Sharecare, Inc. (NASDAQ:SHCR) Q3 2023 Earnings Call Transcript November 9, 2023
Sharecare, Inc. misses on earnings expectations. Reported EPS is $-0.07 EPS, expectations were $-0.01.
Operator: Good day and welcome to the Sharecare Third Quarter 2023 Earnings Conference Call and Webcast. All participants are in listen-only mode. And after today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Today’s call is being recorded and will be available on the company’s website. On today’s call we have Mr. Jeff Arnold, Chairman and CEO; and Mr. Justin Ferrero, President and Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, which include statements regarding strategic initiatives, expected cost savings, new capabilities, pipelines and our guidance.
These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Although, we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that will occur after the call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section of our Form 10-K for the year ended December 31, 2022. In addition, please note that the company will be discussing certain non-GAAP financial measures that we believe are important in evaluating performance.
Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company’s website. I would now like to hand the conference call over to Mr. Jeff Arnold. Jeff, please go ahead.
Jeff Arnold : Thank you, and good morning everyone. We appreciate you joining us today, as we mark a significant and exciting moment for all of us at Sharecare. In addition to continuing to execute our near-term business objectives, as represented in our strong third quarter results, we are also positioning the business for operational excellence and sustained growth with the appointment of Centene Corporation’s former President and Chief Operating Officer, Brent Layton as the next CEO of Sharecare. This evolution is multiple years in the making, and I’m looking forward to working closely with him, as I remain engaged in our day-to-day business activities in my new role as Executive Chairman. Since inception, we have been building an end-to-end digital platform focused on improving health outcomes for people, no matter where they are in their personal well-being journeys.
As we sit here today, we have done just that. We have built a platform of choice for some of the country’s most notable employers and health plans. We also believe there are significant opportunities ahead, which is why now is the right time for me to focus my expertise on our strategic direction to create new solutions, leveraging our data, platform and technology, and have Brent step into the CEO role to accelerate growth and continue to ensure operational excellence. Before I discuss Brent’s appointment in detail, I’d like to start with an overview of our third quarter results. For the quarter, we reported revenues of $113.3 million and adjusted EBITDA of $9.6 million. Revenue exceeded our guidance forecast and adjusted EBITDA was at the high end of the guidance range.
This was driven by the strong execution of our teams, record revenues in our Provider segment and realizing the benefits of our expense reduction program. In fact, our adjusted EBITDA was an improvement of over $4 million versus the prior year quarter. And year-to-date it is triple what it was in the first three quarters of last year. I would like to affirm our full year guidance of revenues between $452.5 million and $460 million and adjusted EBITDA of $21 million to $26 million. Justin will discuss our latest guidance estimates in his update later on the call. Importantly, we remain on track to deliver our year-end commitments to be cash flow breakeven as well as service 12.9 million eligible lives through our high-tech, high-touch platform that delivers personalized and proven health and well-being solutions to our clients’, members populations including large employers, health systems, payers, TPAs and government customers and it was a strong quarter.
And we expect that momentum to carry forward. I also want to spend a moment highlighting what sets Sharecare apart within the Digital Health Space and why we are well positioned to benefit from the industry’s transition from fee-for-service to value-based care. Our platform has proven successful in engaging with our users whether people simply require routine preventative care or managing high risk and chronic conditions by delivering personalized recommendations and interventions, resulting in better health outcomes and lowering costs for both our members and our customers. Our continued investments in Generative AI Technology, leveraging our expansive and ever-growing data sets, continue to enhance efficiencies and improve our capabilities.
We are supplementing our high-touch clinical advocacy and coaching services with AI to improve the quality and efficiency of member interactions. Bolstered with AI, our digital resources, call center specialists and clinical resources can quickly pull relevant information from across dozens of plan types and files, seamlessly delivered to the user in multimodal optionality. Data is critical for value-based care to work and our AI capabilities ensure that we are unlocking the full power of that data, on behalf of both our customers and the people using our platform to navigate their benefits and manage their health. Our integrated and tech-enabled home care solution CareLinx, continues to be another key differentiator in our ability to improve outcomes and lower cost.
