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.

David Larsen: Okay. So on the consumer side, I think, the whole industry is facing a slowdown, ad revenue is under pressure. There’s the risk of a recession, so belts are tightening across the Board. So quite frankly, that’s in line with what’s going on in the market and that makes sense to me. On the Provider side, it looks like very healthy growth, Provider records expected to increase 12% year-over-year in 2023 despite all the pressures that hospitals are under. And then on the enterprise side, it’s what’s booked right now and maybe the PMPM rate on Carillon is coming in a little bit lower than expected for now. Can you talk a little bit about how many more lives there are that you could potentially sell into Elevance and Carillon, I mean, it’s great you have a couple of hundred thousand lives there, but it’s my understanding that this is kind of just the beginning, is that right?

Jeff Arnold: Yeah. Yeah. So we have over 500,000 covered lives at the start and so it’s — we are out of the gates, we think really strong with a new offering and that’s across multiple clients and we do see growth coming from that partnership. And we are extremely focused on the execution of how do we improve the margin, how do we price the PMPMs the right way to the different clients leaning with a more digital-first approach. So just to give a little color on that, it’s 500,000-plus multiple clients with different approaches to each client based on the different services that we are offering and we believe that we are just getting started with that partnership.

David Larsen: Okay. And then just one more for me and I will hop back in the queue. I think you mentioned that the pipeline is up, but could you say like 100% year-over-year and the number of RFPs are up around 100% year-over-year. Any color on what impact sort of the volatility in the banking sector that we are seeing is having, it seems like the labor market is still very strong, but people are a bit worried about the risk of a slowdown. Is that having an impact on the sales process, just any color there on timing for deals?

Jeff Arnold: Yeah. Yeah. I think when you kind of think about our enterprise sales is, one part of our strategy is we have very large clients that we are always working with to expand with. I think Carillon is a great example of that. On the MA side, we have good examples there as well. And then the second piece of our strategy is, we are investing in new salespeople. We have built an unbelievable sales team.

David Larsen: Yeah.

Jeff Arnold: We had a big sales meeting last week, I was with all of them and so they are out bringing the Cokes and the Colliers on, leading with the Sharecare+ pitch and building a big pipeline and giving real confidence to us. Our core offering of the digital front door, the digital therapeutics, the advocacy and the home care as there’s a big demand for that, and it’s differentiated as having it all in one place. And then you complement what I just said there, and you look at our account management, we are doing an amazing job on client renewals. I mean CareFirst is our second largest client. It’s tens of millions of dollars and we are successfully able to renew them for multiyear. And then, lastly, when I look at like Lennar Homes, it’s kind of like what our dream client looks like, it’s a land and expand.

We started off, it’s a huge company, one of the largest homebuilders. We sell them the digital front door and we get more onboarding and engagement than they have got in the past, then they buy Digital Therapeutics, then they buy Sharecare+, then they buy CareLinx and we — and that’s just a dream sale for us. And we are teaching our salespeople how to approach all those deals in a similar way, because some of them are complex and take a little bit more time and some of them are straightforward that we can come in with a digital front door and land and expand over time. But the talent is there, the capability is there, the pipeline is there and they are converting, and we expect a big Q1 this year for next year and we already have some big wins under the tent that we haven’t mentioned on this call.

David Larsen: Okay. And then what kind of lift could there potentially be on the enterprise side in terms of you booking deals now in 2023 that would impact 2023 that isn’t in the guide. Could you book another couple of hundred thousand lives, 5%, 10%, do we have midyear starts, isn’t that kind of normal?

Justin Ferrero: We do and that is all possible. The — but we are taking the approach that we would like to keep with our guide and that’s potential upside, Dave. But, yes, historically, we have brought on new customers, like, for example, Carillon in the latter half of last year. But — we would like to take to keep with our conservative guide and those could be upside.

Jeff Arnold: Yeah. And what I would say the way, we think about that internally is, yes, there’s a potential for new logos and we have seen that historically in the past, not in the guide. Yes, there’s always potential for more upsells within current clients. That’s an active conversation on account management has every day with our clients. That’s not in the guide. And then one of our strengths is big deals and so what we learned last year on Carillon is that we had signed the SOW early in the year with an expected start date and it just took longer. And so we are tracking on some other large opportunities, but we are being conservative in saying, let’s think about that for 2024, but let’s work on it to make it happen in 2023.

