Tivity Health, Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Please stand by, we are ready to begin.

[Scott Forslund:]

Good afternoon, and welcome you to Healthways' First Quarter 2015 Conference Call. Today's call is being recorded and will be available for replay beginning today and for one week by dialing 719-457-0820. The replay pass code is 5818105. The replay may be also accessed for the next 12 months on the company’s website. To the extent any non-GAAP financial measures discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today’s news release, which is also posted on the company’s website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Healthways’ expected quarterly and annual operating and financial performance for 2015 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions, are intended to identify forward-looking statements. We hereby caution that these statements may be affected by the important factors, among others, set forth in Healthways’ filings with the Securities and Exchange Commission and in today’s news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. At this time, for the opening remarks, I’d like to turn the conference over to company’s President and Chief Executive Officer, Mr. Ben Leedle. Please go ahead, sir.

[Ben Leedle:]

Thank you, Scot and good afternoon to everyone. Thank you for being with us today for first quarter 2015 conference call. I’m here with Healthways’ CFO, Alfred Lumsdaine. And we will make some remarks of about our results for the first quarter and our guidance for the rest of 2015 and then following those remarks we will open the call up for your questions. So to begin, our first quarter results support our confidence to achieve our full year guidance for 2015. Simply put, we continue to expect to produce a positive quarterly progression through the remainder of 2015 with sequential quarter improvement in top and bottom line performance. As always we must execute operationally to deliver on our value proposition, but we are on a course to achieving record revenues and strong growth and adjusted earnings per diluted share for 2015. We continue to expect revenue growth of 10% to 15% compounded annually over a three to five year period, with the EBITDA margins increasing to range 15% to 18% by the end of that period. These growth expectations are supported by the execution, renewal and expansion of current contracts and from the yield of new customers from an accelerating pace of business development activity. As noted in our release, we signed 30 core contracts during the first quarter including six new, 17 expanded and seven extended contracts. This marks a 50% increase in the number of signed contracts year-over-year. Of these agreements 80% of the business development was achieved with existing customers. Essentially, these are renewals, where 70% not only re-signed for an additional term, but in doing so also expanded the relationship by adding more services from our comprehensive product portfolio. In fact these agreements represent a wide range of service scope including our emerging solutions such as Blue Zones and the Dr. Ornish program and Innergy, if you remember our Innergy is our intensive weight management program in collaboration with John Hopkins which is targeted search for individuals with body mass index score is greater than 25. We also continue to sell our long established wellness, care management, and our comprehensive total population health services. Following a strong 2014 performance against risk based fees. The renewal rate in expansion at the time of renewal are important indicators that our solutions and operations are delivering on our promised value of improve well being, improve work force performance and reduction of medial claims. In addition to these core contracts in the first quarter we signed 28 consulting engagements to support strategy, change management and physician network development on behalf of integrated systems and health plans. This represents a 65% year-over-year growth in these types of consulting engagements. This emerging customer set of hospital, health systems, and independent physicians groups continuous to look for support in the ongoing navigation for the value based model of care. So collectively, a target performance these core and consulting renewals expansions and new business developments represents approximately 50 million in annualized revenue. A particular note among the first quarter contract secured was a major new joint venture with Sul America to bring the full suite of total population health services to the Brazilian market. In Brazilian private health insurance system as you know second largest in the world is one of the fastest growing private healthcare markets in the Americas. It's newly formed operation initiates with over 2 million lives in membership from Sul America and we will look to add more lives through contracting with other risk bearing entities in that market. Further during the first quarter, we announced the five year agreement with MedAssets the leading group purchasing organization as a sales partner to accelerate deployment of the ground-breaking Dr. Dean Ornish Program for Reversing Heart Disease to hospital's health systems and physician organization. Once fully implemented we expect our partnership and collaboration to drive and accelerate further penetration of health system and physician marketplace. The MedAssets relationship is already an important partnership for growth in the Ornish program but also affords in the future opportunity to be able to expand the distribution in Healthways entire suite of population health solutions. As we look forward to the remainder of 2015 we expect to continue to renew and expand existing customer relationship and to sign additional new contracts. So again without getting ahead of ourselves we had a good start to 2015 with our first quarter performance and it affords us to continue on our path to expected forward growth. So now let me turn this over to Alfred, so that he can walk you through our Q1 results and the outlook for the remainder of the year in much more detail. Alfred.