Our betting and training process is among the most rigorous in the industry and our Net Promoter Score of 90, underscores our commitment to ensure the highest level of quality professionalism and importantly, safety. Our health plan customers use our Home Care Solution, as a supplemental benefit, our employers as a benefit to help their employers’, better care for themselves and their loved ones when they’re not able to do so, and our provider clients as an extension of their care management teams. We have a growing pipeline for 2024 and beyond, and we not only assist with members’ unmet functional needs in the home which drives trust and engagement, but also identify clinical complexity and social risk factors that can help address through our Clinical Advocacy services or third-party referral programs.
As outlined above, we continue to deliver solutions that drive ROI for our customers across the health care ecosystem, leveraging our unique assets and data-centric approach. We’ve made significant progress in our globalization and cost improvement efforts as planned, without sacrificing customer service and with our margin improvements on track. Overall, we have the Proprietary Technology data and interoperable platform to deliver a seamless digital experience and be the partner of choice for our customers, regardless of the populations they serve. As we look ahead, and we continue our focus on unlocking shareholder value, I believe, there are two areas of significant opportunity. The first is in government-funded programs including Medicare, Medicaid and the health insurance marketplace.
We currently have a number of customers in this sector, including several state health benefit plans where we provide health and well-being resources to hundreds of thousands of state employees. In addition, we are contracted with multiple Medicare Advantage programs both using our technology platform to engage with their members as well as offering our home care service CareLinx, as a supplemental benefit for millions of their MA members. We are poised to go even deeper, with existing state and local government contracts. The second is in offering value-based contracts to share in both the risk and cost savings with our customers. With innovation in our DNA, we are leveraging our assets and capabilities to develop new solutions to address many of the challenges our customers are facing and as I mentioned earlier be their strategic partner of choice.
To that end, we are actively exploring value-based care models in addition to our new risk adjustment solution we announced in Q2 that we will roll out in 2024. As against this backdrop and from the strong foundation that I’m excited that Brent Layton has agreed to become our next CEO effective January 2, 2024. His appointment comes following a deliberate and well-planned transition done together with the Board focused on positioning Sharecare to capitalize on the opportunities ahead. I’m sure many of you are familiar with Brent, but those of you who are not he has been a member of the Sharecare Board of Directors since early 2023 and brings more than 30 years of health care and public policy experience and a variety of growth-oriented executive roles, including more than two decades at Centene Corporation.
Brent held many roles and capacities while at Centene including serving as Chief Business Development Officer during, which time the company scales from three health plans to 31 health plans, becoming the nation’s largest Medicaid managed care company. He oversaw many of the divisions and products in his time at Centene including provider contracting where he led the company into value-based care. As President and COO of Centene, he oversaw Ambetter, the nation’s largest health insurance exchange provider and WellCare, the nation’s sixth largest Medicare Advantage company. Brent announced his retirement from Centene in late 2022 and stayed with Centene as Senior Adviser to the CEO. Centene grew annual revenues from $300 million to $144 billion during Brent’s tenure.
I am confident that with the combination of Brent’s expertise in driving growth at scale with large value-based contracts and my extensive experience in digital health M&A and product innovation, we are well-positioned to continue to execute our strategy for growth and profitability and deliver enhanced value for our users, customers and shareholders. We look forward to sharing more detail in 2024 once Brent officially assumes the role. Before I hand the call over to Justin who will provide additional financial details, I want to comment on the previously disclosed unsolicited preliminary nonbinding proposal that we received from Claritas Capital. Claritas, which is a large shareholder of the company is led by John Chadwick who also serves on Sharecare’s Board with me and Brent.
