GoodRx Holdings, Inc. (NASDAQ:GDRX) Q3 2023 Earnings Call Transcript
GoodRx Holdings, Inc. (NASDAQ:GDRX) Q3 2023 Earnings Call Transcript November 9, 2023
GoodRx Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.06 EPS, expectations were $0.06.
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the GoodRx Third Quarter 2023 Earnings Call. [Operator instructions]. Please be advised that today's conference is being recorded. I would now like to introduce your host for today’s call Whitney Notaro, Vice President of Investor Relations. Madam, you may begin.
Whitney Notaro: Thank you, operator. Good morning, everyone, and welcome to GoodRx's earnings conference call for the third quarter 2023. Joining me today are Scott Wagner, our Interim Chief Executive Officer, and Karsten Voermann, our Chief Financial Officer. Raj Beri, our Chief Operating Officer, will also be joining for the Q&A portion of today’s call. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements. All statements made on the call that do not relate to matters of historical fact should be considered forward-looking statements, including without limitation, statements regarding management's plans, strategies, goals and objectives, our market opportunity, our anticipated financial performance, the ongoing impact of the former grocer issue on our business, underlying trends in our business, our potential for growth, collaborations and partnerships with third parties, anticipated impacts of the deprioritization of certain solutions under our Pharma Manufacturer Solutions offering, and our cost savings initiatives, our direct contracting approach with retailers, reliability of our deferred tax assets, and the expected impact from the macroeconomic environment on our business.
These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors. These factors may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Factors discussed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by our quarterly report on Form 10-Q for the quarter ended September 30, 2023, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call, and we disclaim any obligation to update these statements, even if subsequent events cause our views to change.
In addition, we will be referencing certain non-GAAP metrics in today’s remark, including adjusted revenue which we define as revenue excluding client contract termination costs associated with our previously announced pharma manufacturer solutions restructuring. We exclude these costs from revenue because we believe they are not indicative of past or future underlying performance of the business. We have reconciled each non-GAAP metric to the nearest GAAP metric in the company's earnings press release, which can be found on the overview page of our investor relations website at investors.goodrx.com. I'd also like to remind everyone that a replay of this call will become available shortly there as well. With that, I'll turn it over to Scott.
Scott Wagner: Thanks Whitney, and thanks to everyone for joining us today to discuss our third quarter results. Today I'd like to highlight the meaningful progress we're making against our top priorities, and then Karsten will take you through the Q3 results. We've been working to rebuild momentum in the business, both financially and operationally, with an eye towards compounding growth in 2024 and beyond. On our Q2 call, we said our first financial milestone was returning to year-over-year revenue growth. I'm happy to report that in the third quarter we achieved this important milestone on an adjusted revenue basis. We expect year-over-year adjusted revenue growth to continue with modest acceleration into Q4 and expect our full year 2023 adjusted revenue to be $752 to $758 million.
Adjusted revenue for Q3 and fiscal year 2023 is $10 million higher than GAAP revenue because GAAP includes a $10 million reduction related to a one-time nonrecurring contract termination payment that we elected to make to a VitaCare customer to end the relationship as part of our pharma manufacturer solutions restructuring that we announced last quarter, which will yield substantial ongoing savings. The adjusted revenue guidance is within the prior fiscal year 2023 GAAP revenue guidance range we provided of $750 million to $760 million. We anticipate our Q4 adjusted EBITDA margin to be in the mid to high 20% range, which implies a raise in our full year margin guidance. Karsten will go through our outlook in more detail. I'd like to highlight our progress in three areas of the business, which will be particularly valuable as we turn our sights to 2024 and beyond.
First, we continue to execute our hybrid retail pharmacy strategy, specifically structuring PBM and retail agreements that we believe are positive to both parties. Transitioning to this model allows us to help members of our retail network drive increased volume and margins. GoodRx was originally built in partnership with PBMs, who enabled broad distribution across 70,000 pharmacies, and GoodRx brought to band with double-digit millions of annual consumers seeking savings on prescription medication. We're now complementing these PBM relationships with several significant retailer partnerships that can help retailers with their traffic and margin priorities while continuing to deliver great affordability to consumers. For example, in September, we launched a direct program with Walgreens on nearly 200 medications that drove significant incremental claim volume for Walgreens and helped a huge number of consumers save money on their medication.