[Alfred Lumsdaine:]

Thanks, Ben. Good afternoon, everyone. Our first quarter revenue of 190 million represented an increase of 13 million or more than 7% from the first quarter of 2014. As anticipated, on a sequential quarter basis, revenue for the first quarter decreased as a result of the significant amount of performance-based fee recognition in Q4 of 2014. As we've noted many times, the timing of our performance-based fee recognition is typically heavily weighted to the back half of our fiscal year. Our adjusted net loss of $0.05 per share for the quarter represents an improvement from an adjusted net loss of $0.07 per share for the first quarter of 2014. The GAAP net loss for the first quarter of $0.08 per share includes $0.03 of non-cash interest expense which we exclude from adjusted earnings per share results. Our adjusted cash flow from operations for the first quarter which excludes almost 13 million in legal settlement payments was approximately 15 million and capital expenditures totaled approximated 9 million. As expected, our leverage ratio as calculated under our credit agreement increased slightly to just under 3.2 times compared to 3.1 times at the end of 2014. So now let’s turn to our financial guidance for the remainder of 2015. In our release today, we have farmed our financial guidance as Ben just mentioned for 2015. For the full year, we continue to expect revenue in a range of 800 million to 825 million, an increase of 8% to 11% compared with 2014. We expect revenues will grow sequentially throughout the year from first quarter levels, primarily as a result of three specific factors. And these are the same factors that drove sequential revenue growth throughout 2014. The first factor that drives our projected sequential revenue growth is new business. We believe our opportunity to sell and implement services off-cycle and by off-cycle, I mean at any other time than the beginning of the calendar year, is increasing as a result of solutions such as the Ornish program and our Blue Zones projects. These aren't tied to a benefit plan year. The second factor is ramping revenues under existing contracts. Many of our contracts come with revenue streams that can expand over time, whether through ramping service volumes or expanding service scope. The third factor which I've already touched on is the timing of recognizing performance-based fees. We continue to expect the amount of performance-based fee recognition in 2015 will be approximately 6% of revenue, a similar percentage to 2014, and we continue to expect that a significant majority of this revenue will be recognized in the second half of the year. For 2015, we continue to expect to achieve adjusted earnings per diluted share between $0.35 and $0.47, a growth range of 30% to 74% over 2014. We expect non-cash interest expense of $0.12 per diluted share, resulting in GAAP earnings per diluted share guidance in a range of $0.23 to $0.35. As with revenue, we expect sequential quarter improvements in our operating results throughout 2015. We expect adjusted earnings for the second quarter of 2015 to be at or near breakeven with all of our expected full year profits to be generated in the second half of the year. We continue to expect our EBITDA margin for the full year of 2015 to be in a range of 10.5% to 11% and that compares to an adjusted EBITDA margin of 10.6% for 2014. As our revenues grow, we expect to continue to realize operating leverage in the business given our cost structure which has a significant amount of both fixed and semi-variable costs. During our February call, I highlighted one specific mitigating factor that offsets the operating leverage gains from revenue growth for 2015 and that's the loss of the last four remaining legacy disease management only contracts as of December 31, 2014. As we discussed in February, these four contracts which collectively represented approximately 3% of 2014 revenue, carried disproportionately higher than average contract margins as a result of the legacy nature of the technology and operating platforms supporting these services. So while we expect the impact from the loss of this business will be offset by the additional leverage that comes from growth, it clearly mutes what would otherwise be much greater potential margin expansion for 2015. It's also notable that we had no more standalone legacy disease management contracts left in the business as we enter 2015. So essentially the margin profile of the company has now been fully rebased. We continue to expect that operating leverage from the relatively high fixed cost nature of our scaled technology and operating platform will generate material EBITDA margin expansion as revenues grow over the next few years until, as Ben just mentioned, reaching our target EBITDA margin range of 15% to 18%. We continue to expect to generate adjusted operating cash flow for 2015 in a range of 80 million to 90 million. As we noted in February, we'll included guidance for adjusted operating cash flow for 2015 in order to highlight the legal settlement payments expected to be paid in 2015 which should total around $14 million. That could otherwise obscure the cash generating potential of the business. We continue to expect 2015 capital expenditures to be in a range of 37 million to 42 million and that's consistent with our expectation that capital expenditures will run near or even below 5% of revenue now that we've substantially completed our transformational technology and capabilities investments. In fact we expect 2015 capital expenditures as a percentage of revenue will be at their lowest level since fiscal 2007. We currently expect that most of our 2015 free cash flow will be applied toward debt reduction with regard to our debt covenants, we would continue to anticipate our leverage ratio will increase slightly through the first half of the year and then decline to end the year at or below 2.5 times. So in summary, I would just say that our first quarter financial results were highly consistent with our expectations and as a result, we continue to remain confident in achieving our full year financial guidance. With that operator, I would like to open the call to questions.

