Ontrak, Inc. (OTRKQ) Earnings Call Transcript & Summary

Great. Good afternoon, everyone, and thanks for joining this next presentation here. And today with us, I'm pleased to have management from Ontrak. Presenting for the company is Curt Medeiros, Chief Operating Officer; and Brandon LaVerne, Chief Financial Officer. If you have any questions, there should be a box in the webcast to enter it, and I will try to get your questions in as we move along here. So gentlemen, thanks for being here.

Obviously, a lot of news this morning. Maybe just to jump right into it. You announced -- preannounced results this morning, but also noticed -- noted that Aetna, your largest client, has notified you that it's going to terminate its contract effective -- at the end of June. Can you walk us through how this development unfolded?

Sure. Thanks, Charles. So obviously, disappointing news from our perspective. Back in the summer, we were notified that the data feed that we received from Aetna on a monthly basis was going to be shut off due to technical and data sharing issues on their side. We work consistently with them up through December on those issues. In parallel, there were some apps around sharing information between Ontrak, some of the behavioral providers and Aetna as well that we worked through, and we're continuing to implement and always having discussions on the contract, which had planned expansions in it as well. In mid-December, we were notified that despite the data feed being complete, it wasn't going to turn back on until we signed a new contract. And so we put our heads down and had been working with the team on the Aetna side on a new contract since that time.

And that was mid -- you said mid-December?

Mid December, yes. And so we were continuously working all the way up through and including the last few weeks, where a few weeks back, we submitted another proposal to them as well as had teams working together on sales and marketing material so we could jointly go out to some of their customers on the commercial side and be able to sell the Ontrak program, and those activities were going even on the sales and marketing materials as latest last week. So when I received the call late Friday that talked about the termination, it was a surprise. We were working towards a new agreement and an expanded relationship.

And I think the new ones you were trying to explain in the release was -- relates to how Aetna evaluated Ontrak versus your other clients. Can you maybe go into that a little bit?

Sure. So Aetna was very focused on behavioral provider visits. And although we delivered a significant volume of visits for their members, the typical metrics that we look at in terms of reducing hospitalizations, reducing ER visits and ultimately reducing the total cost of care didn't tend to be a high area of focus. This contract was unique compared to all of our others, in that we were contracted as a provider as opposed to a health care vendor. And it seems that Aetna wasn't -- the behavioral side of Aetna was not getting credit for the savings that we generated. And so we looked and provided Aetna with many different analyses, but 1 of them was performance on these typical metrics. And they were performing near the mean plus or minus a few percent, some positive, some slightly below the mean in terms of the rest of our book of business across our other customers. So savings were there, utilization -- positive utilization changes were there.

At this point, you have also talked about the contract coming to an end here. Any chance of signing a different agreement with Aetna? Or Should we assume that this is sort of -- is there -- or in other words, is there an appeals process for you or anything to that sort?

Well, look, we're going to leverage our relationships across our organization to try to see if there's another way to do this. I think a big part of our approach in the market, in general, which hasn't been the case with Aetna, is really working with the medical leadership to be able to articulate our value because that's really where the savings accumulate is on the medical side of the whole thing. And so we're going to do our best to get back to those individuals and try to see if we can change this. But for now, we're working and we'll start to plan the transition we're in.

You noted in the press release today that Aetna represents about 8,400 of the 15,822 total enrolled members as of today. How -- I guess 2 questions. First, how much of the effective outreach pool of 152,000 is comprised of Aetna members? And how should we think about the phasing of Aetna members coming out over the next few months?

