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Cano Health, Inc. (CANO)·Q1 2023 Earnings Summary

Executive Summary

  • Q1 2023 revenue rose 23% year-over-year to $866.9M; adjusted EBITDA fell to $5.0M as medical cost ratio (MCR) spiked to 84.2%, driven by higher ACO REACH mix, supplemental benefit utilization, and branded Rx costs .
  • Guidance raised for FY 2023 membership (390K–400K) and total revenue ($3.25B–$3.35B), while MCR (81%–82%) and adjusted EBITDA ($75M–$85M) were maintained .
  • Liquidity stood at $152M as of March 31, 2023, with $32M cash and an undrawn $120M revolver; company is pursuing divestiture of non-core assets to focus on Medicare Advantage .
  • Management expects MCR to moderate in 2H 2023 on seasonal cost trends and recoveries; narrative suggests second-half improvement as a potential stock catalyst if execution aligns with guidance .

What Went Well and What Went Wrong

What Went Well

  • Membership growth and revenue scale: total members up 44% YoY to 388,667; total revenue up 23% YoY to $866.9M .
  • Raised FY 2023 guidance for membership and revenue, signaling confidence in growth trajectory despite cost pressures .
  • Management tone on execution improvement and embedded profitability: “we expect our earnings trajectory to improve and accelerate, particularly in the second half of the year… unlock substantial embedded profitability as our medical centers continue to mature” (CEO Dr. Hernandez) .

What Went Wrong

  • MCR increased ~480 bps YoY to 84.2% in Q1, pressuring profit; drivers include larger ACO REACH mix, higher supplemental benefits utilization, and branded Rx .
  • Adjusted EBITDA fell to $5.0M (from $29.2M YoY) due to elevated MCR and operating expenses from newer centers; adjusted EBITDA margin compressed to 0.6% vs 4.1% in Q1 2022 .
  • PMPM declined 12.5% YoY to $734 as payer/service mix shifted (Medicaid and ACA PMPM declines), undercutting unit economics despite member growth .

Financial Results

Consolidated Results vs Prior Periods and Margins

MetricQ1 2022Q4 2022Q1 2023
Total Revenue ($USD Millions)$704.4 $680.4 $866.9
Capitated Revenue ($USD Millions)$674.4 $651.2 $841.1
Fee-for-Service and Other Revenue ($USD Millions)$30.0 $29.2 $25.8
Net Income (Loss) ($USD Millions)$(0.1) $(301.7) $(60.6)
Diluted EPS ($USD, Class A)— $(0.61) $(0.12)
Adjusted EBITDA ($USD Millions)$29.2 $16.3 $5.0
Medical Cost Ratio (Third-party medical costs / Capitated revenue)79.5% 76.1% 84.2%
Adjusted EBITDA Margin (new definition)4.1% 2.4% 0.6%

Revenue Mix by Service Line

Revenue ($USD Millions)Q1 2022Q4 2022Q1 2023
Medicare Advantage$442.7 $434.2 $491.9
Medicare ACO REACH$172.5 $162.5 $301.8
Total Medicare$615.2 $596.6 $793.6
Medicaid$52.0 $48.8 $44.4
ACA$7.1 $5.7 $3.0
Total Capitated Revenue$674.4 $651.2 $841.1
Fee-for-Service & Other$30.0 $29.2 $25.8
Total Revenue$704.4 $680.4 $866.9

KPIs

KPIQ1 2022Q4 2022Q1 2023
Total Members269,333 309,590 388,667
Medicare Capitated Members160,306 179,536 207,420
Member Months (Total)803,612 [Internet: https://www.prnewswire.com/news-releases/cano-health-announces-financial-results-for-the-first-quarter-2023-301820074.html]907,179 1,146,069
Total PMPM ($USD)$839 $718 $734
Medicare Advantage PMPM ($USD)$1,249 $1,084 $1,180
Medicare ACO REACH PMPM ($USD)$1,379 $1,374 $1,489
Medicaid PMPM ($USD)$257 $213 $183
ACA PMPM ($USD)$58 $36 $11
Medical Cost Ratio (MCR)79.5% 76.1% 84.2%

