Change Healthcare Inc. (NASDAQ:CHNG) Q2 2021 Earnings Conference Call November 5, 2020 8:00 AM ET

Company Participants

Evan Smith – SVP, IR

Neil de Crescenzo – President and CEO

Fredrik Eliasson – Executive Vice President and Chief Financial Officer

Conference Call Participants

John Ransom – Raymond James

Annie Samuel – JPMorgan

Jack Rogoff – Goldman Sachs

Daniel Grosslight – Citi

Stephanie Davis – SVB Leerink

Sean Wieland – Piper Sandler

Sandy Draper – Truist Securities

Matthew Gillmor – Baird

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Change Healthcare Inc. Q2 FY ’21 Earnings Conference Call [Operator Instructions].

It is now my pleasure to hand the conference over to Mr. Evan Smith. Please go ahead, sir.

Evan Smith

Thank you. Good morning, everybody, and welcome to Change Healthcare’s Earnings Call for the Second Quarter of Fiscal 2021, which ended September 30, 2020. I’m joined today with 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 and provide our outlook followed by closing remarks from Neil. After that, we’ll open the call up for your questions. Before we begin, I’d like to remind everybody 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 everybody that copies of our earnings release and the supplemental slides accompanying this conference call are available on the Investor Relations section of our website at www.changehealthcare.com.

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

Neil de Crescenzo

Thank you, Evan. Good morning, everyone. While COVID-19 has clearly impacted the way we all go about our day-to-day activities, I hope everyone remains safe and healthy as we continue to manage through the new normal in our personal and professional lives. Today, I’ll review Change Healthcare’s strong performance in the second quarter driven by the continued rebound in healthcare utilization and the sales and product momentum across our platform. I will provide insights into our ongoing new business successes, our continued execution on delivering innovation and value to our customers and the strategic initiatives we completed to accelerate growth and expand our market opportunity.

As you can see by the chart on Slide 4, activity in the healthcare system has continued to trend positive. Although we continue to believe healthcare utilization will return to prior levels by the end of our fiscal year, we are still assuming underlying volatility and some potential negative impacts on these trends as a result of potential changes in COVID-19 infection and hospitalization rates in certain markets as well as the hesitation on the part of some individuals to resume normal healthcare utilization.

As we indicated last quarter, in addition to improvement in utilization, we are seeing positive indicators and customer activity across all three segments. Underlying trends for both bookings and demand continue to be positive and above our previous expectations. Change Healthcare’s industry pulse COVID-19 flash report, commissioned with the Healthcare Executive Group, reported our healthcare leaders are increasing IT budgets during the pandemic and beyond, supporting the long-term potential of our solutions and platform. Health care leaders are accelerating digital and payment transformation with an emphasis on consumer experience, telehealth and interoperability.

These are all areas where we believe we are leading the innovation curve as evidenced by our recently launched Connected Consumer Health e-commerce suite, our interoperability APIs to address CMS’ interoperability and patient access role and our clinical data retrievable solution. Now I’ll briefly highlight our financial performance for the quarter. In line with the improvement in utilization and new business implementation time lines as well as our continued market momentum, we reported strong results for the second quarter.

Our team produced solutions revenue of $706 million, adjusted EBITDA of $232 million, adjusted earnings per share of $0.37 per diluted share and free cash flow of over $50 million during the quarter. Given the strength of our performance and liquidity year-to-date, we repaid $125 million of our Term Loan B. Fredrik will provide more detail on our financial performance and outlook following my remarks. Our second quarter results demonstrate our continued focus on the enterprise sales efforts and innovation across our platform while we continue to optimize our cost structure to accelerate growth and performance going forward.

Now let me provide an update on our success on the new business front. More and more payers are recognizing the value of our payment accuracy and coordination of benefit solutions that leverage our front-end position in the industry’s workflow using our extensive network, our value-added and extensive data assets and our AI capabilities. During the quarter, we saw increased demand for Coding Advisor, supported by current telehealth trends, which presents a perfect use case given the dynamic changes in reimbursement and lower average billing per episode.

We replaced a major competitor at a $30 billion Blues plan and signed two significant state Medicaid COB deals, leveraging our unique data and AI capabilities and bringing additional innovation to the sizable market. In risk adjustment, we signed a major expansion of our business with a $9 billion health plan, displacing one of our major competitors in the risk adjustment space by offering a better ROI with our unique data, AI models and workflow capabilities. In RCM technology, the CMS mandate for improved price transparency is increasing demand for our Clearance Patient Access Suite, a solution for hospitals and health systems that creates better patient estimates at or before the point of service to help increase collections and improve patient satisfaction.

In our Enterprise Imaging business, we continue to grow our pipeline and have signed several new enterprise deals, further advancing our position in the market. In addition to new sales within our core customer base, including a multimillion dollar strategic expansion for cardiology clinical solutions for a large West Coast integrated delivery network, we also had three notable new logo wins, representing several million dollars in annual contract value as we continue to take share from our competitors.

