, specifically when you adjust for the 606.I think the guidance that we gave out on the revenue side is consistent with our full year guidance about 0% to 2% growth on the adjusted EBITDA line, once you adjust for 606 about 3% to 7%. So consistent with our overall cadence and really nothing has from our perspective changed in our expectations neither in terms of the quarterly cadence nor in terms of our full-year expectation.

[Operator:]

Our next question comes from Manav Patnaik of Barclays. Your line is open.

[ManavPatnaik:]

Thank you. Good morning, gentlemen. My first question is just, again, in the context of all good deal wins, you've highlighted in your pipeline like have these wins been coming in better than what you had expected or in line. And if you could also just comment around retention of existing business?

[NeildeCrescenzo:]

Well, I mean we looked at the year is benefiting from the increase in our enterprise sales capabilities, cross-sell, all supporting our overall trajectory to 4% to 6% revenue growth in FY'21. So I think these are just examples kind of transactions that we had hoped would happen and we're now seeing examples, because of the efforts we put into place. And from an attrition or retention perspective, we're tracking to what we expected for this year and of course that's included in our guidance and expectation.

[ManavPatnaik:]

Got it. And then just I guess yesterday there was the announcement of the AWS data exchange. And I was just hoping you could give us a little color on the benefits of being part of that maybe there any basic - how we should think about the pluses and minuses of joining that.

[NeildeCrescenzo:]

Sure. For people that might not have seen that AWS announced this data exchange yesterday where they said they were bringing together leaders in their respective fields to make it easy for customers to securely find, subscribe to and use third-party data in the cloud. As this gets launched, we're providing a quarterly market insights report which is optimized for local geographies with easy to digest measures and trend information.Just as an example, now we provide population health statistics, procedure utilization data and some other key financial insights and the report is all based on identify data that is aggregated appropriately permission and HIPAA compliant. We believe that participating in AWS data exchange provides us with the lower cost of distribution for some of our data and insights and analytic assets. Access to a broader set of customers who can benefit from our data including at the small end-of-the-size spectrum. And we'll continue to leverage this in all our IP into this new channel, hopefully in the months and years ahead.

[Operator:]

Our next question comes from Sean Wieland of Piper Jaffray. Your line is open.

[SeanWieland:]

Thanks very much. Good morning. Wanted to ask about the changing competitive landscape in revenue cycle in particular with Cerner, shall we say de-emphasizing that. How is that affecting your go-to-market strategy here?

[NeildeCrescenzo:]

Well, it really hasn't affected our go-to-market, I think it's a recognition that as we've long said, having a broad set of capabilities that are not tethered to any particular EHR circumstance. But really focus is on using data analytics and optimization to improve the revenue cycle continues to be attractive to customers and some of the wins that I mentioned on the call, Sean. So I think we remain focused on our strategy and I think we're continuing to see take up in the market.

[SeanWieland:]

And so on the win that you highlighted with the cancer center. Can you call out maybe whether some of the key reasons for that one?

[NeildeCrescenzo:]

Yes, I mean it was a head-to-head competition with all the revenue cycle software vendors as you would expect. And again as I mentioned, it was really multiple facets of both our software products and our services in a complex environment and a large scale institution. So I would say it was our ability to have multiple aspects of value to help their process and produce as I mentioned a very large expectation in terms of improving our cash flow.

[Operator:]

Our next question comes from Ryan Daniels of William Blair. Your line is open.

[JaredHaase:]

Yes, hi, this is Jared Haase for Ryan this morning. Thanks for the question. Just wanted to ask somewhat of a similar question on the competitive landscape. Just curious if you think about the business more broadly curious if you could comment just on how you're seeing the sort of value proposition resonate with clients, as we think about some of the kind of continued investments in innovation around either artificial intelligence or other advanced sort of analytical capabilities. Just any thoughts there on the value proposition. And then just as maybe a follow-up. Have you seen that drive sort of an uptick in the win rate in competitive situations?

