R1 RCM Inc (RCM) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 1st Quarter 2011 Accretive Health, Incorporated Earnings Conference Call. My name is Anne and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen only mode.

(Operator Instructions)

We will be facilitating a question and answer session following the presentation. I would now like to turn the presentation over to Mr. Gary Rubin, Senior Director of Finance. Please proceed, sir.

Thank you. Good morning and thank you for joining us. With me on the call today are Mary Tolan, Accretive Health's co-founder and Chief Executive Officer, and [John Staton], our Chief Financial Officer. Earlier this morning, we issued a press release announcing Accretive Health's 1st Quarter 2011 results. A copy of that release is available in the Investor Relations section of our website at www.accretivehealth.com.

Please note that 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 Company's Quarterly Report on Form 10-Q for the year ended December 31, 2010, filed on March 18, 2011, which is available on the Investor Relations portion of our website as well as the SEC's website.

The forward-looking statements made in this presentation are based on the company's beliefs and expectations as of today, May 11, 2011 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 a reconciliation to the appropriate GAAP measures. After the conclusion of Mary's 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 Mary Tolan, Accretive Health's CEO. Mary, please go ahead.

Thanks, Gary, and good morning everyone. We are starting 2011 right on target with our expectations. Our first quarters historically are seasonally our lowest quarter and yet we've experienced strong top line growth, margin expansion and increasing profitability. Our net services revenue for the quarter increased 30% year-over-year to $163.7 million and our non-GAAP adjusted EBITDA grew 91% to $8.4 million year-over-year.

We're beginning the second quarter with a very strong book of business. Our projected contracted annual run rate of revenue, or [PCAR], is currently in the range of $765 million to $781 million. At the midpoint of the range, PCAR increased by $156 million, or 25% versus this date last year.

The increase in PCAR is accelerating. Since our call six months ago, we have added $111 million of new contracts which is the midpoint of the PCAR range -- represents a 34% annual growth rate. And today we have $200 million to $240 million in potential annual revenue and contracting -- the last stage of the sales campaign is this contracting stage that we track.

Now based on this progress and our robust pipeline of other sales opportunities, we are confident that our PCAR will exceed $900 million at the end of the year.

For those listening for the first time, we define our PCAR as the expected total net service revenue in the next 12 months for all health care providers which are currently under signed contracts. We believe that this is the most instructive metric for gauging growth in our business as it really eliminates any of the guesswork and takes only those contracts that are signed and projects the known revenue from those contracts for the next 12 months.

We see opportunities to expand our revenue cycle management business -- are increasing as providers face mounting financial pressure. And at $50 billion, the revenue cycle management market is enormous and we have today only a 2% market penetration, so we have lots of opportunity here.

We're gaining traction in this market as providers are beginning to hear more and more about our unique business model and the results that it's generating for our customers. We have a number of customers in our pipeline now that have come from this sort of hearing about it in the market from other customers.

first, we are a results-accountable organization, which means that we only earn our margin when our clients are improving their margins, and therefore, they're not spending one nickel more than their budget or what they were spending before we began unless we are lifting their results and getting them incremental margin contribution. So we're fully aligned.

Second, we're the only company that truly provides an integrated revenue cycle solution integrated from the standpoint of people, process and technology, but also integrated from the standpoint of from the front of the process all the way through to the back. And this allows us to seamlessly integrate our learning along this whole continuum on how we are able to identify and stop revenue leakage.

We're also committed to accelerating the adoption of our shared services solutions. Our Chicago shared service center, which is one of our centers, came online this past quarter and is now operating with full conversions completed from multiple customers with more pending.

We recently hosted a number of CFOs at our operation to give them really a tangible way of seeing the model in operation. We received a tremendous amount of positive feedback. One of our clients, Mark Doyle, who's the CFO at St. Vincent's in Jacksonville, shared with us that this visit and briefing and walk through of the center enabled us to see firsthand the power of the technology, the operating discipline and the quality of the people behind the model. This is truly impressive.

