R1 RCM Inc (RCM) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Accretive Health second-quarter 2010 earnings conference call. My name is Oneka, and I will be your audio operator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Gary Rubin, Senior Director of Finance. Please proceed.

Good morning, and thank you for joining us. With me on the call today are Mary Tolan, the Company's Cofounder and Chief Executive Officer, and John Staton, the Company's Chief Financial Officer.

Please note that earlier this morning, Accretive Health issued a press release announcing the Company's second-quarter 2010 results. A copy of that release is available in the Investor Relations section of the Company's website at www.AccretiveHealth.com.

Certain statements contained in this conference call may be considered forward-looking as defined by the Private Securities Litigation Reform Act of 1995. In particular, any statements made about Accretive Health's expectations for future financial and operational performance, expected growth, new services, profitability or business outlook are forward-looking statements. Investors are cautioned not to place undue reliance on such forward-looking statements. There is no assurance that the matters contained in such statements will occur, since these statements involve various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements.

These risks and uncertainties include those listed under the heading Risk Factors in the initial public offering prospectus filed by the Company with the SEC on May 20, 2010, which is available on the SEC's website, as well as in the Investor Relations portion of Accretive Health's website at www.AccretiveHealth.com.

The forward-looking statements made on today's call are based on the Company's beliefs and expectations as of today, August 12, 2010 only, and should not be relied upon as representing the Company's views as of any subsequent date. While the Company may elect to update these forward-looking statements at some point in the future, Accretive Health specifically disclaims any obligation to do so, even if its views change.

Please note that today's discussion will include references to certain non-GAAP financial measures. Please refer to today's earnings release for more information on these non-GAAP measures and reconciliation to the appropriate that GAAP measurements.

After the conclusion of Mary and John's prepared remarks, they will be available to answer your questions. At this time, I would like to turn the call over to Accretive Health's CEO, Mary Tolan.

Thank you, Gary, and good morning, everyone. As this is our first earnings call, I wanted to actually open our prepared remarks by providing a brief overview of our business, which would give you a sense of Accretive Health's strategy, value to customers and differentiation from alternatives in the market.

We work with healthcare providers, which are large acute-care hospital systems and the large physician groups who are affiliated with them. And as you know, providers today are really faced with enormous financial challenges that stem from many sources, but the least of which is not this very, very challenging financial revenue process that is as complex as you would find in any industry.

One of the direct results of this complexity is substantial yield loss, so that hospitals and physician groups who generally have very lean operating margins to begin with, often only 200 to 300 basis points, are leaking away significant amounts of their revenue every day as a direct result of this complexity.

We help address this fundamental problem with an end-to-end process that starts with a patient scheduled for care with the provider and ends at the point that the entire bill is paid. We help bring out of this process the errors that result in yield loss, and we do this through a combination of people, process and proprietary technology.

Our leading proprietary technology platform drives results within and across the revenue cycle process, with full end-to-end visibility. And we and our customers share financial gains resulting from our solution, which directly aligns our objectives and interests with our customers. This, which we refer to as a results-accountable business model, is the core driver of the significant results we achieve for our customers.

We do this without asking our customers to incur any incremental upfront expenses. Our base fee is the medical providers' existing revenue cycle budget. Our customers pay for results, not for inputs.

In addition, our mature customers typically achieve 400 to 600 basis points of additional revenue from those same episodes of care, which has the potential to more than double the operating margin for our provider customers.

During 2009, the measured cash benefit delivered to our clients was $310 million.

The revenue cycle market opportunity is substantial, as we currently have only a 1% penetration of a potential $50 billion revenue cycle management market domestically. We have laid this foundation to capture this growth by penetrating key market segments with world-class referenceable clients who are well respected leaders in their respective market segments. So the clients that we have obtained so far really address all the major segments of the market.