[NeildeCrescenzo:]

Great. Well, thanks for the questions, Jared. Let me start with the first one. I think what we're seeing in the market, especially with the continued consolidation among many market participants that our ability to have a broad set of solutions that allows them to buy more types of value from Change Healthcare continues to resonate with customers, including small, fast growing companies, as well as the large industry companies that are formed, that are being formed. What we see is that our approach of selling on value, the ROI that we can provide these customers continues to be important as they themselves are seeking to either grow quickly and not do things that perhaps we can do much more efficiently or effectively than they can, as well as the larger companies in the industry that are seeking to improve their own financial performance.I think the win rate that we've seen for some of the examples that we gave continues to move upward. And I think it's because we continue to be effective and looking at cross-selling opportunities with that sort of broad product portfolio and services portfolio, as well as in ROI-based approach to selling.

[Operator:]

Our next question comes from Lisa Gill of JP Morgan. Your line is open.

[LisaGill:]

Great, thanks very much. Good morning. I just really want to talk about the gross margin profit in the quarter, it was down sequentially. I'm just wondering if there's anything specific to call out here or is it just business mix and how do we think about that going forward?

[FredrikEliasson:]

Yes in the first quarter, we took about 80 basis points year-over-year in the second quarter about 40 basis points so we look at the EBITDA, adjusted EBITDA margin, we expect actually acceleration of kind of year-over-year improvements as we get to the second half of the year, because some of the initiatives that we have in place. And so the margin expansion we have talked about since the IPO process that we expect continued margin expansion, not just this year and next year, it does vary little bit depending on the business which is why we don't make it a primary metric, because if you grow a little bit faster in your 20% margin business versus 60% margin business, it can change from one quarter to the other. We don't want to over emphasize this, but clearly margin expansion is a big part of the story going forward as well.

[LisaGill:]

Great. Thanks guys. I was talking about gross margin versus EBITDA margin, is there anything specific as we think about the gross margin, is it again - is it mix of business where one's carrying a better gross margin than another?

[FredrikEliasson:]

Yes, it does vary; same answer is through the gross margin. I think the prior metric that we look at it within our organization is to kind of EBITDA margin, adjusted EBITDA margin, I think that's more meaningful way of looking at it because if you look at the COGS or something like that, it does vary and that you have integration expenses and other things in there. So it's very hard to discern. I think the more meaningful way for our investors to look at it is to look at individual units at the EBITDA margin.

[LisaGill:]

Okay, that's helpful and then just my follow-up question was around these incremental sales that you talked about in the quarter, can you just remind us what your expectations were for guidance because they clearly sounds like you had more wins than what a lot of us were expecting and I'm just curious as to how this will flow through the income statement? So are these wins that will impact more of fiscal 2021 or you already had them in your expectations and just curious how to think about it for the model?

[NeildeCrescenzo:]

And Lisa, this is Neil. Good question. These are really in line with what we are expecting and really support the acceleration of growth into next year; which as you know, we've targeted 4% to 6% revenue growth. I know we did give you a lot of examples on this call, but it was basically to answer some investors' questions about giving some tactile examples of when and how we're winning in the examples of how our cross-sell enterprise sales efforts are bearing fruit.

[Operator:]

Our next question comes from Jailendra Singh of Credit Suisse. Your line is open.

[JailendraSingh:]

Thanks a lot. Good morning. Can you guys talk about the synergies you realized in the quarter? Maybe also talk about the drivers behind the ramp in synergies you expect in the second half?

[FredrikEliasson:]

Yes. So to remind everybody coming out of the transaction between Change and McKesson, we expect $150 million of synergies. We had $87 million left to go this year at the beginning of the year, we did six in the first quarter, 10 here in the second quarter and we expect it to accelerate throughout the year. And so we have good line of sight to that, obviously, it's coming from a variety of initiatives in terms of facilities, in terms procurements, and also some of the partner for success initiatives that we have in place as well. So is continuing consistent with our original expectation is that by the end of this year, we'll have $40 million to $45 million left to get in FY'21 and it all kind of supports our EBITDA margin expansion and also the EBITDA growth that we've outlined.