Consistent with its fiduciary duties, our Board of Directors is carefully reviewing the proposal and we will pursue the course of action it determines to be in the best interest of the company and all of its shareholders. We have a strong path ahead and our distinct advantages set us apart from the rest of the industry. And with Brent on the team, we are accelerating our evolution as a go-to digital health partner. And with that I’ll turn it over to Justin.
Justin Ferrero: As Jeff noted we reported positive third quarter results with revenue of $113.3 million, exceeding guidance and adjusted EBITDA of $9.6 million, which is at the high end of our guide. Since going public our Q3 adjusted EBITDA margin of 8.4% represents the highest single quarter adjusted EBITDA margin for Sharecare and is a very significant increase over our Q2 adjusted EBITDA margin of approximately 3%. Additionally, we are on track to meet our primary annual operating KPIs in both enterprise and provider channels, which are 12.9 million eligible lives and 6.5 million records processed for the year. The enterprise channel performed in line with our expectations with our advocacy solutions driving outstanding results in both care gap closures as well as avoidable readmission rates yielding millions of dollars in potential savings and leading to member satisfaction of over 90% and client satisfaction rates of over 99%.
And our clinical advocacy Net Promoter Score is at nearly 100. I am pleased to report that the Provider channel once again set a quarterly revenue record in Q3, driven by increases in Medicare Advantage risk adjustment related chart volumes. The channel is also realizing meaningful reductions in expenses resulting from the ongoing globalization and cost mitigation efforts. Life Sciences’ Q3 revenue was in line with expectations and with the prior year period, despite softness in macro pharma spend across the industry as we anticipated and have seen throughout the year. We are pleased with the resilience of this channel and are benefiting from the value of our high-quality targeting with our proprietary zero party database of over 100 million people.
Our financial health remains strong. We ended the third quarter with a cash balance of $128 million and approximately $182 million in available liquidity. As we continue to advance toward our target of achieving cash flow breakeven, we reduced cash burn in Q3 to approximately $6.9 million, excluding the impact of stock buybacks and other one-time non-operating payments in the quarter, which compares to $8 million burn in Q2, which had one fewer payroll period. We are continuing to execute against our globalization, automation and other business optimization initiatives to be cash flow breakeven. As an update on our previously announced stock repurchase program, we have bought back 9.2 million worth of shares to-date, leaving 40.8 million remaining under the current authorization through next May.
As noted previously, we continue to evaluate our capital allocation strategy and strongly believe our current stock price does not represent the full underlying value of our business. Looking forward to Q4, we are guiding to revenue within the range of $111 million to $113 million and adjusted EBITDA between $9.5 million and $11.5 million. This represents another expected lift in adjusted EBITDA margin driven by the myriad of operational improvement initiatives underway across the business, amounting to $30 million in annualized expense reduction as discussed on earnings calls earlier in the year. It is important to note that we have taken a conservative approach to our revenue guide in Q4 due to the aforementioned softness in pharma marketing spend.
Revenue guidance for fiscal year 2023 is reiterated at $452.5 million to $460 million. But I’d like to add one note on our adjusted EBITDA reporting. In conformance with the SEC’s clarified guidance around and recent focus on non-GAAP financial measures, our adjusted EBITDA now includes costs related to an exited contract, abandoned leases and certain staff realization expenses, all of which were previously disclosed but excluded from our historical adjusted EBITDA calculations and guidance. The earnings release contains a reconciliation of adjusted EBITDA to GAAP net income inclusive of these changes and all current and historical financials presented reflect this update to our non-GAAP measures. In Q3 2023 and Q3 year-to-date 2023, these costs totaled $1.1 million and $3.1 million respectively.
