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Edited Transcript of CHNG.OQ earnings conference call or presentation 4-Jun-20 12:00pm GMT

·67  min de lectura

Q4 2020 Change Healthcare Inc Earnings Call Jul 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Change Healthcare Inc earnings conference call or presentation Thursday, June 4, 2020 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Evan Smith Change Healthcare Inc. - SVP of IR * Fredrik J. Eliasson Change Healthcare Inc. - Executive VP & CFO * Neil E. de Crescenzo Change Healthcare Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Alexander Yearley Draper SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research * Charles Rhyee Cowen and Company, LLC, Research Division - MD & Senior Research Analyst * Eric R. Percher Nephron Research LLC - Research Analyst * Glen Joseph Santangelo Guggenheim Securities, LLC, Research Division - Analyst * Jailendra P. Singh Crédit Suisse AG, Research Division - Research Analyst * Lisa Christine Gill JP Morgan Chase & Co, Research Division - Senior Publishing Analyst * Manav Shiv Patnaik Barclays Bank PLC, Research Division - Director & Lead Research Analyst * Michael Aaron Cherny BofA Merrill Lynch, Research Division - Director * Robert Patrick Jones Goldman Sachs Group Inc., Research Division - VP * Sean Wilfred Dodge RBC Capital Markets, Research Division - Analyst * Stephanie July Davis Demko SVB Leerink LLC, Research Division - MD & Senior Research Analyst * Steven Paul Halper Cantor Fitzgerald & Co., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Change Healthcare Fourth Quarter Fiscal Year 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Evan Smith, Senior Vice President of Investor Relations. Thank you. Please go ahead, sir. -------------------------------------------------------------------------------- Evan Smith, Change Healthcare Inc. - SVP of IR [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, and welcome to Change Healthcare's earnings call for the fourth quarter and full year ended March 31, 2020. 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 our financial results for the quarter and year and the outlook, followed by closing remarks from Neil. After that, we'll open the call for your questions. 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 for non-GAAP financial measures to GAAP 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 on the Investor Relations section of our website at www.changehealthcare.com. With that, I'll turn the call over to Neil. Neil? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Evan. Good morning, everyone, and I hope everyone is safe and well. The impact of COVID-19 on Change Healthcare and the U.S. health care system is clearly at the forefront of everyone's mind, which is why we plan to spend the greater part of this call discussing its impact and the actions we have taken to support our customers and partners. As you'll hear when we review our solid fourth quarter performance and our views on FY '21, the fundamental strengths of our market position, core franchises and our innovation engine, along with prudent financial management, have served us well in this unprecedented shock. Alongside handling the immediate challenges from COVID-19, we have continued to innovate and expand our core franchises to accelerate our growth coming out of this crisis. As the crisis unfolded in February, we initiated our business continuity systems and established a clear set of priorities, which we communicated widely and consistently. First, we focused on protecting the health and well-being of our team members. Second, we focused on our customers by communicating proactively and frequently, introducing new products and services that address their now-urgent needs while continuing to innovate in our core franchises and providing guidance on how to sustain their business operations. Third, we took the actions needed to support business continuity in our financial and operational objectives. And fourth, we maintained our focus on our transformation through new product development, automation and advancing our platform. Given our Intelligent Healthcare Network sits at the center of the U.S. health care system, we had early warning signals about the potential impact of COVID. And that allowed us to take the actions I just described on a timely basis. In the middle of March, we started to see a material dropoff in certain elective procedures, specifically in our eligibility and claims volume and in specialties like dental. Subsequently, we started to see a progression across other specialties as we moved through the second half of March. As you can see from the chart on Slide 5, we saw a continued negative trend in April, which started to level off and showed early signs of recovery in May. We would expect as elective procedures start to open up across the country we will see incremental improvement in these trends and our performance. While we have seen the financial distress these declines have caused our provider customers, overall, the government support and the effective financial management we help them with seem to be staving off the more dire consequences for most providers. Now I'll briefly highlight our financial performance for the year, then provide some color on our business activity in the current quarter as well as actions we have taken to advance innovation while executing on initiatives to improve our operating performance. I'm pleased to report we closed out the fiscal year with another strong quarter for both solutions revenue and adjusted EBITDA, even with a small impact from COVID-19 in March. During the fourth quarter, we continued to drive free cash flow, delivering over $300 million in free cash flow for the year, ahead of our previous expectations. This demonstrates our ability to execute on our strategic initiatives and deliver organic growth across our leading franchises, advance the transformation of our RCM Services and Enterprise Imaging businesses and execute on operational excellence to further improve margins and free cash flow. Additionally, new business trends in the fourth quarter continued to be positive, exceeding our internal bookings targets for the year with positive trends in new bookings in our Enterprise Imaging and RCM Services businesses. Within RCM Services, positive trends continued in our average win rates and contract size. Let me now provide some color on contract wins across the business in the fourth quarter. In our Payment Accuracy business, we continue to win multimillion-dollar deals, including with 2 leading Blues plans. In our imaging business, we added 2 new logos, displacing 2 of our largest competitors. Increasingly, provider organizations believe that with our cloud-native solutions' flexibility and easy upgrades, this may be the last imaging system migration they may ever need. And in our RCM Services business, we continue to have success selling it to hospitals and aggregators, winning multimillion-dollar deals. Now in the first quarter, despite the challenges of COVID-19, many customers continue to sign contracts, especially in our payer business, but including providers buying our imaging solutions, decision support software, RCM technology and RCM Services. Many of these customers were excited about the new offerings we announced during the quarter, some of which I'll briefly mention in a few minutes. In addition, subsequent to the fourth quarter, we continued to execute on our strategy to fuel innovation and long-term growth and completed the acquisition of eRx Network and PDX. These 2 leaders in the delivery of electronic solutions to the pharmacy industry extend our reach to more than 59,000 pharmacies in the U.S. The combined portfolio of pharmacy network and Software & Analytics solutions will support faster, more integrated development and cross-selling opportunities. I'll now move on to our response actions and outlook related to COVID-19. The spread of COVID-19 and the uncertainty around its trajectory in the United States has driven lower health care utilization without a corresponding increase in spending or transactions from COVID-19-related interventions. As we have always made clear, a portion of our business is tied to overall volumes of activity and spending in the health care industry. And therefore, we have been negatively impacted by this industry trend. While health care activity is resuming, this unprecedented downturn led us to several actions that we took to mitigate its impact on our business and help our customers during this crisis. To ensure our business continuity and the safety and welfare of our team members, we quickly moved our employees to work from home, shifted to a virtual meeting environment, suspended all noncritical business travel and expanded telehealth and COVID-related PTO coverage to all employees. In conjunction with academic, government and private research efforts, we immediately began to use our data to monitor, manage and research COVID-19. For example, we are contributing to a registry that provides de-identified data for what is expected to ultimately be nearly every COVID-19 patient, allowing researchers to study how the disease is spreading, which population groups are most vulnerable and how effective proposed treatments are. This service is free for government and academic researchers. Building upon the relationships we established with this work, we have also signed 2 significant commercial agreements for ongoing projects with several more being negotiated. With our customers, we maintained frequent detailed communications and moved to virtual implementations, even as COVID-19 has caused near-term dislocation in their staffing. Although this will not offset the full impact in fiscal year 2021 from delayed implementations, it places us in a strong position to support our customers among the uncertainty and volatility that they all recognize will be with us for some time. We have seen virtually no canceled implementations to date. From an offerings perspective, we expanded or accelerated several initiatives and solutions across