[JailendraSingh:]

Okay and then my follow-up, Neil, maybe can you spend some time about on the implications and opportunities for Change Healthcare from all this push for healthcare price transparency from the administration?

[NeildeCrescenzo:]

Certainly, Jail, we've been leaders and working with everyone in the industry, including the federal agencies, state agencies, payers and providers around price and cost transparency. It's one of the areas where we have a tremendous amount of impact because of the data we have and the ability to use the identified data to have insights for our customers as to cost and price trends, as well as the transparency around them. In fact, one of the areas that we focus on with our services customers' is around product we have called growth analytics. Where basically they can get insight into what's happening in their environment including price and cost trends, so that then they themselves as a provider, it could be more efficient and effective and looking as to where to open practices and how to gain market share.So I think this is one of the things we've long invested in, in fact, as I mentioned to you and others over the time, maybe a little ahead of the curve, but it's good to see that there is an increased focus on this to help improve the efficiency and the effectiveness of healthcare.

[Operator:]

Our next question comes from Eric Percher of Nephron Research. Your line is open.

[EricPercher:]

Thank you. A question on Connected Analytics, it sounds like year-to-date this is run similar to your expectations for the year. Let me first make sure that is the case. And then any perspective on moving forward how does this fit into the business and we see a decision to exit the business, will there still be something that you need to create a relationship and have as part of the Change portfolio?

[NeildeCrescenzo:]

Yes. So, we've said throughout the last six months that we are optimizing that solution set to ensure we create the most value from it; we have certainly had revenue headwinds in both first quarter and second quarter. We expect that to continue throughout the year. We're obviously going to as we go through this process, we're going to update in terms of what is the long-term plan for it and but right now, there is no - there are no additional things we can share. It is something we've been very transparent about that we're working through and hopefully at some point here, we will have further updates.

[EricPercher:]

Okay, and as it implies to fiscal year 2021, is there any assumption today that either the headwinds abate or that there is improvement when you look at the growth expectation from '20 to '21?

[NeildeCrescenzo:]

Our assumptions in the fiscal year '21, the guidance in terms of the top line, 4% to 6% is that we will either have that or not have that as part of a headwind, but we will have to deal with that. But that's factored into the guidance.

[Operator:]

Our next question comes from Sandy Draper of SunTrust. Your line is open.

[SandyDraper:]

Thanks. Sorry, guys, I couldn't figure out how to get myself off of mute, technology challenged. So one of my questions is actually just asked, so I guess just one question here. Neil and maybe a little bit Fredrik, when you think longer-term about AI natural language processing, newer technologies, you talked about a lot. When I think about taking out costs, how much of this is taking out cost for the customer and the other side is how much you can use that to take out cost for years. I'm just thinking about - I think 14,000 people that you have, when I think about 3 to 5 years, is that a number that could actually be flat or lower, even if you're growing because you're using that technology or is it technology really about taking off the burden in the cost from the customer. Thanks.

[NeildeCrescenzo:]

No, Sandy, that's a great insight and it absolutely is both. In fact, going back to Sean Wieland's question about that RCM win, that's a great example for us bringing to bear some of the innovations, we've announced around our AI solutions in the revenue cycle arena in that case both for better performance from the software that customer uses, as well as the services we provide them. But for your point using which sometimes call robotic process automation or intelligent process automation as we call it, as well as AI solutions. We fully expect them to also improve the efficiency of our own operations excluding our service operations and that really underpins Fredrik points earlier about us seeing continued margin improvement for many years into the future.

[Operator:]

Our next question comes from Stephanie Demko of Citi. Your line is open.

