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Edited Transcript of CHNG.OQ earnings conference call or presentation 14-Nov-19 1:00pm GMT

Q2 2020 Change Healthcare Inc Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Change Healthcare Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Alexander Yearley Draper

SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research

* Allen Charles Lutz

BofA Merrill Lynch, Research Division - Associate

* Daniel R. Grosslight

SVB Leerink LLC, Research Division - Associate

* Eric R. Percher

Nephron Research LLC - Research Analyst

* George Robert Hill

Deutsche Bank AG, Research Division - MD & Equity Research Analyst

* Jailendra P. Singh

Crédit Suisse AG, Research Division - Research Analyst

* James Auh

Cowen and Company, LLC, Research Division - Associate

* Jared Phillip Haase

William Blair & Company L.L.C., 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

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Sean William Wieland

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Yueli Zhang

Citigroup Inc, Research Division - Healthcare IT Senior Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Change Healthcare Second Quarter Fiscal Year '20 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 Evan Smith. Please go ahead.

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Evan Smith, Change Healthcare Inc. - SVP of IR [2]

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Thank you, operator. Good morning, and welcome to Change Healthcare's earnings call for the second quarter of fiscal 2020, which ended on September 30, 2019. I'm joined today by Neil de Crescenzo, Change Healthcare's President and CEO; and Fredrik Eliasson, Change Healthcare's Executive Vice President and Chief Financial Officer.

First, Neil will provide a business update, and then Fredrik will review the financial results for the quarter, followed by closing remarks from Neil. After that, we'll open up the call for your questions. (Operator Instructions)

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 financial measures are included in our earnings release and the appendix of the supplemental slides accompanying this presentation. I want to remind everyone that copies of our earnings release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our website at www.changehealthcare.com.

With that, I'll turn the call over to Neil. Neil?

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [3]

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Thank you, Evan. Good morning, everyone.

I'm pleased to report second quarter solutions revenue of $739 million and adjusted EBITDA of $218 million. During the quarter, the 14,000 team members of Change Healthcare continued to execute on our strategic initiatives to deliver core growth across our leading franchises, transform our RCM Services and imaging businesses and focus on operational excellence to further improve margins and free cash flow.

To underscore the importance of the work we do here at Change Healthcare, you may have seen a recent JAMA study appropriately titled Waste in the US Health Care System, which identified almost $1 trillion in waste in U.S. health care. Hundreds of billions of dollars in waste were attributed to the specific areas of administrative complexity, fraud waste and abuse and uncoordinated care. At Change Healthcare, we are laser-focused on addressing these challenges. We invest in innovation and deliver integrated end-to-end solutions and services to both payers and providers. We help our customers reduce costs, improve quality and enhance consumer engagement.

In a moment, I'll provide some tangible examples of both innovation and execution, reflecting the market's take-up of our solutions, while we continue to attain the financial trajectory we have communicated to investors. As we continue to see growth across our core franchises, we are moving decisively on the transformation of our RCM Services and imaging businesses and as a result, winning new business. We continue to advance our enterprise sales and account management capabilities, which will create broader, deeper and more strategic relationships with our customers.

Now let me provide you with some insights on how we're executing our growth initiatives and embedding innovation across our platform. Our enterprise sales efforts leverage the breadth, depth and quality of our product portfolio for large customers. For example, we had a significant contract win that expanded our relationship with one of the leading National Cancer Institute-designated comprehensive cancer centers in the United States, establishing Change Healthcare as their revenue cycle management or RCM vendor of choice. At this customer, we provide an integrated RCM software, analytics and services solution to accelerate payments, leading the customer to target a reduction in accounts receivable of approximately $150 million by working with Change Healthcare.

In RCM Services, within our Technology-enabled Services division, we use our data and analytics to uncover performance improvement opportunities as well as new growth prospects for our customers. Our comprehensive approach enables us to improve patient access and experience, optimize reimbursement management as we administer daily revenue cycle and business operations more effectively as well as provide optimal payment solutions. Our strategic approach, combined with our increased sales efforts focused on hospitals and physician aggregators, continues to drive new opportunities for growth.

In the first half of the year in RCM Services, we have seen a double-digit year-over-year increase in our bookings and a solid increase in the average size of our contract wins. This is indicative of our initial success as we transform this business over the next couple of years. A notable RCM Services win in Q2 that I'd like to highlight is a nearly $10 million in annual revenue contract with one of the largest hospital systems in the country to provide patient access solutions. This contract illustrates how our cross-selling initiative is expanding our relationships with customers like this who already buys a great deal of our Software and Analytics solutions, and this relationship also provides additional opportunity to extend our services beyond this initial mandate.