In our RCM Services business, we continue to expand our pipeline and grow bookings with positive trends in average deal size, win rates and ongoing success closing multimillion dollar deals. I also want to provide some color around the extent of our wins which underscore the breadth, scale and quality of our service offerings. First, we closed multiple deals with mid- to large-scale IDNs or hospital groups in New York for patient access services totaling more than $10 million in annual contract value. We signed a new multimillion-dollar contract with one of the largest telehealth providers in the country as well as adding significant new clients like Helix, a leading clinical lab supporting PCR COVID-19 testing and serving healthcare providers, governments, retail pharmacies and other organizations across the country.

These new wins in RCM Services further strengthen the foundation for the RCM Services transformation and underlying performance to set us up for growth in FY ’22. During the quarter, we also added 14 new products to our API & Services Connection marketplace, spanning payments, medical network, patient experience and our intelligent healthcare platform analytics center. Our marketplace now offers over 43 API products, providing solutions to power revenue cycle management, payment and medical eligibility workflows.

We processed over 50 million API transactions in Q2, more than doubling the volume compared to the first quarter. In our B2B payments business, in addition to volumes recovering, we continue to win new business, including contracts worth several million dollars annually with two large national dental plan companies. We also signed additional deals for our Connected Consumer Health suite and specifically our Shop Book and Pay solution, which allows patients to play a more active role in their healthcare choices. Just announced in June, we have already signed several clients and have a large number of additional opportunities, either in contracting or in RFP processes with organizations who are addressing the rise of consumerism in healthcare. I also want to note that Frost & Sullivan has recognized our efforts in the healthcare consumerism space with the Enabling Technology Leadership Award for patient experience solutions in North America. We were recognized for our strong overall performance and helping solve provider challenges related to price transparency, patient satisfaction and improving revenue.

During the quarter, we also executed on three key objectives to strengthen our market position and accelerate our growth. First, we launched new solutions in both our pharmacy network and clinical decision support, or InterQual franchises. Second, we acquired advanced technology for both our Enterprise Imaging and value-based healthcare software franchises. And third, we continue to expand our Software & Analytics distribution capabilities with the signing of a two year agreement with Vizient.

Now let me provide a little bit more color on these. In our clinical decision support, or InterQual franchise, we launched a new AI application that automatically extracts diagnostic data from clinical notes to increase the efficiency of automated medical necessity reviews by over 20%. To put this in perspective, this task can take as much as 30 minutes for a typical review and places a significant administrative burden on highly skilled clinical staff. We continue to innovate with payers and providers as we insert more intelligence into clinical workflow.

To this end, we signed multimillion-dollar agreements for InterQual with both payers and providers, including signing a deal with one of the largest service providers in the dialysis market as they navigate changes in reimbursement models. In our pharmacy network, we introduced a new service that now enables pharmacies to easily process and receive reimbursement for COVID-19 tests within their regular workflow.

This means pharmacies can now electronically bill for COVID-19 test just as easily as they bill for prescriptions and flu shots, helping support the expansion of U.S. testing capabilities. I’ll move on to the strategic acquisitions we completed in the quarter. During the quarter, we acquired Nucleus.io to advance our cloud-native enterprise imaging efforts and PROMETHEUS Analytics to enhance our value-based care initiatives. Nucleus.io is a classic buy-versus-build assessment that provided a quicker development time line for our cloud-native diagnostic bureau with superior workflow and rendering capabilities. Nucleus.io also expands our market opportunity with individual radiologists and radiology practices given their installed base of 7,500 users for their image exchange service.

Our second acquisition, PROMETHEUS Analytics helps healthcare payers optimize their provider networks under value-based care reimbursement models. The solution analyzes episodes medical care, creates value-based payment models, evaluates provider performance, identifies care variations and improves network efficiency. Having already leveraged the PROMETHEUS Analytics methodology in our HealthQx solution, this acquisition is a great example of our try-before-you-buy acquisition strategy. Lastly, we continue to expand our channel strategy by signing two multiyear contracts with Vizient, the largest healthcare purchasing group in the country.

These agreements give Vizient members, which include 95% of academic medical centers and more than 50% of acute care providers in the U.S. access to our Change Healthcare Enterprise Imaging and cardiology hemodynamic monitoring solutions. So in closing, the pandemic has highlighted the need for the healthcare industry to move more decisively toward consumer centricity, where digital front doors and virtual health are central to improved access and care delivery, where healthcare organizations manage throughout the patient journey and not just the discrete elements or episodes, and where data and insights are even more critical to deliver enterprisewide innovation, which is necessary to reduce cost, improve efficiency and deliver outcomes. Therefore, we remain confident that Change Healthcare’s platform, which provides best-in-class connectivity, transaction management, insights and integrated experiences will continue to play a central role in helping our customers through this transformation.

Now let me turn the call over to Fredrik, who will review our financial performance and outlook. Fredrik?