Before we transition to current quarter results, I want to highlight our target financial model for new investors who may be on the call. Through 2014, we are targeting a compound annual revenue growth rate of 25% to 30%, and we expect that we will be able to achieve an adjusted EBITDA margin between 14% and 18% in 2014. The increased adjusted EBITDA expansion is primarily driven by the increasing average maturity of our customer portfolio and the increased scalability of our operating model.

Turning to the quarter, we are seeing really opportune strategic shifts in the business and changes to the economic environment. With the greater clarity around the impact of the recent passed healthcare legislation, we're observing hospitals looking to acquire physician practices, or at least create tighter partnerships, given the trend toward accountable care organizations. This creates increasing opportunity for Accretive Health in two ways.

First, as our current clients are adding physician practices, we can expand our revenue cycle services for these clients, picking up this additional revenue on the physician side. It is creating more interest and market traction also for our quality and total cost of care offering, as this offering provides the end-to-end enabling platform to actually implement an accountable care organization.

In addition, continued weakness in the economy is resulting in self-pay growth and decreasing propensity of patients to pay their portion after insurance, and these are contributing to increased bad debt. In addition, healthcare legislation will certainly slow the growth of government reimbursement rates, and most likely reduce these reimbursement rates. So these trends are creating urgency among healthcare providers to dramatically reduce net revenue yield leakage and improve revenue cycle operating efficiency. And we have critical solutions at this challenging time for the industry.

Large physician practices, which have a higher revenue cycle cost per net patient revenue dollar process and thus larger base fees for Accretive Health are becoming a greater part of our revenue cycle business. In addition, is we expect to have meaningful revenue from our new quality and total cost of care business into the future. So as a result, we are transitioning to a more instructive revenue metric. The new metric is projected, contracted annual revenue run rate, which is the expected total net services revenue for the subsequent 12 months for all healthcare providers for which we are providing revenue cycle management services and/or quality and total cost of care services that are under contract as of the end of the reporting period.

We are very pleased with the rate of additions to our customer base thus far in 2010. The total additions to our projected contracted annual run rate during the six months ended June 30 is $104 million to $107 million. In addition, our projected contracted revenue run rate increased to $614 million to $626 million, or approximately by 27% from June 30 of 2009 to June 30 of 2010.

In the last year, we've enhanced the quality and size of our sales team. We are now seeing the results of these investments. As of today, the Company has $627 million to $640 million in projected contracted annual revenue run rate. We currently are in the contracting phase, which is the last and final phase of the sales process with a number of healthcare providers, both hospitals and physician practice groups. When these sales are closed, it will increase our projected contracted annual revenue rate by approximately $64 million and move our contracted annual revenue run rate to $690 million to $704 million as a range.

Additionally, our pipeline includes a number of substantive sales campaigns, including four large systems, each of which can contribute $60 million or more in projected contracted annual run rate.

We estimate that the Company's projected contracted annual run rate at the end of 2010 will exceed $710 million, and an increase of at least 38% from the $510 million to $519 million range that we exited 2009. The Company's ability to exceed $710 million in projected contracted annual run rate at December 31, 2010 will depend on the timing and success in closing the current strong pipeline of customer opportunities.

We are also pleased with the notable increase we are seeing in our existing customers' interest in adopting our shared services operating model. We are presently in detailed discussions concerning the transition of multiple existing customers' revenue cycle operations into our shared services. We expect these transitions to begin in the coming quarters, and these adoptions could increase the use of our shared services model from 33% of our current revenue mix to 52% of our current revenue mix. We do expect that this will lead to a slight reduction of future net-based fees, as we share with our customers a portion of the incremental cost savings achieved after the transition is complete.

However, these upcoming adoptions are a positive development, as our profit margin improves as customers begin using our shared services operating model.

Our new offering in quality and total cost of care is also meeting with significant market traction. This offering provides the end-to-end infrastructure, as I mentioned earlier, and capability to allow integrated healthcare delivery organizations to reduce medical costs and improve the quality of care that is being provided to patients. We are currently in that contracting phase, again, the last and final phase of the sales cycle, with two large health systems and expect these to close in the coming quarters.