[YueliZhang:]

Hey, guys. This is Joy Zhang on for Stephanie. Could you provide some color on your near-term cash requirement priorities, namely if you're more focused on paying down your outstanding debt to reach sub four times net leverage target or if you want to be more flexible to pursue M&A.

[FredrikEliasson:]

Yes. So as we've consistently said I mean number one priority is definitely to pay down debt to get to that interim marker that we've set out for ourselves, which is around four times to your point. It isn't always going to be linear. We are going to continue to look for opportunities to either tuck small things in or add growth capabilities that makes more sense for us to acquire versus build ourselves or look for partnership minority investments as well, so, but there is no doubt that the priorities is to pay down debt. But it won't be completely linear between now and the time we get there.

[YueliZhang:]

Got it. And given that the IPO lock up expires on December 24th. Could you provide an update on the McKesson ownership and in your expectations for when you'll be selling down your share?

[FredrikEliasson:]

Yes. So, my understanding is that McKesson shared an update at their earnings release in terms of they have started to exit process and expect something within the 6 to 12 months from that point. It's obviously a decision completely up to our shareholders. Neil and myself and the team here is working and providing whatever support we can and will continue to do so, but ultimately this is completely up to the shareholders.

[Operator:]

Our next question comes from Michael Cherny of Bank of America. Your line is open.

[AllenLutz:]

This is Allen in for Mike. Thanks for taking the questions on imaging. You guys talked about the Enterprise viewer last quarter in that launch. How is that performing versus expectations? And then how should we think about the revenue contribution through fiscal 21?

[FredrikEliasson:]

It's performing very well relative to expectations and as it sounds like, as you know, in your question. You never should count on that in any product launch. So it's a great - it's a great question. I think the fact that both our roadmap and the initial performance of our initial modules is one of the reasons why some of the large wins; I mentioned we gain the confidence of prospects that turn to us for their long-term solution for imaging. In terms of the impact, we've included that in our guidance and our expectations for next year. We've mentioned that this will be a journey as we really lead at bringing the industry to a cloud-based enterprise imaging platform. So we continue to see the same trajectory that we had estimated in our previous discussions.

[AllenLutz:]

And then, congrats on the imaging win in Ireland. Can you talk about what drove that partnership and if there are any other European countries or any other global countries where a similar opportunity exist?

[NeildeCrescenzo:]

Well I'm not going to sort of speculate on some of the other countries and their approaches to enterprise imaging, I'd say what drove that was really a common vision of how to get better patient care and more clinician satisfaction deployed obviously across a large geography with a large number of clinicians and patients. So when you start with that vision and think about a fundamentally different approach that leverages modern technology including cloud-based technologies, AI we really had a common vision between us and the Irish government and Health Service as Executive and that really drove the continuation of what had already been a decade-long partnership, all the way now to 2026.

[Operator:]

Our next question comes from Daniel Grosslight of SVB Leerink. Your line is open.

[DanielGrosslight:]

Hi guys, thanks for taking the question. You previously noted that your core business which represents around 80% of EBITDA has grown around 5% this year, any changes to the growth prospects of the core business, and you also noted that - around $15 million of attrition in TES, plant to elimination of contracts in TES versus $10 million last year. How should we think about the cadence of attrition in TES of those planned contract eliminations for the balance of the year?

[FredrikEliasson:]

Sure. Good question. So in terms of your first part of the question. Nothing has fundamentally changed in terms of our core business; we continue to be excited about the opportunities not just to maintain that growth. But over time as we continue to expand our capabilities to even further enhance that. So nothing has changed in terms of the core business, we continue to see that kind of 4.5% to 5%. Second in terms of the planned attrition that we have in TES. We've said it's about $50 million for the year; we have about $15 million year in the second quarter. We expect that the third quarter will be similar to that and then start slowly but surely tailing off in the fourth quarter and with most of it behind us. When we get to the first quarter. So it will get progressively easier once we get to the fourth quarter.