Fredrik Eliasson

Thank you, Neil. Good morning, everyone. I’m happy to report a strong second quarter, underscoring the central role we play in the healthcare system as healthcare activity continued to improve throughout the quarter. We believe the recovery to pre-COVID activity levels was a result of the trend toward more normal underlying demand and some catch-up of previously deferred visits and procedures.

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As Neil mentioned, we continue to see underlying strength in our sales efforts across the platform, including positive market reception for our newly introduced solutions. I want to note that the second quarter results reflects approximately $15 million in lower SG&A costs, primarily related to a onetime change in benefits policy, reduced healthcare expenses as a result of lower healthcare utilization by our employees and timing related to deferred hiring as a result of COVID-19. We anticipate a majority of these expenses to come back starting in the third quarter as business activity continues to normalize.

Let me now move on to provide more detail of our quarterly performance for the second quarter and our outlook for the third quarter of fiscal ’21. Starting with slide seven. For the second quarter, solutions revenue was $706 million, including a deferred revenue adjustment of $39 million as part of the fair value adjustment associated with the McKesson exit compared to $739 million in the same period of the prior fiscal year.

Results reflect the negative impact of COVID-19, partially offset by the net positive impact of M&A activity of $15 million and new sales and organic revenue growth in the quarter. Net of the impact of deferred revenue and M&A activity, revenue declined 1.3%. Adjusted EBITDA for the quarter was $232 million compared to $218 million in the same period of the prior fiscal year. The increase in adjusted EBITDA reflects the items that outline related to revenue and the lower-than-normal SG&A cost I also mentioned as well as incremental synergy realization of approximately $5 million in the quarter. Net loss for the quarter was $43 million, resulting in a net loss of $0.13 per diluted share compared with a net loss of $100,000 or $0.00 per diluted unit for the second fiscal quarter of ’20.

Adjusted net income was $104 million, resulting in adjusted net income of $0.32 per diluted share compared with adjusted net income of $87 million or $0.27 per diluted unit for the second fiscal quarter of the prior year. Adjusted net income reflects the increase in adjusted EBITDA, as noted earlier, as well as a benefit from lower interest expense as a result of the year-over-year reduction in our outstanding debt. There were 321 million fully diluted shares outstanding in the second quarter of fiscal ’21 compared to 324 million fully diluted units in the same period of the prior fiscal year.

Now let’s take a look in more detail at the performance of our segments on Slide 8. Starting with revenue. The Software Analytics segment declined by 4.9% year-over-year. Our Software Analytics segment was essentially flat with the prior year after taking into account the $17 million impact of the Connected Analytics divestiture. Revenue in our subscription-based solutions grew low single digits, which was offset with an approximately 10% decrease in a non-subscription contingency-based businesses, primarily in our RCM and legacy imaging solutions due to COVID-19.

We continue to see momentum across the segment with increased pipeline activity in payment accuracy, decision support, risk adjustment as well as new wins in the cloud-based enterprise imaging solution, which we believe bodes well for the remainder of fiscal ’21 and fiscal ’22. Our Network Solutions revenue increased by 27.6% year-over-year, which includes $33 million in revenue from acquisitions. Excluding the impact of acquisitions, network revenue grew 4.8% in the quarter.

Key drivers include growth from implementation of new customers in our data solutions and B2B payments businesses, both growing mid- to high-teens. We also benefited from increased market penetration and market expansion opportunities for our network, resulting from new solutions and increased API-driven volumes. This offset volume headwinds of about 5% from COVID-19. In our Technology-Enabled Services segment, overall revenue declined 6.2%. We saw RCM Services business exhibit a strong recovery, although revenue was still approximately 5% lower compared to pre-COVID-19 and 15% lower in the communication and print business. Our RCM turnaround efforts remain on track, and we continue to see positive trends in both RCM win rates and deal size.

Turning to adjusted EBITDA. Software Analytics increased 5.8% year-over-year. While continuing to make investments to support our AI initiatives in Enterprise Imaging transformation, we were able to effectively manage our costs to offset the impact of COVID-19 and the sale of Connected Analytics. Network Solutions adjusted EBITDA increased 18.8% in the quarter, driven primarily by underlying growth across the network and the acquisition of eRx and PDX.

Results also include our continued investment to support the significant number of new product launches and market expansion initiatives we have under way. In Technology-Enabled Services, adjusted EBITDA declined 26.6% in the quarter, driven primarily by lower volumes related to COVID-19 in our RCM Services and Communication and Print businesses. To further support our RCM Services transformation, we are implementing additional business optimization initiatives to strengthen the performance of the business. I’ll provide more details on this in a moment.

Moving on to cash flow and our balance sheet on slide nine. Free cash flow for the quarter was $68 million compared to $77 million in the same period of the prior fiscal year. Overall, improved business performance and stronger working capital has increased our confidence in our full year cash flow outlook. Adjusted free cash flow is $84 million compared to $113 million in the second fiscal quarter last year. Our liquidity remains strong, ending the quarter with over $167 million of cash and cash equivalents and $780 million in undrawn revolver capacity.