[Operator:]

[Operator Instructions] And we take our first question with Brooks O’Neil with Dougherty & Company.

[Brooks O'Neil:]

Good afternoon. Thanks for taking my question. Can you hear me okay?

[Alfred Lumsdaine:]

We can hear you Brooks.

[Brooks O'Neil:]

Okay. Great. So I'm just curious, if anything about Q1 was materially different than your expectations? I certainly was listening to all your commentary. It sounded like in general it was consistent but I was just curious if anything was different than you really thought.

[Alfred Lumsdaine:]

I think, Brooks, there's always puts and takes in any business inside of a quarter but I think our comments, I believe my comments were that – it was highly consistent with our expectations and I think that that's our overall assessment of the quarter.

[Brooks O'Neil:]

Good. I'm guessing you're not going to want to say much about it, but do you have any comments at all about your strategic alternatives process?

[Ben Leedle:]

Yes, you're right. This is Ben. There's really not much I can add to what we've previously added as public comments. I mean I think it's important to know the Board did conduct a really thorough and comprehensive process that was supported by our advisor JPMorgan. And while that process did garner lots of interest, in the end, the board and our advisor evaluated all of those different options and unanimously determined that the standalone execution of our plan is the best way to maximize shareholder value in the context of the output of that process. And that's really to us, it's behind us. We're focused on delivering on the plan and the expectations that we laid out for the marketplace and growing the business.

[Brooks O'Neil:]

Great. I just have one more question. I'm curious, as you had said, I heard you say that the majority of the free cash flow would be used to repay debt. I'm trying to assess whether you believe the current range of services that you offer today are lined up appropriately, if you will, with market demands? I guess what I'm saying is, are there any areas where you see tremendous opportunity where you don't currently have products or offerings for the marketplace where the demand is there?

[Ben Leedle:]

No, great question. We feel confident that we have the full range of capabilities, solutions and assets to go deliver into the demand that we're seeing into the market.

[Brooks O'Neil:]

Okay, great. Thank you very much and congratulations on a great start to the year.

[Ben Leedle:]

Thank you, Brooks.

[Operator:]

Thank you. We move to our next question which comes from Ryan Daniels with William Blair.

[Ryan Daniels:]

Thanks for taking the questions, guys. I want to go back to the first quarter development pipeline. It seems very strong and I guess one area to hone in on would be the consulting engagement. So two-fold question there. Number one, is that mostly newer clients if you think of the providers of health systems or is that expansions within existing? And then number two, if it's the former new clients, is that typically in your experience a leading indicator for future sales into that client base once the consulting agreements are concluded?