Sure, I'll take that, Charles. So as far as the average pool, Aetna representative the vast majority. We haven't quantified it and we probably will. And we may by our call, but as of this point, we haven't quantified it, but it's a vast majority. The 1 thing to think about with the outreach pool is when we look at our average enrollment rate, our annualized enrollment rate, we've targeted a 20% historically, and that was with the Aetna numbers in them. We released it in the first 2 months of 2021 off of the non-Aetna outreach pool, we achieved a 60% enrollment rate. And so a lot of our metrics are going to be different going forward without Aetna. Frankly, our other plans, when you look at the rest of the business, is a lot less commercial, more Medicare, Medicaid with some commercial. And so that ultimately is going to drive a higher enrollment rate. And so while the average pool is going to come down pretty sharply, it's going to act much differently and be more efficient for us. As far as the phasing of the membership, so the plans asked us to stop enrollment immediately, and so we'll no longer enroll new folks. And so what will happen over the next 4 months in the normal course, if people would disenroll or graduate in the normal course of how that may happen. What we don't know yet is what the transition looks like from Aetna's perspective. They've asked us to wait for their next word on that. What we've ultimately modeled is that there will be some phase out of these folks. And so we're not assuming we're at full capacity, and then we drop off a clip at the end of June. So we assume that there'll be some transition. So the intent is, hopefully, that's conservative. But at the end of the day, we know that the 8,400 will continue to decline over the course of the next 4 months.

And then whatever remainder drops at the end of June?

That's the assumption we have. We could hope that they're not ready and we need to extend, but that's not what we're baking in.

Okay. So I guess then when we think about the revised guidance here, you talked about $100 million of revenue. Can you walk us through the pieces here because you guys talked about $88 million, which you talked about being contracted. Maybe walk us through some of these pieces just so that we can all be clear about it.

Sure. So 100 -- we were ready to guide $165 million, 100% growth before this news. We were scheduled -- still our schedule to have earnings call next week. And so with this news, we look and say what -- how do we adjust for this information. Obviously, we do have Aetna in our numbers for the first few months. We've guided -- I can say we've included about $18 million-ish of Aetna into the $88 million, which is also part of the $100 million. The thing to think about though is this $100 million we think is actually more conservative than the $165 million, in that we've taken out a lot of go gets. There was a lot of go get associated with Aetna even as well that were not included in our, what I would call, our baseline there. And so for the $100 million we've got, roughly the $18 million that we have is Aetna. We've talked about Cigna before being north of $40 million. And so that's obviously going to be the big driver in replacement of the Aetna revenue this year. But we've also recently signed extensions or expansions or just about to sign with 1 customer an expansion that will ultimately help drive into that $88 million. When you look at how we are exiting, like, February, as an example, ex Aetna, our run rate is already about to $67 million. And that's without the soon-to-be signed, and that's also with Cigna not necessarily at full clip. And so we're well on the way there. And so we feel like with the Aetna information; one, trying to be conservative about it; two, Cigna expanding and launching very fast and hoping to continue that, continued enrollment rate increases and then the strongest pipeline we've had in the history of the company that we can hopefully meet and exceed that $100 million.

So it sounds like when you're saying within the $88 million, right, you're saying you have visibility on $67 million. Does that $67 million include the pieces that you expect to sign shortly? Or is that in the other part of it?

Well, let me say it this way, that $67 million is annualized off of non-Aetna. So technically, you'd add $18 million to that to get towards that.

Yes. I understand. I'm looking at sort of an ex Aetna kind of number.

Yes, yes.

You're saying that your -- you feel pretty close about signing something soon. Is that in that $67 million? Or is that separate to that?

No, that would be incremental to the $67 million. So that's when we -- when we talk about the $88 million, it's meant to be what we have, what we expect to sign, it's like ready to go and then the Aetna that's built in.

And then on top of that, you need another $12 million to get to the $100 million. Is that expected to be from net new business or you're assuming that you're under accounting what you have currently?

I would say -- I'll start, and Curt, you can follow up. But it's -- the intent is it's a combination of net new logos or longer reach expansions with existing customers, so ones that we just don't have in front of us today that may be in play. And so -- and Curt, if you want to take it from there?