Another one of our top initiatives for 2011 is to establish a leadership position in population health management which is driving providers to establish accountability in the care of populations and in patients. Our quality and total cost of care program at Fairview in the University of Minnesota is off to a terrific start and its initial results are exceeding our expectations. We're seeing a substantial decrease in readmission rates and a measureable reduction in costs for the patients we've identified as high risk that are included in our care coordination program.

Based upon the progress of these program metrics, Fairview is already an enthusiastic customer reference and has been hosting exploratory visits for other prospective quality and total cost of care customers. Our relationship with Fairview also reaffirms our market approach, and that is we really believe that partnering with highly respected health care providers who are taking the lead in population-based health management is the way to go.

Some of the most prestigious health care institutions in the country now are in active discussions with us about this offering and we're seeing very robust interest and demand. Given this degree of interest, we believe that we're well situated to be selective about which clients we'll actually be able to work best with and to innovate with and collaborate with beyond Fairview. We're on track to add new customers by the end of the year.

We see a big opportunity in population-based health care management which we believe is equally applicable to opportunities in the private and government sectors. Every hospital's Chief Executive that we meet and that we know is under pressure that is unassailable relative to costs. And it's creating huge opportunities for providers to step up and engage in this patient population approach to improving outcomes.

The quality and total cost of care opportunity we believe more than doubles our total revenue opportunity and we view this business as a significant way to attract clients and create value in health care and we plan to continue to invest in it.

Another key initiative for 2011 is building our physician advisory services offering. Now this service assists hospitals in maximizing their compliant revenues associated with emergency room visits and dealing with similar patient classification issues. Through the use of our web-based portal, emergency room doctors can talk to and send data to our highly trained physician advisors who help them reach informed classification decisions.

This service aims to reduce the risk of patients being mis-classified and causing either compliance concerns or lost revenue. We believe the market for our physician advisory services is approximately at $1 billion and we are one of only two firms with scale that are addressing it. This is another business opportunity that represents upside for the company.

Accretive is a built-for-purpose company. You've heard us mention that before but it's also a company that's being built to last. We're committed to making certain that our rapid growth is well supported by investments in our people, our processes and our technology. This quarter, we invested an incremental $2.5 million to bolster our sales and marketing and we have made a number of key additions to our sales team in recent months.

As an example of the caliber of talent that we're attracting, we recently recruited Dave Morlock, the CFO of the University of Michigan Health System. He brings a great deal of credibility and marketing muscle to our team and he's one of many operators and operating executives from the industry who have decided to join our company as they see us becoming an important part of the infrastructure of the industry.

Looking ahead, we will continue to build our team to ensure sustainable long term growth and leadership. We remain laser focused on growing the business and delivering outstanding value to our clients. Let me turn things over to John Staton, our CFO, for more financials.

Thanks, Mary. Good morning, everyone, and thanks for joining our call today. Our results for the first quarter were in line with our expectations. Net services revenue for the first quarter grew 30% to $163.7 million from $125.9 million in the first quarter of 2010.

Net based fee revenues were $141.7 million for the first quarter, an increase of $30.4 million for the prior year. Incentive payments were $17.3 million for the first quarter, an increase of $5 million over the first quarter of 2010

Given the seasonality of our business, incentive payments are strongest in the fourth quarter and our first quarter typically represents 55% to 65% of the prior fourth quarter's incentive payments.

For those new to Accretive Health, incentive payments are a share of the benefits we generate for our clients. Other services revenue was $4.7 million for the first quarter of 2011, an increase of $2.4 million over the first quarter of 2010.

Our operating margin in the quarter was $34.2 million, or 20.9% of net services revenue as compared to $23.6 million, or 18.8% of net services revenue for the first quarter of 2010.

Our infused management technology expense was $19.5 million in the first quarter of 2011, or 11.9% of net services revenue as compared to $14.9 million, or 11.8% net services revenue for the prior year's quarter.

Selling, general and administrative costs were $14.2 million for the first quarter of 2011, an increase of $6.7 million over the first quarter of 2010.