Shifting to our imaging business. We continue to execute on our strategic initiatives there. 10 years ago, the health service leaders and government of Ireland wanted to transform how diagnostic services are delivered to their citizens. Their vision was to build a national diagnostic imaging system that would allow clinicians to have full access to a patient's diagnostic images and reports wherever in the country they were acquired. Change Healthcare was selected to partner with Ireland to deliver this vision. Today, Ireland has one of the largest single imaging systems in the world, supporting over 40,000 clinicians and the almost 5 million citizens of Ireland. Our customer, Ireland's Health Service Executive, and Change Healthcare delivered on that vision.

As a vote of confidence in this special partnership and in Change Healthcare's abilities, we are pleased to announce that this quarter, we signed a deal with Ireland's Health Service Executive to extend our contract until 2026 and provide a full enterprise imaging platform delivering advanced diagnostic capabilities and technologies. This landmark investment in Enterprise Imaging covers the acquisition of all digital imaging in the country, radiology, cardiology and beyond.

In the United States, we also saw success with our next-generation enterprise imaging platform. This is the industry's first cloud-native AI-centric solution. Our Enterprise Imaging solution helps drive significant reduction in IT burden, capital investment and operational cost and provides advanced future-proof decision support and workflow optimization that improves caregiver collaboration and patient engagement. In Q2, we're pleased to announce that we signed 2 multiyear multimillion-dollar agreements to move 2 of the largest integrated delivery networks in the United States to our Enterprise Imaging platform.

Also notable is that one of the new contracts adds a net new logo for Change Healthcare. At that customer, we displaced the largest imaging vendor in the world due to our more aspirational vision, capabilities and cost effectiveness, saving that customer close to $2 million annually in operating costs while they benefit from our industry-leading innovation.

Turning to our payment accuracy business, where we focus on health care plans and payers. That business continues to grow at double-digit rates. Unlike others in the industry, we provide an innovative and unique approach that begins with the provider's office before a claim is submitted and runs through the post-pay audit and recovery process. Our end-to-end solution helps drive accuracy earlier in the payment cycle, lowering administrative costs and reducing friction, sometimes called provider abrasion, between payers and providers.

Our superior solution approach and customer service excellence make us the logical payment accuracy partner for the nation's largest and most advanced health plans. In Q2, we were awarded a more than $15 million payment accuracy contract with one of the largest health plans in the country to support their entire book of business.

Let me turn to our risk adjustment business, another area where we are a market leader and where we help our customers be paid accurately within a complex regulatory environment through our end-to-end risk adjustment solutions incorporating chart retrieval, analytics, coding and submission. We use our proprietary technology and expertise to assist health plans in converting their source data and managing errors to facilitate timely and accurate submissions to HHS. Our advanced analytics are also utilized by health plans to evaluate the documented health status of their enrollees and identify gaps between health status, provider documentation and reported quality and risk scores. We optimize reimbursement with natural language processing coding technology to more accurately identify hierarchical condition categories or HCCs, that are commonly missed or coded improperly in manual reviews.

As the health care ecosystem continues to shift to value-based care, missed codes are a significant challenge for risk-bearing organizations. Clinicians or coders now need to review, document and code all of the patient's chronic conditions regardless of whether or not they are related to the reason for the patient's visit in order to receive the reimbursement they are entitled to. As a result of these types of unique and proven capabilities, we signed a contract in Q2 with a value of approximately $20 million over 3 years with one of the largest payers in the country with additional expansion opportunities across risk adjustment and electronic payments across their entire book of business.

Our payments business also continues its strong growth. Our payment solutions lower distribution costs by increasing electronic payment adoption, reducing print and mail cost and streamlining administrative processes. Our analytics derived from our vast data store accurately predict the payment preference of providers, enabling our payer clients to realize electronic funds transfer adoption rates as high as 90%. During the quarter, we signed a multimillion-dollar deal for our electronic payment solutions with a leading payer in the behavioral health market. They were attracted to Change Healthcare by our ability to drive electronic payment adoption, reduce administrative costs and enhanced IRS and ACA compliance.

