R1 RCM Inc (RCM) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Accretive Health Q2 2015 earnings call. I would like to turn the conference over to Atif Rahim, Head of Investor Relations. Please proceed.

Hello, everyone, and welcome to the call. With us today we have Emad Rizk, Accretive Health's President and CEO, and Peter Csapo, our CFO and Treasurer. We will start with prepared remarks from Emad and Peter and turn it over to Q&A.

As a reminder, certain statements contained in this conference call may be considered forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. In particular, any statements made about Accretive Health's strategic review process and it's ability to reduce the cost of revenue cycle operations, maximize appropriate fee-for-service revenues, prepare for value-based payments, increase capacity to services customers and generate a specified level of cash from contracting activities and add new business are forward-looking statements. Investors are cautioned not to place undue reliance on such forward-looking statements.

All forward-looking statements made on today's call involve risks and uncertainties. Our actual results and outcomes could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the factors set forth under the heading Risk Factors in our annual report on form 10-K for the year ended December 31, 2014 filed with the SEC on June 23, 2015, and our quarterly report on form 10-Q for the quarterly period ended June 30, 2015 filed with the SEC this evening.

The forward-looking statements made on today's call are based on Accretive Health's current expectations and projections of our future events as of today, August 5, 2015 only and should not be relied upon as representing the Company's news 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 to reflect actual results or changes and factors or assumptions affecting such forward-looking statements.

Now, I'd like to turn the call over to Emad.

Thank you, Atif, and good afternoon, everyone. I'd like to thank all of you for joining us on the call today.

I am pleased to say, with today's 10-Q filing we are timely with our SEC filings and have returned to a normal quarterly reporting cycle. The team has truly come together and make tremendous progress in turning the corner on several significant challenges we faced over the last year. In addition to returning to a normal cadence with our SEC filings, we have rolled out new capabilities, strengthened our technology infrastructure and continued to improve our operating rigor. Almost all of our internal indicators of performance have improved, as has customer satisfaction.

From a financial results standpoint, we are on track to deliver net cash from contracting activities at the lower end of our $30 million to $40 million guidance range we previously communicated. Also, as we indicated on our last call, our earnings are expected to be second-half loaded due to seasonality in the business.

I will keep my comments on today's call brief as I recently spoke to you just a month ago.

Before I get into our results, let me say a few things about the strategic review process we announced on July 16th. The process is ongoing and we expect it to be a thorough one. [Also] note that there is no set timetables for its completion. We are working closely with our financial and legal advisors as we move through the process.

As a reminder, we cannot give any assurances that the process will result in the completion of any transaction or other alternative, and we cannot provide an update or discuss details until the board deems further disclosure is appropriate. And so while I appreciate that you may have questions about the process, I hope you can understand that we cannot make any further comments on today's call and would like to keep our focus during the Q&A session on the operations and financial results of our business.

During this process we are committed, as ever, to serving all our customers and continuing the strong momentum we have built over the last year in improving our operations and infrastructure. Our dedicated employees, both on site at customer locations and off site at our offices and shared services center, remain focused on driving improved performance for our customers.

Our investments in our technology and shared services capabilities are on track with our 2015 goals and our new shared service center in Michigan is due for opening this week. This will increase our capacity to serve our customers and I am happy to say one of our customers has already indicated an interest in expanding the use of shared services with us. The dynamics in the healthcare industry continue to place pressure on hospitals' revenue cycle operations, creating increased need for our services. This creates opportunity for Accretive and we continue to pursue opportunities to expand our business with existing customers and add new customers to the Company.

Before I turn the call over to Peter, I would like to remind all of you again of the confidence I have in our people and our organizational ability to provide unmatched services to our customers. Our goals are unchanged: reduce the cost of revenue cycle operations, maximize appropriate fee-for-service revenue, prepare for value-based payments, and improve patient engagement.

The combination of our technology, personnel and shared service centers unique positions us to deliver solutions and results to improve operations for our customers. As I said before, we continue to be focused on operational and performance excellence. Our business performance continues to get stronger and I would like to personally thank all of our employees for their continued focus on our customers and their dedication to our business.