I would now like to have John Staton, our CFO, discuss our financial results for the second quarter. John.

Thanks, Mary, and good morning, everyone. Our results for the second quarter were strong, with continuing top-line growth, margin expansion and improved profitability. These results were a direct derivative of the increasing level of value we deliver to our customers through both net revenue yield improvements and operating efficiencies.

The financial metric that we find the most instructive in measuring the progress of our business is adjusted EBITDA. We define it as net income adjusted for interest income or expense, non-cash expenses, such as depreciation and amortization, our income tax provision, and expenses related to stock option or stock warrant issuances.

Strong incentive fee payments in the quarter, combined with increasing operating cost efficiency, allowed the Company to more than double its adjusted EBITDA to $12.3 million for the quarter ended June 30, 2010 as compared to $6 million for the quarter ended June 30, 2009. Our press release contains a reconciliation of adjusted EBITDA, adjusted net income and adjusted net income per diluted common share with the comparable GAAP figures also included.

We are very pleased with our total net services revenue for the second quarter of 2010, which is $151.9 million. This is an increase of $26.2 million or 21% over the second quarter of 2009. Our base fee revenues for the quarter ended June 30, 2010 were $128.2 million, an increase of 21% from the same period last year. Again, our incentive payments for the quarter were $20 million, with a year-over-year increase of $3.5 million or 21%.

The base fee component of our net services revenue for the quarter ended June 30, 2010 would have been even greater except for the lower-than-anticipated inflation adjustments in both base fees and the associated hospital employee labor costs. Our base fees typically increase annually due to an inflation factor that is highly correlated with actual payroll increases that our hospitals implement across their entire hospital. The impact to second-quarter 2010 revenue of the lower-than-expected inflation adjustment is estimated at $2.2 million.

This trend has virtually no impact on income from operations, net income and adjusted EBITDA, as base fees and unit labor costs move together. Had the expected inflation adjustment factor taken place, revenue for the quarter would have been approximately $154.1 million.

Operating margin increased $11.2 million over the same period last year, or 49%, to $33.9 million for the three months ended June 30, 2010. The increase consisted of $7.3 million related to increased level of cost efficiencies in the performance of our managed services contracts, net of shared customer cost savings. Other portions of the increase in operating margin are the $3.5 million in additional incentive payments and a $0.6 million reduction in the costs associated with the issuance of stock warrants last year.

Share-based compensation expense, which affects both infused management and SG&A expenses, increased $2 million from the same period last year to $3.6 million for the three months ended June 30, 2010. This is a result of new option grants for executive officers, employees and nonemployee directors. These new grants, combined with the natural increases related to the growth of our business, were key factors driving the increases in infused management and SG&A expenses in the quarter.

At June 30, 2010, we had $119.9 million of cash and cash equivalents, an increase of $76.2 million from December 31, 2009. The main driver of this increase was the $82.9 million in net proceeds from our IPO. This increase was somewhat offset by $5 million of capital expenditures in the quarter. We believe that our healthy cash position combined with no long-term debt or capital lease obligation clearly demonstrates our Company's financial strength.

I would now like to summarize our plans for providing financial guidance in the future. Our business model offers excellent visibility to the coming annual level of net services revenue and adjusted EBITDA. Historically, we have had visibility to approximately 80% of our planned revenues and approximately 100% of our planned adjusted EBITDA at the beginning of the calendar year.

At the beginning of 2011, when we report results for 2010, we will provide forward guidance for 2011's projected contracted annual revenue run rate and adjusted EBITDA. At the time of our Q1, Q2 and Q3 earnings calls, we will advise you of any changes to the previously provided annual guidance.

