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Edited Transcript of CHNG.OQ earnings conference call or presentation 14-Aug-19 12:00pm GMT

Q1 2020 Change Healthcare Inc Earnings Call

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Change Healthcare Inc earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Evan Smith

Change Healthcare Inc. - SVP of IR

* Neil de Crescenzo

Change Healthcare Inc. - President & CEO

* Fredrik Eliasson

Change Healthcare Inc. - EVP & CFO

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Conference Call Participants

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* Robert Jones

Goldman Sachs - Analyst

* Lisa Gill

JPMorgan - Analyst

* Manav Patnaik

Barclays Capital - Analyst

* Michael Cherny

BofA Merrill Lynch - Analyst

* Stephanie Demko

Citi - Analyst

* Jailendra Singh

Credit Suisse - Analyst

* Sean Wieland

Piper Jaffray - Analyst

* Daniel Grosslight

SVB Leerink - Analyst

* Eric Percher

Nephron Research - Analyst

* Charles Rhyee

Cowen and Company - Analyst

* Matthew Gillmor

Robert W. Baird - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the Change Healthcare first-quarter fiscal year 2020 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Evan Smith, Senior Vice President, Investor Relations. Sir, you may begin.

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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 first quarter of fiscal 2020 which ended on June 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.

Neil first 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 will 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 constitute forward-looking statements. Actual results may differ materially from the results suggested by these comments for several reasons which are discussed in more detail in the Company's SEC filings. Except as required by law, Change Healthcare assumes no obligation to update any forward-looking statements or information.

Please also note that where appropriate we will refer to non-GAAP financial measures to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix of the supplemental slides accompanying this presentation.

I want to remind everyone that copies of our earnings release and the supplemental slides accompanying this conference call are available in the Investor Relations section of our website at www.ChangeHealthcare.com. With that I will turn the call over to Neil. Neil?

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

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Thank you, Evan. I am pleased to report our first-quarter solutions revenue of $797 million and adjusted EBITDA of $281 million. During the quarter we continued to execute on our strategic initiatives to deliver core growth across our leading franchises, the transformation of our RCM services and imaging businesses and operational excellence to improve margins and free cash flow.

As most of you know we successfully completed our IPO on July 1 with net proceeds of $888 million. This is another great milestone in Change Healthcare's history. It places us in a strong financial position to extend our market leadership and leverage our scale and breadth of solutions to drive innovation, growth and increased value for our customers, partners and shareholders.

And in the two-plus years since we first merged the McKesson Technology Solutions assets with Change Healthcare, we have established a strong foundation for growth, creating the only independent scaled provider in the industry with deep capabilities in Software & Analytics, Network Solutions and Technology-enabled Services.

With more than 30,000 customers and channel partners we play a central role in innovating the way healthcare is managed and delivered. We continue to hear from our payer and provider customers that our breadth of capabilities, data-driven insights and scale are essential to meet their increasingly complex and ever-changing financial, administrative and clinical needs.

Our focus on innovation continues as we deliver solutions spanning the healthcare continuum, from pre-care consumer engagement and eligibility to enabling the efficient and accurate processing of claims and other financial and clinical transactions, all the way to empowering consumers with the ability to review and pay their medical bills online. Our solutions enable new healthcare delivery models in areas like telemedicine as well as new risk and value-based care models that reduce cost, enhance quality and improve outcomes.

When we completed the merger we began executing against a short long-term strategy to ensure sustained success. We have accomplished a great deal in a short period, placing our Company in a strong position for accelerating growth. Initially we focused on integration, establishing the team, systems and processes to support a diverse multibillion-dollar enterprise. We put in place new ERP and HRIS systems as well as a comprehensive approach to sales and account management.

Additionally, we took a disciplined approach to reviewing the combined solution portfolio. We are now successfully rationalizing solutions and contracts where there is overlap where they do not meet our business objectives for growth and profitability. We also began to make focused strategic growth investments in areas like artificial intelligence, robotic process automation and blockchain that are now embedded across our platform to drive innovation.

After all this foundational progress we are now in the build phase and we have already seen the benefits of our efforts with improved margins and underlying growth potential. We are executing on several initiatives to further expand and enhance our intelligent healthcare platform to support the growth of our core solutions and I'll provide a few examples in a moment.

We continue to deliberately reposition our RCM services and imaging businesses. We are seeing early signs of success as we pivot to higher growth segment of the market and drive operating performance. We continue to build our enterprise sales and account management capabilities and are creating broader, deeper and more strategic relationships with our customers. So, we remain confident that all the initiatives and investments and practical innovation our people and our processes can deliver accelerated sustainable growth across the Company over the coming years.

Now let me provide you with some insights on how we're executing our growth initiatives and embedding innovation across our platform. As a leader of payment accuracy we are taking one of the largest payers from an on-premise solution environment to the cloud. Our cloud solutions enable this payer to use advanced analytical capabilities with the latest claims editing content while leveraging the customers' existing on-premise solution.

