Sharecare - Q1 2024

Executive Summary

• Q1 2024 revenue was $90.9M, down 22% year over year, with adjusted EBITDA of $(2.7)M and GAAP net loss per share of $0.10; management cited decline in “largely low margin business” and tight cost controls to minimize adjusted EBITDA impact.
• Sequential trend: revenue fell from $105.3M in Q4 2023 and $113.3M in Q3 2023; adjusted EBITDA deteriorated from $2.98M in Q4 2023 and $9.60M in Q3 2023 to $(2.73)M in Q1 2024.
• Strategic review continues with active discussions on a potential sale; company aimed to conclude in 30–45 days (no assurance), a potential near-term stock catalyst; financial guidance remains suspended amid the process.
• Operationally, Sharecare highlighted a July 1, 2024 launch of its Medicaid digital navigation platform for ~750,000 members, signaling new market expansion and potential revenue diversification.

What Went Well and What Went Wrong

What Went Well

• Medicaid expansion: “our purpose-built digital navigation platform for Medicaid is launching on July 1, 2024, to approximately 750,000 Medicaid members,” positioning Sharecare for growth in government-funded programs (CEO Brent Layton).
• Cost discipline: “coupled with tight cost controls, we were able to minimize the impact to adjusted EBITDA,” underscoring operating rigor despite revenue headwinds (CFO Justin Ferrero).
• Balance sheet flexibility: Sharecare ended Q1 with $100.3M in cash and cash equivalents, supporting execution during strategic review and operational initiatives.

What Went Wrong

• Top-line pressure: revenue down 22% YoY to $90.9M; adjusted EBITDA swung to $(2.7)M; adjusted net loss per share rose to $0.04 from $0.03 YoY, reflecting weaker mix and non-GAAP add-backs.
• Ongoing restructuring/legal costs: Q1 included $3.3M reorganizational and severance and $2.2M non-operating, non-recurring legal/vendor-related costs impacting adjusted metrics.
• Visibility: no financial guidance for Q1/FY24 amid strategic review, limiting near-term estimate anchoring and potentially raising uncertainty for investors.

Transcript

Operator (participant)

Good day, and welcome to the Sharecare first quarter 2024 earnings call and webcast. Today, all participants are in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note that today's call is being recorded and will be available on the company's website. On today's call, we have Mr. Brent Layton, Chief Executive Officer, and Mr. Justin Ferrero, President and Chief Financial Officer.

Before we begin today, I 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 the strategic review, expected cost savings, new capabilities, pipelines, certain contractual disputes, and future expectations. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that will occur after 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, 2023. In addition, please note that the company will be discussing certain non-GAAP financial measures, which we believe are important in evaluating performance. Details of the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website. I would now like to hand the conference over to Mr. Brent Layton. Brent, please go ahead, sir.

Brent Layton (CEO)

Well, thank you, Chris, and good afternoon, and thank you for joining Sharecare's first quarter 2024 earnings call. Before we go into the details, I want to address our strategic review. Under the direction of the Special Committee of the Board, with the support of our Executive Chairman and senior management, the company is in active discussions with multiple bidders for a potential sale of the company or other strategic transactions. We are focused on a clear goal: maximizing value for our shareholders. While we expect to bring the process to a conclusion within 30-45 days and will communicate the result at that time, there can be no assurance of the timing or if a transaction will result at all.

However, I do want to take this opportunity to update you on the progress we've made in each of our three channels and on the new growth opportunities we discussed in our last earnings call. Our life sciences channel is generating more than $80 million on an annual basis. Despite softness in the macro pharma spend across the industry, we have a strong track record of annual renewals from existing clients, and in Q1, the team closed deals with 35 new pharma brands, which creates future growth opportunities in subsequent quarters. We also leveraged the channel's unique digital targeting capabilities and assets to drive engagement, benefiting both our provider and enterprise channels. A decade ago, we established our provider channel through an acquisition, which initially generated about $20 million in annual revenue for its release of information services.

Since then, through purely organic growth, our provider channel has grown into a profitable $120 million business that works with 8,000 health systems and physician groups for whom we retrieve more than seven million records annually. In Q1 2024, our provider team closed 75 deals, with the average deal size double what it was in the prior year. And in our enterprise channel, we believe there's even a bigger opportunity for long-term sustainable growth. Only four months into 2024, we have secured multiyear renewals with several of our enterprise clients across all segments, including government, Fortune 500 companies, commercial health plans, MCOs, and a large health system.