Let me provide some more specifics. (inaudible - background noise) costs are higher than the first quarter of 2010 primarily as a result of $2.3 million increase in stock compensation expense, an increase of $0.9 million public company cost, $1 million in expenses related to our secondary offering in March, and, as Mary mentioned, we've invested an incremental $2.5 million in sales and marketing this year versus last.

These four items accounted for the vast majority of our growth in SG&A in the quarter. We believe adjusted EBITDA, a non-GAAP measure, is the financial metric that is most instructive in measuring our margin progress. As Mary mentioned earlier, PCAR is the metric that best indicates our revenue growth progress.

For the first quarter of 2011, our adjusted EBITDA was $8.4 million, an increase of $4 million, or 91% over the first quarter of 2010. Included in these results were the $0.9 million of incremental expenses associated with being a public company costs, the $1.5 million of increased investment in our new quality and total cost of care offering, and the $1 million of expenses associated with our stock offering in March.

Due to the revenue seasonality in the first quarter that I mentioned earlier, our first quarter adjusted EBIDTA typically accounts for 10% of our full year adjusted EBITDA. Our adjusted EBITDA margin was 5.1% in the first quarter of 2011, an increase of 160 basis points over the 3.5% in the first quarter of 2010. The increase in adjusted EBITDA margin reflects the operating leverage inherent in our business and the increase in (inaudible - background noise) which occurs as our revenue cycle management contracts mature.

As we continue to scale our business, we expect to generate increases in revenue yield which we anticipate will translate into higher incentive payments as well as higher cost efficiencies, both of which will positively impact our margins.

Net income attributed to common shareholders in the first quarter of 2011 was [$0.2 million] and included non-cash employee stock-based compensation expenses of $6 million in the first quarter of 2011 versus $2 million in the first quarter of 2010.

The $4 million increase in stock compensation is due to the timing and amount of equity grants. Prior to our IPO, many members of our senior management team were fully vested in their equity grants. Consistent with our compensation strategy and management retention program, we made additional equity grants to these individuals in conjunction with our IPO. This resulted in the higher stock-based compensation expense in Q1 2011 as compared to Q2 of 2010.

Non-GAAP adjusted net income was $3.7 million in the first quarter of 2011 as compared to $1.3 million for the first quarter of 2010. Non-GAAP adjusted net income for diluted common share was $0.04 for the first quarter of 2011.

Now, turning to our balance sheet. Our balance sheet remains healthy, with $119 million in cash and equivalents and no debt. During the quarter, capital expenditures were $2 million. In addition, cash from operations declined by $45 million, primarily due to $10 million in annual bonuses paid during the quarter and a $39.8 million increase in accounts receivable. $24 million of these accounts receivable that were due during the quarter were paid on April 1, one day after [this report].

As we have mentioned before, we believe that our strong balance sheet provides us with ample resources to invest in organic growth and initiatives such as our New Qual and Total Cost of Care offering and has been a key criterion in winning new business. Before I open up our call to your questions, I will provide an update on our full year 2011 guidance.

Based on our new contract awards to date and the status of our current contract negotiations and strong pipeline, we are reaffirming our previously issued guidance. We expect our projected contractual annual revenue run rate at December 31, 2011 to exceed $900 million. For our full fiscal year, we are expecting net services revenue of $835 to $850 million and non-GAAP adjusted EBITDA $80 million to $86 million. The midpoint of our projected guidance range for 2011 adjusted EBITDA represents an 84% growth over 2010 adjusted EBITDA.

In addition, we are expecting our non-GAAP adjusted net income per diluted common share to be in the range of $0.42 to $0.45. Given the seasonality of our incentive payments and our ongoing investment in our Qual (inaudible - background noise) cost of care service offering, we anticipate that roughly one third of our adjusted EBITDA will be recognized in the first half of the year and the other two thirds will be recognized in the second half of the year.

