Yahoo Finance InnovAge Holding Corp. (NASDAQ:INNV) Q3 2024 Earnings Call Transcript
InnovAge Holding Corp. (NASDAQ:INNV) Q3 2024 Earnings Call Transcript May 12, 2024
InnovAge Holding Corp. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the InnovAge Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Ryan Kubota, Director of Investor Relations. Please go ahead.
Ryan Kubota: Thank you, operator. Good afternoon and thank you all for joining the InnovAge fiscal 2024 third quarter earnings call. With me today is Patrick Blair, President and CEO; and Ben Adams, CFO; Dr. Rich Feifer, Chief Medical Officer, will also be joining in the Q&A portion of the call. Today, after the market closed, we issued a press release containing detailed information on our quarterly results for our fiscal third quarter 2024. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 7, 2024 and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures.
A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also be making forward-looking statements, including statements related to our full fiscal year projections, future growth prospects, Florida de novo centers, our acquisition of ConcertoCare PACE, our payer capabilities and clinical value initiatives, the status of current and future regulatory actions and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for fiscal year 2023 and our subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q.
After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?
Patrick Blair: Thank you, Ryan and good afternoon, everyone. I want to begin by expressing my gratitude to our colleagues, participants, government partners in the investor community who support InnovAge. I'd also like to thank those of you who attended our first Investor Day in late February. We believe it effectively reintroduced the company, including the investment thesis, how we are different than other value-based care models and this unique inflection point in the company's history given the internal transformation over the last 2 years. The company's third quarter results were largely consistent with our expectations. We continue to see ongoing performance improvement in every facet of our operations which is driving greater stability in our financial results and increased confidence in our ability to deliver high-quality care and a great participant experience while also growing our top and bottom lines.
As discussed on prior earnings calls, we normally experience seasonality in the third quarter. This year, it was exacerbated because of what we believe to be a few moment-in-time drivers which I'll cover in a moment. Critically, when we look at the momentum of our business from the top down, we're pleased to see the steady growth in the demand for PACE services. We're confident in the industry tailwinds and the unique benefits to the stakeholders that PACE offers. With respect to quarterly financials, we reported revenue of $193 million for the quarter, an increase of approximately 2% compared to the second quarter and center-level contribution margin of $34 million which represents a 17.6% margin and is generally consistent with the second quarter.
Adjusted EBITDA was $3.6 million for the quarter. Importantly, in the quarter, we incurred increased de novo losses as we're now open in Tampa and Orlando. And you'll recall, last quarter's results included a onetime risk adjustment true-up benefit, making the sequential progression less comparable. On a year-over-year basis, quarterly revenue has increased by approximately 12% and adjusted EBITDA is up $5.6 million from a quarterly loss of approximately $2 million in the third quarter of fiscal year '23. Census increased to 6,820 which represents a quarter-over-quarter improvement of approximately 1%. Overall, our results reflect solid performance in the areas of top line growth, medical cost management, center-level staffing costs and SG&A.
We remain focused on day-to-day execution and exiting fiscal year '24 with solid earnings momentum. The portfolio of initiatives that we've launched over the past 2 years are creating tangible impact that we're seeing translate into earnings. As we discussed at our Investor Day, we continue to challenge ourselves to continuously identify new value creation opportunities at the center level, with the goal of achieving an overall center-level contribution margin of 20% or more over time. While we now operate 20 centers across 6 states, including the opening of our Orlando center which occurred on April 1, health care is delivered locally and there are differentiated opportunities and challenges to address at each center. We are bringing the best practices to centers and to departments within centers that we believe can be improved.
We are pleased with our recent work in this area. We are starting to see the contribution margin impact and we have confidence that we will achieve our future goals. We also remain focused on our 5-pillar performance management framework which uses a balanced scorecard to assess our delivery of high-quality, compliant care in a financially responsible way. We use the 5-pillar metrics to track operational performance at the center and enterprise level and we link our management incentive program to the results. Our strong performance against our target metrics continued this quarter. As a couple of examples, our participant experience which is measured by Net Promoter Score, was 46 in fiscal year '24 against a target of 35. Our proprietary quality composite score was 4.2 which is slightly above our target level of 4 out of 5 stars.
We believe that continued strong performance in the pillars of employee engagement, participant satisfaction, care quality and compliance are an excellent leading indicator for future growth and financial performance. Now turning to the details on the quarter. You'll recall last quarter and during our Investor Day, we touched on anticipated third quarter seasonality. This quarter, seasonality was exacerbated by several moment-in-time factors. We continue to experience ongoing enrollment processing delays in Colorado, in part due to the competing priorities of Medicaid redetermination. As a reminder, the barriers we are experiencing include state enrollment resource constraints, post public health emergency policy changes that now require in-person level of care assessments versus telephonic and new state vendors who are still ramping up to targeted service levels.