So, why did they choose Change Healthcare? They chose Change Healthcare because our solution and our implementation strategy provide substantial return on investment quickly while avoiding operational disruption. By moving advanced analytics earlier in the adjudication process, we leverage our intelligent healthcare network while increasing the customers' ROI and increasing provider satisfaction.

By providing cloud-based deployment of our industry-leading prepayment editing content we further extend our leadership and accelerate our growth in this market. Our solution truly future proofs their processes.

In RCM services we are seeing initial success as we pivot towards faster growing segments. During the quarter we signed several health system and hospital customers, as well as a number of large-scale practices in diverse specialties including pathology and diagnostic imaging. These contracts will be implemented over the next several quarters, thereby providing support for our transition to growth for our RCM services business in FY21.

In enterprise imaging we currently have 3,300 hospitals leveraging our imaging software. During the quarter we launched our new Enterprise Viewer. This product is a scalable enterprise level clinical viewer platform for providers that want anytime anywhere access to relevant imaging data, thereby enabling a unified view of patient history for the entire care team.

While early we are seeing a positive reception to our enterprise imaging platform in the market, including the recent signing of a five-year enterprise imaging contract with a large regional health system that includes our Enterprise Viewer as well as our cloud-based vendor neutral archive, or VNA, and our cloud-based analytics suite, which are expected to be generally available by the end of the current fiscal year.

I'd also like to provide you with a few recent examples of how we are extending our leadership position by bringing additional innovation to existing and new customers. In the area of denial prevention for providers we have applied our Claims Lifecycle Artificial Intelligence technology across our complete claims management suite.

The AI infused in these applications help providers of any size identify problem claims that could result in denials and remediate potential issues before the claims are filed. This AI technology is seamlessly integrated into our existing claims management suite, so providers don't need to purchase additional applications, undergo training or change billing solutions.

To provide a bit of context around the value provided by this solution, the average cost to file a claim is $6.50. With the cost to resubmit a denied claim is as high as $25 to $118, making the total cost to submit, correct and resubmit a claim 5 to 20 times the cost of the original claim submittal. Providers typically experience 5% to 15% of their claims being denied before they work them to eventually get paid.

By reducing the number of denied claims we estimate that we can save the average 20-physician practice at least $200,000 annually. For the average 500-bed hospital we estimate that we can save them $2.5 million or more annually. So, as you can see, applying our Claims Lifecycle Artificial Intelligence can drive significant value for our customers and for Change Healthcare.

Also during the first quarter we unveiled Change Healthcare's InterQual 2019, our latest addition or the industry's flagship clinical decision support solution. Among the new features is support for hospital-in-the-home programs, which have gained traction as an alternative option to acute inpatient stays in have demonstrated significant cost savings, [viewer] readmissions and increase patient satisfaction.

InterQual 2019 is also notable for the addition of day one reviews to the InterQual auto-review product. This enables automatic completion of InterQual criteria through integration with EHR, driving administrative efficiency and freeing up case managers to focus on clinical care.

We provide continuous updates of the clinical data from the EHR over the first 24 hours to present a more complete picture of an admitted patient while significantly reducing the time spent on manual entry or eliminating manual entry altogether.

During the quarter, we also introduced the industry's first patient liability solution that helps improve the entire patient journey. Patient liability is an increasing burden on health systems as out-of-pocket costs continue to rise and poor patient experiences lead to dissatisfaction as well as reduced or delayed payments.

Our suite of patient liability management solutions is designed to address these challenges and provide a synchronized patient experience that improves provider/patient relationships and enables greater revenue collection. Gaps in the current system including outdated or invalid coverage information means hospital staff often cannot request upfront payment. Providers often collect as little as 30% patient payments in dollar terms after discharge.

Our patient liability management suite eliminates this problem by accessing real-time eligibility and obtaining preauthorization prior to service to generate an accurate, upfront out-of-pocket cost thereby increasing payment collections prior to care to as much as 70% of the time and reducing the risk of patient bad debt.

Lastly, we were awarded a six-year extension of our contract with the CommonWell Health Alliance, further advancing our reach and connectivity. Under this contract we will continue to provide clinical interoperability services including patient identification, record locator services and document retrieval to improve patient access and care delivery.

The CommonWell Health Alliance includes companies improving patient care in more than 20 care settings including acute ambulatory and post-acute care through patient portals and even through emergency services. We enable CommonWell to connect more than 13,000 provider sites which have records for more than 50 million unique individuals.

Supporting the interoperable exchange of clinical healthcare information helps move the needle forward on the business case for value-based care and reimbursement as well as supporting the goals stated in the 21st Century Cures Act.

So in closing, the recent wins across our platform, the introduction of new solutions-based investments in advanced technology, 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 Eliasson, Change Healthcare Inc. - EVP & CFO [4]

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Thank you, Neil. Good morning, everyone. Before we move into the financial discussion I just want to mention how gratifying it is to have successfully completed the IPO on July 1 and the support we've already seen from our investors. As Neil stated, this is a key milestone in our Company's history at a point where we see significant potential to leverage the strength of our integrated and scalable platform to accelerate growth and enhance our performance.