We would also like to remind you that we continue to expect our Quality and Total Cost of Care business to break even for the year; however, we believe that ongoing investments in this business in the first half of the year will result in positive contributions to EBITDA in the second half of the year. With that, I'd now like to open up the call to your questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Sebastian Paquette with Goldman Sachs. Please proceed.

Good morning, guys. On the backlog of $200 million to $240 million, the three hospitals which were recently acquired by Ascension -- I believe they are roughly about $1 billion in accumulated net patient revenue -- are those included in your backlog for the quarter?

They are not.

Okay.

We actually have a convention with Ascension that they actually already have a contract in place so it's when we sign the affiliate agreement and what you have there with the -- and I think you're referring to the Alexion deal in Chicago -- and they have not concluded that agreement yet. So they have to become an affiliate of Ascension before we'd be able to proceed.

And when do you expect them to become an affiliate?

I don't know that anyone has it really down to a specific date -- they're working through all the legal processes and they have a fair bit of legal and tax -- I'm sorry, legal and regulatory concerns, but as soon as that deal is done, I know that the leadership of Ascension has brought it to our attention and would like us to have it on our radar screen.

Okay. And then in terms of PCAR, if my calculations are correct from the third quarter of 2010, there's still about $50 million to $100 million in backlog that is now maybe 150 days or so old and I'm wondering what kind of the status is of that, flowing through to PCAR and what are you seeing as kind of average current conversion cycle from backlog to PCAR?

That's a great question. We do have a large deal but it is taking a little bit longer. It is on track and we think that it's actually very close to concluding and we think actually the actual deliberations they've gone through to get a lot of internal alignment and support for the deal on the long run will be very good for the partnership.

In terms of what this conversion cycle -- I mean, you know, as we've talked about, we don't have hundreds of sales in a year. Our business is lumpy and so averages are always difficult to discern, but I think we're thinking that the longer deals can be taking more like 180 days based on what we're witnessing with this one.

Okay, great. And then final question is: in terms of sales force recruitment, where do you stand now in terms of total sales force and when you think about a sales force hiring for your revenue cycle business throughout the remainder of the year -- I understand this is still largely reference-based market, but could you provide us with any projections for hiring going forwards? Thanks.

Sure. Right now we stand for our large core offering at 16 full time deal executives and in terms of hiring, we're actually right where we wanted to be for the whole year but we continue to actually be on alert for excellent leaders in the market, not unlike the one we announced here with Dave Morlock. So there's a number of people who have actually begun conversations with us and they're starting to see how our company can really become woven into the fabric of the industry and industry infrastructure and those types of people are just jewels. So we'll continue to be open to adding more even above and beyond what we're at right now.

Okay, thanks a lot.

And our next question comes from the line of Glen Santiago -- Santangelo -- I'm sorry - with Credit Suisse. Please proceed.

Yes, you got it. Thanks a lot. Mary, listen, I just want to ask a follow up --

I was going to say, Glen, I didn't do that.

That's okay. I just want to ask a follow up question on that backlog. I think you gave us a number [200 to 240] last quarter and obviously it's the same number this quarter. And so, given that the PCAR ran up, from last quarter to this quarter, is it safe to assume that some things got booked out of that backlog and maybe additional things got added to the backlog? Is that the right way to think about it?

Yes, that's exactly right, Glen, and it's a minor adjustment year to year in numbers but I think last time we announced [190 to 230], so you're right, out of that [190 to 230], [56] actually converted --

[57].

- [57] actually converted into new contracted revenue and then it was actually more than replenished with things that advanced into final contracting.

And maybe you can just give us one more little piece of info on that backlog. Roughly how many customers does it -- are in that backlog number of [200 to 240]? Is it just a handful of contracts?

I am going now -- I'm running through this. I believe there are six -- six bigger deals and there's also in this other service line, physician advisory, there 's -- each one of those are small, so there's, there's a number there, but that's probably not pertinent to your question.

Okay.

So what's in there are six larger deals in there.