[Ben Leedle:]

A great question, Ryan and it's probably color that I'm providing that we talk about in general but maybe we give people a better sense of the pace that's happening. It was a mix. I would say predominantly it's, in a consulting business, it's project-based and you're looking to be able to continue the relationship. So, similar to the mix overall, the majority of this was existing customers buying again and expanding or continuing the project work that the team is doing. But there's new work in this as well. And I do believe to your second part of you remember question, when we are asked to come in and be a part of strategy and change management and position leadership and network development for these health systems, it does position us in I think uniquely as an opportunity to be able to naturally help support the provision of the capabilities that are going to be requiring to act on those strategies. So yes, the answer is, when we made the acquisition of Navvis as a consulting entity a little over three years ago, the expectation is that that work would fit hand and glove with the ability for us to follow consulting with services agreement.

[Ryan Daniels:]

Okay. Very helpful. And then I think you also mentioned a pretty big number, about 50 million in incremental revenue. Is that a full run rate after these contracts have kind of scaled and if that is the case, how long does it typically take based on the mix you sold this quarter to get to a full run rate?

[Ben Leedle:]

Yes, let me have clarify first, Ryan. The 50 million is an annualized number and that the source of these 30 agreements again, 80% of these 30 contracts were existing customers as part of run rate. And we said seven of them were extensions. So simply that's run rate that would have been in 2014 recurring again, so those are important renewals in the net gross equation, 17 of them were existing customers from prior period who not only are renewing that run rate but expanding by adding services. So that is going to be incremental. And then six new contracts sit on top of that new, and as a function, then, without laying out the specifics of how much on percent revenue those different pieces represent, we just wanted to give a sense that this bundle is 50 million of secured business, going forward.

[Ryan Daniels:]

Got it. Okay. That's helpful.

[Ben Leedle:]

It's not all incremental.

[Ryan Daniels:]

Yes. That makes sense. And then last question, just in a hop off the pipeline update, can you talk a little bit more about one the aggregate pipeline and then maybe break it down on any areas of strength and weakness you're seeing, international, domestic, et cetera? Thanks.

[Ben Leedle:]

Sure. So size of pipeline we've provided to you in the past set of quarterly reports the estimated annualized revenue represented by the active development in the pipeline. We summarized the domestic market as of 12/31 was about 250 million and it remains at that level. And a little over 100 million in international and that hasn't materially changed either. And you've got to remember through a lot of what was if that pipeline is part of throughput for us as we look at the yields out of the Q1. But a lot of it was obviously driven by the early indications of bids and RFPs that we know get worked over the course of the first half of this year with decisions still pending out into the late summer and early fall. So, no material difference in the overall. I would tell you, though, a marked uptick in the absolute amount represented in the MA plans and in the health systems and physicians bucket, while employer and commercial health plan ticked down slightly. So, you do see a little bit of a make shift here even though the overall size of the opportunity is relatively not materially different from 90 to 120 days ago.

[Ryan Daniels:]

Okay. Perfect. Thank you for all the color.

[Operator:]

Thank you. We take our next question from Tom Carroll with Stifel.

[Tom Carroll:]

Hi, guys, how you doing? First of all, I apologize for the background noise if anything interferes here. Can you give us an update on the Dean Ornish Program and how many markets you guys are currently in, and how visibility on. I think you highlighted 16 states last time so maybe define it that way or some other way that you want to tell us about?

[Ben Leedle:]

Yes. Thanks for your question, Tom and your background noise is not bad. We can hear pretty clear.

[Tom Carroll:]

Thanks. Thank you.

[Ben Leedle:]

We'll continue to talk about Ornish and the growth in Ornish in those same constructs I think you're referring to. So last time we indicated that we were in 16 states. We're now 17 states. We reported a quarter ago that we had contracts with Health Systems with their footprint. So the size of those organizations collectively represented 104 facilities. It's now up to 114 and previously approximately 32,500 physicians associated with those organizations in the footprint now up to 35,000. So we continue to grow obviously the bulk of our new contracts that we referenced in the 30 were Ornish agreements, so we continue to find and add these agreements into the first quarter and we expect to continue to do more. We mentioned the med-assets relationship where we believe we just get acceleration and ramp on sales and business development because there's just a higher reaching frequency and establish set of relationships that are there with that organization and the early work to integrate our work flows and our sales and business development teams and processes has gone really well and we're excited what the prospects of that could yield.