[DanielGrosslight:]

Got it. And just as a follow-up, you guys had a pretty strong beat this quarter. Beat the midpoint of your guidance by 18 million bucks, but you kept fiscal year 2021 guidance the same. So just curious how much of that - this quarter was due to pull through from 3Q and 4Q. And how much is it just general conservatism? Thanks.

[FredrikEliasson:]

Yes, I mean I try not to be too conservative - guidance because eventually that you're not going to believe my guidance. But we did have stronger than anticipated revenue and a lot of that was due to timing which is why we have not changed our full year guidance, and we're making sure that from our perspective, we're executing as we had expected. There will be variations from quarter-to-quarter, which is ultimately what we're not big fans of the quarterly guidance because every - at the end of each and every quarter, there are things that can happen or won't happen in terms of renewables especially renewals is a big part and we got bigger flow-through that we had expected this quarter. But it doesn't change our expectations for the full year.

[Operator:]

Our next question comes from Matthew Gillmor of Baird. Your line is open.

[MatthewGillmor:]

Hey, thanks for the question. I want to get an update on the enterprise sales strategy. From Neil's comments, it sounds like that was a key factor in driving some of these wins, you referenced, if you could take a minute to remind us how Change historically engaged with clients in the past was it more siloed and what's different about the new approach and how far along are you in converting and resourcing to the more enterprise sales approach?

[NeildeCrescenzo:]

Yes, thanks for the question. Matthew, I mean, as we mentioned, even during the IPO process. This is a multi-year process. Myself and other members on the executive leadership team have been through in some cases, multiple times in multiple prior companies. And so we're executing it I would say methodically. Yes, we are seeing the results of it and what it really comes down to a systemically creating an understanding among the broad set of senior executives in our larger customers in particular about all we can do for them and how one plus one equals three by leveraging our data, our AI and our intelligent process automation capabilities. The unique Analytics we provide and having a modular approach.If they'd like a services solution or a software solution or data to power their own internal Analytics, creating that understanding in customers especially large customers take some time, but we are making progress in it and that's why we illustrated such a relatively large number of wins in the different areas when we went through our initial remarks.

[MatthewGillmor:]

And then as a follow-up on the revenue discussion of the upside to the quarter. I appreciate there were some timing benefit that, Fredrik mentioned, I mean it sounds like there was also just stronger underlying performance on the network solutions business, Fredrik mentioned an additional day. I think there were also just better underlying volumes and you had mentioned I think product penetration as well. Can you give us a sense for, if any one of those factors were more important in terms of driving the stronger revenue growth and network?

[NeildeCrescenzo:]

Yes, I mean extra office day without that we would have been definitely below 5% versus a 5.8% that we had. But I mean we're very pleased with what we are seeing across the network business just as well the other ones, but I wouldn't say anything has fundamentally changed where we expected going into the quarter. This business is remarkably stable and I think we have as much recurring revenue as we do, we have great line of sight in terms of our annual performance, but there are variations from quarter-to-quarter, which is why sometimes we read a little bit too much into specific performance from one quarter to the other, which is why we're really focusing on our annual guidance more than anything else.

[Operator:]

Our next question comes from Charles Rhyee of Cowen. Your line is open.

[JamesAuh:]

Hi, this is James on for Charles. Most of my questions have been asked, but can you give us some more details regarding cross-selling, you're realizing the level benefits from cross-selling as expected. I know there's some level of cross-selling embedded within the guidance and do you still see, I think $2.5 billion of cross-selling opportunity you outlined from your top 50 payers and provider customers as you previously noted.

[NeildeCrescenzo:]

Yes, good question, James. Yes. We certainly do and I think that's why some of the examples I gave just given the magnitude of those contracts. Just to give you all a feel for the size of these opportunities by executing on this enterprise sales capability that other question asked about as well as making sure that people understand how we can broaden our portfolio. I think the expectation we had that especially among the larger consolidating folks in the industry that they'd like to have fewer vendors who can provide them more solutions, but do it in a modular fashion where you can provide them solutions either around connectivity, data analytics, software, services continues to be attractive to customers and prospects that we're talking to.