David Larsen: Yeah. Okay. And just one last question, I am sorry, but from Elevance’s point of view, every time I hear them speak, all I hear them talk about is digital-first, expanding value based care, expanding the number of lives in upside and downside risk and you got to have

Jeff Arnold: Yeah.

David Larsen: technology solutions to be able to deliver that. Is there — has there been any change in that kind of dialogue or a viewpoint from their perspective that you are aware of or not?

Jeff Arnold: No. No. I mean, I think, Sharecare can play an enablement role in all those types of ideas and we are involved in many of those conversations and how we can help and participate. And Jaffry, who’s in the room with us on the call leads that effort for us and I don’t know if you want to add color to that?

Jaffry Mohammed: Yeah. No. You said it right, Jeff. And David, the opportunity exists on both sides of the business from Elevance standpoint, the business for fully insured, as well as for capitated risk business. So to Jeff’s point, we are engaging some of the conversations on either side and it does play a big part in what we do.

David Larsen: Okay. Great. And I would imagine from Elevance’s point of view, in order for them to retain their existing membership and win new enterprise clients, the Sharecare solution is certainly a key consideration on a lot of their prospective clients and existing clients have. So all right. Thanks very much. I will hop back in the queue.

Jeff Arnold: Okay. Thank you.

Operator: The next question is from Richard Close of Canaccord Genuity. Please go ahead.

Richard Close: Yeah. Thanks. Thanks for the questions. Justin, can you just clarify, I think, you said enterprise is expected to be down from fourth quarter to first quarter. So, I guess, I want to understand why specifically it would be down, if you guys are generating revenue on a per member per month basis, why would it go down?

Justin Ferrero: That is all around the Carillon discussion. So we are taking a conservative approach. Nothing has been finalized. But as came out in our opening remarks, that’s a fantastic partner for us and what we are working on with them is to tech-enable that business. And as part of that, the conversations include potentially less revenue, but a higher margin business. And nothing is finalized, but in the theme of our guidance for this year as we want to be conservative, there’s a chance that, that PMPM could reduce and so we have built that into our forecast. But at the end of the day, the number of lives aren’t going to reduce, the momentum with that client hasn’t reduced. We have actually added an additional health plan in Q1 with Carillon and so we see that, that relationship only expanding. However, there’s a large client inside of that relationship that we are working on to tech-enable.

Richard Close: Yeah.

Justin Ferrero: And it will have pressure on the PMPM, but ultimately, we believe better gross margin. So that’s why there is a little pressure in Q1.

Jeff Arnold: Yeah. So just to explain what we mean by tech-enable is provide less services, physical services, high-touch services with more digital services, which for that particular client would reduce the PMPM.

Richard Close: Yeah. But I still don’t understand why sequentially your revenue would go down, was there any one-time revenue in enterprise in the fourth quarter or I mean

Jeff Arnold: If the revenue

Richard Close: if you have the lives, you got more revenue, right?

Jeff Arnold: Because we are taking a conservative approach on that particular client, we — it hasn’t been discounted, it wasn’t discounted in Q4. But we believe that the likelihood of us moving in this direction with this particular client is why we are going to guide that way.

Justin Ferrero: Yeah. So if you have the same number of lives against the client and the PMPM is higher in Q4 than it is in Q1, that’s why it reduced.

Richard Close: You are having a price cut essentially.

Jeff Arnold: Yeah.

Richard Close: Okay. And then I just want to go back…

Justin Ferrero: And by the way — that’s not finalized and

Richard Close: Okay.

Justin Ferrero: so a conservative approach there.

Richard Close: Yeah. Okay. That’s fine. So I think it was at a conference early in January. You guys talked about Life Sciences, the selling season was pretty good. You felt pretty good on the 2023, the selling season at the end of 2022. So I am just curious, is it just being

Jeff Arnold: Yeah.

Richard Close: conservative to assume

Jeff Arnold: Yeah.