[Tom Carroll:]

Do you think the revenue of estimates that you've put out there in the past kind of remain the same with Ornish, not estimates in terms of guidance but this terms of, like, what growth could be in the future?

[Ben Leedle:]

Yes, I mean I think we continue to break it back down to kind of the fundamentals which is whether you look at Medicare or now a growing set of commercial pairs reimbursement that as an individual patient completes the program, that that's in a range of, $7,000 to $9500 of reimbursement to the health system of which we get to participate at a 15%, 20% success taking that equation. So that's the fundamental unit and when you know those patients come in cohorts that range from anywhere from 8 to 10, up to 12 to 15. So creating more sites, drives this business, but the real economic engine is once those sites are established, being able to support continued growth and flow of patients and cohorts through the team. So there's no change in our perspective of what we think this can be. I think I've referenced this as early. We're one more quarter further along in the early part of this and in our indications continue to show, market demand, business development is robust, we’re signing more contracts, where the proof in the pudding will still be how fast can we get the contract implemented up to an operating states and how successful can we be getting the flow of the position referrals of the eligible patients through the program. We know this. The patients that are going through this program are excited. They have completed cohorts than we have to-date of producing every bit of the expected outcome that was promised with the research and the early performance of programs in those research efforts. And we think that that fundamental value unit is going to trade well in the market.

[Tom Carroll:]

Great, thanks, Ben. Appreciate it.

[Operator:]

Thank you. Our next question comes from Nina Deka with Piper Jaffray.

[Nina Deka:]

Hi guys, question about…

[Ben Leedle:]

Nina, can you speak up a little bit? It's hard too hear you.

[Nina Deka:]

Sure. How's this? Just a question about the health systems clientele and if you could provide some detail around the rate at which they're advancing from fee-for-service payment models to a value-based purchasing?

[Ben Leedle:]

Yes, I don't have a number in front of me. And there's probably much better resources than me in terms of being able to get that number. And it's constantly changing. I know that it's going to be market dependent so it's not common across the U.S. There are specific markets where that percentage of reimbursement has gone north of 20% and there's still marketplace where is it's throw mid single digits as a percentage of reimbursement has gone north of 20% and there's still marketplace where it's low to mid single digits as a percentage of reimbursement. So, it really is a local market dependency.

[Nina Deka:]

Okay. And then one more about the mid assets partnership you mentioned that you expected to – you expect to see some acceleration once it's fully implemented. When do you expect that to be?

[Ben Leedle:]

Obviously this is a contract that we signed, in the last 60 days. And we have done some initial work obviously in the training and orientation, laying out of the process flows. I would say that this begins to hit its stride, by the time we get to midyear. And that the expectation we have for its contribution in 2015 is really a growing ramp of impact in the back half of the year.

[Nina Deka:]

Great. Thank you. That's helpful.

[Operator:]

Thank you. Our next question comes from Josh Raskin with Barclays.

[Joshua Raskin:]

Hi, thanks. Good afternoon. The health system revenues, I think you guys were targeting 10% of the total revenues this year. I was just curious, was it -- is the first quarter commensurate with that full-year expectation?

[Ben Leedle:]

Yes, I would say it’s a little bit less Josh and the reason is most of our markets other than Medicare advantage, carry more of the fees at risk. So, in the early part of the year you’re going to see a waiting – against those percentages we provided in February you will see the Medicare advantage market a little bit higher than the markets that have risk revenues a little bit lower.

[Joshua Raskin:]

For you, okay. But you still think 80 million plus, one or two more million on top of that, that's still the range your guys are targeting for this year?

[Ben Leedle:]

Yes, I think our view on sort of the market distribution of our revenues hasn't changed based on first quarter results.

[Joshua Raskin:]

Okay. And then who are the biggest competitors? When you guys are pitting some of these health systems, who are you bumping into in the final?

