Sharecare, Inc. (NASDAQ:SHCR) Q4 2022 Earnings Call Transcript

Sharecare, Inc. (NASDAQ:SHCR) Q4 2022 Earnings Call Transcript March 29, 2023

Operator: Good day. And welcome to the Sharecare Fourth Quarter and Full Year 2022 Earnings Call and Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. On today’s call, we have Mr. Jeff Arnold, Chairman and CEO; and Mr. Justin Ferrero, President and Chief Financial Officer; as well as Mr. Jaffry Mohammed, Chief Operating Officer, who will join for the question-and-answer session. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, which includes statements regarding strategic reviews 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 statement to reflect changes that will occur after this 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. Please note this call is being recorded. I would now like to hand the conference over to Mr. Jeff Arnold. Jeff, please go ahead.

Jeff Arnold: Thank you for joining us today as we present Sharecare’s fourth quarter and full year 2022 results. We reported revenues of $123.3 million and $442.4 million, respectively, and adjusted EBITDA of $4.6 million and $15.8 million, respectively. In our core enterprise business, we contracted over 900,000 new eligible lives for Sharecare+, our new digital-first advocacy solution and 1.8 million new members for CareLinx, our home health solution and ended the year above our target KPI of eligible lives with 12.4 million. In our Provider channel, which recently received a best-in-class distinction, we significantly grew our records processed in 2022 to $5.8 million. In August of 2022, we announced our plan to conduct a strategic review of our business and have been working extensively with financial advisers to evaluate all potential options to maximize our shareholder value.

The process is ongoing and we have expected — expanded it to include potential business combinations to complement our thriving enterprise channel, which is on track to grow covered lives from 12.4 million numbers in 2022 to 12.9 million in 2023. In 2022, we won many new enterprise clients, including large employers, leading health systems, several payers and government contracts, as well as expanded our Medicare Advantage members, which yield — yielded millions of new covered lives. Due to our investment in sales, we were able to increase the number of RFPs submitted in 2022 by 100%, resulting in an increase in our pipeline, which has grown 150% year-over-year. Our account management is delivering high client retention and renewal rates for existing clients including one of our largest CareFirst, the largest not-for-profit health plan in the Mid-Atlantic region and expanding accounts with new capabilities, which increase PMPMs and improve outcomes.

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One example is Lennar Corporation, one of the nation’s leading homebuilders. It started as a wellness only client and has strategically at our new product offerings, including digital therapeutics, digital-first advocacy, tech-enabled home care and the Get Active VR program, creating meaningful results. Since its launch, Sharecare+ has been driving new client and PMPM growth, contracting for over 900,000 covered lives with Coke, Collier and through our relationship with Carillon, which demonstrates the strength of our digital-first advocacy solution that integrates AI, benefits navigation, clinical engagement, virtual care and chronic case management. Enhanced with our recently launched CDC-approved digital therapeutic for diabetes prevention, new virtual model of our intensive cardiac rehabilitation program Ornish Lifestyle Medicine, as well as our Get Active VR program.

Sharecare+ represents our innovative outcomes driven, mindfulness based approach to comprehensive health management. On the home care front, CareLinx continued to exceed growth expectations by adding 1.8 million Medicare Advantage lives in fiscal 2022. In addition, we expanded our home care offering to deliver tailored care management programs and traditional care to high risk populations, which results in improved experiences, member acquisition and retention, quality ratings and cost savings. As we have seamlessly integrated CareLinx into our digital-first advocacy solution, our home care capabilities also are providing a valuable differentiator for Sharecare+. Additionally, we have identified approximately $16 million in annualized cost savings within our enterprise channel that we believe we can realize through global outsourcing and streamlining our product investments, contributing to our expectation of nearly doubling our adjusted EBITDA in 2023.

These cost savings will be rolled out through Q2 and Q3 of this year, where we expect to realize approximately $12 million of these savings in 2023. These savings will include operating and capitalized expense reductions, which support both EBITDA expansion and our plan to become cash flow positive. Moreover, the strategic review confirmed that our Life Sciences channel given its expertise in consumer driven healthcare is a core and valuable differentiator to our enterprise offering, contributing advanced member targeting capabilities, 100 million person zero party database and an extensive library of award winning content. In fact, Sharecare was honored with a record breaking 20 awards in the fall 2022 Digital Health Awards competition. In 2022, Life Sciences directly contributed $80 million in revenue and supported $258 million in our enterprise revenue.