Sure. I mean when I think about the pipeline, I'm looking at it in 3 pieces. So Brandon talked about some deals that are imminent with existing clients. So just going back, Centene, Texas signed and extended back in October. With the existing Cigna contract, there's 3 additional states in the Medicare Advantage space that we'll be looking at. And then we have smaller clients like the HAMP and CDC that are looking to extend the relationship as well as work with us to sell into their ASO side of the business, which we have not had access to yet. And 1 of those is actually evaluating Ontrak for its own employees, given the nature of their business and the challenges that their own employees are dealing with. And then last, Optima where we're on the verge of a Medicaid expansion as well as with their entity and VA Premier. And so that will significantly increase the scope of our relationship with Optima and VA Premier. So that's all in the sort of near-term bucket. To Brandon's point, when we look out, we're aggressively pursuing expansions with existing clients, particularly targeting Cigna on the commercial side and Centene additional states. We're -- those are definitely earlier. We're continuing to pursue the relationships. There's interest. Centene is state by state, we have to go. And obviously, with the absorption of Magellan, there's a lot of work going on there. But with Cigna, that's something that we're going to have to continue to pursue and put a deal in front of them that makes sense for them to bite this year. Then last is the new clients. And so as Brandon said, we have the best pipeline of new client opportunities that we have ever had. Some qualify that we're working to put deals in front of them. There were series of meetings last week and this week to understand sort of the high-level business terms that we want to put in front of those clients. And it's a mix of large health plans, either nationals or super regionals. One of which actually found us because of the investments we've been making in our sales and marketing efforts. So I actually had an inbound call from a very large plan that is looking for the type of high-touch service that we provide today. And then 1 of the things that's been a pleasant surprise over the last few months is a lot of conversations. It's still early stage, but any 1 of these could be impactful where we're talking with 3 large provider systems that are looking to augment their existing services with additional telehealth and outpatient type of services. And so some really interesting clients were 2 really large national players on the provider side as well as one that is a fully [indiscernible] Medicare Advantage provider systems. So the savings and the opportunity that help them drive their businesses by leveraging what we do on the telehealth side is getting a lot of interest, especially in these times.

Okay. So then let's -- I guess, maybe bring that together because if we think then, you guys have talked about resume -- returning back to 100% topline growth. That's off the $100 million. So you guys are -- am I correct in saying that you guys are more or less expecting, call it, roughly $200 million of revenue in 2022. And it sounds like because we're going to lose the Aetna piece of $18 million, we're really -- are we starting from a base where we have, call it, 60 something plus net new wins for this year going into '22? Is that the right way to think about it?

Yes, at the end of the day, but when you look at the $12 million as an example of a net new, that's the amount that would be earned in this year, which would definitely be back half loaded and ramping. And so we expect to be signing some folks this year and late this year, early next year. And so again, the pipeline is great. And some of the plans are very, very large, and so it doesn't take many in order to replace the Aetna business that we've lost or even potentially become larger than Cigna, our second largest customer today. So this can pop in pretty quick, pretty fast.

With these plans, though, I mean if we look back historically, I think Cigna had a long pilot phase, Aetna -- a lot of your clients had long pilot phases. Lot of testing within their populations and a lot of work that you'd have to do upfront before you got to signing these contracts. Curt, for example, the inbound call you're getting, I mean, is that what we should be thinking about or are these -- so either -- are these clients ready to go ahead without going to their own pilot phase or are these clients that have -- or gone through a pilot phase and now you've gotten to the point where they're ready to sign?

Yes, so across the buckets that I mentioned in terms of the existing clients versus new clients, I mean, there are at different stages Charles. So some of, I would say, the medium-sized opportunities, the medium-sized clients are more willing to go forward based on the data we're producing across our client base, whereas some of the larger clients, part of what we're planning is starting larger-scale pilots. One of the conversations we're having actually tomorrow would be a pilot that is of a magnitude that is the size of some of our smaller plans. And so assuming that moves forward, as Brandon said, when we move from one geography and book of business and start to add, especially with the larger plans, that can move pretty fast.

So you're basically saying, as we annualize sort of the net new businesses this year plus if we sign some of these clients towards the end for next year, you think you were going to be making up you'll call it $130 million, $140 million difference? Is that sort of the rough math?