We noted earlier this year the innovation we are bringing to our InterQual clinical decision support franchise. InterQual Connect enables real-time automated authorization decisions for medical necessity from within existing workflows to a broad base of payers and their network provider. In Q2, we expanded our relationship with Medecision, an integrated health solutions company that helps manage members in commercial, Medicare Advantage and Medicaid programs. Medecision has now integrated the Change Healthcare InterQual Connect medical review service into its iExchange provider data entry solution. Our highly valued channel partner network, which we believe is the largest in the industry with over 700 channel partners, allows us to distribute our intellectual property and innovations pervasively throughout the industry. We enjoy decades-long relationships with partners of all types and sizes, from the largest EMR vendors to small highly specialized clinical, administrative and financial software vendors to new entrants in telemedicine and digital health.

In Q2, we signed an agreement with one of our larger channel partners, Cerner Corporation, which has now integrated the InterQual Medical Review service and InterQual AutoReview into its acute case management solution. This integration of Change Healthcare's solution helps case managers confirm patients receive the correct services in the right setting. Case managers are able to quickly view the status of medical reviews that have been completed automatically, improving the efficiency of the review process.

Case managers in health care have a range of responsibilities that include verifying patients' health insurance coverage and benefits, determining appropriate level of care and coordinating additional health care services with outside providers. With many different responsibilities, reducing administrative burden for case managers helps them optimize their time to focus their efforts on helping patients receive the care they need. As simply stated by the director of revenue cycle development at Cerner Corporation, this new level of automation in case management is a game changer.

In addition to our success on the new business front with customers and partners, we continue to introduce new solutions to drive added value for our customers. We are in a unique position to drive innovation by pairing the strength of our data asset, our internal development capabilities, key development partners and our embedded position in workflow to deliver high-ROI solutions to the market. In Q2, we introduced 2 new solutions, Charge Capture Advisor and CareSelect Imaging with artificial intelligence. Charge Capture Advisor is a new cloud-based addition to our portfolio of revenue integrity solutions. Our proprietary AI model scans for care episodes, predicts mischarges for procedures, devices or implants and diagnostics, helping ensure charges for services provided are captured, represent the charge recommendations to the user auditor within their workflow who can accept or reject them and send a more complete claim to the payer which increases and/or accelerates their revenue.

We also implemented new AI capabilities in our CareSelect Imaging decision support solution, which is installed in over 1,000 health care provider organizations. CareSelect Imaging leverages CMS-qualified datasets to help clinicians make better imaging diagnosis at the point of care. Our AI model analyzes the patient record at the time of the order and predicts which clinical indication a physician is ordering an exam for. This eliminates the need for the physician to search through hundreds of possible reasons that a specific exam can be ordered. It also uncovers potential deficiencies in documentation such as inadequate documentation to support a patient history related to the intended reason for the exam. Overall, our CareSelect solution reduces the inappropriate use of imaging services and unnecessary tests, improves patient care and helps providers comply with the complexity of PAMA regulations.

In closing, the recent wins across our platform, the introduction of new high-ROI and highly advanced solutions and the execution of our strategic growth initiatives provides us with confidence in our fiscal year 2020 outlook of adjusted EBITDA growth in the range of 6% to 8%. Now let me turn the call over to Fredrik who will review our financial performance for the quarter and provide you with more detail on our financial outlook for the year. Fredrik?

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [4]

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Well, thank you, Neil, and good morning, everyone. Before I discuss the quarter, I want to reiterate our financial and business objectives which are threefold: first, driving continued revenue growth across the portfolio through continued innovation and expanded enterprise sales initiatives; second, execution on our enterprise imaging and RCM service transformation initiatives; and third, operational excellence to improve our operating performance with a focus on cost optimization and automation. We remain on target to execute on all of these core objectives for the full year.

Now let me review our financial results for the quarter and then provide guidance for both the third quarter and the full fiscal year. As you can see here on Slide 6 and as I outlined last quarter, Change Healthcare adopted a new revenue recognition accounting standard, ASC 606, effective April 1, 2019, on a modified retrospective basis. In our financial results for April 1 this year and going forward, we will use the new revenue recognition standard. Historical financial results for reporting periods prior to the fiscal year 2020 are presented in conformity with the prior revenue recognition standard, ASC 605. For fiscal year 2020, however, we will provide a bridge to ASC 605 results for comparative purposes.

For the second quarter of fiscal 2020, under ASC 606, solutions revenue was $739 million. Revenue was ahead of our expectations given strong performance in our Network Solutions and Technology-enabled Services segments during the quarter. These results include a $10 million decrease in revenue as a result of the change in accounting standard. This comes from the new accounting standard where more of our revenue primarily related to our decision-support solutions in our Software and Analytics segment was recognized in the first quarter, which aligns with the annual delivery of certain products and services. As in the current quarter, ASC 606 will also negatively impact our results when compared to ASC 605 in Q3 and Q4 of fiscal 2020, although it's not expected to have a material impact on the full year results.