Okay, and then secondly, if I can just ask another question on the quality and total cost of care initiative. John, it sounds like it's kind of break even for the year. Could you give us a sense for maybe how much more investment spending is going to be required and then maybe, Mary, if you just give us a sense for how the revenue model works in that business and how different it is versus the traditional revenue cycle business.

Yes, Glen, we expect to invest, continue to invest here in the second quarter in the quality and total cost of care. We expect it to go north of break even in the third quarter and then obviously contribute nicely in the fourth quarter.

And then in terms of how to think about this: for every $1 billion in total cost of care that we are addressing, and right now with Fairview, we're addressing about $1.5 billion, we actually will be working together to take about 25% of the cost out over a three year period.

And that would mean -- at full maturity then, our revenue will actually equate to around $60 million, but in year one, it's conservatively been put into our numbers to be a much lower number, maybe in the order of $15 million to $20 million and it's planned to be break even so as you progress through this capability it actually ramps up to $60 million. Actually, the $60 million would be just for $1 billion so it would actually be more like $75 million for just what's in scope right now.

Okay, (inaudible - multiple speakers)

It ramps up in a fairly consistent way through that time trajectory.

Okay, thanks, and John, maybe if I could ask just one last quick expense question. Basically if I look at your SG&A, clearly you laid out some things in that number that may not be repeatable. Obviously, the $1 million for the secondary that you guys did in [third] quarter, but you also said a $2.5 million increase in sales and marketing. Should that -- is that a good number to kind of go with going forward or should theoretically some -- were some of those investments one time in nature? I'm just trying to think about how to model that SG&A line.

That will be a sustained investment as we go forward, probably growing slightly less than revenues for the foreseeable year -- next year or two.

Okay, thank you.

And our next question comes from the line of Ryan Daniels with William Blair. Please proceed.

Yes, good morning. Thanks for taking the question. A couple on the quality and total cost of care. I think last quarter you mentioned that if we took a look at the pipeline on a forward 12-month basis, it might be covering around $50 million. Does that accelerate at all? Sounds like you're getting a lot more interest in some site visits to the Fairview reference accounts. Any color on what's included for that in the pipeline?

Well, in the late stage contracting, we don't have any that we have put into that category because that's where we're actually beyond any pricing discussions or decision making on the part of the client to move forward [we're] in contracting. So it's really a legal process at that stage.

So the other two deals that we're in active discussions on that are pretty serious -- they're serious and the management teams are really looking hard at moving forward and structuring a deal with us but they haven't gotten quite to that stage.

Okay, fair enough. And then you mentioned that in Fairview, you're seeing greater than anticipated success early on, both in cost reductions and some of the, I think, quality outcomes reduced readmissions. Do you have any data you can actually share with us on about what you're achieving up in Fairview?

I don't have the data for this call but I think in the future as this thing matures we will begin to release that information and we'll do it with our partner, Fairview's sort of agreement and concurrence.

Okay, fair enough. And then if we think of the accountable care organization regs -- I know they haven't been out there a lot and they're not finalized -- but I'm curious if looking through those, how that fits in with the program and if you think that could be an accelerator, and I think the answer's probably yes, of demand for your services with some of these larger integrated systems?

Absolutely. I think everything that we're doing is all about improving quality while reducing costs, which every aspect of the health care ecosystem is looking for that. And right now we believe that moving forward in -- with the commercial relationships and entirely in the private sector, is a path that is cleared and open to us and that's what we're proving with Fairview.

But we also believe that the governmental populations are going to be very much addressable. You mentioned Medicare. Both in the form of the accountable care regulation, but even right now in the Medicare Advantage business model. This is an ability to go after it and to be prepared.

Frankly, we also see that the state Medicaid programs are really encouraging providers to come forward with any innovation that they can think of to improve quality and reduce costs with those populations. So, and we really see that this offering will be addressable to all of the patient populations as physicians [see]. And that's important, because what physicians are telling us is that they want to be able to practice medicine in a new way but they need to be able to do it with all their patients and not just one way with some populations and another way with others. So we've built this offering to be addressable to the full patient panels that a physician would be seeing.