Since this is our first earnings call, I would like to advise you that management currently projects that full-year 2010 adjusted EBITDA will be $43 million to $46 million. Reiterating the guidance that Mary shared earlier on the call, management projects the contracted annual revenue run rate at the end of 2010 to exceed $710 million.

Operator, we would now like to open up the call for questions, please.

(Operator Instructions) Atif Rahim, JPMorgan.

Could you provide some color on the new metric you are providing, the projected annual revenue run rate relative to NPR? So Mary, for example, you said the hospital, the four large hospitals you're adding could add about $60 million to this number. But just to give us an apples-to-apples comparison, what would be the NPR added by those hospitals?

Typically for a hospital, the run rate would be about 4.3% of the hospital's NPR. And the reason why we think it is more instructive to actually move to run rate is that there is much more variability in that when you come to the physician practice side. In other words, their base fee could be anywhere from 6% to 10%, so there is a huge amount of dispersion.

And then we also think with the total cost and quality contracts, which has really got another complement of revenue relative to the revenue of the customer, it is just a lot more illuminating to move to this actual contracted run rate. It just takes all the guesswork or all the converting out of the process for you.

Okay, got it. So essentially, it would be about $1.5 billion if we were just looking at your hospital revenue that you are adding?

Exactly.

(multiple speakers) right there.

Second, just a follow-up on the shared services metric. This increase going from 33% to 52%, that is -- I'm assuming that's within your numbers on the base fee revenue side.

And then secondly, how should we be modeling this going forward? What kind of timeline do you expect this to occur over? And then as we look out to adjusted EBITDA for the back half of the year, how should we looking at that on a sequential basis? Thank you.

Thanks for the question. Very good one. I think as we think about our shared services business and starting to impact, we will start to see that roll out gradually over the next three to four quarters, both in terms of expansion of our adjusted EBITDA margin and continued -- it would be some impact, although minor, to our base fee and base fee growth, as we, again, share a portion of those savings from the shared service center with our clients.

So that -- I think the second part of your question, I can't quite recall right now.

It is actually all upside. One thing we just want to be really clear about is it is something where we can absorb the transition costs without having any diminution in our margins. And actually then, it begins to throw off increases or margin expansion as we transition. So we will complete the transitions on these over the course of the next two quarters, and then as John mentioned, the margin expansion begins to unfold from there.

Got it. Thank you.

Glen Santangelo, Credit Suisse.

I just wanted to follow up, Mary, on some comments you made just with respect to the pipeline. You gave us a couple numbers, and I think you said that the four large systems would increase your annual revenue run rate by $64 million. But then I think later in your comments, you said that there were two large systems that you expected to close in the coming quarters. Could you just be a little bit more clear in terms of maybe what is expected within that $710 million annual revenue run rate?

Yes, I mean, basically Glen, I am glad you asked, because I really want to make sure that this information is being absorbed properly. So we actually have $64 million that is in the final stage of a sales campaign, which is the contracting phase. These have a very, very, very high probability of moving to closure. So those alone move us into this $690 million to $704 million.

Additionally, the pipeline is so strong that there is another four large systems, each of which can contribute another $60 million of annual run rate. So that would be all upside to that range. And those are all in substantive stages of the sales campaign, but not quite to contracting yet.

Okay. And then you said that there were two that you expected to close in the coming quarters. Is that two part of that group of four you just referenced?

Glen, those are separate actually. That refers to our new offering in the quality and total cost of care. We are in detailed contract negotiations with our new offering, which are independent of the numbers that we just shared -- that Mary just shared with you.

Okay, and then -- I'm sorry.

So just to clarify, all those numbers were on the revenue cycle offering. And there are two, again, in contracting phase in the new offering in total cost and quality.

Just to follow up on a question on shared services, it kind of sounds like you've had a lot of success in terms of selling that offering, at least -- even since the IPO. Is it fair to say that you think that given that shared services can be over 50% of your revenues, or at least representative of 50% of your revenues, is it about half your customers now are using shared services? Is that the right way to think about it?