Our financial and business objectives 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, continued cost discipline to improve our operating performance with a focus on cost optimization and automation.

Now let me review our financial results for the quarter and then provide guidance for both the second quarter and the full fiscal year. As you can see here on slide 8, Change Healthcare adopted a new revenue recognition accounting standard, ASC 606, effective April 1, 2019 on a modified retrospective basis. Our financial results from April 1 this year and going forward 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 comparison purposes.

For the first quarter of fiscal 2020, under ASC 606, solutions revenue was $797 million. The impact from the change in accounting standard was a $42 million increase in revenue. This comes from the new accounting standard with more of our revenue primarily related to our Decision Support Solutions is recognized in the first quarter, which aligns with the annual delivery of certain products and services.

Revenue related to these products and services was recognized over time throughout the year under the prior revenue recognition standard. So, with the change in standard having a material impact on the first quarter, it will not have a material impact on the full-year as it was merely an acceleration of revenue from the remaining three quarters of the year.

Adjusted EBITDA was $281 million for the quarter. In addition to the impact from the acceleration of revenue from ASC 606, expenses were also favorably impacted by $6 million from the new accounting standard. This is caused by lower commission expense driven by the extension of the amortization period. For the full year we expect that impact to be about $18 million.

As the result of both the revenue acceleration and the longer amortization period for commission expense, adjusted EBITDA improved by $48 million versus the prior accounting standard in the first quarter. Adjusted net income of $142 million improved by $45 million and adjusted net income per unit of $0.56 improved by $0.18 versus the $0.38 in the prior accounting standard.

I also want to point out that following our initial public offering the Securities and Exchange Commission provided us with updated feedback regarding the calculation of adjusted net income. As a result we will now report adjusted net income as net income before amortization expense only from acquired intangible assets as adjusted to exclude the impact of certain items that are not reflective of our core operation and the tax effect of the foregoing adjustments. Previous guidance did not permit us to distinguish between amortization resulting from acquired intangible assets and amortization attributable to developed software.

Now moving to our results under ASC 605 for comparative purposes on slide 9. For the first fiscal quarter of 2020 under ASC 605 total revenue was $814 million compared to $823 million in the same period of the prior year. Solutions revenue was $756 million compared to $750 million for the first fiscal quarter of 2019. We will focus our presentations on solutions revenue as it excludes posted revenue which is merely a pass-through.

Growth in both software and network solutions businesses was more than offset by an unfavorable impact of $9 million from the divestiture of Extended Care in the prior year, $10 million from planned contract eliminations in our technology enabled services business, and the year-over-year impact related to optimization of our Connected Analytics solutions business.

Adjusted EBITDA for the first fiscal quarter of 2020 was $234 million compared with $228 million in the same period of the prior year. Adjusted EBITDA margin as a percent of solutions revenue for the first quarter of fiscal 2020 was 30.9% compared with 30.1% in the same period of the prior year.

The favorable impact of productivity improvements in growth across our software and network segments more than offset the aforementioned unfavorable impact from divestitures and timing related to the elimination of costs associated with the planned contract eliminations.

Net income for the first fiscal quarter of 2020 was $27 million resulting in net income of $0.11 per diluted unit compared with net income of $13 million and net income of $0.05 per diluted unit respectively for the first fiscal quarter of 2019.

Adjusted net income for the first fiscal quarter of 2020 was $96 million resulting in adjusted net income of $0.38 per diluted unit compared with adjusted net income of $98 million or $0.39 per diluted unit respectively for the first fiscal quarter of 2019. Adjusted net income reflects items noted above and $7 million reduction of strategic and integration-related expenses.

Now let's take a look in more detail at our performance of our segments on slide 10. 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 was essentially flat year-over-year. Adjusting for the impact of the divestiture of Extended Care, the growth would have been 2.2%.

While our core Software & Analytics solutions showed strong growth, they were partially offset by our continuous strategic assessment and optimization of our Connected Analytics solution and the impact of our investment and transition in our imaging business to a cloud-based enterprise imaging solution.

Our network solutions revenue increased by 3.7% year-over-year primarily due to strong growth in our data and B2B payment solutions. We continue to make progress on adding new opportunities for growth in areas like attachment, new market expansions for data use cases for healthcare marketing and payer data services including areas like health savings and flexible spending accounts.

And in our technology enabled service segment, core growth of $5 million were more than offset by the $10 million of planned contract eliminations. We have seen early wins in the health system and aggregator market and continue to see more opportunities ahead of us.

Turning to adjusted EBITDA, Software & Analytics grew 9.6% year-over-year. Strong productivity from our off-shoring initiatives, synergy realization and growth in core solutions more than offset the impact of the Extended Care divestiture. Network solutions adjusted EBITDA increased almost 3% in the quarter driven again by the growth in the data and B2B payment solutions.

And technology enabled services' adjusted EBITDA declined $6 million due to the repositioning of a revenue cycle business and the communication and payment solutions. Margins improved on a sequential basis and we expect that as we move throughout the year we will see more improved productivity to both our real estate strategy, our robotic process automation and artificial intelligence initiatives. As a result we expect this segment will grow adjusted EBITDA for the full year.

