Healthcare services firm Envision Healthcare (EVHC 28.87 -13.73 -32.2%) is getting pummelled this afternoon after the company misses on both the top and bottom lines for Q3, and guides Q4 earnings and revenues behind the Street expectations. Further dragging shares is the news that the Board of Directors has authorized a full review of a broad range of alternatives to enhance shareholder value.
First, the Q3 report missed on both the top and bottom lines; earnings of $0.73 and revenues of$1.99 billion, despite growth of 142.0% year-over-year, were below Street views. Some of the miss had to have been accounted for, though, as the company has a solid stronghold in the South – the region most impacted by recent unfavorable weather. Specifically, according to EVHC, its Physicians Services segment holds a significant presence in Arizona, California, Florida, New Jersey and Texas.
With that being said, net revenues for the Physician Services segment were $1.68 billion, an increase of 7.6% from $1.56 billion during the prior-year period. This includes an estimated impact of $19.0 million due to the aforementioned storm-related disruption. The revenue growth was driven by contributions from acquisitions of 9.6% and same contracts contributed 0.4%. These were partially offset by net contract terminations. New contracts contributed revenue growth of 6.7%, while revenue declined by 7.0% due to contracts terminated in the latter part of 2016, resulting in a net decline of 0.3% from new contracts. New contracts were also impacted by a 2.1% decline due to the previously announced population health contract termination. Same-contract net revenue growth was 0.6% in the third quarter of 2017 when compared to the prior-year period. EVHC estimates that the storms had the effect of reducing same-contract revenue growth by about 1.1%.
In Ambulatory Services, net revenues were $309.4 million, which compares to $314.6 million for the prior-year period. The company estimates that storm-related disruption reduced Ambulatory Services revenue by $3.0 million. Day adjusted same-center revenue increased by 0.8% for Q3 due entirely to an increase in net revenue per procedure as same-center procedure volume was unchanged from the prior-year period. Excluding the estimated impact of storm-related disruptions, day-adjusted same-center revenue grew by 2.0%.
The company also adjusted its Q4 guidance. For the quarter, EVHC now expects to generate revenue of $1.88-2.02 billion, Adjusted EBITDA of $182-202 million, and Adjusted EPS of $0.44-0.54. Further, EVHC is estimating emergency medicine patient volume for Q4 will be lower than the run rate of Q3, and that the revenue per encounter for anesthesia services will be at levels experienced during Q3. The company had previously anticipated an increase on emergency medicine volume, relative to prior-year comparisons, as well as anesthesia rate growth. In addition, due to the rate of new contracts signed in 2017, EVHC expects to incur higher-than-anticipated startup costs. Lastly, the company is adjusting its outlook for Evolution Health to a slight loss for Q4.
On a separate note, the company also announced that its Board of Directors, in consultation with management and financial and legal advisors, has unanimously decided to initiate a full review of a broad range of alternatives to enhance shareholder value. There can be no assurance that this review will result in a transaction or other alternative of any kind. Further, EVHC does not intend to provide updates on its review until it deems further disclosure is appropriate or required.
The strategic review comes just slightly under three months after the company sold its American Medical Response unit to KKR’s (KKR) portfolio company, Air Medical Group. In addition, management blames the underperforming report on the impact of the recent hurricanes in the south and the continued deceleration of healthcare services in key markets following two years of higher demand as a result of the Affordable Care Act. It’s obvious by the stock’s reaction then that investors are not pleased with the latest report and guidance. We’ll see how much confidence EVHC can win back with this strategic review.