Well, here -- if you're comparing that to the $67 million as we sit today, yes. At the time that we're signing those, they won't have to make up as much. But yes -- so I mean, clearly, we need to have the number that ex Aetna this year, but be fully doubled off the whole $100 million. So yes, to the point to do the right math, we're ultimately expecting $200 million in 2022 versus $100 million this year. So we're looking to...

Okay. I have a lot of questions here actually. Two are pretty quick. Does this have any -- the announcement today, loss of Aetna have any impact on your loan covenants with Goldman?

Sure. So we do have loan covenants with Goldman. Most of the covenants that would directly impact right now are in Q3 and Q4 as they relate to EBITDA. And so as you can imagine, we're going to be talking to them, and they've been a great partner with us, and we would expect to move forward. They -- we've got about $50 million outstanding with them. And that they want to protect them, we want to keep. And it's a very effective rate for them. And so I think that we're all interested in moving that forward, and we'll reassess and come up with something that works for both of us.

Okay. Another question here. Do you think Aetna has a replacement for what you are providing for them? Example, do you think they're looking at sort of Teladoc combined with Livongo as a replacement? Any sort of idea what their plans are at this point? I know it's pretty soon, but...

No. I mean we have thought about this. And obviously, during the conversations have messaged against potential competitors, but there's nothing definitive that we've heard.

Okay. Can...

I just want to say, Charles, is whether it's Teledoc or Livongo, like you mentioned or other competitors, what I'm concerned about is this particular population that we go after that high-cost, multi-comorbid these are folks that are not flocking on their own good care. And so we're going to work with Aetna in the transition. But a big part of why our other clients are moving forward and expanding is because we do have a unique approach, and we are going after a population that they're not touching with a broader solution.

Okay. You had a positive EBITDA at the end of the year, in fourth quarter continued improvement over the course of the year. Can you talk about your ability to adjust costs for the lower 2021 revenue and obviously, a different client mix?

Sure. And so we just announced this internally to our team this morning. There was a very small group who was working on all this information over the weekend. And so we have to come up with a plan, we need to rebudget. At the end of the day, a lot of our costs are -- and cost of sales in our coaches. The hope is that we can bring up enough new business quick enough over the next 4 months that the coaches can be redeployed. I don't know if that will be a perfect science or not. And then similarly, we have -- none of our plans are changing as far as our business model, our product strategy, our M&A strategy. And so ultimately, this does come down to how can we and our lender ultimately get happy with a number that helps us continue to grow. And -- because that's what our focus is. It's not at this moment going to be, hey, how can we achieve the greatest EBITDA number, which is maybe where we were exiting last year is how do we grow back to a number that's got the scale and capabilities that ultimately will drive that EBITDA that we've proven we can do. And so I'd say that we're going to be focused internally on rebudgeting the organization. And some of the things that we want to do, we still want to continue to do. And frankly, I think we need to do. And in order to do -- in order to get to the promised land that we expect. And so we're going to be moving forward and there will be more conversations associated with how we handle now that internally.

Another question here. Has there been any material change in the cost benefit opportunity for traditional clients for -- I think, is members seeking services through Aetna? Well, I'll reask it. Has there been a material change in the cost benefit opportunity for the traditional clients seeking Ontrak-A? Has mental health services produced significant revenue? I guess it's kind of asking, has there been any change in the cost benefit analysis for Aetna that you think might have prompted this decision or...

No. So we provided Aetna with data. We tried as best we could to review with them. We showed that the performance, and I think I might have said this earlier, was consistent with their history as well as consistent with the average across our book of business despite some of the challenges in their plan design associated with copays and coinsurance. So there was not a change towards negative in performance on the key metrics around utilization or costs. And in fact, we showed in the history of the relationship, the return that they were generating was in the 3:1 ROI range. So in that regard, near the top. So no, there wasn't a change that we saw. And when we tried to engage them in details, they were articulating that we needed to sign a new contract with them.