Moving on to cash flow and our balance sheet on slide 11. Free cash flow was $17 million for the three months ended June 30 fiscal year 2020 compared to $126 million for the same three months in the prior year. Adjusted free cash flow was $61 million compared to $199 million in the prior year.

The decrease in free cash flow and adjusted free cash flow primarily resulted from the inclusion of $155 million of pass-through funds in the three months ended June 30, 2018 as compared to only $12 million for the three months ended June 30, 2019. Netting out the impact of pass-throughs, our adjusted free cash flow improved $4 million year-over-year.

Cash flow in the first quarter is historically lower than the remaining quarters as a result of seasonality in our working capital and employee performance-based compensation payouts. We continue to expect our free cash flow to improve year-over-year through 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 approximately $5.8 billion excluding the impact of the IPO proceeds. The pro forma net debt gave an effect to the $888 million net proceeds for the initial public offering of common stock and a concurrent offering of tangible equity units as well as the redemption of $805 million in term loan facility obligations is approximately $5 billion. This reduces our credit agreement net leverage ratio to 4.9.

Our liquidity remains strong ending the quarter with over $27 million in cash and cash equivalents and a fully undrawn revolver which we recently amended, increasing it to $785 million and extending the maturity to July of 2024. Our objective is to reduce leverage by approximately half a turn a year including debt pay down and improved operating performance.

Now moving on to our financial guidance and key assumptions on slide 12. Change Healthcare expects full-year fiscal 2020 revenue growth of 1% to 2% as revenue growth will be subdued due to the strategic repositioning of our imaging and RCM services business and the strategic assessment process of our Connected Analytics business.

Even with this subdued revenue performance, we expect adjusted EBITDA growth of 6% to 8% due to the strong pipeline of productivity initiatives across our Company. We also expect 9% to 11% adjusted net income growth this year. This growth is based on fiscal year 2019 adjusted net income of $410 million where, consistent with the new definition of adjusted net income, we only add back acquired intangible amortization of $147 million versus all of the amortization under the prior methodology.

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 well above $400 million.

For fiscal year 2021 the Company expects revenue growth of 4% to 6% as we see the business that we're 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 first-quarter revenue increased as a result of ASC 606 implementation, full-year revenue is not expected to differ materially between the two accounting standards. The impact from extended recognition periods for commission expense is expected to be favorable about $4 million per quarter for the remainder of the fiscal year for a total of $18 million for the full year.

While our intent longer-term is not to provide quarterly guidance, we felt that this year, due to the impact of ASC 606 and this being our first year as a public company, it was important for investors to get a clear view of our quarterly expectations. As such, our expectation for our second fiscal quarter this year is for solutions revenue to be in the range of $710 million to $730 million and adjusted EBITDA to be in the range of $210 million to $220 million. In addition, we expect adjusted net income to be in the range of $80 million to $90 million.

As a reminder again, our guidance is based on ASC 606 and is not comparable to our prior-year quarter results in ASC 605 as a result of the aforementioned acceleration of certain revenue recognized in the first quarter.

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 then basic units outstanding of 319.2 million units.

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

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

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Thank you, Fredrik. On the heels of a successful IPO, we are off to a great start to the year. We are excited by the opportunity to extend our leadership position and drive value for our more than 30,000 customers and 700 channel partners through continued innovation as we work to inspire a better healthcare system. Looking out longer-term, we will continue to execute our innovation and operational improvement strategy to drive accelerated performance.

I would like to thank our 14,000 team members for their hard work and dedication to our customers' success. Combined with the support of our customers and partners, they are the reason Change Healthcare is the partner of choice in the industry. As our first quarter as a public company demonstrated, we can create value for providers, payers and consumers and, in doing so, create value for the broader healthcare system and for our shareholders. Now I will turn the call over to the operator to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Robert Jones, Goldman Sachs.

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Robert Jones, Goldman Sachs - Analyst [2]

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Great, good morning. Thanks for the questions. I guess just I had one on network solutions. Margins in that segment came in better than we expected. I was hoping maybe you could talk a little bit about any impact you might have seen from re-contracting from customer consolidation in that segment.

And then -- curious, if you were able to offset that, if there were any impacts from those renegotiations on that re-contracting, if you're able to offset that with any new products or if it was just better performance than expected.

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

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Yes, thanks for the question. So, we have continued to do that as we have in past years, namely looked at continuing to expand our business with customers when we are in contract renegotiations. And then of course adding new solutions in that space -- either new transaction types such as electronic attachments and other capabilities, and also of course in the overall segment growing the data solutions and payments businesses that are part of the network solutions segment.

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Robert Jones, Goldman Sachs - Analyst [4]

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Great and then if I guess if I could just sneak one more in on the TS segment. Fredrik, I believe you said there was a $10 million impact from an RCM contract exit in the quarter. Just wondering how we should think about any other impacts from contract exits for the balance of the year there.

