Tabula Rasa HealthCare, Inc.
Q3 2022 Earnings Call Transcript

Published: 4 Nov 2022

[Operator:]

Good day, and thank you for standing by. Welcome to the Third Quarter 2022 Tabula Rasa HealthCare, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Frank Sparacino. Please go ahead.

[Frank Sparacino:]

Good morning. This is Frank Sparacino, SVP of Investor Relations and Corporate Development for Tabula Rasa HealthCare. The company intends to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements within the meaning of that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Tabula Rasa HealthCare's actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include our ability to adapt to changes or trends within the market for health care in the U.S., a significant increase in competition from a variety of companies in the health care industry. Developments and changes in laws and regulations, including increased regulation of the health care industry through legislative action and revised rules and standards and the extent to which we are successful in gaining new long-term relationships with clients or retaining existing clients. For additional information on the risks facing Tabula Rasa HealthCare, please refer to our filings with the SEC, including the Risk Factors section of our 10-K filed on February 25, 2022, and our 10-Q to be filed shortly. When we discuss our results on this call, unless indicated otherwise, we are referring to results from continuing operations. For additional information on our results from discontinued operations, please refer to the financial statements contained in the earnings release issued on November 3, 2022, and the notes to the financial statements to be included in our 10-Q for the third quarter of 2022. A recording of this call is accessible through a link on the Investor Relations page of our website. I will now turn the call over to Brian Adams, President and Interim CEO of Tabula Rasa Healthcare.

[Brian Adams:]

Thanks, Frank. Good morning, and thank you for joining us. We delivered another solid quarter with third quarter revenue of $77.1 million, which was 5% ahead above the midpoint of our guidance range for the third quarter provided on August 4. In our CareVention Healthcare division, which represents our core PACE business, revenue increased 17% versus a year ago during the third quarter and 18% through the first 9 months of 2022. Our growth from existing and new PACE centers is being driven by a combination of factors, including

[Tom Cancro:]

Thank you, Brian, and good morning, everyone. I will focus my comments on 3 areas

[Operator:]

[Operator Instructions] Our first question will come from the line of Sean Dodge from RBC.

[Sean Dodge:]

Congratulations on the good progress this quarter. Tom, I want to start just on the better-than-expected Q3 results, you said partly driven by higher PACE census growth. I think the guidance originally assumed 0.9% month-on-month increase in census. What did you actually recognize over the quarter? And I guess, how much better did census growth run versus what you all had assumed?

[Tom Cancro:]

Yes, it was probably like 0.1% better. But -- it occurs to me that we should provide more clarity around that. And some of you in the analyst community have asked us to maybe think about that in a different way because the census growth is kind of same-store sales, right? Well, that doesn't really tell the whole story because we mentioned, we added a huge program in California in third quarter. We have another one coming on in fourth quarter. And so sometimes, these new centers overwhelm and outnumber of the new participants at existing centers. And then, of course, goes the other direction, too, you have churn, right? You have some people who pass away, just enrol, whatever. So the net number -- the story of the net increase isn't told entirely by same-store sales growth, if you will. So we'll have to perhaps provide more clarity going forward on that, maybe give the total number of participants. But to answer your question, both are doing meaningfully better than we projected. Both the growth of new participants at existing centers and new participants at newly added centers, newly won RFPs and both contributed to that outperform in revenue in the quarter and therefore, the guidance raise as well.

[Sean Dodge:]

Okay. That's helpful. And then so one of the new metrics you did give us was the average PMPM in PACE. You said that was up 9% year-on-year during the third quarter. So there'll be a few drivers within there. How much of that was cross-selling versus is there a pricing component to that, too? And then as we look at these new metrics that you've given us on this average PMPM how should we think about maybe the levels that you guys can maintain there going forward?

[Tom Cancro:]

Well, I don't know that we've guided to that because I don't know that I'm going to get into levels going forward. I think our guidance is reflected in our revenue guidance and coming next year, reintroduce EBITDA guidance. I don't know that we're going to guide to a PMPM because it's a mix factor, and you can't always predict that. As to the first part of your question, what -- how much did that contribute? I'd say mix was an important part of the story. We do a great job of cross-selling from one product to another. And so it's a big part of it.

[Brian Adams:]

And Sean, this is Brian. I would just add to Tom's comments. I mean this is really a measure of our success with cross-selling. And the area where we have the least penetration in PACE today is on the pharmacy side. And the pharmacy is where we have the largest potential for a revenue contribution on a PMPM basis. So it is part of our strategy to continue to push on that cross-sell opportunity. So our desire is to have that number continue to increase over time.

[Sean Dodge:]

Okay. Sorry, I didn't mean to cut you off, Brian.

[Brian Adams:]

No, you're good.

[Operator:]

Our next question comes from the line of Ryan Daniels from William Blair.