While these delays do not affect the eligibility of potential participants, the protracted nature of the enrollment processing delays have resulted in some prospects opting to pursue other service options. We continue to work with the state to resolve these issues as quickly as possible. Additionally, due to physician and nurse practitioner staffing vacancies and recruitment challenges in our Sacramento and San Bernardino centers, we made the proactive decision to temporarily slow the rate of enrollment despite market demand that surpassed expectations to ensure the workload of onboarding new enrollment match our primary care staffing levels. While certainly more seniors remains a top priority, ensuring we deliver a high-quality participant experience is bedrock to our responsible growth strategy.
We have now filled the open positions and have resumed normal enrollment tempos. This year, we also experienced an unusually competitive environment due to the richness of the Medicare Advantage supplemental benefits when compared to past annual enrollment periods. The amount has increased materially from the years past and the breadth of where cash benefits can be spent has expanded as well. As a result, we believe this had a marginal impact on both our ability to enroll new participants and a higher number of existing participants who disenrolled for an alternative plan. We have strong conviction that the integrated and personalized nature of the PACE model offers a superior value proposition to frail seniors struggling to maintain their independence when compared to other Medicare-needed options.
And our enrollment and operation teams are working to educate our participants and potential participants on the benefits of PACE. We also believe that margin pressure which has recently materialized across the MA industry, will result in a reduction of MA value-added benefits in 2025 which will only enhance our relative competitiveness. Despite these temporary headwinds, the overall demand for our services has continued to grow as evidenced by a sequential increase in sales qualified leads of 10%, with the total number reaching over 1,600 leads in the third quarter. This underpins our ongoing confidence that far more individuals are interested in PACE than we are enrolling today. On the de novo front, we're excited to announce that we're operational at our new Orlando center.
Like Tampa, this new state-of-the-art facility has the capacity to serve approximately 1,300 participants at maturity. Enrollment efforts are underway and job number 1 is to begin expanding access to the many deserving eligible participants in the community. We're hosting a grand opening on May 29 to bring awareness and to celebrate this important milestone in Orlando. In our recently acquired Crenshaw, California center, we're encouraged to see momentum build under our ownership as Q3 enrollment began to ramp in line with our expectations. On the regulatory front, we're pleased to report that our post-sanction monitoring in Colorado which was initiated in January of 2023, has been closed out by CMS. We continue to engage with the state of Colorado to finalize the outstanding process improvements.
On our last call, we touched on the ongoing activities in our San Bernardino center with the California Department of Health Care Services. DHCS conducted their targeted medical review in March and we await notification on a date for the exit interview. Regarding Sacramento, we submitted proposed corrective actions to DHCS in March. And at the beginning of this month, CMS officially closed its portion of the audit; we are awaiting feedback from DHCS. Following resolution of the audits and corrective actions in California, we expect to resume discussions with the state regarding our Downey and Bakersfield expansion plans. Turning to operating performance. We continue to see improvement in our management of external medical costs as evidenced by a sequential decrease in participant expense PMPM from $3,903 last quarter to $3,823 this quarter which represents an approximate 2% improvement.
The largest driver of our sequential improvement was the decrease of permanent placement nursing home costs. As discussed on previous calls, our goal is to have our population reflect the population of the communities we serve. And these communities are made up of a mix of people that are living independently, those that are receiving some type of supportive housing and those in an institutional setting. As we continue to enroll new participants who are living independently in the community, we're seeing a decrease in the percentage of our participants permanently residing in nursing homes. We believe this change in the composition of living situation demonstrates a modest improvement in risk mix relative to where we were while under enrollment restrictions.
Said differently, our mix is migrating back in line with the underlying assumptions used to derive our rates. Over time, improved mix should help offset external medical cost trends while supporting the independent living goals of CMS and our state partners. Additionally, we've piloted an end-of-life comfort care program in Denver which supports our participants with palliative care expertise and 24/7 access to our own team of nurses as a means of improving participant experience while also reducing lower-value external hospice costs. In addition to better coordination with our interdisciplinary care team and participant in family satisfaction, the program reduced external spend by 43% from the baseline in November while improving overall quality of care.
We're currently developing the business case to scale this program to other markets. Our portfolio of clinical value initiatives, or CVIs, as we refer to them internally, are performing in line with our expectations. As you would expect, some are ahead of plan and there are a few which are delayed and we don't anticipate seeing the run rate benefits until fiscal year 2025. Further, we're seeing improvement in our center-level staffing ratios which has improved approximately by 5% relative to where we started the fiscal year while holding our quality and compliance resources constant during the period with the same level of CMS and state auditing activity. Recall, center-level staffing ratios were negatively impacted by the effect sanctions had on our centers and because of the additional internal and external resources required to meet the demands of the audits.
In summary, we believe we are continuing to improve the business every quarter. The combined effect of our broad set of initiatives in the areas of top line growth, cost management, quality and compliance over the course of the past 2 years is accelerating as evidenced by our improving results. We will continue our tireless efforts to make each center better every day as the centers are the heart of our business. And with that, I'll turn it over to Ben to walk through our quarterly financial performance.