[Ben Leedle:]

There's a consulting cohort to that obviously. You're going to see organizations also who have blended consulting with some degree of tools and support of getting physicians and health is out in front or population health. Advisory board, we're seeing [Evelent] [ph], there's consulting organizes like [Navigant] [ph]. There's no shortage of organizations that are out essentially helping that first part of this transition to population health which is kind of model and design. If you're going to do this at a physician level, what's the physician strategy? Is there the ability to put together and support or partner with clinical integrated networks? When you do that, how does the business model works? And then there's the support to figure out what the contracting methods ought to be. And all that will is around, setting up the approach and the infrastructure and the strategy. And then once those organizations actually get flow of lives, either from health plans or large employers, then those organizations that I mentioned we're competing with do help with kind of the aim, A-I-M, the aim part of the process which is what can you learn about the population? How do you analyze it? How do you stratify it? How do you look at risk? Where do you put resource? How much resource can you put to cause and effect the changes, trend? And then the next big phase is, okay, if you know where to aim, how do you go about, then, delivering on the idea of engaging patients and physicians in a way that affords them to use and have access to additional support whether that be extended experts or whether it be, digital resources or whether it's programs and infrastructure in the community in which it can be leveraged. So, I think most of the competition we see out there in the first category lends itself to organizations that do consulting work. And then the competition for us, Josh, once you get past aiming at something and you actually have to deliver, goes straight on over as competition for us to the Optum’s, the Active Health of the worlds. That's where we're seeing the core of competition in that marketplace station for us.

[Joshua Raskin:]

Okay. And you think the health plans are more in that later phase, and you think, you have an advantage just sort of not conflicted, not part of the reimbursement systems that result of that resonate with the health system?

[Ben Leedle:]

I think, well, I think it does, to a certain degree. We're not a provider and we're not a payer. So put us in the unique category so the likelihood of potential conflicts or downstream implications of partnering with us probably carry less of that. But I would not underestimate the breadth and scope of what other competitors are trying to do. So in the case of Optum they'll start with these organizations right out of the gate with consulting, supporting, strategy, aiming, analytics, delivery, outcomes, networks, everything. So it's a robust competitive environment for us and I think the health plan's probably on an end to end basis are the most formidable competitors that we have.

[Joshua Raskin:]

And then just last one on the MA revenues. I think just sort of imputing the growth rate based on the guidance by segment for revenue, talks about sort of a 5 percentage type of growth. I'm just curious I think Alfred, you said that no real changes within the segment so my first opposition would be it's still a 5% expectation and then my question would be within that, is that mostly existing MA plans that you're servicing that are seeing growth in their plans, or is that new MA plans that you guys are bringing in? I'm just curious how much of it is sort of like same-store existing customers versus new customers?

[Ben Leedle:]

Yes. It's going to be both, Josh. But clearly given our market size, and our market penetration, our overall lift is very consistent with a lift in growth for, for the population and our results were very consistent with our expectations for the quarter.

[Joshua Raskin:]

I guess maybe just more specific just so I understand that. I mean, I think Medicare advantage, lives are up about 8.5% for the year. So I guess I'm just trying to figure out if the market's growing 8.5 and you're guiding to 5. It doesn't sounds like you –it sound like a retention very high, so I'm just curious, is there a mix issue there or I'm just trying to figure out what the difference is?

[Ben Leedle:]

Yes, I think there's, there is a lot of things that happen inside of a market. Again, I would point to our results being very consistent. You always have - we have additional new customers. We do have contract losses. And again, and obviously our mix of customers may or may not grow with the overall percentage of market growth. So there's any number of factors that go into our rate. Again, I would just point that our results were very consistent to the guidance that we established at the start of the year.

[Joshua Raskin:]

Okay. That makes sense. Thanks, guys.

[Ben Leedle:]

Thank you.

[Operator:]

Thank you. That is all the questions we have for today. Mr. Leedle, I would like to turn the conference back to you for closing comments.

[Ben Leedle:]

Thank you, everyone, for joining the call. Alfred, Chip Wochomurka heads our Investor Relations and I are available if you have any follow-up calls, we look forward to talking with you soon.

[Operator:]

That does conclude today's presentation. We thank you for your participation.