[Jared Haase:]

Yes. This is Jared Haase for Ryan. I wanted to ask one around the cadence of implementations for PACE that was up significantly both year-to-date this year and also in the quarter relative to last year. So I'm just curious on that sort of cadence of implementations. How much of that should we read into, its just sort of easing of kind of COVID-related conditions. It's just a little bit easier to get out there and do those implementations this year relative to last year. How much of that is sort of just a reflection of a growing sales funnel or more opportunities, that sort of thing? And how much of it is kind of just the natural kind of benefit of better execution?

[Brian Adams:]

I would say it's really -- Jared, thanks for the question. It's really the latter 2. I wouldn't say this is a COVID factor at all. I would primarily say that there's a lot of activity in the market right now. As I mentioned in my prepared remarks, I was at the National PACE Association meeting in October. And the energy at the conference was amazing, I would say. It's really incredible to see the number of organizations that are recognizing the PACE model and the ability to really drive down cost and improve quality and the different areas that this model can be applied. So as we continue to see more of that recognition, there's definitely more activity. We are signing more contracts. The implementation pipeline continues to grow. It's really an exciting place to be right now. So it is about the activity in the market and our execution. So I don't see that slowing anytime soon.

[Jared Haase:]

Okay. That's great to hear. And then maybe I'll just ask a quick follow-up on the model. Thinking about the gross margin line, looking out to 2023, obviously, I know there are some headwinds at present that sounds like are expected to alleviate as we get into next year. I guess, obviously, I get that you guys aren't still holding back on the profit guidance here. But just any sort of directional commentary on how to think about sort of where that gross margin line, in particular, might settle out? Or maybe any thoughts on sort of the magnitude those headwinds are having right now?

[Tom Cancro:]

Yes. I'll give some color on that. Sean, in his earlier question asked about pricing as well as cross-selling. And let's speak to that now as well as to your question. There are 2 drivers, both of which I believe can go in a favorable direction if management does its job in impacting margin. The pricing side is a large one. We are seeing enhanced pricing power in our contracting approximately 20% on our pharmacy contracts, which is our largest revenue center and largest driver of margin. About 20% are up for renewal between now and December 21, 2023. And the renewals we're seeing are happening at 2023 pricing. They're not happening at the legacy pricing when those contracts were signed years ago. And that is significantly higher. On the cost side, on the margin side, we're starting to see -- we have a little headwinds from shipping costs versus last year. It started to level out versus last quarter. So that's starting to abate a little bit. Revenue mix played a little bit in our margin diminution this quarter. That tends to level out over time. The real driver of not just gross margin but ultimately EBITDA margin. It's going to be our ability to iterate on cost savings on the operating expense side. The disposition of Sinfonia, in particular, will facilitate cash and margin savings. We'll shed 400 heads right there. And while that's discontinued ops, there are many shared services costs that support those 400 heads professional service costs that tend to scale with headcount, outsourced IT support, legal fees, real estate, insurance, other costs. So you ought to see that push in a favorable direction. Our capitalized labor, and this is less of a margin question, more of a free cash flow thing, but capitalized labor declined to $4.5 million for continuing, that's $1.5 million improvement over the last quarter. So as Sinfonia eventually is disposed of. It's a large bleed on our cash, but it also will enable us to iterate on support costs. And now to drive margin up, the more favorable pricing environment ought to drive margin up a bit. And you'll see this reflected when we give guidance in our fourth quarter earnings call for '23.

[Operator:]

[Operator Instructions] Our next question comes from Stephanie David from SVB Securities.

[Stephanie Davis:]

I just wanted to get an update from you, Brian, about the strategic review committee that's been formed after the cooperation agreement. Are there any early reads on incremental value creation ops?

[Brian Adams:]

Stephanie, that's a great question. I would say the immediate focus of the strategic review committee has been centered around the divestiture process. And I believe we're on track with both DoseMe and Sinfonia and we'll continue to report out over the coming months. But in general, I would say that there's a nice alignment between the newly constituted Board that met really for the first time this past week and the management team to ultimately drive enhanced performance and increase shareholder value. So I'm excited about this new group and what we can do together.

[Stephanie Davis:]

With the idea that management hours has often been 1 of the biggest limiting factors for Tabula Rasa's strategy, how are you and Tom really focusing your time right now?

[Brian Adams:]

Well, that is a great question, and you always have limited bandwidth, right? We are focused in a couple of different areas. I would say one of those is evidenced by an announcement we made earlier this week with the onboarding of April Gill, who is our new Chief Commercial Officer. The new function that is really aligning all of our commercial activities. So she's overseeing strategy as well as sales, account management, marketing, communications, client success. And that is an important focus for us in terms of how we are going to market and the commercial infrastructure that we need and rigor as a company to really execute on our plans going forward. And then the second is, as Tom was just mentioning is on the cost side as well. So we -- I think we both believe that there's an opportunity to maintain a very strong growth rate while improving margins and cash flow all at the same time. So none of those need to be sacrificed. And so I think you're going to see a continued focus from us on refining that go-to-market strategy so that we can really direct resources towards a few key opportunities that really provides some nice leverage going forward.