Lastly, the strategic review affirmed the value of our Provider channel. The interest we received showed that on a standalone basis, Provider attracts valuations equal to more than half of Sharecare’s equity value based on our current trading price. Thus, we will continue to evaluate ways to unlock that value, while increasing profitability through global outsourcing and growing and retaining clients. We believe that that Provider channel complements our other offerings and the use of proceeds remains a key consideration for any potential transaction. The Provider segment contributed $104 million in revenue in 2022, and through our previously discussed globalization efforts, we are tracking to deliver $14 million in annualized cost savings, which began in Q1 2023 and we expect to realize approximately $10 million of operating expense reductions within the year.

This is in addition to the previously mentioned cost savings of $16 million in enterprise. This in-depth strategic review has affirmed that our unique combination of enterprise assets, Life Science capabilities and Provider solutions aligns well with the future of value based care and data interoperability mandates. As we focus on growth, high margins and maintain a strong cash balance, we are well positioned as a leading digital health platform. This approach will enable us to deliver increased value for our shareholders, while ensuring continued growth and success in the evolving healthcare landscape. While Justin will walk through the specifics of our guidance for Q1 and 2023, I want to emphasize that we have built our projections for the enterprise channel based solely on the business currently under contract and model growth for the Provider and Life Sciences channel in line with their 2022 growth rates.

Our achievements in 2022 are a tribute to our passionate and talented team and we look forward to building on this momentum in 2023 and beyond. Thank you for your ongoing support and confidence in Sharecare. I will now turn it over to Justin.

Justin Ferrero: Thanks, Jeff, and to everyone for joining this morning. As Jeff shared, we delivered strong results for the fourth quarter and full year 2022. I will share the full year highlights, provide a look at the fourth quarter results and then outline our outlook for the first quarter and full year 2023. Our full year revenue grew 7% to $442.4 million from $412.8 million a year ago and adjusted EBITDA was $15.8 million versus $27 million a year ago. We also ended the year in a strong financial position with $182.5 million in cash on our balance sheet and over $233 million in available cash. Year-over-year growth was impacted by sunsetting health security, resulting in a revenue reduction of approximately $37 million and an adjusted EBITDA reduction of approximately $20 million over the prior year period.

When normalizing for the previously announced sunsetting of health security, our overall year-over-year growth was 18% and adjusted EBITDA growth was over 100%. Our fourth quarter grew 4% to $123.3 million from $118.5 million a year ago. Growth in the quarter was driven by year-over-year increases in eligible lives on the platform and an increased number of records retrieved. Adjusted EBITDA for the quarter was $4.6 million, compared to $5.4 million a year ago. Adjusted EBITDA reflects investments and sales force expansion and infrastructure around our advocacy business. One area to highlight is the infrastructure we support to deliver our advocacy solution for certain large customers fully resides in our cost of sales, which is the reason behind the lower gross margin in the quarter.

However, we believe these investments will drive long-term value to our shareholders and will reduce over time. Similar to our full year results, year-over-year growth for Q4 was also impacted by our decision to discontinue health security, which resulted in a revenue reduction of approximately $10 million and over $4 million in adjusted EBITDA over the prior year period. When normalizing for the discontinuation of that offering, our fourth quarter revenue growth was approximately 14% and adjusted EBITDA growth was over 100%. As mentioned in our last call, we will resume providing guidance with respect to our financial projections. We are establishing Q1 estimates for revenue of $111 million to $113 million and an expected increase of approximately 11% over Q1 fiscal 2022 using the midpoint of the range and adjusted EBITDA of $1 million to $2 million.