I think that's right. At least half of the revenue represented by our customers, maybe not the instances. But it's actually probably close to half of the actual instances of customers as well.

It's very close to half, as well.

Okay. And then I guess my final question, you know, John, you kind of referenced 2011 guidance. When do you anticipate giving that 2011 guidance? I think I missed that.

We will share that when we share with you our full 2010 guidance. We haven't set a date for that, but more likely than not it will be toward the end of February of 2011.

Okay, perfect. Thanks.

Daryn Miller, Goldman Sachs.

Just wondered if you could remind us the impact to your business model from weaker utilization that we are seeing across healthcare, does that have any impact?

It doesn't. You know, we actually have our base fee, which really stems from what the costs were historically, and then we have our gain share fees based on lift improvement. So any sort of changes in terms of the lower utilization, in essence, is not really affecting our revenues or our margin.

Great. Just on the pipeline, a lot of activity there. Any characteristics there in terms of a lot of penetration or increased penetration with some of the religious centers, or is your pipeline pretty diverse at this point across all the different types of hospital systems?

It is actually very diverse, a good smattering of the academics, of the community-based and of the faith-based. But we are seeing that there is a tremendous amount of strategic synergy between our new offering on being able to assist a provider in taking on accountability for driving down total cost of care for populations and our revenue cycle offering. So it has a tremendous amount of strategic impact talking about the two in combination. And we are seeing then providers respond with, let's move immediately on revenue cycle and let's explore even more deeply this second offering.

Great. Thank you.

Corey Tobin, William Blair.

Just a couple, if I could, please. Coming back to the run rate revenue metric that you are referring to, I just want to be clear -- this includes both base fees and incentive payments for the next four quarters, as you currently have it sold. Is that correct?

That's absolutely correct, Corey.

Okay, so it doesn't include the other services revenue?

I'm sorry; it does include the other services revenue that has been contracted. Many of those are long contracts as well, but it would only be for the length of what those contracts are.

Okay, so it's total revenue, basically?

It's total revenue, yes, under contract.

Okay, great. And then shifting gears for a second to the clinical product that Mary talked about in her prepared remarks, a couple things there. One, you said you are in discussions with a couple of potential clients. Is these something that you expect to close here in 2010? And additionally, can you give us a feeling for what sort of revenue you might see from a clinical contract per client?

Yes, so the answer to the first question is yes, we expect the two that are in contracting to close in 2010. And in terms of the revenue potential, for every billion of total cost of care that we are taking on, our revenue would be about $60 million annually.

Okay.

And by the way, the total cost of care that we are taking on is not generally equated to the client's NPR, because the hospital revenues will only be a portion of the total cost of care for a population, generally representing only about 40% of it. So the total cost of care opportunity is larger than all of the NPR in the hospital segment.

Great. And Mary, just to clarify, the $60 million you're referring to there, that is a combination of both kind of a base fee, as well as some sort of incentive payment?

That's exactly right. So our new offering has the same sort of structure, base fee and incentive payment.

Great. Congrats on the margin. Thanks for taking the questions.

Paul Nouri, Noble Equity Funds.

I was wondering if you had the customer and hospital count at the end of the quarter.

We talked -- hospital count was 61 at the end of the quarter. And customer count -- we'll get it to you -- I think 23, I believe, in terms of our major contracts.

Okay, and I noticed an increase in the accounts receivable. Is that a seasonal thing or --?

It's a little bit of a seasonal thing. A number of our hospital clients finish their fiscal years on June 30. So as you will see, our AR is up from the end of the year, but only up a little bit from 12 months ago. We were about $41 million in open AR at June 30 of 2009, and we are now at about $47 million of open AR at this time.

We do expect that the AR would not increase through the rest of the year and likely decrease, as we've seen our patterns in prior years.

Okay, thank you.