Adjusted EBITDA was $218 million for the second quarter, in line with our expectations, placing us in a solid position to meet our full year financial objectives. Adjusted EBITDA was negatively impacted by the previously mentioned revenue impact from ASC 606 primarily in our Software and Analytics segment and additional investment to support the growth of our data solutions and network businesses. This was partially offset by a $6 million favorable impact on commissions and new contract setup costs as a result of the new accounting standard. For the full year, we expect the positive impact on commission expense to be about $18 million or approximately $3 million per quarter for the second half of the year. Adjusted net income was $87 million, and adjusted net income per diluted unit is $0.27.

Now moving to our results under ASC 605 for comparative purposes on Slide 7. For the second quarter of fiscal 2020 under ASC 605, total revenue was $806 million compared to $800 million in the same period of the prior year. Solutions revenue was $749 million compared to $738 million for the second fiscal quarter of 2019. We will focus our presentations on solutions revenue as it excludes postage revenue, which is merely a pass-through.

Overall growth in the second quarter revenue was 1.5%, which included $15 million from planned contract eliminations in our Technology-enabled Services business, the year-over-year impact related to optimization of our Connected Analytics Solutions business and effect of prior year onetime nonrecurring revenue of $6 million in our imaging business.

Adjusted EBITDA for the second fiscal quarter of 2020 was $222 million compared with $216 million in the same period of the prior year. Adjusted EBITDA margin as a percent of solutions revenue for the second quarter of fiscal 2020 was 29.7% compared to 29.3% in the same period of the prior year.

Net income for the second fiscal quarter of 2020 was $4 million, resulting in net income of $0.01 per diluted unit compared with net income of $113 million and net income of $0.45 per diluted units, respectively, for the second fiscal quarter of 2019. Note that net income in the prior year period included an after-tax gain of approximately $111 million or $0.44 per diluted unit for the sale of the Extended Care business.

Adjusted net income for the second fiscal quarter of 2020 was $91 million, resulting in adjusted net income of $0.28 per diluted unit compared with adjusted net income of $90 million or $0.35 per diluted unit, respectively, for the second fiscal quarter of 2019. Adjusted net income reflects improved margin, including a $10 million reduction in our strategic and integration-related expenses, which were more than offset by higher amortization expense related to strategic and integration CapEx and higher income tax expense in the current period. The per unit results also give effect to the IPO, with 324 million fully diluted units outstanding in the second quarter of fiscal 2020 compared to 253 million fully diluted units in the same period of the prior year.

Now let's take a look in more detail at the performance of our segments on slide -- on the next slide. Once again, we're using the prior accounting standard, ASC 605, to provide a more meaningful year-over-year comparison. Starting with revenue. The Software and Analytics segment grew 1.5% year-over-year. Growth in our Software and Analytics segment was in line with expectations, including strong performance in our leading franchises like payment accuracy and decision support. Results were partially impacted by our previously disclosed strategic assessment and optimization of our Connected Analytics solution and the impact of our investments and transition in our imaging business to cloud-based Enterprise Imaging solution.

Our Network Solutions revenue increased 5.8% year-over-year. Key drivers were volume growth across the network, including increased market penetration in the medical network and dental network; continued growth in our data solutions and B2B payment solutions; and inclusion of 1 additional business day. In addition, we continue to make progress on adding new opportunities for growth in areas like payments; e-prior authorizations; new market expansions for data use cases for health care marketing; and payer data services, including areas like health savings and flexible spending accounts.

In our Technology-enabled Services segment, overall revenue declined 1%. This includes $15 million of planned contract eliminations. Excluding this planned attrition, revenue growth was 3.7%, and as we mentioned, we continue to drive additional wins and expand our discussions in the health system and aggregator market and continue to see more opportunities ahead of us. Overall, the results across the business continue to support our ability to achieve our revenue goals for the year.

Turning to adjusted EBITDA. Software and Analytics grew 6.8% year-over-year. The results were driven by revenue growth, operational synergies and cost initiatives related to Connected Analytics solution partially offset by the decline in Enterprise Imaging. Network Solutions adjusted EBITDA increased 3% in the quarter driven again by the growth in data and B2B payment solutions and continued volume growth across the network, including increased market penetration of medical and dental network, partially offset by increased investment to support the expansion of our data solutions business into new markets and expansion of our dental network.