We've also created drug-specific pricing programs at several other large retail pharmacies in the quarter. As a marketplace, we're not just creating pricing transparency and value for consumers, but also marketing and merchandising opportunities for our retail partners. We plan to continue strengthening and expanding our relationships, retailer by retailer, over the coming quarters. We believe the continued progress here will help us ensure network stability, provide more value to retailers and PBM partners alike, and allow us to drive consumer demand and proactively help retailers with price and margin optimization. Our second priority has been to extend the GoodRx benefit to commercial insurance programs called funded plans in industry lingo.
As we all know, commercial insurance plans continue to get more complex with an increasingly wide range of co-pay, deductible, and benefit coverage options, even within the same company. Companies are constantly trading off what they can afford in terms of healthcare expenses with providing benefits and coverage for their employees. The result is often an increasing proportion of healthcare costs falling on individuals. The vast majority of GoodRx's consumer base and transaction volume has come from people who already have third-party payer coverage. We believe there's a huge opportunity to seamlessly bring on- and off-plan benefits together for both patients and their employers. In tandem with several of our PBM partners, we've created a product called Integrated Savings Program, ISP for short, that helps align these corporate funded programs more closely with GoodRx. It's simple and elegant.
The employee presents their employer-provided benefit card and pays the lower of their funded benefit price for a prescription or the GoodRx price, as is often the case. During the third quarter, we announced two more PBM partners, MedImpact and Navitas, to add to our existing programs with CVS Caremark and Express Scripts. These programs further strengthen our relationships with each of the four PBMs, who combined, cover over 60% of U.S. lives. Now, there are two questions investors have frequently asked us about these Integrated Savings Programs. The first is whether the programs are cannibalizing or creating pricing risks somehow. The second is how big they can get and how fast. To the first question on cannibalization, we've noted that the top 10 medications in our direct-to-consumer prescription savings offering only make up a small, low single-digit percentage of the medications we see consumers accessing through integrated savings.
And, with respect to pricing risk, we don't believe there are any material issues. In terms of sizing the opportunity, we're optimistic about ISP's potential. With over 60% of U.S. lives covered by the PBMs who've adopted the program, the opportunity could be significant. At this stage, though, our programs are nascent and only available to a subset of eligible members through these PBMs. Given changes in plan designs employers and other sponsors may make around year-end, we're going to want to track our trajectory into the coming quarter in Q1 before we quantify how big we think the program will be in 2024, let alone beyond. These are programs that we think every PBM should be doing with us. We believe these partnerships are a win-win-win for GoodRx, our PBM partners, and for consumers and the companies that employ them.
First, GoodRx becomes more deeply integrated into the healthcare ecosystem and can reach an incremental segment of the prescription savings TAM. Second, PBMs access incremental volume while helping their plan sponsors save money. Third, and most importantly, consumers get access to better prices on their medications, which can improve adherence and health outcomes. These programs also create a more seamless experience for healthcare providers at the point of prescription, as well as pharmacists at the pharmacy counter, helping both of them save time and relieve administrative burden. Some of these integrated savings programs are already live and are expected to scale going forward. And the CVS Caremark and MedImpact programs will benefit eligible members once the expected rollout takes place in January 2024.
Our third priority has been to accelerate our affordability and access solutions for branded medications, which show up as pharma manufacturer solutions in our P&L. Our unique ability to increase affordability for brand drugs drives direct claims impact, and we're seeing this play out across a large number of brand drugs and conditions. For example, we're working with Sanofi, a global leader in diabetes care, to offer a new way for people living with diabetes to access their most prescribed insulin, Lantus, for only $35. For context, even with government initiatives to lower the cost of insulin earlier this year, the implementation has been slow and a significant number of consumers have actually not been able to access the low price point due to structural issues within the healthcare system.
When pharma companies like Sanofi collaborate with GoodRx, they're able to leverage our reach and scale and their direct-to-consumer relationships in an effort to broaden access and affordability for their medications. Now, any consumer with a prescription, regardless of insurance status, can access Lantus for $35 using GoodRx across 70,000 retail pharmacies in the U.S. Affordability is becoming one of the key issues for brand pharma marketers due to its impact on adherence. The Sanofi partnership is a clear demonstration of the unique role that GoodRx plays in the healthcare value chain to enable affordability and access to tens of millions of Americans, regardless of their insurance status or prescription drug coverage. GoodRx's consumer reach and brand strength, both for patients and healthcare professionals, as well as our direct connection to the prescription transaction itself, are what set GoodRx apart from others in the healthcare marketing ecosystem.