Richard Close: Life Sciences is flat for 2023, because it seemed like you guys were pretty positive on the selling season?

Jeff Arnold: Yeah. We are being conservative across all guidance. Yeah, I think, we probably — we might have had our largest day ever yesterday in Life Sciences with our bookings. But as David mentioned, there are some — the macro environment issues in Life Sciences is real. I did a talk last week in New York at one of the big ad agencies and that was the topic of the day, that’s kind of like what’s the environment look like and when is the bounce back going to occur, is it this year or not. But we have a great team. We are seeing some positive results as like I mentioned yesterday. We typically have a really great Q4, but we thought, because we are taking a conservative approach as we go through the strategic review and other things that, that this was the — holding serve was the right way to think about it for now.

Justin Ferrero: Yeah. And just to reiterate some of those comments. So when we were coming back strong on those — the calls you are referring to, it was — it’s really kind of first half, that’s when you are selling — the selling season, primarily around the first half of the year. The reason why we want to be conservative is, as you know, is that about 35% of this business is realized in the fourth quarter and so until we have really solid view on what Q4 is going to look like, we think the prudent approach is to be conservative until Q4.

Jeff Arnold: And have more visibility throughout.

Justin Ferrero: Yeah. We will have more and more visibility on how Q4 is going to come in.

Richard Close: Okay. And with respect to Elevance or the old Anthem, I think, back when you guys originally de-SPACked , you talked about there was a 10-million lives opportunity with Elevance in terms of clients they had where there were multiple payers, I guess, insurers in those employers. Can you just talk to us a little bit about like that 10 million number and maybe where you guys are with upselling or penetrating that base?

Jeff Arnold: Sure. Yeah. So I think this is an important relationship and it’s multifaceted. So one part of the relationship is we provide AI services to Anthem and that’s going well and Jaffry leads those efforts for us, but that’s an important part of the relationship. And then the second important part of the relationship was they invested in Sharecare and we had to show them that we could take those dollars and we could build a better advocacy solution that’s in the market and we think we have done that. And why we think we have done that is Carillon moved 500,000-plus members over to our platform and so we are going through that execution now and that’s a ton of work, but we are building confidence, I think, with them and us and how we can work well together.

And then the next piece was how could we bring on a big important client like Coke Industries and that is one of their clients and be able to have flawless execution with a new product offering. So we launched Sharecare+ to Coke in partnership with Anthem, that would fall in that national accounts category that you are talking about and have done really well rolling that out starting in January. So that builds confidence. And then it’s — and then we have — we are starting to get better muscle memory on how to include Sharecare into national account RFPs. We are getting better on how to think about things like Deal Desk, where how do we approach clients separately or together. And we expect that more business is going to come over and it already has through Carillon, from where we started in Q4, we have already onboarded new big, important clients.

Justin mentioned one payer, there’s others and so we think that we are on a good path.

Richard Close: Okay. And then my final question, I will turn it over. I apologize for asking too many. But on CareLinx, I just want to better understand the 1.8 million new members that, I guess, you can target with CareLinx. How does that compare? I think when you bought it in 2021, August of 2021, you said you had about 1 million MA lives in the pool, I am not sure

Jeff Arnold: Yeah.

Richard Close: in terms of apples or oranges

Jeff Arnold: Yeah.

Richard Close: if you could just talk to us a little bit about and then did you generate the $35 million from CareLinx that you expected at the time of the acquisition for 2022?

Jeff Arnold: Yeah. We have seen explosive growth since we have owned this. I think, it was 80,000

Justin Ferrero: Yeah. It was

Jeff Arnold: 80,000 when we bought it.

Justin Ferrero: Just probably 300,000.

Jeff Arnold: Yeah. 300,000 MA lives when we bought it. It was 1.8 million ending last year. It will be more for this year.

Justin Ferrero: It will be around $2 million, $3 million.

Jeff Arnold: And yeah, we exceeded that $35 million number.

Richard Close: Okay. So essentially you went from 300,000 MA lives to 1.8 million at the end of 2022. That’s the number?

Jeff Arnold: Yeah. That’s kind of it and it will be over $2 million this year.

Richard Close: Okay. All right. I will jump back in the queue. Thanks.