As a reminder, this includes the seasonality in our Life Sciences business, whereby the first quarter is our lowest revenue quarter and ramps as we move through the year. Our full year 2023 revenue guidance is $450 million to $460 million and adjusted EBITDA is $25 million to $30 million. To unpack that, we have added over 750,000 lives through our Carillon contract. Over the course of this year, we are working with Carillon to deliver Sharecare+ at a lower PMPM reducing revenue but providing a higher margin solution by leveraging Sharecare’s digital capabilities. Relative to EBITDA guidance and similar to 2022, we expect 80% of our adjusted EBITDA to be generated in the second half of the year. This is a result of the optimization initiatives largely taking effect in Q3 and Q4, as well as seasonality in our Life Sciences and Provider businesses where we see higher growth in the second half of the year.

As we continue to drive efficiency in our business throughout 2023 and we expect significant improvement in our adjusted EBITDA margins compared to 2022. Our full year guidance assumptions reflects the following; increase in eligible lives from 12.4 million to approximately 12.9 million by year-end fiscal 2023, a 4% increase over fiscal 2022. As a reminder, the 12.4 million includes growth in lives from Sharecare+, which we will receive the benefit of a full year of contract delivery in fiscal year 2023; increase in records retrieved to $6.5 million records, a 12% increase over fiscal 2022; capital expenditures of approximately $30 million. To close out my comments, we are confident that the 2022 investments in our sales organization and new product innovation will deliver topline growth in 2023 and beyond.

At the same time, we will begin to realize the financial benefits of approximately $30 million in annualized cost savings as we progress throughout 2023. As Jeff said, we are grateful for your ongoing support and confidence in Sharecare. Thank you all for joining us today. We will now open the call to your questions.

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Q&A Session

Operator: The first question is from David Larsen of BTIG. Please go ahead.

David Larsen: Hi. Can you talk a little bit about like the 1Q revenue expectations, why would there be a significant sequential decline from 4Q to 1Q? And then can you also talk a little bit about the Carillon deal, is the PMPM rate for those lives coming in at — in the range that you had expected and any color around that would be helpful. I guess the revenue guide for 2023 looks a little bit lower than what we were expecting, can you maybe just talk about that on the enterprise side? Thank you.

Justin Ferrero: Yeah. Thanks, David. It’s Justin. So the Q1, if you remember, Q4 is typically a dip in Q1, because in Q4 is our strongest quarter for Life Sciences and typically there’s $8 million to $9 million debt going from Q4 to Q1, so that’s normal. We have also factored in, as we talked about, none of this has been finalized, but we were fortunate to close the relationship with Carillon, and now what we are doing through the course of this year is working with them to tech-enable that business and there will be trade-offs. So, ultimately, we think there will be less revenue, a lower PMPM, but a higher margin business as we go through the year. So that’s why we factored in a little bit of a dip in the enterprise revenue in Q1 as well.

Jeff Arnold: Yeah. I would just add, I mean, it’s a large contract with Carillon and it’s — and there’s — the customer base is becoming broader and some customers have less high touch services, so it’s less PMPM. And then as it relates to your question on revenue guidance for the year, we went — we made a decision to only guide to what’s booked in enterprise, which is not what we have historically done. So we have taken out any new logos that we might add during the year, any upsells, any cross-sells and any upside.

Justin Ferrero: Yeah. And maybe I will just add one other thing, Dave, is that, just when you look year-over-year, it’s quite positive. Our guide is 11% higher than where we were in Q1 of 2022.

David Larsen: Great. And then can you talk about like growth by division, what your expectations are for 2023? I think what I heard was Provider lives are expected to be up pretty nicely in 2023, but I hear 20% Provider records. Just any color on the growth rates by division would be helpful?

Justin Ferrero: Yeah. No. No. You heard around 12%. So the Provider we think will grow similar to last year, which is approximately in the 10% range — 10% to 12%. We are guiding, if you remember, Life Sciences last year, all of the industry had a difficult time and so we are looking at the Life Sciences business as really flat just a little bit of growth. And then, as Jeff just said, we are guiding on enterprise to what’s booked, that is new. So we are guiding around 4% growth on the enterprise side. But that’s taken a very conservative approach. Through the year, as we have talked about in the past, we typically onboard new customer’s mid-year and so there’s upsells through the year. Lots of things that happened in the enterprise business, but we are going to take a conservative approach and only guide to where we are booked today.