In Technology-enabled Services, adjusted EBITDA improved approximately $2 million due to the repositioning of the revenue cycle services and the communication and payment solutions business. Margins improved on a year-over-year basis, and we expect that as we move throughout the year, we will see more improved productivity as a result of our real estate strategy as well as automation and artificial intelligence initiatives. As a result, we expect this segment will show stronger year-over-year and sequential adjusted EBITDA and related margin improvement for the remainder of the year. Last, corporate expense increased $7.5 million due to prior year indirect tax credits, increased public company expense combined with increased IT expense for company-wide initiatives.

Moving on to cash flow and our balance sheet on Slide 9. Free cash flow was $77 million for the 3 months ended September 30 fiscal year 2020 compared to negative $22 million for the same 3 months in the prior year. Year-to-date, free cash flow was $94 million versus $103 million in the prior year. Adjusted free cash flow was $113 million compared to $34 million in the prior year. And for fiscal year-to-date adjusted free cash flow was $174 million versus $233 million in the prior year. And once again prior year-to-date fiscal 2019 includes the proceeds from the sale of Extended Care. We continue to expect free cash flow to improve year-over-year due to the earnings growth, improved working capital, reduced strategic and integration expenses and reduced integration-related CapEx compared with the prior year.

Total long-term debt, including the short-term portion, was slightly under $5 billion, with credit agreement net leverage ratio of 4.9. During the quarter, we paid out $890 million in debt. Our liquidity remains strong, ending the quarter with $73 million of cash and cash equivalents and a fully undrawn revolver. Our objective remains to reduce leverage by approximately 0.5 turn a year, including debt paydown and improved operating performance.

Now moving on to our financial guidance and key assumptions on Slide 10. As I stated last quarter, we do not intend longer-term to provide quarterly guidance but given the impact of ASC 606 and this being our first year as a public company, we felt it was important for investors to get a clear view of our quarterly expectation.

Our expectation for the third fiscal quarter this year is for solutions revenue to be in the range of $745 million to $760 million, which includes a greater impact from ASC 606 compared to the second quarter, including approximately $5 million anticipated 606 impact headwind for TES in contrast to a $3 million benefit we had in the second quarter. We also expect corporate and eliminations to remain flat with the second quarter for the remainder of the year. Adjusted EBITDA is expected to be in the range of $225 million to $235 million as a result of continued improvement in overall margins year-over-year and sequentially, partially offset by the ASC 606 revenue impact on TES that I already mentioned and $3 million lower benefit from commission deferrals. In addition, we expect adjusted net income to be in the range of $98 million to $103 million.

Moving on to our full year guidance, where we are reiterating our full year fiscal 2020 expectations, including revenue growth of 1% to 2%, which as previously stated will be subdued due to the strategic repositioning of our imaging and RCM Services business and the strategic assessment process of the Connected Analytics business. Included in the guidance is the expectation that solutions revenue in Software and Analytics segment in the fourth quarter will be in line with the prior year reported results due to the impact of ASC 606 and slower-than-expected timing related to the ramp-up of new contracts as well as improved year-over-year revenue in TES versus our prior expectation as a result of new customer wins. Even with the subdued revenue performance, we expect adjusted EBITDA growth for the full year of 6% to 8% due to the strong pipeline of productivity initiatives across our company. We also expect 9% to 11% growth in adjusted net income this year.

We also expect free cash flow to be in the range of $250 million to $300 million for this full year with adjusted free cash flow that excludes our temporary integration CapEx and operating expenses to be above $400 million. Based on our bookings performance year-to-date, for our fiscal year 2021, the company continues to expect revenue growth of 4% to 6% as we see the business that we are repositioning this year returning to growth, and we expect adjusted EBITDA growth of 6% to 8% next year as well.

As I mentioned earlier, while second quarter revenue decreased as a result of ASC 606 implementation, full year revenue is not expected to differ materially between the 2 accounting standards. The impact from extended recognition period for commission expense is expected to be favorable by about $3 million per quarter for the remainder of the fiscal year, for a total of $18 million for the full year. To provide even further transparency for investors, I would like to highlight the following key assumptions for the full fiscal year that support this guidance: interest expense in the range of $290 million to $295 million; integration-related expense of $100 million to $120 million; adjusted effective tax rate for the fiscal year of 12% to 13%; CapEx of approximately 7% of solutions revenue, excluding integration CapEx of approximately $25 million to $30 million; and basic units outstanding of 319.2 million units.