Total long-term debt included in the short-term portion, net of cash at quarter end, was slightly under $4.8 billion, which includes the repayment of $50 million in term loan facility obligations during the quarter. Credit agreement net leverage ratio was 5.2 at quarter end. Given the incremental improvement in working capital and our outlook for free cash flow for the year, subsequent to the quarter end, the company repaid an additional $75 million in term loan facility obligations.

Let’s move to Slide 10 for financial guidance for the third quarter, along with certain assumptions and supplemental information for the full fiscal year. For the third fiscal quarter, we expect solutions revenue to be $725 million to $745 million, which includes the impact of a fair value adjustment related to the McKesson exit, which will reduce reported revenue due to a reduction in deferred revenue in the third quarter by $24 million.

Adjusted EBITDA to be $215 million to $235 million and adjusted earnings per share to be $0.28 to $0.33 per share. Let me provide additional color by segment. In Software Analytics, approximately 75% of the revenue is subscription or maintenance and is expected to grow in the low single digits, while 25% is contingency or renewal based, which is currently estimated to have a negative impact of about 5% in the third quarter. The S&A impact is driven by the timing of implementation, procedure volume decreases and relaxation by a certain number of states on reporting requirements. In addition, the third quarter will be impacted by the divestiture of Connected Analytics.

In Network Solutions, based on current volume trends, we anticipate similar trends as the second quarter, which includes about a 5% decline in network volumes offset by market share gains, mid- to high-teens growth in the B2B payments and data solutions, each representing about 8% of Network Solutions revenue. In addition, the third quarter will be impacted year-over-year by the acquisition of eRx Network and PDX. In Technology-Enabled Services, we’re expecting on average about a 5% decline in contingency-based RCM revenue for the third quarter, in line with the second quarter. In Communication and Consumer Payment Services, we’re expecting a decline of about 10% sequentially improving from the second quarter and the other businesses remain stable. As we previously stated, the second half of fiscal ’21 will be impacted by a decision by one of our RCM Services customers to in-source a significant portion of their current business.

This is anticipated to have an approximately $15 million impact on our revenue per quarter. Adjusted EBITDA will also be impacted and exacerbated by the lag between revenue decline and related cost takeout related to this contract. As part of our ongoing efforts to further improve our operating performance in tests, we have started the implementation of an accelerated and enhanced transformational program with a cost-saving opportunity of approximately $60 million on a run rate basis. This value creation of our 24-month period would allow us to continue increasing customer innovation and shareholder value.

Our increased investment in AI-enabled and automated workflows will deliver greater customer value through enhanced collections and accelerated cash flow. Additionally, we are focused on driving productivity and fixed cost efficiencies through further facilities operating and vendor optimization as well as increased strategic global and offshore partnerships of certain functions across our existing services portfolio.

Last, let me provide you with some supplemental information and assumptions for full fiscal year ’21. First, we continue to expect that healthcare utilization will gradually improve throughout the remainder of the fiscal year, and there will be no material changes in COVID-related volume, trends or procedure restrictions. Second, we’re increasing our free cash flow assumption. As I noted, because of improved earnings outlook and working capital trends, specifically collections, we now expect full year ’21 free cash flow to be in the $250 million to $300 million range.

Incorporated in the improved free cash flow guidance is an assumption that capex, as a percent of solutions revenue, will be around 7.5% to 8% this year versus our prior guidance of around 7% of solutions revenue, excluding the impact of fair value adjustments and integration-related capex in both cases. The reason for the increase is due to the strong growth opportunities we see ahead of us and a very temporary decline in revenue due to COVID-19 this year.

Integration-related operating expenditures is estimated to be approximately $80 million and integration-related capital expenditures approximately $20 million, no change from the prior quarter. As a result of our repayment of debt, we now expect interest expense to be in the range of $245 million to $255 million for the fiscal year. Adjusted effective tax rate of approximately 25%. And basic and fully diluted shares outstanding will be about 321 million, which includes the minimum number of shares for the TEUs.

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

Neil de Crescenzo

Thank you, Fredrik. To summarize, we believe the combination of the positive reception to new solutions and growing demand from existing and new customers across our platform will enable us to deliver accelerated growth and improved performance. Thanks to the dedication of the Change Healthcare team members, we continue to deliver innovation and value to our customers and the communities we serve, helping them navigate the current market environment and future opportunities to lower costs, enhance access and improve outcomes.

Thank you, and we will now take questions.

Question-And-Answer Session

Operator

[Operator Instructions]. Our first question will come from the line of John Ransom with Raymond James.

John Ransom

Hey, good morning. Is it fair to say that, just triangulating your comments, that your market share and innovation wins are more payer-facing in the short term?