We have grown our revenue pipeline threefold and have signed contracts and verbal confirmations received to date, which we currently expect to exceed $40 million in net new revenue, some of which will be recognized this year. Based on the RFP cycle, we expect to close additional new revenue opportunities throughout the remainder of this year. Last earnings, we discussed the substantial growth opportunities with MCOs that specialize in Medicaid, Medicare, and the exchange. Sharecare's navigation platform provides Medicaid members with easy access to their benefits, providers, government programs, and resources. In addition to enabling members to navigate their benefits through using smart chat functionality, our Medicaid platform also nudges people to engage in preventive actions and close gaps in care.

With CMS issuing new rules last month to ensure that patients don't have to wait too long for a doctor's appointment, our Path platform also includes a dynamic, searchable provider directory that uses geolocation technology to help members find in-network providers and resources near them, such as pharmacies or shelters. Members can easily access the hours of operation, supported languages, and whether they accept financial assistance programs like SNAP benefits. It also includes a digital wallet for secure access for their financial assistance and rewards program. We're excited to share that this Medicaid navigation platform will go live on July 1, 2024, with our first client, Georgia's largest Medicaid managed care company, Peach State Health Plan, starting with approximately 750,000 members, which is expected to grow as redeterminations come to a conclusion and as other growth opportunities arise for Medicaid managed care in Georgia.

Additionally, we partnered with the largest independent, specialized general reinsurance agency in the U.S., which will utilize Sharecare as an exclusive well-being offering in order to bend the risk curve for self-funded employers. We are in contracting phase for a significant deal with the country's largest directly contracted network of value-based oncologists, with 4,500 physicians across 16 states, to provide in-home support for patients undergoing chemotherapy. We are partnering with three risk-bearing entities to use our respite care capabilities to support their application for the CMS GUIDE program focused on dementia. These applications have been accepted for both the established and new program tracks, and we will participate in supporting the quality metrics that will determine performance-based adjustments.

These agreements underscore our ability to innovate by leveraging the assets we have already assembled, as well as our intent to share both the financial risk and rewards with our partners, and demonstrate how we continue to unlock the value from our 2021 acquisition of tech-enabled home care solution, CareLinx. In summary, we remain focused on growing the enterprise business and have implemented operational improvements to create best-in-class processes for procurement and implementation. As you saw in this afternoon's press release, we reported Q1 2024 revenues of approximately $91 million and adjusted EBITDA of -$2.7 million. These results reflect the negative revenue and adjusted EBITDA impact that was expected for the dispute we discussed in our last earnings call and the 10-K filing on March 29th. As a reminder, the dispute is with a counterparty that has violated their commitments to Sharecare.

We now consider this an active legal matter and are focused on pursuing our legal rights and amounts owed, and we will not be commenting further, other than to reiterate that this dispute does not involve matters applicable to any of Sharecare's other customers or relationships. Given the current uncertainty created by this legal issue and the ongoing strategic review, we will not be providing 2024 guidance today. While I know you're eager to hear about the board's decision on the strategic review, I want to reinforce that our team remains laser-focused on growth, profitability, and delivering our commitments to our clients and the people they serve. Thank you for the ongoing support and interest in our company. I will now hand the call over to Justin before we open for Q&A.

Please note, during the Q&A, we will not be able to address additional details on the strategic review process or the legal dispute.

Justin Ferrero (President and CFO)

Thank you, Brent, and appreciate all of you joining us this afternoon. I will be taking you through the financial highlights for the first quarter of 2024. As Brent noted, we reported first quarter revenue of approximately $91 million and adjusted EBITDA of -$2.7 million. Revenue was down $25.4 million over prior year, primarily impacted by certain eliminations related to the previously mentioned legal dispute. That said, we continued to realize the benefit of our globalization efforts and tight cost controls, resulting in a decrease in adjusted EBITDA of only $3.3 million over the prior year. It is also worth noting that our adjusted EBITDA was negatively impacted by additional costs required to support the strategic review process, as well as the contract dispute.

We ended the quarter with $100.3 million in cash on our balance sheet and over $154 million available cash. We used cash of $27.9 million in the quarter, an expected burn, which was similar to the first quarter of 2023's cash burn. This is based on the cyclicality of the business, where Q1 revenue is typically lower for the life sciences and provider channels, which generate a higher percentage of their revenue in the second half of the year. Also, from an expense standpoint, Q1 had several one-time payments, including annual prepaid expenses, cash used for income tax-related payments associated with RSU vesting of locked-up employees, and we had an additional payroll compared to the prior quarter. Similar to 2023, we expect the business's cash burn to improve significantly over the course of the year.