Now with that, let me turn it over to Neil for his closing comment.

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [5]

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Thank you, Fredrik. We delivered a strong first half and remain excited by the opportunity to extend our leadership position and drive value for our more than 30,000 customers and 700 channel partners through continued innovation as we work to inspire a better health care system. Our continued investments in innovation and advancement of our operational improvement strategy will be the foundation to drive accelerated performance as we move forward. Our 14,000 team members are working diligently to deliver value for our customers every day, helping them optimize financial performance, eliminate administrative waste, improve clinical outcomes and enhance engagement and access to health care for consumers.

Now I'll turn the call over to the operator to take questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Robert Jones of Goldman Sachs.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [2]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [3]

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Sure. Well, Bob, just to be perfectly accurate, what I've talked about was the bookings growth in TES. It said that it was a double-digit rate relative to the previous half year for the first half of this year. So doubling bookings would be good too, but just wanted to be accurate there.

In terms of the deals that I mentioned, including ones, as you mentioned, across really the whole portfolio, RCM, imaging, RCM services, risk adjustment, payment accuracy, our InterQual business, our payments business, I'd say the thing, as you sort of asked about trend, is really our ability to build on the relationship we already have with these customers. Every single one of these, other than the new logo I mentioned in imaging where we displaced a very significant competitor, essentially an example of beginnings of seeing our enterprise strategies and cross-sell activities pay off. And so I think that's an important point to note, as we've talked about that previously.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [4]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [5]

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

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [6]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [7]

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Well, as you remember, first quarter, we pulled through a lot of revenue year-over-year. And so the S&A impact is about $13 million, $14 million, $15 million a quarter between the second, third and the fourth. The fourth quarter is the one we see the most headwinds in S&A specifically, but we have a little bit of pickup and positives on TES in that quarter. But overall, the basic implementation of 606 pulls revenue forward into the first quarter, and then we're seeing the offset on the revenue side for the second, third and the fourth.

And I would say, overall, as we think about the third quarter specifically, when you adjust for the 606, I think the guidance that we gave out on the revenue side is consistent with our full year guidance, about 0% to 2% growth. On the adjusted EBITDA line, once you adjust for 606, about 3% to 7%. So it's consistent with our overall cadence. And really nothing has, from our perspective, changed in our expectations, either in terms of the quarterly cadence nor in terms of our full year expectations.

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Operator [8]

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Our next question comes from Manav Patnaik of Barclays.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [9]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [10]

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

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [11]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [12]

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Sure. For people that might not have seen that, AWS announced this data exchange yesterday where they said they were bringing together leaders in their respective fields to make it easy for customers to securely find, subscribe to and use third-party data in the cloud. As this gets launched, we're providing a quarterly market insights report, which is optimized for local geographies with easy to digest measures and trend information. Just as an example, Manav, we provide population health statistics, procedure utilization data and some other key financial insights. And the report is all based on de-identified data that is aggregated, appropriately permissioned and HIPAA compliant.

We believe that participating in this AWS data exchange provides us with a lower cost of distribution for some of our data and insights and analytic assets, access to a broader set of customers who can benefit from our data, including at the small end of the size spectrum. And we'll continue to leverage this and all our IP into this new channel, hopefully, in the months and years ahead.

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Operator [13]

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Our next question comes from Sean Wieland of Piper Jaffray.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [14]

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I wanted to ask about the changing competitive landscape in revenue cycle, in particular with Cerner, shall we say, deemphasizing that. How is that affecting your go-to-market strategy here?

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [15]

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

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [16]

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And so on the win that you highlighted with the cancer center, can you call out maybe what are some of the key reasons for that one?

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [17]

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

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Operator [18]

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Our next question comes from Ryan Daniels of William Blair.

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Jared Phillip Haase, William Blair & Company L.L.C., Research Division - Research Analyst [19]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [20]

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

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Operator [21]

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Our next question comes from Lisa Gill of JPMorgan.

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [22]

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I just really wanted to talk about the gross margin profit in the quarter. It was down sequentially. I'm just wondering if there's anything specific to call out here. Or is it just business mix? And how do we think about that going forward?

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [23]

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

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [24]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [25]

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

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [26]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [27]

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

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Operator [28]

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Our next question comes from Jailendra Singh of Crédit Suisse.