Fredrik Eliasson

John, I think it’s a balance between the two. I think there’s a lot of demand on the provider side, particularly for the consumerism-oriented solutions that we have and also where we have differentiation, particularly due to our data and the AI elements of where we’re able to innovate on behalf of our customers. But as described in our — discussing what we’ve been doing in the payment accuracy space, including with coding advisor and leveraging the network, as well as the COB wins, I think we’re seeing innovation across the board. It’s just, I think, the increase in attraction for consumerism-oriented solutions and providers has been particularly dramatic, especially obviously as we work through the pandemic.

John Ransom

And my follow up would be — if I look at your slide deck and look at the October utilization numbers at 102%, aren’t you trending above what your initial guidance was in terms of recovery? So if it continues at this level, will you — will you get there a little faster than you initially said?

Fredrik Eliasson

Well, I think what you see there on this slide is the combination, as we said in our prepared remarks, between market share gains of our medical network and underlying utilization. So we still think the utilization levels is still at 5% or so below pre-COVID level. But because of the gains that we’ve seen in market share, you can see on that slide that we’re at 100%, and that’s reflective of our — that’s consistent with our guidance.

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Operator

The next question will come from the line of Lisa Gill with JPMorgan.

Annie Samuel

Hi, it’s Annie Samuel on for Lisa. You spoke to the Software & Analytics subscription business up low singles. I was just wondering, is there any COVID disruption that you’re seeing within that segment around purchasing? And how quickly can that segment ramp up to your longer-term target of mid-single digits?

Neil de Crescenzo

Well, I think actually, we’re beginning to see the ramp. But as we described and when Fredrik was talking about our expectations for Q3, there’s still a lag to some degree from earlier in the year around implementations and just catching up with what would be, as you described, the more normal level. I don’t think we’re seeing maybe as much disruption as others may be feeling. But that’s in part because, as you know, our solutions really focused on pretty directly, either increasing people’s revenues or reducing their costs or a combination of both. So I think even in some of the healthcare systems that are concerned about the impact of either demand or some of the complexities of handling COVID this winter, look at their future financial performance, we’re particularly well positioned to help them out with our solutions just because of the nature of how they help our customers.

Annie Samuel

And I was just wondering if maybe you could provide a little bit more color on the cost savings initiatives that you announced. What catalyzed that? And just how should we think about the cadence of when that will come through the P&L?

Fredrik Eliasson

And so the way you should think about that is really — we started the process. There’s obviously ongoing productivity savings right now as well. But really, what we expect to see basically at the beginning of our fiscal year of FY ’22 and 24 months following is how we measure the $60 million that is enhanced. And it’s coming across the gamut of things that we’re doing between AI-enabled workflow solutions that’s going to improve the collections, there’s automation initiatives, there’s increased opportunities to offshoring, there’s consolidation of some vendors, and also some facility savings. So it’s across the board to drive not only a lower cost structure for us, but also better customer value for our test customers.

Annie Samuel

And as we think about your kind of 6% to 8% longer-term margin growth target, is this incremental to that?

Fredrik Eliasson

I think it’s going to be there to support it. I think we’ve also said that we’re very clear that where we are today, obviously, COVID has impacted. There’s that — the 4% to 6% to 6% to 8% is our kind of, what we would say, the medium-term target. I think longer term that our business supports a higher growth rate, but we got to get one step at a time. But clearly, something like this will allow us over time to get to an even higher growth rate. But we got to do one step at a time.

Operator

Our next question will come from the line of Robert Jones with Goldman Sachs.

Jack Rogoff

This is Jack Rogoff on for Bob. So on utilization, Fredrik, I think you talked about improving utilization through year-end. And Neil, I think you might have talked about continued volatility and some negative impact. I guess, just taking a step back, how should we think about your expectations for healthcare utilization against the backdrop of rising COVID cases into the end of the fiscal year?

Neil de Crescenzo

I think as we’ve tried to do all along during this pandemic, we’ve tried to have a balanced approach. And I think the thing to remember that we have such a balanced and diversified business across our customer sets, our end markets, our product sets that we’ve incorporated into our guidance at least what we would say, as Fredrik mentioned, anything other than truly material changes in the dynamics around — issues around COVID, including as you identified some issues that are happening in certain geographies that are particularly problematic. So I believe we continue to see utilization gradually increasing and getting back to what we consider a normal level in our next fiscal year, toward in the spring period. And I think if there are some disruptions as we’re seeing in some locations, we’ve accommodated that in our guidance, and we’re able to do so again because of the sort of breadth and balance of our business.

Jack Rogoff

And then thinking about the eventual approval of a COVID vaccine, I guess, would you anticipate that COVID vaccine distribution would connect to your network? And would revenue from that vaccination of the U.S. population move the needle for you?