Atif Rahim, JPMorgan.

I just had a question on the tax rate during the quarter. That was much higher than we had expected, higher than we've seen in the past. So anything going on there, and how should we be looking at that going forward?

It is really -- Atif, good question. We've -- basically dealing with expanded volume in some states that have a gross receipts tax. And that is a tax that we've actually been working with. And we do expect as we go forward that our tax rate will probably be in the 40% to 42% range as we go forward to future quarters, as we've been able to address some of this in a couple of states that we are at. But we still have a situation where we have a gross receipts tax in effect in the second quarter -- and for the first half.

Okay. And in the third quarter, that is when it drops to 41%, 42%, or are we expecting that to be at the high 40s for 3Q?

It will be closer -- certainly in the fourth quarter, we will make that transition to the lower rate. But we would expect it to be certainly less than it is here in the second quarter in the third quarter.

Got it. Thank you.

Eric Coldwell, Robert W. Baird.

When you enter a year, you comment that you have about 80% visibility into your forward revenue. And if you hit your target of having $710 million of projected contracted revenue going into 2011, could we make this as simple as suggesting that perhaps you would gross that number up by the 20% visibility that you don't have, such that 2011 revenue, you are currently looking at a number close to $888 million. Is that a fair way of looking at it?

It is one way of looking at it, but we actually see that we -- that number, the $710 million, does not even include those other four large systems or the rest of the pipeline. So that is only going with the things that are in the contracting phase.

Got it.

So -- but at this time, we are not trying to give you guidance for next year on the annual, but just giving you as much visibility as we can to our pipeline.

Got it. Second question is the commentary on adding -- or seeing more activity with physician groups. Are these physician groups that are affiliated with your IDNs that you are working with or the hospitals that you are working with, or are you actually contracting separately with physician groups that are non-affiliated at this point?

These are the ones that are affiliated, but we are noticing as a trend is that more are becoming affiliated. And so health systems are looking strategically to tether, if you will, physicians more closely to them, whether it be by stronger forms of affiliation, whether it be in joint contracting relationships with payors or whether it even be in acquisitions or hiring physicians.

Do you have a sales force targeted on going after physicians separately, or is that a goal, or is the primary objective at this point to capture the physician groups affiliated with your current account base?

It's really the latter. It's really staying focused on these larger physician groups that are moving into the web, if you will, of the health systems.

Got it. Thanks so much.

(Operator Instructions) Paul Nouri, Noble Equity Funds.

Can you talk a little bit about the Ascension contract and whether you guys are addressing that now, or whether that is something you will begin to look at maybe in the start of 2012?

Everything with our Ascension relationship is very strong. We actually have two additional hospitals in our pipeline that are affiliated with Ascension, and we would expect that relation to be strong.

Certainly as we get toward the end of 2012, the middle and the end of 2012, we'll give you updates in terms of how we are progressing on the magnitude and the length of the renewal contract.

Adding to John's remarks, even the adoption rate of shared services has been increasing within the Ascension Ministry population. So both growth in new ministries, as well as adoption rate of shared services.

Okay. Thanks.

Corey Tobin, William Blair.

One quick housekeeping follow-up question, if I could. John, can you give us the anticipated basic and diluted share count, both for the third quarter and what you expect for the full year?

Yes, our share count would be in the 98 million to 99 million range for the third and fourth quarter. This is an increase mostly because all the new shares we issued during the IPO will be in effect for the full quarter versus the second quarter, just the partial quarter we had at that time. Does that address your question?

And the basic share count?

Basic share count would be about 90 million to 92 million. It really depends on the amount of share -- or option exercises we might have at the tail end of the year.

Great. Thank you.

At this time, there are no further questions. I would now like to turn the call back over to Mary Tolan or John Staton for closing remarks.

Thank you, everyone, for participating on the call. And again, we are really pleased with the progress that we are making and thank you for your time.

Thank you.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a great day.