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [5]

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There were actually two that constituted a -- $10 million. And as I think about the year I would model essentially the same sort of run rate for the rest of the year. Essentially they both end at of the end of the fiscal year. There's a little bit of overlap, but generally I would just keep it at about the same rate.

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Operator [6]

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Lisa Gill, JPMorgan.

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Lisa Gill, JPMorgan - Analyst [7]

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I just wanted to follow up on some of your recent business highlights and just understand a couple of things, Neil. First, when we think about some of these, can you talk about the impact that they'll have on 2020 and what you're seeing for new versus existing customers?

And then just maybe more broadly, how do we think about the current competitive landscape? We get a lot of questions around new entrants that are coming into the market, especially around the analytics side of the business.

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [8]

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Okay, great. Thanks, Lisa. So, in terms of some of the new areas that I mentioned, what we're seeing is the ability for us to extend the business we have with a very large, as you know, current customer base as well as with new customers.

So given, for example, in the imaging business, as I mentioned, the relationships we've had with multiple thousands of customers over many years, when we have the kind of innovation we're now bringing to market, which is pretty unique with this native cloud-based AI-based data analytical platform in conjunction with Google, we're able to leverage those relationships to expand with the customers what they do with us. And we're seeing that really across our segments with the kind of innovation that I described in my remarks that you were referencing.

In terms of new entrants, one of the things that's great about the relationships we have with our customers and our ability to work with channel partners is we can often work with a lot of these new entrants to help with our distribution in the industry and be very complementary.

You may have seen announcements we made with companies like Health Fidelity and Natural Language Processing for payers or MDsave around consumer payment platforms in the provider market. So, we pay careful attention to the new innovations from these new entrants, but often we're able to partner with them and learn more about what they can do and eventually perhaps work with them commercially or ultimately perhaps even in an acquisition.

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Lisa Gill, JPMorgan - Analyst [9]

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That's helpful. And then just on the synergy capture side, can you just tell us, Frederick, what's in your guidance for 2020? Thank you.

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [10]

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Yes, so beginning this fiscal year we had about $86 million, $87 million left -- we had I think after about $5 million or $6 million this quarter. So, we expect we're going to accelerate a little bit throughout the rest of the year and we will capture about half of that $86 million, $87 million for the full year. That's a current run rate [we're on, consistent] with what we had expected.

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Lisa Gill, JPMorgan - Analyst [11]

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Okay, great. Thank you.

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Operator [12]

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Manav Patnaik, Barclays.

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Manav Patnaik, Barclays Capital - Analyst [13]

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My first question is just in the Software & Analytics business there's clearly a lot of good stuff going on. And I was wondering if you could just help segregate the growth of that core Software & Analytics business versus what the headwind is from Connected Analytics and then Imaging separately?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [14]

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Great. Well, as we've talked about including with investors in recent months, the full core growth that -- where you have defined as the Software & Analytics business excluding the Connected Analytics solution as well as network solutions business, we still see growing at 5% this year.

As you may remember, that part of our business, which was about 80% of our EBITDA last year, we see as continuing to deliver strong result while we reposition the test business for growth in FY21.

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [15]

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And then obviously also that 5% includes the Imaging business that we are seeing some headwinds short-term, but as we expect fully to expect to return to growth as we move forward. And then specific to your question about Connected Analytics this quarter is about a $4 million to $5 million drag on the top line.

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Manav Patnaik, Barclays Capital - Analyst [16]

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Got it. And then just as a follow-up on the ICM repositioning, I guess it sounds like your backlog there is building. I was just curious if you could help us understand what the pitch is from Change's perspective that is getting these customers to I presume switch from another provider to you guys.

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

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Well [often] or not, just to be clear, they are looking at us helping them future proof their imaging strategy by going from the on-premise solutions that have existed historically to a cloud native solution and -- on the imaging side.

On the RCM side it's really going to market with a comprehensive solution that is based on this business process as a service that allows us to take technology, services and the expertise -- the domain expertise we have and allow us to differentiate from others in the market, particularly the smaller players.

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Operator [18]

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Michael Cherny, Bank of America Merrill Lynch.

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Michael Cherny, BofA Merrill Lynch - Analyst [19]

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Good morning and thanks for all the color so far. Neil, you had talked a bit about your artificial intelligence applications and how it's working its way through your business. Maybe as you think about that as a premise for some of your other R&D priorities, what do you see as the biggest opportunities as we bridge the higher growth rate about what drives new product innovation, aside from what you're doing right now? And where are the elements that you're spending money to drive returns? And I guess also along those lines, how do you think about the ROI on your R&D spend?

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

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Well, we look at the areas that we think are going to be critical to our customer success and certainly it's around artificial intelligence. And when you ask about where we're spending our money, leveraging the data and understanding we have our customers' business and really co-creating with them is a big part of our R&D spend.

Because of the connectivity we have, the data we have and how we are embedded in the workflow of our customers, we could not only provide AI solutions because of the core technology, but actually provide the value for them faster and more broadly than many people in the industry because of where we sit in the value change of our customers.