our platform that met our customers' new or newly urgent needs. Let me give you some examples of these offerings that are helping our clients deal with their unexpected challenges. For the Department of Health in one of the largest states in the United States, Change Healthcare rolled out a COVID-19 ordering and testing service between clinics in 67 counties across the state and one of the major commercial lab companies, all within 24 hours. Both the state and the commercial lab company have praised our team for this unprecedented rapid and high-quality rollout. Our Technology-Enabled Services team is working closely with the New York City Department of Health and Mental Hygiene on clinical triage services. We are utilizing our credential nursing staff for the city's COVID-19 paid time off initiative, which helps New Yorkers gain access to unemployment benefits if they are unable to work, if they have been exposed to COVID-19, are ill or caring for someone who is. After gaining insights into the long-term needs for analytical data sets from our work with leading researchers, public health officials and other experts, we launched our COVID-19 Analytic Data Sets, a service which uses de-identified COVID-19 claims data to track disease progression and the efficacy of treatment in real time and is free for qualified researchers. Current data on COVID-19 is mostly limited to static reports that capture the number of new cases, overall cases, deaths and cases by geography and, while useful, offers limited insights into actual disease progression over time or the effectiveness of interventions on a timely basis. We expect the increase in telehealth services to be a permanent change in health care delivery. But the speed and magnitude of the increase was a challenge for many providers and telehealth platform providers. To help with these telehealth services, we launched a set of virtual care enablement solutions, including engagement, financial management and workflow products and services. We are now engaged with over 150 telehealth platform providers. Our telehealth medical eligibility and claims bundle can be found on our API & Services Connection and purchased via the AWS Marketplace. Our telehealth lab orders, results and ePrescribe bundle can be found on our API & Services Connection and will soon be added to the AWS Marketplace. The rapid expansion of virtual health care underscore the critical need for clinicians on the front lines to be able to quickly access the patient's health record, regardless of where that patient previously received care. With our partners, including the CommonWell Health Alliance, we are enabling digital access to tens of millions of patient records during the COVID-19 crisis to help improve care coordination and health outcomes nationwide. The DoD and VA have also indicated a future interoperability expansion, including a connection to CommonWell this year, further expanding this important aspect of fighting COVID-19 and improving care coordination generally. The expansion of telehealth reimbursement and new state mandates caused by COVID-19 resulted in an overwhelming rush of new policies, many with never-before-seen nuances that required rapid comprehension and implementation. Our enterprise account teams and network implementation teams helped health plans and providers manage the sometimes daily policy changes with rapid content updates and real-time analytics, including new payment codes. Our immediate implementation of COVID-19 codes enabled timely and accurate payments for providers on the front lines of fighting COVID-19. While health care payers have been less severely impacted by COVID-19 than many providers, our payer customers brainstormed with us to come up with new products that could enable them to reallocate their resources as they deal with the unexpected challenges from COVID-19. Payers noted that they needed to begin developing solutions to comply with the recently issued CMS Patient Access and Interoperability rule, which comes into force on January 1, 2021. They knew that Change Healthcare had worked closely with industry leaders across the health care ecosystem as well as the federal agencies to develop this new approach to making patient data available using industry standard APIs. So together with our customers, we designed and have now launched our Connected Consumer Health interoperability APIs to enable health plans to quickly and securely meet the deadline for the CMS Patient Access and Interoperability rule. Our innovative solution significantly reduces the cost, complexity and deployment barriers to empower payers to rapidly meet CMS's regulatory requirements while further advancing the trust between health plans and their members with improved data security. To support our customers and the industry, to give them more access to patient data in the midst of the COVID-19 challenges, we are providing our APIs for free to our health plan customers. Given health care providers' financial and operational challenges, we also launched a new service, the Change Healthcare National Payments Connector. This one-stop solution dramatically accelerates providers' path to a paperless business with a single enrollment delivering connectivity to 100% of U.S. payers. This new service includes the electronic transmission of claims attachments as well as the receipt of digital payments from any payer in the United States. In addition to eliminating costly, manual, paper-based processes, this solution allows providers' administrative staff to work from home while accelerating payments, 2 urgent priorities among providers that have emerged during the COVID-19 crisis. Our insights into the software and service components of patient access as well as our deep and long-standing relationships with customers in those areas helped us design and deliver new innovative patient access solutions. Utilizing our virtual front desk capabilities, we rolled out a new touchless waiting room for our customers. This digital patient access service allows patients to remotely check in for their appointments, complete forms and register on their personal device. When the clinic is ready, they are appropriately directed inside the office or hospital to receive their exam or procedure to help ensure that social distancing practices are followed. So as you can see, based on the feedback we have heard from our customers around these new innovative offerings, we expect continued demand from both providers and payers for solutions that reduce their dependency on labor, improve efficiency and create a more flexible and distributed infrastructure to ensure patient access to information and care and enhanced engagement, especially during a period of volatility and uncertainty. Now let me turn the call over to Fredrik, who will review our financial performance and the initiatives we have taken to strengthen our liquidity and cost structure as well as provide our financial outlook. Fredrik? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Neil. Good morning, everyone. I am very pleased to report a strong fourth quarter and first fiscal year as a public company, achieving our goals to deliver underlying growth across all 3 segments, including the impact of the previously disclosed planned contract exits in our RCM Services business and the transformation of our imaging business. In addition, we continue to work diligently on our strategic objectives. And subsequent to the year-end, we divested our interest in the majority of the Connected Analytics businesses and acquired both the eRx Network and PDX businesses, supporting our long-term growth objectives. So starting on Slide 7. In the fourth quarter of fiscal 2020, under ASC 606, solutions revenue was $787 million, which was slightly above our expectations, despite a $6 million negative impact from COVID-19. Consistent with our prior guidance, ASC 606 negatively impacted revenue in our Software & Analytics segment by $12 million, offset by a $2 million positive impact in our Technology-Enabled Services segment for the quarter. Adjusted EBITDA was $264 million, which was negatively impacted by the previously mentioned revenue impact from ASC 606 but partially offset by a $6 million favorable impact on commissions and new contract setup costs as a result of the new accounting standard. Adjusted net income was $133 million and adjusted net income per diluted unit was $0.42. Now moving to our results under ASC 605 for comparative purposes on Slide 8. For the fourth quarter, under ASC 605, solutions revenue was $797 million compared to $778 million in the prior year. Overall growth in revenue was 2.4%, which included a negative impact of $12 million from planned contract eliminations in our Technology-Enabled Services business; year-over-year impact related to optimization of our Connected Analytics business; and $6 million due to COVID-19. Excluding the impact of these items, solutions revenue growth would have been 5.5% for the quarter. Adjusted EBITDA for the quarter was $269 million compared to $257 million in the same period of the prior year. Adjusted EBITDA margin as a percentage of the solutions revenue for the quarter of fiscal 2020 was 33.8% compared to 33% last year. Improvement in adjusted EBITDA and related margin improvements reflect the incremental revenue growth and operational synergies, offset by COVID-19 impact and continued growth investment to support our enterprise sales, Enterprise Imaging and new product development and launch activities. Net loss for the quarter was $108 million, resulting in a net loss of $0.34 per diluted unit, compared with net income of $38 million and net income of $0.15 per diluted unit, respectively, for the fourth fiscal quarter of 2019. As part of the McKesson exit, additional NOLs are now available for Change Healthcare to utilize. And the creation of the associated tax receivable agreement created a onetime impact on our P&L this quarter of $164 million. Adjusted net income was $134 million, resulting in adjusted net income of $0.42 per diluted unit compared with adjusted net income of $126 million or $0.50 per diluted unit, respectively, for the fourth fiscal quarter of 2019. Adjusted net income reflects the improvement in adjusted EBITDA, lower interest expense and lower tax rate. This was partially offset by higher amortization expense related to strategic and integration CapEx. The per unit results also give effect to the IPO with 320 million diluted units outstanding in the fourth quarter of fiscal 2020 compared to 253 million fully diluted units in the same period of the prior fiscal year. Now let's take a look in more detail at the performance of our segments on Slide 9. Once again, we are using the prior accounting standard, ASC 605, to provide a more meaningful year-over-year comparison. Starting with revenue, the Software & Analytics segment grew 2.8% year-over-year. Growth in our Software & Analytics segment was driven by strong performance in our leading franchises, like Payment Accuracy, decision support and risk adjustments. Results were partially impacted by a previously disclosed strategic assessment and optimization of our Connected Analytics business and the transition in our imaging business to a cloud-based Enterprise Imaging solution. In addition, in the quarter, we experienced a $3 million COVID-19 impact mainly due to deal timing. Our Network Solutions revenue increased by 8.6% year-over-year. Key drivers include a onetime customer settlement of $7 million as well as growth from implementation of new customers and data solutions, payments and increased market penetration in medical network, partially offset by lower dental and medical network volumes of $2 million resulting from COVID-19. In our Technology-Enabled Services segment, our overall revenue declined 1.3%. This includes $12 million of planned contract eliminations and a negative $2 million impact from COVID-19. Excluding the planned attrition, revenue growth was 4% for the quarter. For fiscal year 2020, planned attrition was $53 million, in line with our expectations, delivering revenue growth for the full year, excluding the planned attrition of 2.9%. Turning to adjusted EBITDA. Software & Analytics grew 2.2% year-over-year. The results were driven by revenue growth, along with operational synergies and cost initiatives related to the Connected Analytics business, partially offset by investments to support AI initiatives and the Enterprise Imaging transformation as well as COVID-19 impact, as I mentioned earlier. Network Solutions adjusted EBITDA increased 6.4% in the quarter, driven again by the growth in the data and B2B payment solutions and continued volume growth across the network. The growth in our medical network was partially offset by the COVID impact I mentioned as well as increased investment to support new product launches and market expansion opportunities and the integration of additional network capabilities. In Technology-Enabled Services, adjusted EBITDA increased approximately $1 million due to the efficiency gains from automation and productivity initiatives, offset by increased costs associated with our repositioning initiatives as well as a $3 million COVID-19 impact. Moving on to cash flow and our balance sheet on Slide 10. Free cash flow was $121 million for the 3 months ended March 31, 2020, compared to negative $18 million in the prior year. Adjusted free cash flow was $157 million compared to $42 million in the fourth fiscal quarter last year. For the full fiscal year, free cash flow was $335 million versus $41 million in the prior year. This includes $22 million of pass-through funds in fiscal year '20 and $3 million of pass-through funds in fiscal year '19. Adjusted free cash flow was $482 million for fiscal year '20, an increase of $189 million year-over-year. Late in the quarter, we drew $250 million from our revolver during the height of the market turmoil. While we continue to have strong liquidity position and believe we will be cash flow positive for the year, we thought it was prudent to have access to additional liquidity in an uncertain macro environment. Our liquidity remained strong, ending the quarter with over $408 million of cash and cash equivalents and $530 million in undrawn revolver capacity. In addition, subsequent to the quarter, to support eRx Network and PDX transactions, we successfully issued $325 million of notes as an add-on to our already outstanding 5.75% unsecured notes due March 2025. Total long-term debt, including a short-term portion, net of cash at quarter end was slightly over $4.6 billion with a credit agreement net leverage ratio of 4.6. Now let me move on to provide some additional color related to the impact of the COVID-19 pandemic on Slide 11. As Neil shared with you earlier, we are already seeing early indications of recovery based on our claims volumes and expect this to continue over the coming months and quarters. As such, we currently anticipate the most significant of the impact on our financial performance from lower health utilization levels will be in the first quarter of fiscal 2021 with the greatest impact on our Network Solutions and Technology-Enabled Services segments. Thereafter, we would expect a smaller impact on a year-over-year basis for our quarterly revenue and adjusted EBITDA performance as we move through fiscal 2021. Although the speed of the recovery is uncertain in what we call our moderately severe scenario, where we have assumed elective procedures volumes and utilization do not fully recover until the end of our fiscal 2021 year, we expect our fourth quarter revenue to be in line with the prior year, including the impact of fair value adjustments, the eRx, PDX and Connected Analytics transactions. We have actively aligned our staffing levels, primarily in Technology-Enabled Services segments, to address lower interim volumes. We reduced the number of contractors and primarily furloughed employees, in total about 2,000 headcount reductions, providing us with greater flexibility to scale back up as volume recover. The benefit of these actions will start to impact us late in the first quarter and into the second quarter. We also continue to move forward or accelerate our automation and productivity initiatives, which should provide further margin expansion as we move beyond this period. While we are encouraged by the signs that utilization is starting to improve, the speed of the recovery is still not clear. And as a result, we will only be providing financial guidance for the first fiscal quarter of 2021, along with certain assumptions, and then provide you with supplemental information for the full fiscal year. So to that point, turning to Slide 12. For the first quarter, we expect Solutions revenue to be $595 million to $620 million, which includes the impact of a fair value adjustment related to the McKesson exit, which will reduce reported revenue due to a reduction in deferred revenue in the first quarter by $55 million. I will provide more detail in a moment. Adjusted EBITDA to be $160 million to $175 million, which includes up to $10 million in additional bad debt expense and excludes the delayed impact of approximately $15 million of benefits from cost initiatives and adjusted earnings per share to be $0.14 to $0.18 per share. Let me provide additional color by segment. In Software & Analytics, approximately 75% of revenue is subscription or maintenance, which will have minimal impact, while 25% is contingency- or renewal-based, which we currently estimate to have a negative impact of about 35% to 40% in the first quarter. The S&A impact is driven by timing of implementations, procedure volume decreases and relaxation by a limited number of payers in states on the reporting requirements. The segment will also reflect the sale of Connected Analytics business as of May 1, 2020, which generated approximately $67 million in revenue and $26 million in adjusted EBITDA for the prior 12-month period. In Network Solutions, based on the current volume trends, we anticipate, on average, approximately 35% decline in network volumes for the quarter; about 20% to 25% decline in our business-to-business payments and which is about 10% of our network revenue; and high-teens growth in the data solutions, which also represents about 10% of our network revenue. Network Solutions impact is driven by decreased elective visits and the overall health care activity. The quarter also included contribution from eRx Network as of May 1, 2020, and PDX as of June 1, 2020. As a reminder, eRx generated approximately $67 million in revenue and $31 million in adjusted EBITDA annually prior to the exercise of our option on acquisition. And PDX generated approximately $75 million in revenue and $17 million in adjusted EBITDA annually for the prior 12 months. In our Technology-Enabled Services, we are expecting, on average, about 40% decline in contingency-based RCM revenue for the first quarter. In communication and consumer payment services, we're expecting a decline of about 25% and the remaining businesses are stable. The impact on test is driven by reduced elective procedures volumes impacting our RCM Services business and lower print volume impacted by reduced EOB and ERA volumes related to reduced claims activity. Although we've taken cost optimization actions, they will have minimal impact on adjusted EBITDA in the first quarter due to a lag between revenue decline and the cost reductions and incremental cost due to work-from-home transition that will help the following quarters. Last, as a result of the McKesson exit, we were required to account for the exit of the business combination, which results in making certain fair value adjustments. The adjustments will have an impact on our reported revenue for the first quarter and full year but will not impact our adjusted EBITDA. Let me give you some color on the quarterly impact of such fair value adjustments. The impact on revenue results from the required reduction of deferred revenue that will reduce reported revenue in Q1 by $55 million. In addition, interest expense and depreciation will be impacted by the revaluation of the balance sheet as well. This will impact both net income and adjusted