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Jailendra P. Singh, Crédit Suisse AG, Research Division - Research Analyst [29]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [30]

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Yes. So to just remind everybody, coming out of the transaction between Change and McKesson, we expected $150 million of synergies. We have $87 million left to go this year at the beginning of the year. We did $6 million in the first quarter, $10 million here in the second quarter, and we expect it to accelerate throughout the year.

And so we have good line of sight to that. Obviously, that's coming from a variety of initiatives in terms of facilities, in terms of procurement and also some of the partnering for success initiatives that we have in place as well. So it's continuing consistent with our original expectation, is that by the end of this year, we'll have $40 million to $45 million left to get in FY '21. And it all kind of supports our EBITDA margin expansion and also the EBITDA growth that we have outlined.

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Jailendra P. Singh, Crédit Suisse AG, Research Division - Research Analyst [31]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [32]

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

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Operator [33]

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Our next question comes from Sandy Draper of SunTrust.

Our next question comes from Eric Percher of Nephron Research.

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Eric R. Percher, Nephron Research LLC - Research Analyst [34]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [35]

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Yes. So we've said throughout the last 6 months that we are optimizing that solution set to ensure we create the most value from it. We have certainly had revenue headwinds in both first quarter and second quarter, and we expect that to continue throughout the year. We're obviously going to -- as we go through this process, we're going to update you in terms of what is the long-term plan for it. And -- but right now, there is no -- there are no additional things we can share. It is something we've been very transparent about that we're working through. And hopefully, at some point here, we will have further updates.

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Eric R. Percher, Nephron Research LLC - Research Analyst [36]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [37]

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

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Operator [38]

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Our next question comes from Sandy Draper of SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [39]

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So one of my questions was actually just asked, so I guess just one question here, Neil, and maybe a little bit, Fredrik. When you think longer term about AI, natural language processing, newer technologies, you talked about a lot. When I think about taking out costs, how much of this is taking out costs for the customer? And the other side is how much can you use that to take out costs for you? So I'm just thinking about your -- I think it's 14,000 people that you have. When I think about 3 to 5 years, is that a number that could actually be flat or lower even if you're growing because you're using that technology? Or is the technology really about taking off the burden and the cost from the customer?

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [40]

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

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Operator [41]

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Our next question comes from Stephanie Demko of Citi.

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Yueli Zhang, Citigroup Inc, Research Division - Healthcare IT Senior Associate [42]

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This is Joy Zhang on for Stephanie. Could you provide some color on your near-term cash requirement priorities, namely if you're more focused on paying down your outstanding debt to reach sub-4x net leverage target or if you want to be more flexible to pursue M&A?

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [43]

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Yes. So as we've consistently said, our #1 priority is definitely to pay down debt to get to that interim marker that we've set out for ourselves, which is around 4x, to your point. It isn't always going to be linear. We are going to continue to look for opportunities to either tuck small things in or add growth capabilities that makes more sense for us to acquire versus build ourself or look for partnership and minority investment as well. So -- but there's no doubt that the priority is to pay down debt, but it won't be completely linear between now and the time we get there.

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Yueli Zhang, Citigroup Inc, Research Division - Healthcare IT Senior Associate [44]

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Got it. And given that the IPO lockup expires on December 24, could you provide an update on the McKesson ownership and your expectations for when they'll be selling down their share?

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [45]

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

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Operator [46]

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Our next question comes from Michael Cherny of Bank of America.

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Allen Charles Lutz, BofA Merrill Lynch, Research Division - Associate [47]

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This is Allen in for Mike. On imaging, you guys talked about the Enterprise Viewer last quarter and that launch. How is that performing versus expectations? And then how should we think about the revenue contribution through fiscal '21?

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [48]

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Well, I mean it's performing very well relative to expectations. And it sounds like, as you know in your question, you never should count on that, on any perfect launch. So it's a great question. I think the fact that both our road map and the initial performance of our initial modules is one of the reasons why on some of the large wins I mentioned, we gained the confidence of prospects who turn to us for their long-term solution for imaging.

In terms of the impact, we have included that in our guidance and our expectations for next year. We've mentioned that this will be a journey as we really lead at bringing the industry to a cloud-based Enterprise Imaging platform. So we continue to see the same trajectory that we had estimated in our previous discussions.

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Allen Charles Lutz, BofA Merrill Lynch, Research Division - Associate [49]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [50]

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

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Operator [51]

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Our next question comes from Daniel Grosslight of SVB Leerink.