[Operator:]

[Operator Instructions] Our next question comes from the line of David Grossman from Stifel.

[David Grossman:]

I'm wondering, Thomas, would you just go back to your comments about Sinfonia, and any information you could get -- I'm sorry if this was in the press release and I missed it. But if you could break out the drag on free cash flow from Sinfonia this year or perhaps, I don't know, if we have for a quarter, but somehow to frame for us what kind of drag that is and what impact that may have once divested?

[Tom Cancro:]

In the last quarter, Sinfonia, all in, by which I mean margin bleed in the P&L, but also capitalized costs, capitalized software development was close to $5 million. And that's a lot. And when that business is disposed of, that's an overhang that will go away.

[David Grossman:]

And is that $5 million an appropriate run rate to use for the year or it was last quarter, particularly high?

[Tom Cancro:]

It was higher this quarter than in prior quarters.

[Brian Adams:]

David, you might remember there is seasonality to this business. The second half of the year, in particular, is where top line starts to contract a bit in Q2. And the second half of the first quarter is really where you see profitability at a much higher level.

[David Grossman:]

I got it. And so as we kind of look forward, is the disposition of Sinfonia and up to get you kind of on a consistently positive free cash flow trajectory?

[Tom Cancro:]

I wouldn't look at any one item as the sole driver, this will obviously help. I mean any time you put $5 million in a quarter for one business unit, and that business unit goes away, by definition, that's a positive. But when I think of the cash-generating potential for this business, I think of 2 things. The first thing I think about, and it's far and away above that $5 million. I think of this business being at double-digit EBITDA margins before it acquired a number of businesses that perhaps distracted management. Well -- and then you got to go back to 2018 or so to see that. When we are done with this realignment restructuring of the business, you will have disposed of those businesses and the remaining core business resembles what it looked like when you have this double-digit EBITDA margins. And so that seems like a good starting point. But also remember that this is a business, particularly when you strip out the EMTM sunset, that is growing high teens year-over-year. And that doesn't seem to be abating anytime soon. And so one of the things we will do at some point in 2023, after we've been able to iterate on the cost structure is project out a multiyear model because then you will see with revenues growing at what they're growing, if you right-size and gently grow the cost structure, you see the leverage in the model. And so if you project 2 years out, the way this place has grown and you iterate on both the cost side, but also on the pricing side, like I mentioned, it can be a dramatically different story that far and away overwhelms the benefit of just getting rid of Sinfonia. That is Brian and my and the team's mandate, I believe.

[David Grossman:]

Right. So it sounds like longer term, you're pointing our eyeballs at kind of going back to what it looked like pre-acquisitions to get back to that model, right? So I understand and appreciate that. So as you think about getting to that model, can you give any sense of what it may cost you in cash flow to get there? Or is that -- do you think that's really not -- that's really not going to substantially impact cash flow over the next 12 months or 24 months or whatever it takes you to get to that model.

[Tom Cancro:]

I don't think it's substantial. Will there be some investment, let's say, and things that allow us to scale? The new business is growing. When your pharmacy business is growing high teens, at some point, you got to make sure you could scale. And could there be an investment -- CapEx investment that allows you to handle that growth a little more efficiently and therefore, get a little more scale in your margins, yes. Is any of that recurring annually, no. Is any of that terribly troublesome to a company with $80 million of cash on its balance sheet and no debt maturity for 3.5 years, not really. We'll guide to all of that when we guide for '24 and we'll enumerate the run rate CapEx required as an ongoing investment in the business. And any onetime items we may choose to do to achieve synergy and to help our margins scale better, which, by definition, ought to pay for itself in a short period of time. But we're not going to guide on that today.

[David Grossman:]

Right. And just one last thing. The comment on pricing, how much of the pricing is actually pricing power versus passing through higher costs?

[Tom Cancro:]

I don't know that they're terribly different. I would say that a lot of our contracts that are expiring, were priced several years ago in a very different environment. So it's -- and remember, a lot of our costs are ultimately pass-throughs to CMS. And as long as they're reasonable, there tends to be acceptance on the part of our customers. So some of it is simply catching up to 2022 and 2023 inflationary environment. But a lot of it is our customers recognize the value they get relative to our competitors. And our pricing hasn't always reflected that. And I can tell you, this is an anecdote, of course, but I can tell you there were 3 contracts, renewals and proposals that we put forth recently that were happily accepted at a margin level that was higher than what we've done in the past. And I view that as a good omen for the future.

[Operator:]

[Operator Instructions] And this will conclude our Q&A session as well as our conference for today. Thank you for participating. You may now disconnect. Everyone, have a great day.