Neil de Crescenzo

Yes. I think any time, as you know, there’s more activity in the U.S. healthcare system because of the nature of our solutions, we’re able to benefit from that. And of course, as you know, with the purchase of eRx Network and PDX, we’ve established a very strong position in the pharmacy market. And again, I’m sure you’re aware, the pharmacies and pharmacy companies are going to have probably a particularly important role as already has been mentioned in the press regarding vaccine distribution as well as, if you want to call it, the traditional healthcare system. So I think given the breadth of what we provide, including across the pharmacy segment, we would expect that to be beneficial to our company. But again, in the midst of a $3.6 trillion U.S. healthcare system, we have to look at all of these activities as having a measured impact.

Operator

Our next question comes from the line of Daniel Grosslight with Citi.

Daniel Grosslight

Going a bit deeper into the S&A this quarter. If I adjust for some of that onetime $15 million benefit, and I take out connected analytics. It looks like adjusted EBITDA grew around $6 million, whereas revenue fell slightly around $1.4 million according to my estimates. Can you spike out a little what exactly drove the strong EBITDA result in S&A apart from a portion of that $15 million one time benefit?

Fredrik Eliasson

Yes. I mean, I think every quarter has a few different items. I can’t point to anything specifically. You’re right that, obviously, the $15 million since after that, we’ve said that probably it’s good to allocate the $15 million based on revenue. And then, on top of that — and therefore, S&A gets a pretty big portion of that $15 million. And on top of that, there’s continued cost initiatives that our team there executing on, which is great to see. And so this quarter was a little bit more favorable perhaps than what you would indicate the run rate to be over time, but that happens from time to time. So there was nothing specific or one time in nature that drove that. It was just very good quarter and well executed by the team.

Daniel Grosslight

And I think you’ve previously said that you expect the fourth quarter to be essentially flat from last year, when you take into account some of the deferred impact in the M&A. I think, just the quarter, again going to my estimates, that implies sort of a high single-digit sequential growth over 3Q. Where do you anticipate that growth coming from — apart from the return of normalization in COVID?

Fredrik Eliasson

Yes. I mean — obviously, we’re living this strange world quarter-by-quarter at the moment, which is why we gave the third quarter guidance. But you’re right, I’ve said that in the past. And I don’t think anything has fundamentally changed with our fourth quarter, except perhaps a little bit more visibility, a little bit more certainty to it. And we would expect in the fourth quarter that between the third and the fourth, we probably would have the same sort of pickup year-over-year in revenue as we did last year. The mix of business might be a little bit different at that point.

And clearly, we’re going to be finding the impact of the RCM customer that is leaving us in that quarter as well and the delay of being able to take the cost out. But I think overall, you’re going to see broad-based growth sequentially from between the third and the fourth, as we said before. But that’s more consistently or consistent with what you’ve seen in prior year. And in addition to that, of course, the kind of the continued normalization that we expect right now in our underlying business as we go through the rest of the fiscal year.

Operator

Our next question comes from the line of Stephanie Davis with SVB Leerink.

Stephanie Davis

First one for me. I’ve noticed a very high margin flow-through in your recent weeks. How much of that is scaling up of the platform or operating leverage compared with being more opportunistic in things like your geographic rationalization given the pandemic?

Fredrik Eliasson

Well, let me start in terms of number. I mean, I clearly think, obviously, since — and we highlighted this because with the $15 million is not sustainable. That’s why we want — so clearly, the incremental margins were very attractive when you have that sort of a confluence of three things that we highlighted. But beyond that, I think that we continue to feel that we’re blessed with a business that has very high margins. And especially incremental margins are very high as we see business coming back. But there was nothing unusual from that perspective. I don’t know, Neil, if you want to add anything there.

Neil de Crescenzo

No. I think, Stephanie, as we’ve described in previous calls as well, we continue to innovate with a lot of offerings, particularly in the network business. You heard Fredrik talk about the continued solid and substantial growth in some of the faster-growing areas like data solutions and our payments business. But in addition, from new offerings like attachments and others, as we mentioned, we continue to take share with our core network business just because there has been increasing ability to serve, including new and fast-growing customers like the telehealth companies, particularly through the API growth that we’ve seen from the investments we’ve made there over the last year as well.

Stephanie Davis

Maybe a quick follow up on some of those initiatives you mentioned like the patient experience. How are you differentiating your solution with kind of a broad set of data that you have compared to a lot of the existing players in the market?

Neil de Crescenzo

So I think one of the things we’re hearing from customers is that they sort of gone over the chance on now on deciding that this needs to be a serious investment area for them, while some of them may have been a little bit more reticent to that prior to the pandemic. But what they’re beginning to see is that they need sort of a scaled player that truly has an advantage in what they could otherwise get by knitting together some smaller vendors. So by having a platform that gets smarter and smarter through the use of our data, and that, as we mentioned, continues to provide them better and better estimates, of patient liability, what customers or patients in that case, want to see from their providers, it really allows them to think about working with us in a bit more of a future-proofed fashion than might be the case with some of the smaller point vendors. And I think, as you see in many software markets, when they become core to the operations of a customer, they start thinking about platforms versus point solutions, because they realize that they need to get leverage out of this over an extended period of time.