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Daniel R. Grosslight, SVB Leerink LLC, Research Division - Associate [52]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [53]

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Sure. Good question. So in terms of your first part of the question, nothing has fundamentally changed in terms of our core business. We continue to be excited about the opportunities not just to maintain that growth, but over time, as we continue to expand that capabilities, to even further enhance that. So nothing has changed in terms of the core business. We continue to see that kind of 4.5% to 5%.

Second, in terms of the planned attrition that we have in TES, we said it's about $50 million for the year. We have about $15 million here in the second quarter. We expect that the third quarter will be similar to that and then start slowly but surely tailing off in the fourth quarter, with most of it behind us when we get to the first quarter. So it will get progressively easier once we get to the fourth quarter.

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Daniel R. Grosslight, SVB Leerink LLC, Research Division - Associate [54]

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Got it. And just as a follow-up, you guys had a pretty strong beat this quarter, beat the midpoint of your guidance by $18 million but you kept fiscal year '20 and '21 guidance the same. Just curious how much of that -- of the beat this quarter was due to pull-through from 3Q and 4Q and how much is it just general conservatism.

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [55]

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Yes. I mean I'll try not to be too conservative in our guidance because, eventually, you're not going to believe my guidance. But we did have stronger-than-anticipated revenue, and a lot of that was due to timing, which is why we have not changed our full year guidance. And we're making sure that from our perspective, we're executing as we had expected.

There will be variations from quarter-to-quarter, which is ultimately why we are not big fans of the quarterly guidance, because, at the end of each and every quarter, there are things that either can happen or won't happen in terms of renewals. Especially, renewals is the big part. And we got a bigger flow-through than we had expected this quarter, but it doesn't change our expectations for the full year.

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Operator [56]

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Our next question comes from Matthew Gillmor of Baird.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [57]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [58]

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Yes. Thanks for the question, Matthew. I mean as we mentioned even during the IPO process, this is a multiyear process. Myself and other members on the executive leadership team have been through it, in some cases, multiple times in multiple prior companies. And so we're executing it, I would say, methodically. Yes, we are seeing the results of it. And what it really comes down to is systemically creating an understanding among the broad set of senior executives in our larger customers in particular about all we can do for them and how 1 plus 1 equals 3 by leveraging our data, our AI and our intelligent process automation capabilities, the unique analytics we provide and having a modular approach, if they'd like a services solution or a software solution or data to power their own internal analytics. Creating that understanding in customers, especially large customers, takes some time, but we are making progress in it. And that's why we illustrated such a relatively large number of wins in the different areas when we went through our initial remarks.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [60]

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

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Operator [61]

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Our next question comes from Charles Rhyee of Cowen.

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James Auh, Cowen and Company, LLC, Research Division - Associate [62]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [63]

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

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James Auh, Cowen and Company, LLC, Research Division - Associate [64]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [65]

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I think it's going to be relatively consistent with the -- with what you're seeing. It's going to probably be a little bit more at the beginning of the year and then actually tailoring off because, as you can see right now, we're accelerating throughout this year. And then as logically as we get to the end of it, it's going to come down.

Now it's important for our investors to remember that we set out $150 million at the onset of this transaction several years ago. We think there are more opportunities to drive productivity. It becomes a very difficult delineation between what's synergies and what's just general productivity. But we're going to stop counting at $150 million, and then it's really going to be ongoing productivity from there. So we have good line of sight for the rest of the synergies that we're looking at, but we also have a good line of sight into a lot more productivity, as some of the questions earlier alluded to, between intelligent process automation, AI, et cetera, that's going to continue to drive margin expansion for many years to come.

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Operator [66]

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Our next question comes from George Hill of Deutsche Bank.

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George Robert Hill, Deutsche Bank AG, Research Division - MD & Equity Research Analyst [67]

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I guess the first one for Neil would be -- you talked a little bit about the new imaging logo. I guess could you talk about the competitive environment you're seeing in the imaging market and whether you're seeing more demand from like the acute care space or the ambulatory imaging space? And kind of what's driving the decision-making process there?

And then for Fred, I guess, with respect to bookings, could you talk about -- was there significant bookings concentration? You highlighted a handful of functionalities. Or is the booking strength more broad-based?

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [68]

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

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Fredrik J. Eliasson, Change Healthcare Inc. - Executive VP & CFO [69]

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

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George Robert Hill, Deutsche Bank AG, Research Division - MD & Equity Research Analyst [70]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [71]

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

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Operator [72]

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

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Neil E. de Crescenzo, Change Healthcare Inc. - President, CEO & Director [73]

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

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Operator [74]

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