Guidance Changes

MetricPeriodPrevious Guidance (Mar 1, 2023)Current Guidance (May 9, 2023)Change
Total Membership (Year-end)FY 2023375,000 – 385,000 390,000 – 400,000 Raised
Total Revenues ($USD Billions)FY 2023$3.10 – $3.25 $3.25 – $3.35 Raised
Medical Cost Ratio (MCR)FY 202381% – 82% 81% – 82% (upper-half bias) Maintained (upper-half bias)
Adjusted EBITDA ($USD Millions)FY 2023$75 – $85 (new definition) $75 – $85 Maintained
Total Medical CentersFY 2023177 170 Lowered
Interest Expense ($USD Millions)FY 2023~100 (incl. ~$10M non-cash) ~100 (incl. ~$19M non-cash) Maintained (higher non-cash)
Stock-based Compensation ($USD Millions)FY 2023~50 ~50 Maintained
Capital Expenditures ($USD Millions)FY 2023~15 ~15 Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2022)Previous Mentions (Q4 2022)Current Period (Q1 2023)Trend
Medical Cost Ratio (MCR) trajectoryMCR improved to 78.2%; PMPM revenue lower, MCR higher than expected due to new members’ lower rates .MCR improved to 76.1% on lower third-party medical costs across lines .MCR rose to 84.2% on ACO REACH mix, supplemental benefits utilization, branded Rx; 2H moderation expected Deteriorating in Q1 with expectation of improvement in 2H
De novo investment strategyContinued center build; de novo losses impacting EBITDA .Reduced de novo investments; modified adjusted EBITDA definition (excludes de novo losses) going forward .Adjusted EBITDA definition maintained; elevated expenses from newer centers cited Shifted to optimization, less new-center add-backs
Liquidity/capital managementFocus on cash flow; lower 2022 revenue guidance; leverage and cash discussed .$150M term loan; liquidity ~$179M; long-term leverage reduction via EBITDA/cash flow .Total liquidity $152M; focus on improved EBITDA and free cash flow to reduce debt Liquidity bolstered in Q4; stable but constrained in Q1
Portfolio focus/divestituresOptimization and profitability prioritization .Reduce de novo, review platform to improve liquidity/cash flow .Pursuing divestiture of non-core assets; Oppenheimer retained Accelerating portfolio simplification
Admissions per thousand (APTs)/utilizationAPTs ~7% lower in 2022 vs 2021 .Continued monitoring .Admissions per 1,000 chart shows variability; management notes stable APTs Mixed utilization signals; stability noted

Sources for current-period call content: external transcript listings and press release .

Management Commentary

  • “We are pleased to start the year with solid operating and financial performance that was generally in-line with our expectations… we expect our earnings trajectory to improve and accelerate, particularly in the second half of the year.” — Dr. Marlow Hernandez, CEO .
  • “Cano Health has established a differentiated Medicare Advantage focused business model… we expect to unlock substantial embedded profitability as our medical centers continue to mature.” — Dr. Hernandez .
  • Strategic focus: “pursuing divestiture of certain non-core assets… retained Oppenheimer & Co. as a financial advisor.” .

Q&A Highlights

  • Analysts probed MCR drivers and 2H moderation timing; management cited higher-than-expected revenue PMPM and seasonal cost recoveries as support for 2H improvement .
  • Questions on ACO REACH mix impact and MA supplemental benefits utilization; management acknowledged mix and utilization pressure on MCR .
  • Clarifications on adjusted EBITDA definition changes and de novo expenses; reiterated 2023 definition excludes de novo losses, with newer center ramp weighing on near-term margins .
  • Liquidity and divestiture process timeline raised; management emphasized capital management focus and advisory engagement .

Estimates Context

  • S&P Global/Capital IQ consensus estimates for CANO Q1 2023 were unavailable via our tool at time of analysis; comparisons to Wall Street consensus could not be made. Values retrieved from S&P Global were unavailable due to mapping constraints.
  • Given the unavailability, investors should anchor near-term estimate adjustments to reported MCR and PMPM trends and management’s maintained EBITDA guidance range .

Key Takeaways for Investors

  • Near-term: MCR spike and PMPM mix headwinds compressed margins; watch 2H MCR moderation and pharmacy/stop-loss recoveries as catalysts for sentiment improvement .
  • Guidance: Raised FY revenue/membership but maintained MCR and EBITDA; execution against upper-half MCR bias is critical to meet EBITDA targets .
  • Mix/Unit Economics: Rising ACO REACH contribution and lower Medicaid/ACA PMPM dilute blended PMPM; monitor payer mix shifts and MA plan supplemental utilization .
  • Cost Discipline: Reduced de novo investments and portfolio divestitures should aid cash flow; tracking SG&A ratio stability and newer center ramp is key .
  • Liquidity/Leverage: $152M liquidity and undrawn revolver provide flexibility, but leverage remains high; improved EBITDA and free cash flow are necessary to de-risk .
  • Trend Analysis: Q4 showed cost control; Q1 reversed with cost pressure—risk is execution timing of 2H improvement; any slippage may necessitate guidance revision .
  • Stock Implications: Sustained progress on MCR moderation and asset divestitures could catalyze re-rating; misses on cost trajectory or cash generation likely weigh on shares .