Okay, that's helpful color. Maybe two more quick ones. I think you've discussed with Fairview to actually increase the number of physician group that, I guess, have become exclusive to the hospital and obviously that's a much less capital intensive way for hospitals to garner that physician alignment versus going out and acquiring groups. I'm curious if that has also been part of the sales pitch or if that's helping momentum in that business too.

You hit -- you hit the nail on the head. In terms of an early indicator that is very powerful, it really is about getting that positional alignment. Every executive running a health system is really contemplating their strategies for physician alignment and how they're going to organize to be able to care for populations and care for patients in a holistic way. And this really creates a degree of cohesion and integration and really co-reliance that can make a health system really act like a system. And the fact that you can pick up market share with physicians in a market so readily with this capability -- it has been a very important signal to the market.

Okay, and then one real quick one for John and I'll be done. Just the shared services penetration as of the end of the quarter?

Yes, those contracts that we've had in place for a full year, we're at 39% so that has been steady, but we continue to grow our revenues so we continue to have more people adopt and we have a number of additional clients right now that are in the planning phase to move in through the next few quarters.

Okay, thanks a lot guys.

And our next question comes from the line of Jamie Stockton with Morgan Keegan. Please proceed.

Yes, good morning. Thanks for taking my questions. I guess, the first one Mary, just following up on something Ryan asked about the Medicare ACOs. In your conversations with hospitals, do you get the sense that the returns or the incentives are really enough to get them to participate in the Medicare ACO?

I am hearing, Phil, a lot of confusion and an early read on the part of executives that the regulation in and of itself, as it stands right now, is not particularly attractive and has some kinks that need to be worked out. But I get the sense that they believe they will be worked out and that it's becoming inevitable that there's too many different pressure points coming in and CMS is just one of them.

But it's becoming inevitable that they're going to have to find new ways to collaborate with physicians to be able to drive down costs. And that's the part that I've seen really change in terms of a mindset in the last 12 months. Maybe 12 months ago, there was a sense of we don't even know what this regulation is really going to be. It doesn't make a lot of sense. It keeps changing, and we're going to continue to sort of let it settle before we start paying a lot of attention. Not that people find it particularly clear right now or that they think it's perfected yet, but they are finding that we are in a trajectory now and it's somewhat inevitable and the leaders really are starting to say we're going to want to seize the mantle here and sort of make this change happen of our own accord as opposed to in a reactive way.

Okay. And, real quick, John, the cash flow during the quarter. I know that you went into some detail about what impacted it. I guess, going forward, should we expect the first quarter to be a pretty heavy drain from a working capital standpoint or was this a little unusual? Could you give us any color there?

This one was clearly more [unusual], given the growth in A/R but we do historically see it because we do pay our annual bonuses in the first quarter which are fairly significant in magnitude. This year they were $10 million. You'll see that every first quarter.

The ramp up in the A/R. I don't expect to see that quite to the magnitude we had this year. Certainly it is bigger than what our growth in the business was.

It was (inaudible - multiple speakers) one [basically] between the one day, right? 31st versus the 1st?

Yes. We had $24 million that should be coming in at the end of the quarter. It came in the day after. And we would expect that the cash position in the A/R -- a lot of that's been co-opted here in the early part of April -- we would expect, as we go through the year, that the cash balances should snap back up.

Okay, and I guess my last question: on the PCAR goal for the end of the year, the $900 million plus. Given the revenue guidance that you guys have out there for 2011 and what it looks like you're going to do in the first half, given what you reported for the first quarter and where PCAR is right now, would you say that you kind of need to get above that $900 million a little before the end of the year in order to hit the full year revenue guidance?

Depending on the timing of when these contracts come in through the second quarter, third quarter will determine that. But yes, it needs to be $900 million or a little more to get to the high end of the range.

Right. Thank you.

Yes.

And our next question comes from the line of Doug Simpson with Morgan Stanley. Please proceed.