Benjamin Adams: Thank you, Patrick. Today, I'll provide some highlights from our third quarter fiscal year 2024 financial performance and insight into some of the trends we are seeing in the quarter. While it is still early in our margin improvement initiatives, we continue to track to our internal targets and we are pleased with our progress and with the opportunity for additional margin recapture over time. Starting with census. We served approximately 6,820 participants across 19 centers as of March 31, 2024 which represents quarter-over-quarter growth of 0.7%. We reported 20,360 member months in the third quarter, a 1.2% increase over the second quarter. This reflects the anticipated third quarter enrollment softness that Patrick discussed.
Total revenue of $193.1 million increased 2.2% compared to the second quarter due primarily to an increase in member months, coupled with an increase in Medicare capitation rates. This was partially offset by a California rate decrease of approximately 2.5% effective January 1, 2024 and a onetime Medicare true-up outside the regular payment cycle that was recorded in the second quarter. We incurred $100 million of external provider costs during the third quarter of fiscal 2024, a 1% decrease compared to the second quarter. The sequential decrease was primarily driven by lower permanent nursing facility utilization, resulting in a decrease in cost per participant, partially offset by an increase in member months. Cost of care, excluding depreciation and amortization of $59.1 million, increased 8.8% compared to the second quarter.
The increase was due to higher cost per participant, coupled with an increase in member months. The cost per participant increase was driven by an increase in salaries, wages and benefits due to higher head count and increased wage rates associated with the annual reset of employee benefits and taxes, an increase in software license fees associated with a new pharmacy software program that we rolled out in January, de novo occupancy and administrative costs associated with our new Crenshaw and Bakersfield centers acquired in the ConcertoCare PACE acquisition and third-party expenses associated with the annual Part D bid creation and retrospective coding review. Center-level contribution margin which we define as total revenue less external provider costs and cost of care, excluding depreciation and amortization, was $34 million for the quarter compared to $33.6 million in the second quarter.
As a percentage of revenue, center-level contribution margin of 17.6% was relatively unchanged compared to 17.8% in the second quarter. Sales and marketing expense was $7.2 million, an increase of approximately $1.3 million compared to the prior quarter. The increase was primarily due to increased head count, coupled with increased marketing spend for our newly opened Tampa center and recently acquired Crenshaw center. Corporate, general and administrative expense increased to $27.5 million, a $2.3 million increase compared to the second quarter. The increase was primarily due to an increase in benefits expense due to annual reset of employee benefits and taxes, an increase in bad debt, an increase in software license and maintenance costs, including user licensing costs associated with Epic and an increase in third-party legal expense.
The increase was partially offset by a decrease in costs associated with the Epic conversion that we completed in the second quarter. Net loss was $5.9 million compared to a net loss of $3.8 million in the second quarter. We reported a net loss per share of $0.04 on both the basic and diluted basis and our weighted average share count was approximately 135.9 million shares for the quarter on both a basic and fully diluted basis. Adjusted EBITDA which we calculate by adding net interest expense, taxes, depreciation and amortization, M&A and de novo center development expenses and other nonrecurring or exceptional costs to net loss, was $3.6 million for the quarter compared to $7.8 million in the second quarter. The decrease was due to the onetime Medicare true-up payment in the second quarter as well as the increase in de novo costs associated with Tampa, Orlando and Crenshaw in the third quarter.
Our adjusted EBITDA margin was 1.9% for the third quarter compared to 4.1% in the second quarter. De novo losses which we define as net losses related to preopening and start-up ramp through the first 24 months of de novo operation for the third quarter, were $4.1 million and primarily related to the recently acquired Bakersfield and Crenshaw centers and our centers in Florida. This compares to $2.2 million of de novo losses in the second quarter. Turning to our balance sheet. We ended the quarter with $54.1 million in cash and cash equivalents, plus $45.2 million in short-term investments. We had $81.3 million in total debt on the balance sheet, representing debt under our senior secured term loan plus finance lease obligations and other commitments.
For the third quarter, we reported cash flow from operations of $3.5 million and we had $450,000 of capital expenditures. We are reaffirming our fiscal 2024 guidance which, as we said last quarter, includes the ConcertoCare PACE acquisition. Based on the information as of today, we expect our ending census for the year 2024 to be between 6,800 and 7,400 participants and member months to be in the range of 79,000 to 83,000. We are projecting total revenue in the range of $725 million to $775 million and adjusted EBITDA in the range of $12 million to $18 million. Finally, we anticipate that de novo losses for fiscal 2024 will be in the $10 million to $12 million range which again, is inclusive of our recently acquired Bakersfield and Crenshaw centers.
In closing, I want to reiterate Patrick's comments as we believe we are continuing to make improvements to the business every quarter. We remain focused on the day-to-day operational execution and exiting fiscal 2024 with solid earnings momentum. Operator, that concludes our prepared remarks. Please open the call for questions.
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