In our remaining time, just a couple of follow-up questions. Curt, you mentioned about opportunities with Cigna and MA, additional 3 states. Those were not included in the original Cigna agreement, so those would have to be expanded upon in the original agreement? Or is that part of the original agreement?

The original agreement is structured to have new SOWs for different states. And this is a reflection of Cigna's Medicare Advantage business actually expanding. So we take this as really good news because these are states that Cigna has expanded into relatively recently, and they want us to be one of the first programs for their members in those states.

All right. And then, Brandon, you talked about sort of the enrollment rates, and it's going to change dramatically now that we take out now. So what you're implying -- it sounded like you said, your enrollment rate in the MA population is actually at 60%. Did I hear that correct?

The enrollment rate for our non-Aetna business for the first 2 months was 60%. And so that's got a couple of functions in it. One is, obviously, not Aetna, which was impacted most recently by the stale data. It's been -- it's 8 months old at this point. But 2 is -- so it's not just MA and does have some commercial business in it as well. It does include the Cigna -- the additional states that we launched at the end -- near the end of the fourth quarter. And so it is an early ramp for them. And so they're, obviously, driving a big chunk of that number. And so we do expect it to normalize over the course of the year. But the 1 thing to think about too is we're getting data -- if you know our business, we've talked for a long time about Aetna, given this data, maybe once a month or every other month or every 3 months. We're giving data continually to them. And so we were always getting refreshed people into the pool, which really helps the effectiveness of what we do. And so we hope and expect that that's going to continue, especially with Cigna and our other plans as well. And so the 60% isn't just MA. But we have always said MA is higher than the 20% average that we've seen. And so we -- As we sit today, we look at the post-Aetna business, we would expect that the next business will be much higher than 20% on average.

Is that adjusted for COVID, do you think? Or -- obviously, COVID has had an impact, right? I think you guys talked about it last year, people being home, makes them easier to reach. When you think about it in a post-COVID world, obviously, with vaccinations, do you think you'll still see that kind of -- do you have any data from prior to COVID in some of these non-Aetna populations that you've had much higher?

Yes. I'd say prior to COVID, the difference there, and this is where it's a little bit hard for us to tell, is we were putting in new strategies, new capabilities within -- in the AI that ultimately was delivering the outreach pool to us. And so I think we're a lot more effective with the pool that we have. The other thing to mention is COVID really -- again, this is old Aetna data, but COVID took a big hit on the outreach pool or created big hit to the outreach pool because people ultimately underutilized and did not make it into the pool. And so the hope is when we look at our existing plans now or the plans that are left is that, that will help bring people into the pool. Will that change our enrollment rate? We've been very successful as we looked at the utilization changes going on this -- in the third and fourth quarter, our rates were maintaining all throughout that -- through all those changes. Curt, I don't know if you'd have anything further to add on that point?

Yes. So I think the ramp that we're seeing with Cigna is consistent with prior data so prior to COVID data on new launches because we would see, within new books of business across different clients, that there will be a significant ramp at the beginning and then, as Brandon said, it will start to normalize. So it doesn't seem that COVID is having a significant positive effect. I mean we talked about in the past that it might be 5% to 15% at best, but that is more than offset by what Brandon said in terms of the outreach pool decreasing. So the performance that we're seeing, we believe, is sustainable once we get past this initial peak because it will normalize, but still be significantly ahead of the 20% average.

Okay. And that also basically assumes utilization kind of normalizes for this -- for the future outreach pool as we go out within the '21 guide?

Yes. I think we've assumed that it normalizes in the later part of the year, and as the vaccines roll out and people feel a lot more comfortable going back in.

Okay. And I think we'll have to stop it there. I'm sure we could have talked about this a lot more. But Curt and Brandon, I appreciate you both joining us today. Thank you, everyone, for tuning in. Stay tuned for our next presentation. And certainly, if anyone has any follow-ups, feel free to reach out, and we can help try to facilitate that as well. Thank you, everyone, and take care.

Thanks. Bye. Take care.

Take care, everyone.