Jeff Arnold: Thanks.

Operator: The next question is from Craig Hettenbach of Morgan Stanley. Please go ahead.

Craig Hettenbach: Yes. Thanks. Following up on the lower PMPM at Carillon, can you just talk about does this shape your view of the broader opportunity set? Do you think it’s specific to them or just how you are thinking

Jeff Arnold: Yeah.

Craig Hettenbach: bigger picture on the enterprise side and opportunity?

Jeff Arnold: Yeah. So what we believe is special about Sharecare+, it’s a digital-first offering. And what we mean by that is, it’s self-service. So anything that I could do with an advocate, I should be able to do directly within the platform myself and that’s not — doesn’t cost us much, obviously, to execute that type of experience. And so there’s certain clients that will gravitate to that for certain reasons, maybe they have got the right demographic of the population or maybe there’s cost constraints. We have an example within the Carillon partnership where there was some cost constraints and there was the desire to get to digital first. And so that particular client, we are moving down the path of the more digital offering with the less high-touch services, which is going to reduce that particular client’s PMPM, but it’s also going to make a higher margin.

We also have a big mix of clients that have the combination of both and so you get the advocate with the care console and you get the digital-first approach and we are taking both of those approaches to market. And so sometimes the digital-first works really well, as I said, for people that might not have substantial budgets for these types of things. We like it because it’s higher margin and it’s easy to turn on. I mean I think I have shown it to you in the past, clearly, it’s like turning WiFi on, the little blue button shows up and all the data there. And so I don’t see — I see it as an advantage in that we, as a go-to-market that we have got both offerings and depending on the client, we tailor the offering to fit the need.

Craig Hettenbach: Got it. And then as a follow-up, Justin, you mentioned just some infrastructure support for enterprise. Can you maybe touch on it, on like an intermediate to longer term basis where you think ultimately gross margin will shake out and what the implications are for that?

Justin Ferrero: Yeah. So we are making significant investments to support largely bringing on 900,000 lives. If you just put that in perspective, that’s a massive lift between Q4 and Q1. And so we overinvested to make sure that our delivery for those customers was flawless and has gone extremely well. We mentioned on the last call that we think that this business can be a mid-30s gross margin business long-term and that’s what we believe. So that’s ultimately how we will model this out. In order to deliver, we had to use outsourced partners, which is why it’s showing up in the cost of sales line. But over the course of this year, we will optimize, we will start to bring more of those resources in-house and so you will see the gross margin begin to expand through the course of this year, and ultimately, our belief is that this is a 35% plus gross margin business for us as you look to 2024 and beyond. Jaffry, is anything you would like to add to that?

Jaffry Mohammed: No. You covered it pretty much.

Craig Hettenbach: Is it specific to enterprise or blended, that’s enterprise?

Justin Ferrero: No. No. No. That’s just — I thought you were referring to the advocacy of offering. So that’s just around the Sharecare+, like, what we have been talking about here with Carillon. So enterprise as a whole we believe will be back to where we were, which is in the 50% to 55% long-term.

Jaffry Mohammed: Yeah. Justin, you covered all, one thing which I would add is, the asset that we have, I mean, accumulated in terms of the analytics and precision on the clinical side, that give us some ability on the pricing side of the equation to take more shared savings for our customers. And as Jeff said, about the example of Lennar, this is where we are going in with the proposition, matching the market, beating the competition and then adding more value to our customers who some of them are running over $100 million in their employee benefits on the medical side. So there are upsides on the shared savings as we bend the cost curve through containment of an emergency room with an excessive visit for both chronic and episodic care, that’s where the margin improvements will also come apart from what Justin said.

Justin Ferrero: Yeah. So just putting a thing, just remember, last quarter, we were 47%, 48% gross margin. And so with this large customer and outsourcing, we book all of those resources that support those 900,000 new lives in the cost of sales line. As we bring those in-house, which we are planning throughout the course of this year and obviously into 2024, that will be split, right? It won’t all show up in the cost of sales line. So we see in the next 12 months returning back to our normalized enterprise gross margins, which have been running in that 50% range.