Hi, good morning everyone. Just in the quarter, any color you could give us around the relative size of incentive payments. They came a little bit above where we were thinking, offsetting the base fees which were a little bit lower. Any way to help us with thinking through the seasonality of those line items to get you to that $835 to $850 as the year progresses?

Yes, we do -- as we talked earlier --we do see seasonality in the incentive payments from fourth quarter to first, typically, which you're -- you're right on on that, Doug. I think as we think about the business, we see that progressing. There are a couple of other variable factors that may impact a little bit quarter to quarter.

I don't see this first quarter being out of line with what our progression's going to be through the year. It was certainly slightly better than our expectations but not substantially larger than our expectations.

Is it -- is it [55 to 60]? I think historically you've talked about Q1 running about [55 to 60] and I think this quarter was more like [70, 73]. Are those -- a little bit higher -- but are those still good numbers to think about?

Yes, I think the [55 to 60] are still the ongoing numbers but I think it's -- Q4 might have been just a little bit lighter and Q1 is probably more in line with our expectations. Since we think about where we're heading for incentive payments through the year, we're very comfortable with the kind of mix of business between -- a mix of revenues between base fees and incentive payments. We don't see those changing more -- just a slight up tic in terms of percent of revenue through the year.

Okay. And then there's obviously been a lot of questions around ACOs. Maybe just to come at it a little bit of a different way. If you're, if you're sitting in the CFO seat at a hospital and you're dealing with the utilization pressures. You've got ICD-10 coming down the pike, you've got contracting pressures on the commercial side. Certainly there's a couple of things going on there that they're focused on.

Are you seeing any consistency as they're thinking about partnering with you? Is there a change in sort of the push point or the thing that ultimately drives them to contract in the last 12 months? And if you look at over the next 12, do you think there's going to be some coalescence around one of those as really the key driver?

I'm starting to see an interesting phenomena where -- I know it's relative to a question that was asked on this call -- I'm seeing the CEO really beginning to get their strategies mobilized around physician alignment and how they're going to really draw their physicians closely to them and be able to operate as more of a health system with the kind of infrastructure that they would need to do a more holistic job. And historically, they were contemplating capital-intensive acquisitions of physicians or they were contemplating having to employ physicians and it's always been a mixed bag in history on both of those strategies and it doesn't -- it's not anything that a CEO thinks of as a low risk strategy.

So when we begin to talk about this and we can see this becomes a really primary way of competing for some of the best physicians in town and drawing them to them and keeping them locked in. So I think that is, more than anything, starting to really catch hold in the market.

Now the other thing I'm noticing is that some institutions that are already viewed as the best or very good are also, by virtue of being as good as they are, they're still recognizing where they have [gained] a hold and where they have not been able to get their arms around population management, and because they're already so good at what they're doing, they're also good at knowing what they're not doing and that group is really alert for how do we take this to the next level.

And I think the big barrier that they have historically felt that they would have is the inability to get the data from the insurance companies and we have been able to break through that log jam and be able to get that in our capability as well as we're marrying that data with the real time data that we have in the revenue cycle. So we've been able to solve one of the big problems that they have been struggling with and I think that's another key motivator. Those two things are the things that I see are creating new momentum.

Okay, that's helpful. Thank you.

And our next question comes from the line of Atif Rahim with JPMorgan. Please proceed.

Hi, thanks for taking the question. Mary, I want to dig a little deeper on one of the things you briefly touched on in the question and answer session on the physician advisory business. You mentioned that's not a key component of your backlog and I wouldn't expect it to be, but just in terms of how that's trending, over the last year the kind of growth levels we're seeing in that business and especially the competitive dynamics with the largest competitor in that business being acquired. How has that changed? Are you seeing more competition on that front or less? How is that shaping up?