The bottom line is that GoodRx is able to connect brand marketers to patients and prescribers right at the point of prescription. This can translate into a highly effective return for brands. We're finding several brands achieving 5 to 10x increases in volume on GoodRx via our access and buy-down programs, and others are achieving best-in-class rates on industry metrics like cost per new patient start. In terms of go-forward financial performance, we expect pharma manufacturer solutions revenue to grow quarter-over-quarter in Q4. We're continuing to focus on our access and awareness solutions that we believe will accelerate 2024 growth. These are distinctive programs at the intersection of high ROI for our clients and attractive margin for us that build on GoodRx's core value proposition of providing savings on prescription medication.
As we've mentioned, this year we've been prioritizing deal quality for going one-off deals and instead creating standardized go-to-market programs that we expect to scale rapidly. A restructuring announced last quarter, which includes VitaCare, is ahead of schedule and we're on track to deliver our expected savings in 2024. Karsten will speak to this in more detail. There's great work underway by teams across the organization and we have exciting things in flight which should lead to year-over-year adjusted revenue growth in 2024. I like where we're headed and look forward to providing updates to everyone next quarter. With that, I'll hand it over to Karsten.
Karsten Voermann: Thank you, Scott. I'll first speak to our 3Q23 financial results before turning to guidance. In summary, during the third quarter, adjusted revenue, adjusted EBITDA, and adjusted EBITDA margin were each in the upper end of our ranges. Total revenue for the quarter decreased 4% year-over-year to $180.0 million. Adjusted revenue for the quarter increased 1% year-over-year to $190.0 million. Adjusted revenue excludes a $10 million one-time non-recurring contract termination payment to a VitaCare client associated with our pharma manufacturer solutions restructuring announced last quarter, which was recognized as a reduction of revenue. This $10 million payment has been excluded from our adjusted revenue calculation since we do not believe it is indicative of past or future underlying performance and we do not anticipate any incremental client contract termination costs going forward.
Moving on to prescription transactions revenue. We're pleased to have had another quarter of growth with PTR up 3% year-over-year to $135.4 million. Max increased 5% year-over-year to $6.1 million and we're flat quarter-over-quarter. The year-over-year increase in prescription transactions revenue is largely driven by the increase in max partially offset by lower fees per transaction which primarily decreased as a result of our ongoing shift to a hybrid model as well as contra revenue relates to our customer incentive program. As we continue leaning into our retailer relationships we're seeing volume increases offsetting slightly lower fees per transaction. Pharma manufacturer solutions revenue is $15.9 million in the third quarter and was impacted by $10 million in contract termination costs which were treated as a reduction of revenues since they related to a payment to a client.
As I mentioned earlier we do not believe this $10 million payment is indicative of past or future underlying performance as it was made in connection with our pharma manufacturer solutions restructuring and we do not anticipate any incremental client contract termination costs near term. Growth in the underlying pharma manufacturer solutions offering partially offset the impact of the $10 million client contract termination payment. Based on the trajectory and the quality of campaigns we're running we remain very optimistic about this offer is contribution to adjusted revenue growth. Turning to subscriptions. Subscriptions revenue declined 12% year-over-year to $23.2 million due to a decrease in the number of subscription plans where the decrease was primarily associated with Kroger Savings Club which form minority and declining portion of total subscription count as well as a change in the mix of gold plans towards more single-user plans and away from family gold plans.
Inclusive of the impacts of Kroger Savings Club we ended the quarter with 930,000 subscription plans down 12% year-over-year. Our own GoodRx gold subscription plans however were up both year-over-year and quarter-over-quarter continuing the momentum from last quarter's QOQ growth. Cost of revenue is $18.7 million versus $17.4 million in 3Q22. The increase in absolute dollars is related to personnel costs arising from the restructuring of pharma manufacturer solutions. I won't comment on costs and expenses as a percentage of revenue during this call since the $10 million client contract termination payment in connection with our pharma manufacturer solutions restructuring that was recognized as a reduction of revenue makes those percentages incongruent with percentages discussed on prior calls.
Please reference slide 14 in our Q3 earnings presentation for tabular information relating to percents of revenue including our adjusted view that we believe may be more informative given a restructuring and other impacts in the third quarter. Product development technology expenses were $39.6 million compared to $35.9 million in 3Q22. The increase was primarily driven by the loss on the disposal of certain capitalized software principally in connection with our pharma manufacturer solutions restructuring partially offset by a decrease in payroll and related costs due to lower average headcount. Sales and marketing expenses were $91.6 million versus $86.2 million in the third quarter of 2022. The increase was driven by a payroll and related costs primarily due to higher stock-based compensation as well as higher third-party vendor fees.