While the provider channel's revenue was flat compared to Q1 2023, it is important to note that Q1 2023 benefited from a several-million-dollar tailwind due to an extended CMS COVID calendar that provided more time to prepare 2022 Medicare risk adjustment submissions. This anomaly has normalized in Q1 2024. Otherwise, the provider channel would have shown positive growth over prior year. As Brent noted earlier, we have a positive outlook on the channel, with expected overall revenue growth during the remainder of the year. For life sciences, there were several things that impacted growth. A discontinued product offering that generated revenue in Q1 2023, as well as a core brand customer that is going generic, and as a result, has eliminated their digital marketing spend.

We remain bullish on this channel and expect revenue to significantly increase over the course of the year, similar to prior years. As previously discussed, we have generated positive momentum in the enterprise channel in the first four months of the year, with signed contracts, finalist opportunities, and verbal confirmations, which we expect to yield more than $40 million in net new revenue, some of which will be recognized in 2024 and should also position us for a great 2025. It has been a busy start to the year, and we remain confident in our business. We are expanding into new markets, leveraging our assets, continuing to drive meaningful cost savings while delivering high-quality services and carefully managing our balance sheet, specifically our cash position, all while supporting the strategic review process to maximize shareholder value.

As Brent said, we are grateful for your ongoing support and confidence in Sharecare. Thank you all for joining us today. We'll now open the call to your questions.

Operator (participant)

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you may press Star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press Star then two. We will now pause momentarily to assemble our roster. Today's first question is from David Larson with BTIG. Please proceed.

Jenny Shen (Equity Research Associate)

Hi, this is Jenny Shen on for Dave Larson. Thanks for taking my questions. Congrats on the new Medicaid platform launch. Can you just provide some more color around the financials of the platform and the opportunity? Can you talk about the margins and PMPM there? And I think you noted that it will be launching in July. Should we expect to see any revenue lift from that this year? If so, how much? Or is it a longer-term opportunity? Thanks.

Brent Layton (CEO)

Well, thank you for asking about our WellCare navigation tool, and we are very excited about it, and we're very excited to begin this summer in July from that standpoint. In regards to the margin, in regards to the revenue, I am not gonna convey that right now. As we said, we're not gonna do anything in regards to talking about earnings for 2024, but I will talk about what we've created. What we have created is a very unique tool that provides a navigation so that a Medicaid member is easily able to find a provider that is nearest to them, that's in-network, that they are able to see when they open, when they close, are they taking new patients?

Where they're able to openly see the nearest grocery store that takes SNAP benefits, to be able to access social determinants of health programs, and ultimately, be able to really be a chassis, a development tool that Medicaid MCOs can use to really connect doctor and patient together. So we're very excited about it, and, we believe we can build upon it. At the same time, we think that it has a great opportunity, to move into the exchange and ultimately into Medicare Advantage. So, and we were able to do this using existing assets and a lot of great brainpower around here for being creative and innovative.

Justin Ferrero (President and CFO)

And maybe I'll just add one thing, since we commented that this will start in Q3. We do expect revenue this year, and we're excited about the margin profile, and we'll leave it at that.

Jenny Shen (Equity Research Associate)

Got it. That's helpful. And then for a follow-up, one thing that we've been kind of looking at is utilization for different platforms across the board. Do you have a utilization number you can share? And do you have, like, an executive dashboard where you can track data on things like how many people log into your platform, how often, and also data around the total cost savings that you can impact and that you can then show your clients? Thanks.

Brent Layton (CEO)

We are on par with the best in the market, but as far as metrics that we'll be seeing on this Navigate platform, we will be learning this together as we roll this out on July first. This is a brand-new approach, and engagement and helping people access services, benefits, and ultimately, providers is what we are going to initially be judged by. But as people are able to access their benefits, their providers, and their services, then the ROI will begin. And we will be conveying this, and we'll be creating new KPIs that we'll be discussing with you over the coming quarters.

Jenny Shen (Equity Research Associate)

Okay, great. And if I can sneak a last one in here. So, GLP-1s and weight management programs have still been really relevant in our space. So I know you've mentioned before your Eat Right Now program. Can you just talk about the traction there and what progress you've been seeing? Thank you.

Brent Layton (CEO)

Oh, absolutely. And, and traction is probably a very good word to use there from that standpoint. You know, ultimately, with Eat Right Now and leveraging the therapeutics as a pre-authorization, we've been able to do this with multiple clients.

... and we believe that it's having a positive contribution. We're also exploring partnerships with PBMs to resell our relevant digital therapeutics, and we're really leveraging our advocates for education on the benefits in drugs. So we're really pulling all this together as we're really on the front end of what these weight loss drugs can do.