That's a great question, Atif. First of all, the competitive dynamic. There's really only one other competitor that we go up against and we are really excited about the competitive dynamic that we're witnessing. We're winning 2 to 3 head to head competitions with that other competitor with some of the most sophisticated buyers in the market. So we have won a lot of the HCA business, for instance, in head to head competition. And we are finding that the technology that we've brought into this -- our physician portal -- the kind of turnaround times and quality metrics that we have are all extremely beneficial to the market reaction.

In terms of our actual numbers in PCAR, this is not the kind of thing where you take over a base fee. And, to a certain extent, the utilization of the service, once it's turned on, can be variable based on how many cases the hospital is referring, so we tend to be very conservative on what we're putting into PCAR for this offering. Having said that, the offering is growing in a very robust fashion, if you look at sequential quarter on quarter growth. John, do you have any of the specific statistics?

Yes, what we do share is our other services business which you'll see -- which is where this rolls up and it's over doubled year over year in that line and obviously strong momentum from the fourth quarter to the first quarter where, again, it's up over 50% sequentially.

That's great. And then, a follow up for John. Just digging deeper in the P&L. A couple of things. On the incentive fees, the upside there. Are we starting to see anything from the cost quality initiative start to come through on the incentive fee side? Would that have anything to do with the upside versus what you had guided to last quarter?

Atif, can you say that again? In terms of what initiative?

The upside in the incentive fees. Are we seeing any of that as a result of the cost and quality initiative?

No, there's no revenues for total quality cost of care and incentive fee line or in the quarter. We have a lag revenue recognition in that business and we'll begin to start recognizing revenue here in this second quarter which is based on results delivered in the first quarter of 2011.

Got it. Perfect. And then, the investments in sales and marketing. I would guess some of those are head count related, with the specialty new hire that you mentioned, but in terms of outreach efforts to hospitals, are you ramping that up too or anything else going on there that might be ongoing or even one time in nature?:

We have added a number of really seasoned experts and deal executives to the sales team and so it's a small x but a very high impact sort of talent additions and this is primarily the comp and the travel expense associated with that. But I would say absolutely our proactive sales campaigns in terms of what we're putting into the pipeline is definitely ramping up.

Okay, got it. Thanks very much.

(Operator Instructions)

And our next question comes from the line of Deepak Chaulagai. Please proceed.

Good morning and thank you for taking my questions. Mary, in terms of your comment being on track to add new customers by year end on the quality and total cost of care, do you expect that second or third contract to have similar revenues -- less profitability ramp up, as your first contract [to serve you]?

Hi, I would say that a second contract will always -- well, I would expect the second contract to have better sort of list, because you are sort of baking in all of the learning curve from the first one. But the actual pricing, I think, will be fairly similar.

Okay, and just to follow up to that. Are you seeing anybody else in the marketplace trying to offer what you are offering in that segment?

I am hearing from our perspective client that they are being approached by insurance companies but they also tell me readily that they don't really view that as a viable way of partnering and the reason being that they know that their physicians want one way of working with their patients and so they don't want to treat the Aetna patients one way and the United Health group patients another way and have to have all kinds of disparate different technologies, data sources and so forth.

So -- as well as, of course, they have a general sort of skepticism about the payer situation because of the kind of contentious negotiations they've had in contracting and so forth. But that's the one place we're hearing it. There's no other sort of services and technology company such as ours that is giving them any sort of a robust offering here.

So you're not seeing companies like Healthways and other (inaudible) health management companies competing against you when you're out there talking to potential clients?

You know, we really haven't.

Okay. That's great. And, John, do you have the total number of customers served and number of hospitals served at the end of the quarter?

Yes, at the end of the quarter it was 27 full service revenue cycle contracts that we had in place and we had 67 hospitals as of 3/31 -

Okay, thank you guys.

- on the cycle.

Thank you.

Ladies and gentlemen, with no further questions, this concludes today's question and answer session. I would now like to turn the call over to Mary Tolan for closing remarks.

Thank you. I'd like to thank everyone for participating on our call today and for your interest in our company. We're very excited about the great growth opportunities we see ahead and we're looking forward to keeping you updated on our progress. Thanks and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.