CHNG’s Management Review

Credit Suisse’s https://www.credit-suisse.com post quarterly conference call with Change Healthcare’s (CHNG) https://www.changehealth.com management, discussed further details on the loss of a major contract, business performance by segment, expectations over the deal with McKesson (MCK), and expectations for FY20 & FY21.

Credit Suisse researchers in discussing the Software & Analytics Segment with management, asked a follow up question related to the Enterprise imaging business. Is CHNG gaining market share or are existing clients transitioning from “on premise” to the new cloud-native infrastructure solutions?

CHNG management said, “One of the wins in the Enterprise imaging business results from customers switching from another major vendor to CHNG.” They further explained, that with the specialized nature of the market, it is difficult to estimate market share. However, the company is gaining market share as the industry is accepting the idea of using a cloud-based approach to imaging.

Management also said “Although the imaging business is slightly shrinking their year, they expect return to growth although modest in FY21. These contracts produce revenue for CHNG when they go live. The company expects revenue to be realized in the first half of the calendar year.

Management was questioned as to the latest on the Connected Analytics Segment. According to the FY20 & FY21 outlook, it was assumed that the company will not see any headwind related to the optimization of this business in FY21. Why is this taking longer than what was previously estimated?

Management answered by saying they have to be very careful about how they discuss the situation. However, management has always said that it assumes that Connected Analytics is with the company and does not want to create plans/guidance that assumes that this is not the case. CHNG would like to complete the process tomorrow but the priority is also to get the most value for it.

Management indicates that the Network Solutions Segment continues to perform well. The question asked is how revenues in this segment are split among Networks, Payments, and Data Solutions?

The response was that the Networks business is the vast bulk of the segment and due to its longevity continues to do well. The Payments and Data Solutions businesses are smaller but still produce double digit percentages in the segment which continues to help the overall growth of the segment.

As for the Technology Enabled Services (TES) segment, more details were requested by researchers as to how the $30 million revenue headwind resulted even though a client moved their RCM business in-house?

Management reports that RCM had been with CHNG for decades but sometimes large integrated delivery networks tend to change their strategy and as a result, they sometimes decide to move operations in-house. There is still a broad-based relationship where the customer still uses CHNG’s RCM software, a number of other software services, and CHNG’s network capabilities etc.

When asked how big the RCM business is in terms of revenues, CHNG management but did not disclose the exact revenue contribution from their RCM business. However, the company notes that this contract is a significant part of the RCM business.

Management has always said that this customer was significantly bigger than any other CHNG customer but after the contract loss, there will be less than 2% of sales so the concentration risk is significantly reduced going forward. Credit Suisse thinks that while the contract loss in RCM business is disappointing, they are encouraged by the momentum in the company’s businesses overall.

As for the deal with McKesson’s (MCK) exit, the question is will this affect or help CHNG operationally? CHNG indicates that when it comes to running the company, the split-off will have zero impact. Even though MCK has been on board, the day-to-day operations have not been impacted, and so the decision-making will continue as it has.

The transaction will however, significantly simplify the corporate structure as well as improve CHNG’s tax rate. Also, the deal will provide a lot more liquidity to the stock as well as attract more long term shareholders. CHNG’s board is very much aligned to create value while MCK has a little bit shorter time horizon from an investment perspective. Credit Suisse thinks that MCK’s ownership exit removes one of the key overhangs for the stock.

Credit Suisse comments that CHNG has said in the past, that eRx Network is complementary to company solutions and provides claims processing and editing, real time insurance verification, e-prescribing, medical and vaccination claims billing, plus other services. eRx was spun out of Legacy Change Healthcare prior to the McKesson transaction. CHNG has an option to acquire eRx Network subject to certain terms including a requirement that McKesson own less than 5% of the equity interests in CHNG.

Credit Suisse in summing up, reports that CHNG is very excited about what they are doing, and. they estimate that it will take another quarter to do what they think is needed to unleash the true potential of the company.

For more information or to provide feedback, email Jailendra Singh, Research Analyst at jailendra.singh@credit-suisse.com or call 212-325-8121.

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