net income going forward. We expect first quarter interest expense to be approximately $70 million, including approximately $4 million in noncash pretax interest expense for fair value adjustment related to McKesson exit. We also expect depreciation and amortization expense of approximately $140 million, including approximately $54 million from the impact of fair value adjustments related to McKesson exit. Included in this $54 million is $77 million increase in amortization of intangibles, an increase of $2 million for depreciation of fixed assets, offset by approximately $25 million reduction in amortization of capitalized software. This reduction in amortization of capitalized software will favorably impact our adjusted income and earnings per share. We're also estimating up to $10 million of increased bad debt expense provision in the first quarter, consistent with anticipated increase in our receivable balance due to the impact from COVID-19 on our provider customers. Let me move now to Slide 13 for full fiscal year 2021 supplemental information and assumptions. As I stated, our current assumption is for a gradual improvement of health care utilization throughout the remainder of the fiscal year. If the recovery occurs faster, our results, in turn, will recover faster as well. We expect full year fiscal '21 free cash flow to be positive with amount dependent upon the pace of the recovery. However, first quarter free cash flow is expected to be negative but improving sequentially throughout the year as historically the first quarter is our lowest free cash flow quarter due to bonus payments and timing of working capital. Capital expenditures are still expected to be approximately around 7% of solutions revenue, excluding the impact of fair value adjustments and excluding integration-related CapEx as we manage spending in line with the COVID impact. Integration-related operating expenditures is estimated to be approximately $80 million and integration-related capital expenditures, approximately $20 million. The full impact on revenue resulting from the required reductions in deferred revenue will reduce revenue recognized in future periods by $137 million. As a result of building back our deferred revenue during the fiscal year '21, $129 million of the $137 million impact will be recognized in fiscal year '21 and the balance will impact fiscal year '22 reported revenue. Once again, we don't expect any impact on adjusted EBITDA. We expect interest expense in the range of $280 million to $290 million for fiscal '21, which includes approximately $14 million in noncash pretax interest expense for the fair value adjustment related to the McKesson exit. We also expect additional depreciation and amortization of approximately $250 million for fiscal '21. The additional amortization expense is comprised of an increase of approximately $308 million for intangible assets, offset by an approximately $100 million for the above-mentioned reclass to acquired intangible asset amortization as well as an additional $7 million of depreciation from fixed assets. In addition, adjusted effective tax rate of approximately 25% as corporate structure will now be simplified post McKesson exit. And last, basic outstanding shares will be about $320 million -- 320 million shares, which includes the minimum number of shares for the TEUs. Finally, I want to reiterate that I believe the first quarter will experience the largest negative impact on a year-over-year basis with a relative negative impact declining and a positive impact from cost initiatives increase as we move throughout the year. Now with that, let me turn it back over to Neil for his closing comments. -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Fredrik. Let me close our prepared remarks by summarizing some key aspects of what we have learned over the past few months as well as our longer-term views. First, prior to the COVID-19 crisis, the multiyear financial trajectory we established upon our IPO last year remained on track. Naturally, lower health care utilization in the short term will impact our results negatively this year. However, as overall health care activity picks up, our results will automatically improve even prior to the benefits we will see from new sales. Second, the solutions we provide our customers to streamline operations, enhance engagement and increase revenue are even more important, given the impact of COVID-19. Each of our solutions aims to provide a clear ROI for our customers that will improve their financial performance. And third, we are accelerating our initiatives to further improve our operational excellence and our cost structure as we are dealing with COVID-19. These actions will enable us to emerge from this period as an even stronger company financially. The COVID-19 crisis has created tremendous challenges for our society and the U.S. health care system. But it has also underscored the strength, resiliency and commitment of our Change Healthcare team members, customers, partners and the communities we live in and serve. Thank you, and now we'll take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from Michael Cherny with BofA Securities. -------------------------------------------------------------------------------- Michael Aaron Cherny, BofA Merrill Lynch, Research Division - Director [2] -------------------------------------------------------------------------------- Thanks for a lot of the details you provided. Fredrik, I want to go back to a comment that you made regarding the pacing of recovery you're expecting over the course of the year. Are there any subsectors, as you've seen the steady improvements in certain areas so far, that you think will come back faster? And I guess how do we think, as we look at all the various different data points we'll see across health care in terms of the different specialties, the different types of utilization and the speed of those recovering versus when those -- each one will have the greatest impact on your business? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [3] -------------------------------------------------------------------------------- Yes. I mean I think we have an incredible accurate barometer in the medical network volume that we see each and every day in terms of the volume because we see subsegment there. So I think generally, as health care utilization overall increases, we are very much in that kind of 2/3 of our business, that 1/3 is volume-based, 1/3 revenue-based and then 1/3 is kind of SaaS perpetual license businesses. I think in that volume base, I mean, as you see that slide that Neil showed, as that increases, I think we will see a relatively consistent improvement across our business. But there's some lag in certain areas, such as our print business, for example, that takes a little bit longer to recover just because when those statements goes out. But generally, as the health care utilization comes back, so does the different parts of our business as well. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- Our next question comes from Robert Jones with Goldman Sachs. -------------------------------------------------------------------------------- Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [5] -------------------------------------------------------------------------------- Great. Just two questions. I guess, one, just on the outlook for top line growth. If I look at the utilization comments and slide that you provided, it certainly looks like you're off the bottom, at least tracking claims, looks like down 26% from the pre-COVID levels. I guess assuming that this trend line continues in the direction it's in, is it feasible to think you can get back to that kind of mid-single-digit top line growth by the end of the year? Is that something -- I know you're not giving full year guidance. But is that is that within the realm of possibilities from where you sit today? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [6] -------------------------------------------------------------------------------- Well, I said in my prepared remarks that if you look at all of M&A activities and the deferred revenue impact, that we should be in line with the fourth quarter of last year, so essentially flat year-over-year when you get to the fourth quarter of this year. Now once again, I think it's important to point out that we've taken a relatively conservative view of the recovery here really in order to stress ourselves internally not to hang on to assets and to drive productivity to the greatest extent that we can. So if you have recovery, if you just take the kind of the straight line that you've seen so far, that would indicate that you will get back earlier. But of course, we don't have a good predictor of second wave, regional shutdowns and those sorts of things. So if the recovery happens earlier, there is no doubt that we should be able to see earnings growth in the fourth quarter as well and revenue growth. But based on what we have said in terms of kind of just to give you some sort of a gauge in terms of how we're thinking about the business, we're not planning for that right now. We're planning for that the full health care utilization recovered to pre-COVID levels by the end of the fourth quarter. We'd like for that to be wrong, obviously, and a lot quicker. But that's how we kind of give you a sense of how we're thinking about revenue year-over-year as well. -------------------------------------------------------------------------------- Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [7] -------------------------------------------------------------------------------- That's helpful. And then I guess, Fredrik, on the cost side, you mentioned $15 million of savings. Is that mostly all in 2Q based on the comments you made? And I guess anything by segment would be helpful. And then just on the cost savings, if the scenarios don't play out as optimistically, are there other levers you can pull on the cost side as we progress further in the year? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [8] -------------------------------------------------------------------------------- Sure. So the predominance of that cost saving is in Technology-Enabled Services. And what we've identified is the lag impact between the volume decline and the ability to get those resources out, which is probably 6 to 7 weeks. The actual cost takeout is probably a little bit greater than that. But reality is we expect to call a lot of the furloughed employees back hopefully sooner rather than later as well as some of the contractors that are no longer with us. So we were just indicating that, that's the lag in the first quarter that we're expecting. If you then -- to your second part of your question, in terms of where do you see the cost takeout opportunities, in our Technology-Enabled Services business, clearly, that's where the most is. And our network business is a very fixed business. It's great when things are growing. But in a decline like this, it's obviously painful because there aren't that many levers we can pull because at the same time, we do have so many opportunities to grow that business and we continue to invest there as well. And in the software business, there's some in that 25% that isn't SaaS perpetual per member per month. And we've pulled some of those triggers as well. So -- but the biggest is clearly within the Technology-Enabled Services business. There are -- I think the last part of your question, there are additional levers we're looking at, such as real estate. And we're working through that because obviously we have proven that we are able to work from home in a way that we perhaps wasn't able to do before. So in this environment longer term, what does it make sense -- what makes sense for us to do with our real estate portfolio, that's something that we're still working through internally right now. And that could provide additional lever going forward. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question comes from Manav Patnaik with Barclays. -------------------------------------------------------------------------------- Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [10] -------------------------------------------------------------------------------- My first question is just -- Neil, at the beginning, you talked a lot about new wins and your pipeline and so forth. Obviously, nobody wants disruption. But do you think there's opportunities here, given your scale, to take incremental share beyond maybe what your original pipeline looked like? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- Well, I think we've seen that, especially with the innovation and the new offerings that we launched in conjunction with the needs we saw with our customers. So if you think about the ones that I covered even in my prepared remarks, Manav, these are things that are really hitting the needs that our customers see in the market. Part of it really builds upon the data and the timeliness of our data. And I mentioned how we're working both like many people in almost a public assistance mechanism with a lot of the work we're doing with many entities around tracking COVID, but learning how that's allowing our data assets to be utilized in ways we frankly hadn't seen as much previously, given the needs are new and they're urgent. I also mentioned work we're doing, whether it's with Department of Health in different states, to take advantage of our networks, our software and our Technology-Enabled Services business. And of course, those are new offerings because those are new needs again. And then as you know, we've been investing a lot in looking at how to create a better digital patient experience. And you've seen the launch of our Connected Consumer Health suite in conjunction with Microsoft and Adobe, our touchless waiting room for providers, the National Payments Connector. These are all things that we've been working on for quite some time. But given the massive changes, including the advent of telehealth jumping upwards so tremendously, 5 or 10x volumes from what people previously saw, and the need for people to think about the long-term operational implication of COVID-19, these are sort of tailwinds for us as we go through the year and as we build up a continued robust solution portfolio going into FY '22. -------------------------------------------------------------------------------- Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [12] -------------------------------------------------------------------------------- Got it. And then just kind of similarly, I mean, you guys done 2 deals now, sold your Connected Analytics business. I mean in terms of that buy versus build-type decision, like is the -- does the M&A pipeline get more active? Or how should we think about that for you guys? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- Well, we've always had a very active M&A pipeline. I think as we've discussed previously, we look at well over 100 potential opportunities each year. But it's very intentional in terms of building upon the core strength in things like our network connectivity, and the eRx network is obviously a great example of that. And also, the synergies we get with Software & Analytics businesses that are deeply embedded in important parts of the health care system, and so the PDX acquisition obviously fits very well into expanding both our market reach. And the breadth of our solution portfolio is clearly the use of therapeutics. And frankly, the position of pharmacies in what we're seeing around testing and the provision of treatments and medicines to people will continue to be prominent as we deal with COVID-19 and the long-term investment in testing, contact tracing and other mechanisms to deal with any future pandemic. So we maintain the strategic approach that we've discussed since the IPO, being intentional, looking at things that add to the strength of our core capabilities and doing it in a way that's financially prudent, given that we want to also maintain our focus on maintaining liquidity. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question comes from Lisa Gill with JPMorgan. -------------------------------------------------------------------------------- Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [15] -------------------------------------------------------------------------------- Neil, one of the things we've heard in the marketplace is entities giving discounts, especially on the provider side, just given how difficult this environment is for them. Are you hearing that at all? Are your customers asking you for a discount, whether it's temporarily or in some way? So is that impacting your revenue at all would be my first question. And then secondly, I just really want to understand the bad debt. I understand that it was conservative to take the $10 million. But where specifically are you seeing pockets of customers that are having issues around potential payments? And how do we think about that as we move throughout COVID? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Sure, Lisa. Why don't I take the first question, then I'll ask Fredrik to reply more to your financial distress kind of question? So I think, first of all, we've maintained really a focus on innovating with our customers. There are obviously some customers that have talked about discounts. I think the financial support provided, particularly to the provider industry, by the federal government and other mechanisms and the fact that people are now opening up to elective procedures that are more -- the beginning of normalcy in the health care environment really have not made that maybe as prevalent a phenomenon as you might have thought. And given the innovation we've been providing customers and the feedback we've gotten from them and their appreciation on the continued support both in financially and operationally as they've had to deal with so many challenges, particularly the providers on the front lines, I wouldn't say that it's really been any impact on our business. There is an impact on DSOs and financial challenges. And as your second part of your question, so I'm going to let Fredrik give you an answer there. -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [17] -------------------------------------------------------------------------------- Sure. So obviously, we had -- we've anticipated an increase in DSO from our provider customers. We're in dialogue with a lot of them that are asking for different things. And we certainly don't want to be perceived as a bank in any way, shape or form. But we are working where it strategically makes sense both for them and for us to do certain things. We do work with them on a case-by-case basis. But generally, we don't want to be extending additional credit. We have seen an increase in DSO in the first month here in April. And we will continue to monitor that. We took the $10 million -- or we anticipate taking up to $10 million is what we said here in the quarter. But obviously, we will take a look at that where we end up in June to see where DSO and see what the payment patterns are. As Neil indicated, there is a lot of support for the providers as well. So it might not be as bad as we think. But right now, that is our best estimate. But we'll continue to monitor very closely. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Our next question comes from Jailendra Singh with Crédit Suisse. -------------------------------------------------------------------------------- Jailendra P. Singh, Crédit Suisse AG, Research Division - Research Analyst [19] -------------------------------------------------------------------------------- So Fredrik, I just want to better understand your comment around fiscal fourth quarter '21 expectations, where you expect to just be flat year-over-year even after including these recent transactions. I mean EBITDA should benefit from recent deals. But it seems that your underlying assumptions are that trends will also normalize in fiscal fourth quarter. Just trying to understand like why you don't expect to return to some growth in fiscal fourth quarter. Are you saying that trends will normalize at a lower run rate than previously? Just give us any color, just more color on that. -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [20] -------------------------------------------------------------------------------- No, it's just really math in that you're saying, by the end of the quarter -- you have to have some sort of scenario that you plan your resourcing around your capital expenditures, et cetera. So we aligned around a scenario where, at the end of the quarter, which means that at the beginning of the quarter, it is still down in terms of overall utilization. So the average for the quarter will be net down versus prior year. And once again, it is -- we hope that we're wrong on this and we will know real time in terms of how accurate we are. But it is driven by our desire to test productivity levels as volume returns and to not sit on resources more than we really need to see what sort of additional productivity we can have. We firmly believe that we have the opportunity with some of the things that we're doing here to actually come out of this crisis as a stronger company because of some of the prudent financial decisions we're making. And this is one of them that underlies that comment. -------------------------------------------------------------------------------- Jailendra P. Singh, Crédit Suisse AG, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Okay. And then my follow-up -- thanks for all the comments around telehealth and virtual care you guys are doing. Clearly, COVID-19 is having implications on how care might get delivered once things return to a more normal environment. There's a high likelihood that mix between virtual care and in-person would look very different in post COVID. I was curious about Change Healthcare positioning in that new environment. And does that have any implication on your long-term revenue and EBITDA growth targets if mix changes? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- Well, Jailendra, it really doesn't. I think one of the benefits from the diverse revenue base we have and the way we're integrated into all the care processes is that the site of care continues to provide the volume to our networks, utilizing our software, our analytics both in the payer and provider side. I think one of the things that's been clear, while we had already been servicing the telehealth platform providers prior to the advent of COVID, I think the fact that we had built our technology so that it can be uptake and not only by obviously large providers who are doing their own telehealth type of activities or the very large telehealth platform providers, but really all the way down to very specialized or smaller providers, really put us in good stead. And as I mentioned in my prepared remarks, we were careful to put together a series of easily consumable bundles that are available at a very economic price for even the smaller providers. So I think one of the benefits of having, as we've always talked about, over 30,000 customers as well as over 700 channel partners is that we've been able to cover the waterfront. So having to sort of reinvent things for the telehealth phenomenon is something fortunately we had always done because we hadn't thought that as being anything any different than just another site of care. But then what we did do is kind of ramp up the access ramp, if you will, including for smaller providers, who are really challenged because of the jump in volumes that they've seen over the last 3 months. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from Stephanie Davis Demko with SVB Leerink. -------------------------------------------------------------------------------- Stephanie July Davis Demko, SVB Leerink LLC, Research Division - MD & Senior Research Analyst [24] -------------------------------------------------------------------------------- So with the idea that there's not much you can do about volume, it actually does give you a unique opportunity to accelerate these different initiatives that you maybe would not have had the opportunity to work on behind the scenes. So with that in mind, what are you working on now that's ahead of schedule in your initial turnaround plan? Or what's on your near-term list of things you can work on for this year? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [25] -------------------------------------------------------------------------------- Well, Stephanie, we've really tried to continue to accelerate our innovation. And I think you've seen that on other proof points in just the pace with which we've introduced new and pretty innovative solutions into the market. I'd say more than with the decrease in volumes sort of allowing us to move much, much faster, I think we generally moved pretty fast. What I've really seen the difference being is the customer receptivity to these sorts of innovations. I mean, clearly, every provider, to one degree or another, had a telehealth strategy, even if it was not to focus on telehealth historically. But these sorts of areas that we focus on, on using data to provide better decision support as part of the workflow, the ability to do things digitally, including our digital patient experience, using open APIs to allow data to flow better, these are all things that were priorities for our customers and we have had these solutions underway, including the ones that we announced even in Q1. But I think what's really changed more than necessarily an increase in pace of our innovation, because I think it was pretty decently paced beforehand, is the receptivity of customers, who now are saying, "Okay, the idea around digital, the ideas around interoperability, the ideas around in-line real-time analytics, we need to adopt them now because we've got many other challenges to focus on, and we need to be a little bit less perhaps reticent to look at these innovations and including them in how we operate." -------------------------------------------------------------------------------- Stephanie July Davis Demko, SVB Leerink LLC, Research Division - MD & Senior Research Analyst [26] -------------------------------------------------------------------------------- Continuing that train of thought, you guys did have a lot of data solutions, even 2 years ago and last year that we saw. Have you seen a market uptick in any of these as now folks are thinking, "Oh, gosh, we really should have had a lot more analytics and we just -- it's been under-invested for the past few years"? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Yes. I think, one, I think that's a good summary, Stephanie. I'd say also the use of it in a broader sense, and I mean, of course, the COVID-19 tracking is a clear indication as well as the coordination that's needed now on a county or city or regional or state or even national basis, so there's a natural focus on data. I'm sure not too many people in America knew the phrase flattening the curve prior to 3 months ago, right, which is essentially a statistical determination in and of itself. So we're seeing people looking at analytics as a way to manage the kind of volatility that we see that, to be frank, wasn't quite the case previously in health care. So I think that's really increased people's understanding and appetite for data. And then the fact that we can take the data we have, which is quite unique in terms of its timeliness, its breadth and its granularity, and use it in a variety of circumstances. And then once we get the understanding from working with customers and partners on how that is needed and sort of packaging it into new offerings, as you've seen with our COVID-19 Analytical Data Sets and some of the work we're doing with public health entities and others, that's meant that the growth of that business, which is in the high-teens in terms of continued revenue growth, has not only continued that growth but also broadened our set of offerings. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question comes from Eric Percher with Nephron Research. -------------------------------------------------------------------------------- Eric R. Percher, Nephron Research LLC - Research Analyst [29] -------------------------------------------------------------------------------- Thanks for all the commentary on the volume-dependent businesses. I'd like to ask your views on some of the businesses that are more tied to provider spending. We know that budgets are being adjusted in real time. And it sounds like there was some real momentum in Enterprise Imaging. I'd expect that some of those products probably appeal to a more decentralized hospital environment. So maybe a little bit on how you're thinking about the hospital budgets and how that may play through in your products. -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Yes. And I think, Eric, that's a good question. And I think we did allude to some of it. But to be more specific per your question, we did see people take a pause as they were in the midst of dealing with COVID. It wasn't that they didn't understand the value proposition or didn't still appreciate it. But you could imagine, especially when the uncertainty was at its height, it just wasn't the time that purchasing processes remained in the same trajectory that they did back in our Q4. We're now seeing that come back, and we're very optimistic relative to the otherwise still evolving environment in terms of our new sales and the momentum we're starting to see maintaining in Q1. So I think what we've seen is that there was a delay, I almost call it hitting the pause button, on some of the spending and the sort of trajectory or pace of processes that were underway. But they're now beginning again because again our solutions being so oriented to either helping people improve their revenues, reduce their cost or improve their efficiency, that's something that I think every CFO, particularly in the provider segment, has got at the top of his or her agenda. -------------------------------------------------------------------------------- Eric R. Percher, Nephron Research LLC - Research Analyst [31] -------------------------------------------------------------------------------- And on that front, on the test side, do you see more demand for outsourcing? I know you've got both physicians and the hospitals are moving towards the hospitals. But do you think that demand increases as organizations are financially challenged? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- I think we've just seen the beginning of that, Eric. I think that would be a supposition that we would have. And having lived through like you and many others, many business cycles, I think that's almost inevitable when you go through a business cycle like this, particularly with the challenges we're seeing in the economy. And we all, of course, don't know how fast that's going to come back. But I think people honestly have been so focused on dealing with the disruption due to COVID. I mean, obviously, you heard about some of the contracts we've signed that were engendered by the need, whether it's around testing networks, triage services, call center services, which frankly wouldn't have even existed without the need that existed pertaining to COVID. But per your question on sort of a broader, longer-term trend, I think you're probably right. But I think people are just now starting to think, "Okay, if I'm out of the -- I'm beyond the fire of dealing with that, what am I thinking about for the future?" So we're cautiously optimistic, but I think we'll have to see. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question comes from Steve Halper with Cantor Fitzgerald. -------------------------------------------------------------------------------- Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [34] -------------------------------------------------------------------------------- On the comment of $15 million of delayed cost actions, are we to think of that as an annualized benefit? Recognizing that you're going to be bringing back people, but just sort of clarify that $15 million of delayed cost action. -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [35] -------------------------------------------------------------------------------- Sure, Steve. So you should think about that as that's the impact in the quarter from having this a 6-, 7-week lag between the volume declining and us being able to adjust the resource base. I would say the actual number of reductions, which I said in my prepared remarks, about 2,000, it's actually slightly higher than that. But as volume returns, and I said, we're actually in the process of starting to return some of the furloughed employees, that will hopefully be instead substituted by revenue growth with a higher margin than that. But if, for some reason, things don't return, if we have significant disruption during the second half, that is certainly helpful and you should think about that as continuing for the rest of the fiscal year and going forward. But that's how to think about it is really the lag impact in the quarter itself. And hopefully, it will be substituted by revenue growth as things recover. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Our next question comes from Glen Santangelo with Guggenheim. -------------------------------------------------------------------------------- Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [37] -------------------------------------------------------------------------------- Neil, I just want to -- and Fredrik, I just want to follow up on some of the cash flow and balance sheet issues. It seems like you have a fair amount of leverage on the balance sheet, but you're in a good spot from a liquidity perspective. And in this quarter, you now spent over $420 million on these 2 acquisitions. And Neil, I was hoping you could maybe comment on what you think some of the cross-selling and synergy opportunities are that you referenced in your prepared remarks and how we can maybe start to think about how that could impact the growth algorithm on a more normalized basis? And then maybe my second question to that is, as you compare the potential ROI on these investments, were you at all tempted to buy your own stock intra-quarter, given the big dip? And how do you think about that from a comparison perspective? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [38] -------------------------------------------------------------------------------- Yes. This is Fredrik. So I'll take the first -- or the second part and I'll let Neil, I think, comment on the cross-selling opportunities. So we are in a good place from a liquidity perspective. As I said, we did the $250 million early on at the height of the turmoil and we raised the $325 million at really attractive rates compared to where the market, I think, was at that point. So we don't have a liquidity issue. We don't think about it that way. We're at 4.6. We were much higher pre IPO. So we worked our way down, intent was to get down to 4.0 very quickly. Obviously, that's going to be slowed down a little bit where we are right now. The acquisitions that we've done hasn't really materially changed the leverage because of the fact that we've got it at attractive multiples. And so that's just another testament to the strategy that we have in terms of how we think about our M&A strategy. But I'll let Neil talk about the kind of the cross-selling opportunities there. -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Yes. So I think when you think about the eRx and the PDX deal, first of all, strategically, these are really in our sweet spot. I know you know we have over 30,000 customers. But the penetration, the understanding, and these businesses have been in the pharmacy market for over 30 years, that we get with these acquisitions really allow us to leverage a number of our solutions into those markets. Also, eRx and PDX have also worked together again literally for decades. So when you think about the revenue opportunity, it's very much in line with keeping within our overall approach to getting our revenue growth into the mid-single digits. And with the synergies, which were frankly pretty easy to identify because of the scale we have and the relationships we already had for many years, of course, with both of these companies, we're very optimistic about the EBITDA growth, of course, being in excess of that. The other thing that's maybe not quite so obvious because they're clearly leaders here in the pharmacy market are the relationships with life sciences companies. When you think about the pharmacy market, there's obviously a close relationship with the people providing generic or branded therapeutics. We've certainly been doing a lot more work with those companies through our data solutions business. But now the way that we can inject analytics to help with everything from medication adherence, to identifying opportunities, to do interventions at the pharmacy and frankly the continued importance of the pharmacy as a health care provider, it really gives us enormous leverage with both the solutions we already had at Change Healthcare as well as to take the understanding of pharmacy transaction from eRx, the deep and multi-decade understanding of pharmacy workflows in PDX and the great data our assets in connectivity to the rest of the health care system we have and we think really accelerate the innovation and cross-sell across all those constituencies. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- (inaudible) Sandy, your line is open. -------------------------------------------------------------------------------- Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [41] -------------------------------------------------------------------------------- I'm sorry, you broke, I didn't hear you call me. Most of my questions have been asked. And so maybe just one clarification. Fredrik, obviously, Connected Analytics, that business goes out of Software & Analytics. But I just want to make sure when I think about the PDX and eRx, which of the -- which segments are those going to be going into? Will they be discrete? Or will it be sort of mixed across the different segments? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [42] -------------------------------------------------------------------------------- Yes. So both PDX and eRx will be added into the Network Solutions business. And you're right, Connected Analytics was in the software business and it will now no longer be there obviously, so... -------------------------------------------------------------------------------- Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [43] -------------------------------------------------------------------------------- Okay. Great. And then just as a follow-up clarification, a couple of people asked this. So it sounds like, Fredrik, as you've taken cost out of the business and you're bringing revenue back on, there's some of the costs that come back on. But do you think longer term, because of this change in structure, the long-term margins of the business may end up potentially being better than you thought? Or is it just you can get back to those same targets? Or is there something structural that long term, there's actually a higher long-term margin potential? I'm not trying to quantify a date but just that long-term potential. I just want to make sure I was clear on your answer there. -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [44] -------------------------------------------------------------------------------- Yes. No, I do think that's the case. I think as volume returns, there is no incremental sales or anything. So we're very comfortable that we have every solution that we have is as strong or even stronger coming out of this. When we look at the cost structure, we have done a couple of things. I've alluded to this before, look at our real estate portfolio, we have 85 different sites across the country, so we're looking at what can we do there to drive efficiency that we probably wouldn't have done in the same time span as we're now able to do it. Second, as we now transition a lot of things to work from home, it look -- it requires you to look at productivity per team member in a different way, especially on our services parts of the business. And we think there's opportunity here to manage it differently going forward. It requires some technology overlays and so forth that we're working through. But net-net, the core of your question is, yes, I do think there are opportunities to actually improve margins coming out of this. A good crisis should always be utilized. And that's what we're looking at here. And that's a tough way of looking at it. But that's the way you have to look at it to make sure that when you have dislocation like this that you try to take advantage of it. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question come from Charles Rhyee with Cowen. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [46] -------------------------------------------------------------------------------- I just -- obviously, a lot has been already asked and gone over. Just wanted just to clarify a couple of things. You talked about some of the opportunities with the eRx and PDX. But if I recall, you had -- at the start of fiscal '20, you had talked about $150 million in sort of synergies related from organizational optimization, partnering, productivity improvement, et cetera, by the end of fiscal '21. If you could just remind us, where do we end up at the end of fiscal '20? And does any of the remainder get impacted because of what's going on with COVID-19? Or some of what we're talking about, like the $15 million, is that sort of additive to that number? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [47] -------------------------------------------------------------------------------- Yes. So we had about $150 million originally from the merger that we identified. We did about $37 million in this past year. So we have about $49 million left to be gained from what is identified. Nothing has really changed in terms of the ability to get to that. We have detailed plans along to get that. I would say probably some of it has pushed back a little bit just because of the fact that you can't move as quickly when you're transitioning people to working from home. Some of the offshore initiatives that we had is probably delayed a quarter or 2. But of that $49 million that is left to be done, so we've got about $100 million total so far, I would say that we have -- we will get the vast majority of that here in FY '21 with some spillover into the first and second quarter of FY '22 because of the fact that we had to focus on a few other things for a period of time here. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [48] -------------------------------------------------------------------------------- Great. And then just -- if I missed it, I apologize, did you provide any sort of cost synergy targets for eRx and PDX? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [49] -------------------------------------------------------------------------------- We have not. We think that they are significant in opportunity, especially on the cost side. We think the significant portion can probably be achieved over the next year, but there's more to be had after that. And then I think the revenue synergies are quite substantial as well. And that's probably going to be over a 2-, 3-year period to start achieving those. But that's the foundation for the transactions, which is not only to get them at the appropriate price, which we obviously have, both of them, but also to even further enhance them by driving significant amount of synergies, so absolutely. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [50] -------------------------------------------------------------------------------- That's great. And I'm sorry, one just last clarification. You talked earlier about sort of seeing sort of steady improvements across your businesses. Within the Network Solutions business, are you able to tell us or see into it and see like what percent of your clients may have begun to start elective procedures? Is that something you're able to detect? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [51] -------------------------------------------------------------------------------- Yes. No, we do. And I'd say the answer is all. I think someone asked a question earlier about whether there are significant discrepancies. And it's really just a matter of the pace at which people are opening up, and everybody is opening up. I think we'll see. And as Fredrik mentioned, we've tried to be prudent in presuming both how fast people will open up and then whether we'll see a resurgence that might cause some shutdowns or decreases in the fall or from some of the regional issues that may result from some of the circumstances that have been reported in the press. But we've seen basically everybody starting to open up. I think all the states have allowed elective procedures over the course of the last month. But the pace will differ, obviously, depending upon a number of factors. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Sean Dodge with RBC Capital Markets. -------------------------------------------------------------------------------- Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [53] -------------------------------------------------------------------------------- Maybe on the Payment Accuracy business, can you give us a little insight on how your payer clients are balancing or thinking about those types of activities over the next few quarters? I guess providers have taken a big hit. So I'd imagine there's some sensitivity or increased sensitivity around wanting to minimize things like abrasion. Then at least for the time being, payers seem to be enjoying some lower medical costs. So it seems like there's a little bit of less incentive for those types of activities to snap back quickly. Do you have any thoughts around that? -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [54] -------------------------------------------------------------------------------- Yes. No, I think, first of all, I think you're absolutely right on your insights. I think, obviously, providers, particularly over the last few months, have had a very challenging situation. And so payers have been particularly focused on avoiding, which they're always trying to, but particularly focused provider abrasion. I think -- we mentioned that there was some negative impact just because some of the activity was really not the main focus of payers over the last few months. But the efforts around utilization management and electronic prior auth and payment accuracy or payment integrity are going to continue because it's appropriate to make sure that we have prudent spending in the health care industry. And so we see things now normalizing even relative to some state changes that were imposed, if you will, on a couple of states on the payers. Those are now sort of going back to normal. So we see it, again a little bit like I described earlier, a bit of a pause in what would normally be the pace of utilizing those solutions. But it's now coming back. And I think one of the things that a number of our customers told us they really appreciated, as I think you may know, we've really focused on solutions in that space that minimized provider abrasion because we put the logic in helping them code correctly and submit claims correctly on the front end rather than on the back end, where it's been a lot more invasive into their processes when you're trying to correct any issues. And I think it's really increased the appreciation among our payer customers about the way we're approaching this to try to find the balance in the industry. But I think you're right on how it was a bit of a different circumstance over the past 3 months. -------------------------------------------------------------------------------- Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [55] -------------------------------------------------------------------------------- Okay. That's great. And then just a real quick one on the revenue cycle services business, how much of a lag is there from when claims or reimbursement slow down and when it shows up in revenue? I guess at what point does revenue recognition occur there? Is it the actual cash collection? Or is it at some point after that? -------------------------------------------------------------------------------- Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [56] -------------------------------------------------------------------------------- Yes. It used to be under 605 that it was more the cash collection. But the way 606 changed that was that you'd move it much closer towards the actual activity that we're doing. So I would say it's about 30 to 45 days of a lag between the actual activity to us recognizing the revenue. It used to be 60 to 75 to 90 days before. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Thank you. And this concludes the question-and-answer session. I would now like to turn the call back over to Neil de Crescenzo for closing remarks. -------------------------------------------------------------------------------- Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [58] -------------------------------------------------------------------------------- Thank you very much, operator. Well, we really want to express our appreciation from all the dialogue we have with everybody on the call. We're just very pleased with the work we've been able to do with our customers, our partners and really, we hope, in our way, helping the country deal with these unprecedented shocks that we've seen and the ongoing challenges around COVID-19. Fortunately, as we've long told you, we focus on the kind of solutions that improve the efficiency of health care and the effectiveness and do it in a way that makes it as easy as possible for both our provider customers and our payer customers to help the system evolve to something that's more efficient, more effective and has better outcomes. So we're really very pleased by the support our customers have shown us as we've been in this crisis, and we're going to continue to innovate with them to help the U.S. health care system. So thanks, everybody, for calling in today. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.