Jenny Shen (Equity Research Associate)

Great. Thank you so much.

Justin Ferrero (President and CFO)

Thank you, Jane.

Operator (participant)

The next question comes from Craig Hettenbach with Morgan Stanley. Please proceed.

Craig Hettenbach (Executive Director)

Yes, thanks. You had noted, just in terms of the revenue reduction in the quarter, there was some impact of lower margin business kind of moving away. I'm just curious if, if that's Q1's a good run rate here, or are there still some mixed things as you kind of manage the business going forward?

Justin Ferrero (President and CFO)

No, I think Q1. Hey, hey, Craig, it's Justin. I think it's how I laid it out in the opening remarks, which is, we expect to improve over the course of the year. So on the enterprise side, we just talked about, you know, the WellCare Medicaid product, and that will be coming online in Q3. So we expect growth over the course of the year in the enterprise channel. When it comes to life sciences, you know, just historically, you've seen last year, Q1 was $17 million, Q4 was $27 million. So our campaigns performed very well, and as a result, we get the second half of the year buy-ups, and our revenue increases typically quarter-over-quarter. We expect to see that again this year. And then on the provider side, you know, provider's been performing extremely well.

This Q1 is an anomaly for the reason I laid out. The highest quarter is typically Q3, but they are definitely generate more revenue in the second half of the year than they do in the first half of the year. That's really where those risk adjustment audits kick in. And so we expect to see growth over the course of the year.

Craig Hettenbach (Executive Director)

Got it. And then just a follow-up question for Brent. I know you've been busy kind of on the road and meeting with customers and various governments. Curious what the feedback's been, and just what are some of the things that are maybe resonating on the platform that you feel like are actionable, you know, from a growth perspective, looking out next 12, 18 months?

Brent Layton (CEO)

I believe that we really have a solid base of current customers, and what I'm finding from them is that they're looking for innovation. You know, a moment ago, they asked a question about GLP-1 drugs and what all can you do, and we're excited what we've been able to do about how we can really be on the front end of authorizations and leading people to ultimately get care as they need from that standpoint. And just yesterday, we were with a Fortune 500 company, a current client of ours, and we spent several hours with them. And we were excited how they saw how we were progressing with them. But more importantly, we liked the discussions about innovation. What more can you do?

So in my time on the road, that is really what I'm hearing, is that we find customers that are ultimately partners with us, and those partners are looking for creativity, and at the same time, I mentioned a moment ago, really the return on investment and ROIs. And as we continue to evolve as an industry and evolve as a company, we're gonna continue to show outcomes, health outcomes, and really, ultimately, I look forward in coming quarters to talk to you about new KPIs, because that's really ultimately what the customers and, and governments are looking for, and MCOs.

Justin Ferrero (President and CFO)

Maybe I'll add one thing, Craig, is that all this innovation that Brent and team are driving is using current assets. So we are. He is tweaking current assets. I think you can see our operating expenses are down significantly year-over-year. We expect to keep pushing on our expenses and refining and optimizing even more. And so all of this innovation is happening with existing infrastructure and existing assets. Not that we have to go buy something new or hire a lot of new people. It's all with our existing base, so they should be long-term, very profitable to the bottom line.

Craig Hettenbach (Executive Director)

Got it. Thanks for that.

Brent Layton (CEO)

Thank you.

Operator (participant)

Our next question comes from Eric Percher with Nephron Research. Please proceed.

Eric Percher (Founding Partner)

Thank you. I'd like to get your perspective on the revenue performance. Obviously, we don't have guidance, but maybe looking rearview mirror, can you tell us how you performed relative to budget? I think we're about 10% below where consensus was. Then, again, revenue line, if we look at the segments, were you in enterprise, did you see a similar headwind to from the dispute as last quarter? I think that's what you had commented on previously. Then in provider, assume you knew the $4 million comparison, was that in line? Life sciences, you knew the generic conversion was coming, was that in line? Can you walk us through how you're doing relative to internal views?

Justin Ferrero (President and CFO)

Yes. Hey, Eric, we are. We're right in line, and the really where the consensus was off wasn't enterprise. Like we talked about that a lot. It was really on the provider and life sciences is where there was consensus higher growth than, and you'll see this when we obviously release the Q. And that's why we commented on the few items that impacted those channels in particular. So with the provider business, there was a tailwind last Q1. Like, there would have been nice growth in provider this Q1, if that COVID calendar extended into 2024. It didn't. It is a little bit, you know, we expected that, and so that's why it's flat year over year versus growth, which is really in the models.