Craig Hettenbach: Got it. Thanks for that color. And then last question for Jeff. You mentioned or alluded to potential business combinations in enterprise. Can you touch on just maybe be it the importance of scale or capabilities like how do you take some of the momentum you have in enterprise and what could even elevate it further through any potential combinations?

Jeff Arnold: Yeah. No. That’s a good question. We have learned a lot through the strategic review, and if I had to quickly summarize it, I would say that enterprise is the core and what makes up the core is the digital front door, the therapeutics, the advocacy and the home care, similar to, let’s say, what Lennar bought. And it’s really valuable and we are building pipeline and we have got great clients and we are showing renewals and we are growing our big accounts and we are excited about that and we see — we are not just looking at the strategic review on what are assets that we could sell and what are those worth. But we are also looking at what could we buy and what would we use the proceeds for if we were to sell something, say, like Provider and so there’s a lot of activity going on right now, business combination centered around the core of enterprise.

And the theme I would say that we are focused on is two; one is how to go — how to create scale that’s the big theme of Sharecare. How do we get the scale and how do we contribute meaningful EBITDA and so we are looking at potential business combinations that could get us there. And then the second is, as there’s also opportunities for acquisition — for logo acquisitions where we think our superior platform could replace other platforms that would drive meaningful EBITDA. And so those are kind of two ends of the spectrum as it relates to enterprise, that we have been spending a lot of time on and are excited about and the folks that we have conversations with, I think, really appreciate the capabilities that we have and the clients that are there.

And then the theme of scale, because I think digital health in general or health tech suffers from scale and subscale and that’s something that Sharecare really wants to try to lead the path on is let’s get digital health to scale and through — likely, through a combination.

Operator: The next question is from Eric Percher of Nephron Research. Please go ahead.

Eric Percher: Thank you. Jeff, I also had a question relative to the review and maybe to focus on your comments on Provider, it sounds like there was a comment around validating the strategic value, also comment on the potential value of a sale. Can you remind us what your considerations are, I know there’s an element of ongoing access that is key here, what are you looking for to be able to go forward with the sale?

Jeff Arnold: Well, one is we want to maximize price. So what’s — how do we maximize price. That’s one consideration. The second consideration is, how do we maintain data rights, and potentially, if we were to sell it, are there partners to sell it to that could increase the amount of data that we could have access to and maybe potentially together create new products, data products. And then the third consideration is use of proceeds. So if I lose that asset and I have that revenue and EBITDA, how do I replace it and so those are the three. And we feel like we are getting good validation that we can get a good price, people value what we have built over the last several years and we believe that there’s partners out there that would get creative with us on data rights and data products.

And then we are looking at things with an enterprise that if we were to buy them, could we use the proceeds of Provider to have less dilution are — for to make that acquisition happen.

Eric Percher: That’s helpful. Maybe a follow-up there, have you seen a significant shift in valuations? It does feel like we have seen quite a few digital health transactions announced over the last two months, does it feel like

Jeff Arnold: Yeah.

Eric Percher: sellers are at market?

Jeff Arnold: Yeah. Yeah. I feel like there’s definitely you are starting to see both, obviously, first in the public markets a push — a pullback and I think now in the private markets. And a lot of it depends on what their cash position is, and so if they are sitting on a good cash position, they don’t want to come off valuations in the first conversation. And if they need — if there’s a need for cash, then that’s a different conversation, but I definitely think it’s a buyer’s market.

Eric Percher: And then the last question on consumer, I know that was always a business that you were thinking more 2023 or further into 2023. As the macro remains a challenge, what are your thoughts on timing for that asset?

Jeff Arnold: It’s a really important asset for us, because it, like for example, when you register for Sharecare, the first thing you do is you take the RealAge test and that’s one of the ways we get so many people to onboard. And so instead of doing a health risk assessment from your HR department, you come in and you learn your RealAge and we have this really great content that we then deliver you that helps you be better educated to lower your risk. And then we tie incentives to that like taking your RealAge and lowering your risk and so it’s an important component. And it’s also very tightly woven into Life Sciences. So we have a really unique asset in Life Sciences. And with cookies going away, this idea of a zero-party database where I have got 100 million people or I know their e-mail and they filled out 100 questions on RealAge.