Operator

Our next question comes from the line of Sean Wieland with Piper Sandler.

Sean Wieland

The client decision to in-source revenue cycle, can we just get a better understanding of the reasons behind that? And what does this do to the retention rate in that segment?

Neil de Crescenzo

Sure. Well, Sean, a couple of things. One, this is a customer that actually, even though they decided to in-source part of the services they do with us, because they believe they had reached a scale that they felt that this was something they wanted to handle themselves, it’s been very orderly. And as Fredrik mentioned, in terms of us having the financial impact of it, something we’ve managed with them very carefully.

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So obviously, their patients and their services are maintained at a high level. They continue to expand their business with us, including the recent quarters in other areas, including within our service business. And so the reason why we highlighted this for investors is because it was just such a significant aspect. But if you look at the rest of our services business, there’s no customer that’s more than 2% of revenue. So I think this was a very large customer and a bit of an aberration in terms of the otherwise breadth and balance of our business, and that’s why we highlighted it.

Sean Wieland

And then separately, you made a call out on your risk adjustment business a couple of times. It sounds like that’s trending well. But I wanted to get a better understanding of how you see this business changing as CMS migrates — from RAPS to EDPS in 2022?

Neil de Crescenzo

Sean, that’s, as you probably know, a kind of complicated area given people could submit data both through RAPS and EDPS. And now they announced in September that we are only going to be able to use EDPS in 2022 for the 2021 dates of service. I think what we found is this has continue to drive customers to look at vendors that understand the complexities involved here, because the EDPS submission, the file is much more extensive than the traditional RAPS file. You need a lot more data for the submission, including more CPT codes, and you have to adhere to these National Correct Coding Initiative standards. And so the accuracy and complexity has really increased.

And I think one of the reasons for your question that we continue to do well in that business is because payers are beginning — not beginning, but particularly appreciative of people who’ve been ahead of the curve on this, particularly our use of AI to link claims and encounter data upfront, and not be as reliant on coding for understanding how to optimize the revenue that’s appropriately earned by the payers any circumstances. So I think it’s a good example of the underlying complexity that’s not always appreciated in these areas and why, frankly, we have to invest ahead of the curve in AI models and other mechanisms in order to make sure we serve our customers as their needs get more complicated and more extensive.

Operator

Our next question comes from the line of Sandy Draper with Truist Securities.

Sandy Draper

First question, just on the acquisitions. I didn’t hear you say it, Fredrik, but is there a materiality to the revenue contribution in these deals?

Fredrik Eliasson

In terms of Nucleus and really PROMETHEUS, there really isn’t any material revenue impact short term. Obviously, longer term, we fully expect it to be. But I would say, over the next 12 months or so, there’s no real revenue impact that we baked in. Probably a little bit of a drag on the EBITDA as we continue to make investments. But beyond that, nothing major. I assume that in terms of eRx and PDX, you’re well aware of the impact of those. They’re much significant. But in terms of Nucleus and PROMETHEUS, there’s really nothing material.

Neil de Crescenzo

Yes. I think the way to think about that is it really gives us continued unique capabilities. And I think as we described in terms of some of the new wins, I think what it does is it shows our customers that they can be very confident investing in our platforms, whether for value-based care or for Enterprise Imaging, because we’ve covered the waterfront on kind of world-class IP, underpinning our offerings over a period of time.

Sandy Draper

And I guess, sort of a related question more from a sales approach with both the acquisitions, you’re rolling out a lot of new products. What’s your sense of the sales force’s ability to digest all this? How fully trained are they and all this? I’m just imagining being a Change salesperson. I mean the good news is I’m getting more and more product that the hard part would be, gosh, how do I understand all these things I’m getting to sell them? How do you train up your sales force? And how would you sort of rank or assess where they are in terms of really understanding the product? And how long does it take to bring people up to speed as you keep rolling out all these new products? Thanks.

Neil de Crescenzo

We think a lot about that, and we planned a lot on that as we discussed the growth and sophistication of our enterprise sales and marketing efforts over the last year or two. So we’ve actually switched, per your comments, into a much more just-in-time education mechanism for our sales force. And first of all, just to recognize, that we’ve invested a lot in the enterprise sales level, which calls them for the C-suite and has a much more, particularly, consultative sales capability. In addition, we still have deep expertise in specific verticals, so you shouldn’t necessarily have to think about somebody being a 10-mile deep expert in all our various product lines. We have a nice mix now between the people who can talk about the overall value proposition across multiple product lines, and then people with deep expertise. But per your point, this year, we moved to a semiannual virtual sales conference like many companies. We used to do a lot of this once a year in person.

Obviously, that’s not happening now. And so our team really pivoted quite quickly to a much more just in time, much more virtual yet very engaging mechanism to educate the sales force, as you say. But I think it’s a combination of the way we organize the sales force, the skills that we have in the specific buckets to execute, I’ll let you describe. And then yes, indeed, a change in the way we’re doing the education and development of people so they can be effective, bringing this innovation to our customers.