The other area that we will continue to see is important will be operational improvement in our own services including through technologies like RPA or blockchain. We process more than 20 million blockchain transactions every day in our network and it provides us a much lower cost, highly secure approach to helping our customers get more value from our solutions.

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Michael Cherny, BofA Merrill Lynch - Analyst [21]

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Thanks. And then just a quick follow-up maybe for Frederick. You talked about the priorities and the delevering of half a turn annually give or take. That being said, this is a business that was put together through a number of acquisitions.

So, as you think going forward, how prevalent will M&A and bolt-on M&A be in your priorities? And how do you think about priorities in terms of what you want to target relative to what you want to build out?

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [22]

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Yes, I think that's exactly how we look at it. We look at our M&A strategy [at a lens of] are there nice tuck-ins that are going to add to growth or are the capabilities that are more suitable to buying versus developing ourselves. And so, in terms of M&A going forward, there's no doubt that deleveraging is our number one priority, but it won't be necessarily 100% linear.

There will be opportunities to acquire small things or medium things along the way. We will certainly do that if that makes sense for shareholders and enhances our growth profile. We did a couple small ones last year and I think you should continue to expect us to always look at new opportunities. And also if there are opportunities where -- and solution area is more valuable to somebody else than to us we will of course look at divestitures as well.

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Michael Cherny, BofA Merrill Lynch - Analyst [23]

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Excellent, thanks.

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Operator [24]

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Stephanie Demko, Citi.

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Stephanie Demko, Citi - Analyst [25]

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Congrats on a great first quarter. Could you tell us more about your network business' defensibility against some of the larger financial institutions and fintech players just given some of the recent M&A (inaudible) payment space?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [26]

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Sure, Stephanie. Well, first of all, it's not surprising that some of these very large merchant services companies like JPM or Global Payments are investing and looking to get more understanding of the large healthcare market. We work with a variety and multiple merchant service companies and will continue to do so on whatever behalf best advantages our customers.

And we'll continue to partner with companies like -- for example, AdvancedMD continues to be a customer of ours after their acquisition by Global Payments. They have a very innovative management team. We recently extended our network services contract with them and are now engaged in discussions with them around some of the new innovative solutions that I mentioned we look to co-create with customers. So, we certainly appreciate the increased focus on the payments innovations that are a big potential for us in healthcare.

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Stephanie Demko, Citi - Analyst [27]

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In that line of thought, could you talk more of some of the renovations in the consumer facing portion of your payments business? And is there any opportunity in kind of (inaudible) you're growing hospital facing (inaudible) cycle solutions?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [28]

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Yes, I think in fact one of the things that's a big advantage for us is the way that we facilitate payments not only for consumers whether through co-pays or people paying their medical bills, but then of course all the work we do around payments from payers to providers in order to make sure that we facilitate payments at all stages during the value process.

It actually allows us to differentiate because we also have the clinical, administrative and other more industry-specific types of financial information that allows us to add to the raw payments, if you will, transaction. Key areas that enable payments like electronic attachment, electronic prior authorization and the data that's needed needs to be maintained under the healthcare regulatory regimes in order to facilitate payments to make sure their accurate and that the payment information is understood by consumers.

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Operator [29]

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Jailendra Singh, Credit Suisse.

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Jailendra Singh, Credit Suisse - Analyst [30]

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First, just a quick clarification on your FY20 EBITDA growth guidance of 6% to 8%. Is it fair to say that it includes slightly less than 2% benefit from $18 million benefit from this ASC 606 adoption this year?

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [31]

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It includes some benefits from that as well, that's correct.

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Jailendra Singh, Credit Suisse - Analyst [32]

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Okay. Then moving on to FY21 -- thanks for the color on that. Can you help us understand how much of that revenue growth acceleration you expect in FY21 is driven by acceleration in core growth market share gains or versus some of the headwinds you are facing this year going away in a 521? Give us some flavor like how much new market gains or new market projects you expect next year.

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [33]

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Well, clearly the acceleration itself is to a large degree driven by what we are expecting to see out of our RCM and imaging business going forward. Our core growth, as we said here that we defined as software and network business ex the Connected Analytics business, as Neil said earlier, around 5% is what we are expecting here. We'd like to see that accelerate as well, but a key driver is really returning those two businesses to growth as we get into FY21.

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Jailendra Singh, Credit Suisse - Analyst [34]

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Okay, and then last one, I just want to get a [part] around the implications of the current political environment. Are you seeing your clients putting any kind of projects on hold as we enter the election-year next year? Or maybe because of the uncertainty around ACA, focus on price transparency and other potential reforms coming out of DC?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [35]

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Actually less than seeing people put things on hold, we're seeing people ask more questions about how they're going to grapple with some of these new changes or potential changes in reimbursement models.

I think the focus that we've had on healthcare consumerism, both in our own offerings and joint efforts we've done with Adobe and Microsoft around patient experience and our partnership with MDsave, have really made us a destination among the different players they deal with, help them try to determine how to react to some of these changes that you referenced.