And they have given me permission to talk to them, it’s a huge asset, whether we are helping our payer partners, recruit members or our hospital partners, recruit patients or us using that — their advanced targeting to get more members to enroll in our programs. And so through this strategic review, we have had several conversations and know there’s buyers of that business and we don’t think now is the right time to sell it financially because of where the market is at. But at the same time, we are also trying to understand it’s not as simple as, say, Provider where just give us the data rights. There’s a little bit more complexity here that still needs to be thought through and we are also hopeful that it’s going to bounce back as like, I mean, if you remember, what was it 37% growth in

Justin Ferrero: Yeah. 2021, if you remember, Eric, that asset grew 36% organically and then the market changed last year and went to essentially flat. But we have a great team. We have a great asset. And

Jeff Arnold: We have great optionality.

Justin Ferrero: And we have got — yeah. Great optionality. So hanging on to that asset a little bit longer, we believe we will only increase the value of that business.

Eric Percher: Would it be wrong to think that when you first announced this, there was a real focus on simplification and what you were just discussing around the core enterprise and today I am hearing a little bit more that you want to make sure you have ways to redeploy and focus on EBITDA, is that a change in your view?

Jeff Arnold: I don’t think it’s a change. I think it’s an improvement. Yeah, so we are basically saying that, we have done the strategic review and affirm that, yes, enterprise is the core and we are doing really well there, and we need to double down there. And we have affirmed that there’s a market for Provider, and it’s easier to detach from Sharecare and we think we could maintain data rights, which is why we are in the business to start with. And then we are getting that more profitable too, because we have started this major globalization with Jaffry coming on board and Harsha coming on Board, our CTO. And then on Life Sciences, we have gone down the track to say, yeah, there’s buyers for that, too. It’s a little bit more complex to untangle it, but it’s not growing right now, but we believe so much in the team and the asset, we know it’s going to grow in the future.

And I can’t do everything I want, I have to sequence things and so if I had to prioritize what the sequence, it would be get enterprise to scale, trade the Provider assets to the right partner that not only provides money but strategic value. And then in Life Sciences, being more of a position of strength by showing growth, because we think that the team will achieve the growth and if we are not getting the growth right now, it’s more macro issues than capability issue.

Eric Percher: Great color. Thank you.

Jeff Arnold: Sure.

Operator: The next question is a follow-up from Richard Close of Canaccord. Please go ahead.

Richard Close: Yeah. Maybe just a follow-up on that last set of questions. So, Jeff, in terms of the sequence that you just mentioned. So should we think about like 2023 — from a time line perspective, should we think about this being essentially a clean story as we roll into 2024? Just maybe some thoughts on the timing of finalizing

Jeff Arnold: Yeah.

Richard Close: what you are trying to do here with the review and offload

Jeff Arnold: Yeah. Yeah.

Richard Close: offloading and whatnot?

Jeff Arnold: Yeah. That’s a great question. So basically if you think about what our goal is from today is like we wanted to convey the confidence of the topics that we have been talking about. Here’s where enterprise is, here’s where Life Sciences is, here’s where Provider is. We wanted to convey with confidence that we have got financial advisers and we have active conversations and this is a daily thing that we are working on, figuring out how do we take these puzzle pieces and unlock value in the best way and while that’s happening is, there’s a huge focus on profitability. And so we are taking — we have made big investments in sales, we have made big investments in products and now we have to realize that cost savings.

So we can improve our EBITDA profile and others and so that’s happening. And we have set a goal to say, hey, we are sitting here, we have basically put guidance out that says we are booked, and yes, we believe that there are all kinds of good things are going to happen throughout the year, like they always do, but this is what we are going with is what we are booked and that we are going to conclude the strategic review as quickly as we can. And we are not — right now, if you said, well, where are you? I would say, we are almost in the red zone, like — we are almost in the red zone and it will definitely conclude in 2023. And we are working to give to finalize it so that we can give you complete clarity as we make progress throughout the year, but more importantly into the future.

Richard Close: Okay. Thank you.

Jeff Arnold: Sure.

Operator: This concludes our question-and-answer session, as well as the conference. Thank you for attending today’s presentation. You may now disconnect.