And then the second piece is on life sciences, and we talked about we're very bullish on that channel. We're still very bullish on that channel. There was two items that impacted Q1, primarily, which we talked about. That is, one of our brand customers, a big brand customer, is going generic, so they cut all their spend. And then the second one is we discontinued a non-core product. It wasn't a pharma product, and it just wasn't worth continuing to invest in. But our team performs, and our campaigns perform very well. And just like I mentioned before, you know, grew from $17 million in life sciences to $27 million in Q4 of last year.

We expect that a similar trajectory this year, and expect that to drive both of those divisions to drive growth for us this year. So we were in line. We weren't able to guide, unfortunately, when the models came out, or we would have called you.

Brent Layton (CEO)

But I would like to talk a little bit about the enterprise pipeline. I mentioned in my remarks that ultimately, we—you know, first thing I wanted to make sure is we have a healthy pipeline. And we have worked hard, this team has, growing the pipeline threefold since the beginning of this calendar year. And also, the innovation that we've done, and as Justin has reiterated many times, this is using existing assets. Really just looking at things a little bit differently, with slight tweaks of new segments, with MCOs and reinsurance and value-based care, and really, really new approaches, higher deal sizes, higher acuity contracts. And we put together a new team. We have a new head of sales, we have a new head of operations, and we are using tried and true business development to help us grow.

And as I mentioned, in the coming quarters, we'll talk about new KPIs, and one of them is gonna be around sales. And a lot of people have asked me about, you know, our RFPs, how many RFPs are you getting in? And there's been plenty. But I would say I'm focused more on the close rate and the success rate, and that is how we're looking at things.

Eric Percher (Founding Partner)

Okay, and then at the EBITDA line, I think we got some guidance last quarter on the impact, if there's any difference there this quarter versus the prior. And you mentioned that there is cost for the review and dispute. Are you primarily seeing elevated legal expense, and was that greater than you had expected?

Justin Ferrero (President and CFO)

Yeah, but there's... For the dispute, there's legal, it's like there's always accounting, there's... So yes, legal, accounting, professionals, it, it's across the board, that we're spending money on across the strategic review as well as the dispute. So it would have been much closer. The point of that is that the gap, even at, you know, we knew this reduction in revenue was coming year-over-year, but we managed cost, and the gap was only $3 million on a $25 million top line, and we think it would have been much closer without those other one-time expenses that are related to those two items. Does that make sense? That's the point we were trying to make. There's additional expense that we're incurring to support the strategic review and the disputed contract.

That wasn't in last Q1.

Eric Percher (Founding Partner)

If we look at last quarter, I think you called out $6.3 million of EBITDA impact. Is it that plus $3 million that gets us to the impact that you're facing?

Justin Ferrero (President and CFO)

No, that's really apples and oranges. We're talking about two different items. That was a balance sheet item that impacted-

Eric Percher (Founding Partner)

Got it.

Justin Ferrero (President and CFO)

- Q4. Yeah.

Eric Percher (Founding Partner)

Is there any guidance you can give on-

Justin Ferrero (President and CFO)

Because that was an impairment.

Eric Percher (Founding Partner)

Okay.

Justin Ferrero (President and CFO)

That was an impair-

Eric Percher (Founding Partner)

Is there a guide-

Justin Ferrero (President and CFO)

Yeah, that was an impairment.

Eric Percher (Founding Partner)

Guidance you can give on the impact at the EBITDA line?

Justin Ferrero (President and CFO)

Well, we're not guiding for the year, but what I will say is that we expect EBITDA to improve for all the reasons that we talked about before. You know, just Q1 is a seasonally low quarter from a revenue standpoint. It's also high from an expense standpoint with prepaids and others, and we expect two things to happen. I mean, as you know, our EBITDA is historically back half of the year loaded, and that's how we expect it to play out this year. We expect in Q3 to have our best quarter for the provider channel. We expect Q4 to be our best quarter for life sciences, and we expect our enterprise business just to add, you know, this momentum that Brent has taken you through, starting in Q3 as well. So EBITDA will improve.

Eric Percher (Founding Partner)

Thank you.

Justin Ferrero (President and CFO)

You bet.

Operator (participant)

At this time, we are showing no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Mr. Brent Layton for any closing remarks.

Brent Layton (CEO)

Yes. Thank you, Chris. I want to reiterate, we will be transparent, and we will convey when the special committee and our board of directors concludes the strategic review. Thank you for your time today in support of Sharecare.