Also when you look at some of the new reimbursement models, they all focus on reducing costs, improving access and having a more value-based healthcare system. So, the investments we've now made in many years to have -- over many years to have leadership roles in those segment has really caused us to be very meaningfully engaged with our customers to see how we can help them with any of the changes that we'll see due to reimbursement changes.

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Operator [36]

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Sean Wieland, Piper Jaffray.

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Sean Wieland, Piper Jaffray - Analyst [37]

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On your CommonWell renewal, aside from the extension in time, can you tell us maybe how that renewal is different in terms of what you're bringing to that organization from a technology or services capability?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [38]

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Yes, absolutely. Thanks, Sean. So, first of all, as we mentioned, our network capability in conjunction with AWS has really become second to none both because of the integration of technologies like blockchain, but also the scale and the cost efficiencies and security we've been able to design into the network over recent years. So, it's really become a capability that's second to none in the industry.

In addition, I'd say some of the evolution of our relationship with CommonWell, and really CommonWell's continued growth in the industry, has focused on new capabilities such as document retrieval and others that weren't really practical until you achieve the level of pervasiveness that they've now achieved.

So, it's a technology capability that's really improved dramatically in recent years due to the investments we've made, plus new use cases, if you will, that are enabled by the ubiquity of the connectivity that we have in the market.

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Sean Wieland, Piper Jaffray - Analyst [39]

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Great, thank you. And Fredrik, a quick one on FY21 -- I also appreciate the sneak peek on the guidance. But how do you think about operating leverage in FY 2021?

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [40]

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I think we continue to see opportunity to drive operating leverage going forward. It is not the focus of our guidance because we have such a disparity between our business units and segments in terms of their margin. So, depending on which one goes faster, it could very the margin improvement. But clearly as we move forward, just as we see this year, we're going to continue to drive margin expansion.

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Sean Wieland, Piper Jaffray - Analyst [41]

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I understand, thank you.

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Operator [42]

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Daniel Grosslight, SVB Leerink.

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Daniel Grosslight, SVB Leerink - Analyst [43]

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Congrats on a solid quarter here. I just wanted to dig into the return to growth in RCM services in 2021 a little bit. So, after the outsized attrition rolls off this year, where do you think attrition normalizes in 2021 and beyond? And how should we think about same-store sales growth going forward in 2021 and beyond? Should it grow at generally the same rate as healthcare spend?

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [44]

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I think overall if you look at that market depending specifically on the comparables you use, but from our perspective as the markets are going to grow 4% to 6% to 7% to 8% -- it really depends on the specific focus area. But from our perspective that's a good range to think about our overall business.

We already see attrition normalizing when you strip out those $10 million of impact that you saw this quarter and we expect to stabilize that as we continue to improve the value proposition for our customers.

So, we think the same-store sales growth opportunity is good. We think the market the opportunity is good. And as we get the situation both on the plan side but also just general attrition to a lower level, which we are seeing already, we think the growth rate going forward is going to be very attractive.

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [45]

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The only thing I'd add to that, we continue to see consolidation in the market including on the aggregator side. And so, we are finding whether it's concerns about being able to operate at scale, information security, bringing innovation like AI and RPA to bear, the customers are increasingly more demanding, especially the larger ones, to come to scaled providers like ourselves.

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Daniel Grosslight, SVB Leerink - Analyst [46]

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Got it, thanks. And then just on the imaging side for 2020, are we still thinking about kind of flat to slightly down-ish growth returning to 1% to 2% growth in 2021?

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [47]

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Yes, I think that's a reasonable place to be.

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Daniel Grosslight, SVB Leerink - Analyst [48]

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Okay, great. Thanks, guys.

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Operator [49]

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Eric Percher, Nephron Research.

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Eric Percher, Nephron Research - Analyst [50]

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I will continue with imaging. This is an important part of the story moving forward. As we don't have a bookings number it would seem that you'll have a feel for how this business -- or how the market is responding to what you're offering well before we see it in revenue. Can you give us a little bit more on what the mile markers are you'll be looking for and how you might communicate when you do see new wins or adoption?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [51]

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Well, I think first of all, (inaudible), we really look at the excitement we're seeing among customers in the market. So, we continue to have an increased number of active discussions with anywhere from small to mid to large integrated delivery networks, especially now as we are producing the modules in the market that people can get their hands on them and really see the benefits practically among their users.

In addition, when we go into most of these on-premise implementations, we can typically see a benefit on their operating expense applied to imaging of at least 20%. So, in the increasingly cost-conscious environment many of these IDNs are operating in that's very attractive. So, the combination of having this -- really the only native cloud AI first platform being developed in the market, plus the operational cost benefit, is continuing to help us build the pipeline.

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Eric Percher, Nephron Research - Analyst [52]

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And maybe a follow-up on a separate topic, on the net income, Fredrik. I want to make sure I'm just crystal-clear here. So, we have at the net income line this year a benefit of $18 million. As you think about that moving forward do you expect that that commission expense remains steady or does it become a headwind and how might that impact net income going forward?