To put that into context adjusted EBITDA margins delivered in Q3 would have been even higher than the record margins reported. Additionally, we have updated our adjusted EBITDA guidance to $21 million to $26 million for fiscal year 2023 to reflect this change. It is important to highlight, there are no new expenses and no impact on the balance sheet or cash flow. This is simply moving previously discussed below-the-line expenses, back into our adjusted EBITDA guidance. I will also note that, these expenses are not expected to recur in 2024. In closing, we are pleased to report the positive third quarter performance included record adjusted EBITDA margins, execution against our core KPIs successful implementation of our comprehensive cost savings program and continued advancements towards cash flow breakeven.
Thank you for your continued support and commitment to the Sharecare vision. We’re now ready to take your questions.
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Q&A Session
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Operator: We will now begin the question-and-answer session. [Operator Instructions] At this time, we will take our first question which will come from David Larsen with BTIG. Please go ahead.
David Larsen: Hi. Congratulations on the excellent EBITDA growth. Can you talk a little bit about the progress you’re making in the Enterprise division, RFP activity the sales pipeline? And then what was the revenue for Enterprise in the quarter? And then any color or thoughts on Carillon without getting too specific obviously. Thank you.
Justin Ferrero: Thanks, Dave. There’s a lot of ton packed on that one. Which one do you want me to focus on first? I’ll start with the quarter. We had a — I think we set out for significant EBITDA growth. We came in at a record since our IPO 8.4%. As you know, that’s almost 3x our percentage EBITDA that we did in Q2. So sequentially just a significant lift there. And so we’re really pleased with the quarter. Relative to the pipeline it continues to grow. It’s a very strong pipeline. We had a number of — we can’t talk to them yet but we had double-digit wins in new customers in Q3. Those will come out later and are real excited about how that sets us up for 2024.
Jeff Arnold: Yes. And I would just add to that David, it’s Jeff, not only great quarter strong pipeline but we’re starting to get in a lot of results from our Sharecare+ deployments some in conjunction with Carillon and the results have been really great like satisfaction really high, outcomes coming in better than expected and so we’re super encouraged by that.
David Larsen: Okay. And it sounded to me like you have incremental opportunities within some existing large Enterprise customers. And it also sounds like you’re sort of moving forward with your value-based care and risk-sharing efforts. Can you provide any color on that? Like, would you be accepting like a PMPM rate? Would there be like a value-based care sort of arrangement like we see with like a Privia or an Evolent for example? Just any thoughts there would be helpful.
Jeff Arnold: Yes. So, the plan remains the same. We have a big installed base. And so the opportunity is to expand within those clients, and have some good success stories of clients who bought the digital front door to start and then added digital therapeutics and then added advocacy and now have even added CareLinx. And obviously, in those examples the PMPM continues to increase. And then — in addition to that, we remain focused on obviously, adding new logos. And so we’re happy with our pull-through in the pipeline. We had a huge day, yesterday, as an example across all three of our big — our business segments, new wins. And then we think our platform is really well positioned for value-based care. And the way that we participate today outside of our PMPM, is that we do a lot of performance guarantees, which is kind of a form of shared risk and are making a lot of investments in our technologies and people Brent in particular to aggressively move into value-based care, where we’ll move beyond just performance guarantees and PGs into more risk sharing arrangements.
David Larsen: Okay. And then one more for me, before I hop back in the queue. Is this EBITDA margin sustainable into next year? Or should we expect like a step-up in cost for incremental investments in new onboarding? Just at a high level, just some color around the sustainability of higher margin.
Justin Ferrero: Well, maybe I’ll — well first of all, I think it’s important to note that this EBITDA margin would have even been higher, that you heard in my — it was a record percentage for us, but would have been even higher due to some of the shifts in the clarified discussions that we had around our non-GAAP measures. Those are going to go away. Those will not recur next year. So there will already be a tailwind there. I think you should also get comfort in that our EBITDA margins are sustainable, as you look at our Q4 guide. And so we’re guiding to another step-up in EBITDA margin at $9.5 million to $11.5 million. So we — without getting too much into 2024, we want to spend time with Brent, as we come up with the 2024 guide.