In the third quarter we continue to invest in consumer incentives including our point of sale discounts program and spent a total of $7.4 million, $5.6 million of which was included in sales and marketing and $1.8 million of which reduced revenue. General and administrative expenses were $35.3 million versus $49.5 million in the third quarter last year. The decrease was primarily driven by a $16.6 million change in fair value of contingent consideration related to the VitaCare acquisition in the third quarter of 2022 which elevated the comparable period expenses. Depreciation and amortization expenses were $33.0 million versus $14.0 million in the third quarter last year, primarily driven by an increase in amortization related to accelerated amortization of the acquired intangible assets and capitalized software in connection with our pharma manufacturer solutions restructuring.
Net loss was $38.5 million compared to a net loss of $41.7 million in the third quarter of 2022. Adjusted net income was $25.5 million compared to $29.9 million in the third quarter of 2022. Adjusted EBITDA increased 3% year-over-year to $53.5 million, which was ahead of expectations. The primary driver of the year-over-year increase is higher prescription transactions revenue. Adjusted EBITDA margin of approximately 28.1% was up 30 basis points year-over-year. Cost savings related to the restructuring of our pharma manufacturer solutions offerings are ahead of plan, including the shifting of more high cost to serve clients off VitaCare sooner than originally anticipated. Because of this rapid client off-boarding, we expect an approximately $1 million revenue impact, decreasing 4Q23 revenue and adjusted revenue, which is reflected in our guidance.
We generated net cash provided by operating activities of $60.3 million compared to $33.7 million in the prior year period. Our capital allocation priorities are unchanged and will continue to focus on high return investments and maximizing value for shareholders. Our balance sheet remains strong and we ended the quarter with $794.9 million in cash and cash equivalents on the balance sheet and $661.8 million of outstanding debt. Our revolving credit facility had $90.8 million of unused capacity, representing total liquidity of $885.7 million. Now on to guidance. We're transitioning our Q4 and full year 2023 revenue guidance to be reported on an adjusted revenue basis. Our outlook for 4Q adjusted revenue is $188 million to $194 million, which represents mid-single digit year-over-year adjusted revenue growth, as well as growth acceleration from the third quarter.
We expect adjusted and GAAP revenue to be identical in the fourth quarter because the third quarter adjustment to revenue in relation to the pharma manufacturer solutions restructuring related to VitaCare was solely one-time and non-recurring. Previously, our full year GAAP revenue guidance range was $750 million to $760 million. After adding back the $10 million client contract termination payment to GAAP revenue, we continue to expect we will be within that range with adjusted revenue between $752 million and $758 million. From a margin perspective, during the last couple of quarters, we've delivered adjusted EBITDA margins in the high 20s and we're expecting to be in the mid-to-high 20% range again in the fourth quarter, which implies high 20% adjusted EBITDA margin for the full year above our prior guidance of mid-to-high 20%.
Moving on to fourth quarter guidance by offering, we expect prescription transactions revenue of approximately $133 million to $136 million. We expect pharma manufacturer solutions revenue of approximately $27 million to $30 million. This guidance range reflects our continued rationalizing of this offering, including deprioritizing of VitaCare services. We expect subscription revenue of approximately $23 million in the fourth quarter. Our GoodRx Gold subscriber counts have been increasing and we anticipate that they may increase again in Q4. However, we expect total subscription plans to continue to fall due to declines in subscription plans for the Kroger Savings Club program we operate. We expect other revenue to be approximately $5 million in the fourth quarter.
Also, as a reminder, we released the remaining shares related to our co-founders' performance RSU grants in October of this year. The performance conditions were met as of 2020 and delivery took place in 4Q23 as anticipated. As we mentioned in previous quarters, we withheld shares to cover the tax liability due in connection with delivery of the grant and expended GoodRx cash to pay the taxes. This cash expenditure related to the co-founders' performance RSU grants was approximately $44.5 million incurred in October 2023. Many of you have asked about our perspectives on 2024 during prior calls. We're currently in the ordinary course of planning for 2024 and are confident that the priorities Scott discussed are the right focus areas for the business.
These priorities catalyze growth in the third quarter and we anticipate that adjusted revenue trend continuing in the mid-single digit percentage range as previously indicated for 4Q23. While we are continuing to refine our views on 2024, including assessing the uptake in our new initiatives like ISP, for those of you building models, we feel good about the business growing next year at a roughly similar rate to the growth rate implied in the 4Q23 and we expect adjusted EBITDA margins to meet or exceed those of 4Q23 into 2024. Similar to prior years, we expect to provide more detailed 2024 guidance on our next journey's call following our annual planning cycle. With that, I'll now turn it over to the operator for Q&A.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Charles Rhyee of Cowen.
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