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [53]

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Because of the extended amortization period it's going to continue going forward. So it's not a headwind. I think we generally see it as kind of flat versus this year or next year. Eventually -- unless you really accelerate growth, you eventually pay the piper as you amortize something over a longer period of time. But we don't see that as being a headwind -- and of course it's going to be part of our guidance going forward, but we don't see it as a headwind anytime soon.

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Eric Percher, Nephron Research - Analyst [54]

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Perfect, thank you.

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Operator [55]

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Charles Rhyee, Cowen.

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Charles Rhyee, Cowen and Company - Analyst [56]

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I don't think you guys really touched on it so far in the presentation, but your data solutions business, maybe give some color here on what you're seeing in selling data into areas like the life science payer space. That seems to be an area of focus for other companies in this space and just wanted to get your -- get a sense on your positioning there and what you're seeing in the market.

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [57]

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Yes, great question, Charles. We continue to make traction in expanding the use cases for our data. And it does start of course continuing with the work we've done for many years in the existing payer and provider market, so things like patient referral patterns, comparative cost analytics, especially as we have the greater push at the federal, state and commercial level around price and cost transparency.

But as you mentioned, we have hired up and are expanding and have more opportunities now in other markets such as life sciences around patient recruitment, in financial services around data services for the people who operate HSAs and FSAs, financial services companies, and also consumer and media and marketing companies that want to better target the information they provide consumers.

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Charles Rhyee, Cowen and Company - Analyst [58]

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That's helpful. And then maybe what do you think about the growth outlook then for this segment in terms of growth rates? And do you see this as an area where we could see overall growth start to accelerate?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [59]

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Yes, we'll continue to look at accelerating the growth of the segment given we've got a very broad footprint. But as we described previously, these new areas that -- are growing far more rapidly such as payments and the data solutions business that you just mentioned.

So, we are very happy about the balance we have between steady high-margin businesses that still exhibit growth tailwinds because of the growth of US healthcare and these new innovative areas that we've begun over recent years.

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Charles Rhyee, Cowen and Company - Analyst [60]

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Great. If I could just sneak one more in. Did you guys -- I'm sorry if I missed it, but did you -- can you talk about the benefit at all of any kind of cross-selling you had in this quarter? And so, what do you assume in the guidance for this year and then your initial 2021 outlook? Thanks.

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [61]

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Yes, we certainly have included in our guidance the expectations we are seeing due to not only cross-selling but really the deeper and more strategic relationships we're developing with some of the larger players in the industry.

So, as you see us continuing to accelerate growth and, as we mentioned, the steady growth we're already seeing in our core businesses, we're benefiting from the cross sell opportunity we have given the breadth of our solution portfolio and frankly the size of our customer base.

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Operator [62]

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(Operator Instructions). Matthew Gillmor, Robert Baird.

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Matthew Gillmor, Robert W. Baird - Analyst [63]

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Maybe following up on the RCM services outlook, you quantified the contract exits at $10 million, which was helpful. Can you also quantify the revenue pickup that you may get from some of the sales that you mentioned, just so we can understand the trend line over the next couple quarters?

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [64]

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I think -- obviously that is part of our embedded growth rate improvement as we get to FY21. We will try to continue to give you proof points along the way for that. And as I said, we're seeing a strong funnel of new deals that we are signing and it gives us a clear visibility and confidence frankly that we're going to be able to hit those numbers next year.

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [65]

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And it's been included in the guidance that Fredrik has provided.

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Matthew Gillmor, Robert W. Baird - Analyst [66]

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Okay, fair enough. And then the strategic assessment on the Connected Analytics. I know there's probably not a lot you want to say on that topic, but can you maybe just give us a sense for where you stand in the process? Are you in the latter stages or early stages and just a range of potential outcomes for that business?

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [67]

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I think we are just being thoughtful about thinking through that and looking at the capabilities that we have with those analytical assets. So, we are really just in the midst of the process and we'll continue to look at the core capabilities there and the options we have for them.

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Fredrik Eliasson, Change Healthcare Inc. - EVP & CFO [68]

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Either way, the terms of the outcome our guidance for next year will stand. And we're going through a very thoughtful process and has been and will continue to make sure we optimize the value of those assets. There are some great assets in there. We just want to make sure that it is in the right hands and that we are utilizing it appropriately.

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Operator [69]

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Thank you and I'm showing no further questions at this time. I'd like to turn the call back over to Neil de Crescenzo for closing remarks.

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Neil de Crescenzo, Change Healthcare Inc. - President & CEO [70]

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Well, we're very pleased all the questions that we received on the call and the interest in our Company. We're also very excited on behalf of our customers, partners and our 14,000 employees to have had such a strong quarter after our IPO.

And we'll look forward to continuing our discussions with investors and making sure we answer your questions and are able to communicate the excitement we have over our accelerated growth and the potential for our Company in improving healthcare. So, thank you very much.

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Operator [71]

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Ladies and gentlemen, this concludes today's conference. Thank you for joining and everyone have a wonderful day.