Operator

[Operator Instructions] The next question comes from the line of George Hill with Deutsche Bank.

Unidentified Analyst

It’s [Max] on for George. Thanks for taking the question. Can you talk about what you’re seeing from a claims volume perspective as it relates to the mix of doctors’ offices, hospitals, labs versus others? And as it relates to flu vaccines and COVID-19 tests, can you comment on the volumes you’re seeing there as well? Thank you.

Neil de Crescenzo

So first of all, we did see a particularly robust response in the outpatient or physician office. I think, as everyone has recognized, there was a bit of catch-up, obviously, when the lockdowns in the spring period ended. We continue, of course, to see a recovery in the inpatient environment. And I think as has been reported, the utilization levels responded there. But I would just say from a slow perspective, it was certainly even more rapid on the physicians’ side. And now we’re seeing that begin to equal out as I think the healthcare system, as we described, while not probably at full utilization that we otherwise would have seen pre-COVID, is in the 90% to 95% level.

So, I think that’s what we’ve seen. In terms of COVID claims, we have indeed seen in the daily reporting that Fredrik and I and other senior executives in the company get an increase in COVID claims that you would expect, given the number of cases and inpatient admissions that have been reported. I think it’s, frankly and unfortunately, starting to trend not dissimilar to what we saw back in the spring. But I think it’s been, again, reported by many people, hopefully, with a lot less adverse events for the people being admitted because of the advances in treatment. So I think that’s a dynamic we’re seeing in our data as well. But since we obviously serve all that utilization, it’s just the continued strong underpinning of our business given the diversification we have across the whole U.S. healthcare system.

Operator

And the next question comes from the line of Matthew Gillmor with Baird.

Matthew Gillmor

You all made a comment about share gains and new wins within the network segment. I was hoping you could unpack that a little just so we understand where you’re having success within that market.

Neil de Crescenzo

Absolutely, Matt. So first of all, I’d break it into two buckets, innovation, and then basically accessing new segments of the market. So I’d say in terms of innovation, as you know, we’ve introduced a number of new offerings, including attachments and others that pertain to ways to get more value out of all the services we provide. Our network clients, I think that has continued to grow and has been another avenue of growth for us that has to do with the continued investment, as Fredrik mentioned, that we’ve continued, including this year in terms of CapEx and operating investments in innovation. And I think that’s been appreciated by customers, and that helps us continue to grow the core network revenue. Then the other area I’d point out is that accessing some of I would call either the new entrants or under the pandemic, the fast growers in U.S. healthcare.

We have over 5,000 digital health companies that we’re accessing in order to increase the growth of all our businesses, but in particular, our network business because of the connectivity that virtually all those companies need. And again, the investment we’ve made, our enterprise sales and marketing, our online investments in digital marketing, e-commerce, the growth I pointed out in our API marketplace are really indicative of, not only our innovation, but our ability to access new, and given the pandemic, very fast growing, in some cases, versus pre-pandemic customers, which is a real advantage for us in the market.

Matthew Gillmor

And then on the increase to the free cash flow guidance, I think at one point, you all had assumed that collection rates may be delayed just because clients are obviously going through some financial difficulty with COVID. I just wanted to get an update in terms of your ability to collect cash from clients, and whether that was also a factor in the free cash flow guidance.

Fredrik Eliasson

So yes, originally, we obviously — back in April, wasn’t really sure what we were going to see. But it’s clear that the CARES Act and where the hospitals are financially is different than what we expected at that point. The CARES Act truly helped, and the financial health is stronger. So collections has not deteriorated year-over-year anywhere close to what we expected. In fact, it’s probably pretty similar to what it was last year. And that is part of the reason why we feel more comfortable now with the free cash flow generation in addition to, of course, the earnings growth that we’ve also seen beyond what we had expected originally. And so that has led us to the $250 million to $300 million. And I think it says a lot about the strength of this company that we are in that range. I think last year, we were, I think, 310, 315 or something like that.

And so with earnings down, really getting close to that because our integration CapEx and OpEx is coming down. And it bodes well for next year. And from our perspective, I think we’ve said consistently, we think next year’s free cash flow will be well above $400 million. And it will be a very strong year from a free cash flow perspective as we get through this pandemic. And it’s exciting to see where we’re heading.

Operator

With that, we are showing no further audio questions. I’ll now hand the conference back for closing remarks.

Neil de Crescenzo

Well, thank you, everyone, for joining us today. We appreciate the interest, obviously, in the company and all the dialogue we have with all of you as we work through this pandemic, but also continue to invest in innovation that we have on behalf of our customers, our continued and even accelerating productivity initiatives, and really the demonstration, as Fredrik was just mentioning, of the strength of this very balanced and diversified business, which makes us so important to our customers, but also hopefully continue to attract it to investors as well. So thanks to all of you for joining us today.

Operator

This does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.



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