[JamesAuh:]

Okay, great. And also in terms of synergy, they are expected to ramp throughout fiscal '20 but how should we think about I guess the synergy ramp in fiscal '21. Will it be similar or would it be a little bit flatter?

[NeildeCrescenzo:]

I think it's going to be relatively consistent with the -we're just saying it's going to probably be a little bit more at the beginning of the year and then I should tailor off because as you can see right now, we're accelerating throughout this year. And then as logically as we get to the end of it, it's going to come down, it's important for our investors to remember that we set out a $150 million at the onset of this transaction several years ago. We think there are more opportunities to drive productivity, it becomes a very difficult delineation between what synergies with general productivity, but we're going to - we're going to stop counting at $150 million and then it's really going to be ongoing productivity from there.So we have good line of sight for the rest of the synergies that we're looking at, but we also have good line of sight into a lot more productivity, some of the questions earlier alluded to between intelligent process automation AI et cetera that's going to continue to drive margin expansion for many years to come.

[Operator:]

Our next question comes from George Hill of Deutsche Bank. Your line is open.

[GeorgeHill:]

Good morning, guys and thanks for taking the question. I guess the first one for Neil would be you talked a little bit about the new imaging logo. I guess could you talk about the competitive environment you're seeing in the imaging market and whether you're seeing more demand from like acute care space or the ambulatory imaging space, kind of what's driving the decision making process there? And then for Fred, I guess, with respect to bookings could you talk about was there significant bookings concentration, you highlighted a handful of functionalities or is the bookings strength more broad based? Thanks.

[NeildeCrescenzo:]

Sure, George, let me start on your Imaging question. I think the demand as it sounds like you expect might be a bit different in these different segments that you mentioned. And in some of the ambulatory arenas, there's certainly a consolidation going on there, I mentioned aggregators as well on the call, they're beginning to think about how do I have a long-term solution that's future proofed, in terms of the technology and support I can get from a vendor which might not always have been quite their intent historically, if they are much smaller types of ambulatory radiology centers. On the hospitals or integrated delivery network side, we do believe that we're beginning to see people get more and more focus on having a solution that leverage is a cloud native environment.And an AI centric approach versus the departmental on premise approach that has been prevalent in the industry for so many years. So we think we're continuing to see an upward trajectory in the comfort level and then obviously the demand for those sorts of approaches, which of course is why we've been investing in the Enterprise Imaging platform.

[FredrikEliasson:]

Yes, in terms of your second question about bookings is broad based, but it's also consistent with what we had expected going into the year and hopefully, as we said in our prepared remarks, it gives us even further visibility and confidence in our guidance for next year and hopefully our investors will see that as well as another proof point in the journey that Change Healthcare is on.

[GeorgeHill:]

Yes, Neil, if I could sneak in a quick follow-up, do you have a sense for what percentage of the market has moved to the cloud and imaging versus remained on-prem?

[NeildeCrescenzo:]

Well, I think we're at the early stages. So I think there is a lot more people who have expressed the intent and desire that have actually made the move, as you may remember, our previous commentary on the enterprise imaging journey, we describe the size of the prize is being very significant, but also the rate of adoption not for any bad purpose, just because these are important decisions and an important implementation process will take a number of years. So I would say that we are seeing a higher percentage quarter-over-quarter of intent, desire and vision, but it will be a measured pace of progress in terms of implementations.

[Operator:]

There are no further questions. I'd like to turn the call back over to Neil de Crescenzo for any closing remarks.

[Neil de Crescenzo:]

Well, thank you very much everybody. We appreciate the interest and the support of Change Healthcare. We're very pleased to have had another strong quarter as we continue on our journey and look forward to our continued dialog with all of you and your support of our company. The value we provide for our customers and our partners and the 14,000 team members who work hard every day to bring that value. So thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.