With that, I would like to turn the call over to Peter for a discussion of our financials. Peter?

Thanks, Emad, and good afternoon, everyone.

For the benefit of those of you who may be new to Accretive Health, let me provide a quick overview of our non-GAAP financial measures. We use two non-GAAP measures to supplement our GAAP results and provide a better view of our operations. The first measure we use is gross cash generated from customer contracting activities, which is our reported GAAP revenue plus the change in deferred customer billings.

The second measure is net cash generated from customer contracting activities, which is our reported net income before interest, taxes, depreciation, amortization, share-based compensation, restatement related expenses, reorganization related expenses, and certain non-recurring items, as well as the change in deferred customer billings. Effectively, it is our adjusted EBITDA plus the change in deferred customer billings.

These two measures are primarily how we internally measure our financial performance and we believe it's important for investors to look at our results on this non-GAAP basis as well. The reason we use these non-GAAP measures is that our business model generally entails entering into three- to five-year contracts with customers, with GAAP revenue recognition typically deferred until substantially later than when we deliver services, bill and collect cash from our customers.

We typically invoice our customers and collect cash on a monthly or quarterly basis. At the same time, our direct costs for delivering services are expensed as incurred. The effect of our deferred revenue recognition is that we experience large variations in our GAAP revenue and earnings, with significant upswings in periods when we have revenue recognition events, which are typically at the end of the contract or renewal when we reach agreement with customers on the value we generated.

For revenue that is not recognized until we have reached revenue recognition criteria, the amounts billed and cash collected is added to our deferred customer billings and to customer liabilities account on our balance sheet. When revenue recognition occurs, deferred customer billings are reduced by this amount.

Now, let me walk you through our second quarter 2015 results based on our non-GAAP metrics. I would like to remind you that a GAAP to non-GAAP reconciliation is included in this afternoon's press release and in the appendix of the presentation accompanying this call.

Gross cash generated in the second quarter $47.2 million, a decline of 16.4% year over year. Our core RCM business was impacted by customer losses over the past 12 months and we also granted $5.5 million of credits to potentially expand future profitability opportunities with the customers by transitioning off of the legacy pricing model to resolve the customer issue and to remove the early termination option of the contract.

We were also impacted by the timing of incentive fee collections which we now anticipate collecting in the third and fourth quarters. As a reminder, we use a cash basis of accounting for incentive fees. Other service fees, which comprise mainly of physician advisory services, PAS revenue, declined $2.9 million during the second quarter due to the protracted compression since the implementation of the Two-Midnight Rule in the fourth quarter of 2013. We are seeing some stabilization in the PAS business, but remain cautious until various regulatory decisions are finalized over the next several quarters by CMS.

Cost of services declined 11% to $39.7 million, primarily due to reduced volumes in the PAS business and reductions in infused management expenses due to initiatives to optimize the allocation of resources deployed to our customer sites.

SG&A expenses declined 9.7% year over year to $14.1 million as we reduce support costs for the PAS business and reduce certain corporate expenses due to the continuation of cost reduction initiatives started in prior years.

Net cash generated was negative $6.6 million, or $2.8 million below the prior year, driven mainly by the decline in gross cash generated and partially offset by lower cost of services and SG&A expenses, as previously mentioned.

Our cash balance at the end of June was $121.9 million, a decline of $10.1 million from the end of the prior quarter. The end of the second quarter and the early part of the third quarter is a seasonally low point for our cash balance. We utilized cash in the quarter to pay accrued 2014 performance incentives and had capital expenditures of $5 million related to investments in technology and in the new shared service center in Michigan.

Turning to our outlook, our guidance remains unchanged at $230 million to $240 million for gross cash generated and we continue to expect net cash generated to be at the lower end of our $30 million to $40 million guidance range.

Additionally, as discussed on our last call, we expect gross and net cash generated to be higher in the second half of the year due to the seasonality of incentive fee collections and improvements in net operating fees. We expect one-time costs of $69 million, excluding costs related to the ongoing strategic review process which we expect to be in line with the customary costs incurred in such a process.

Lastly, I would like to provide an update on our stock exchange relisting process. We previously anticipated being relisted soon after we were current with our filings. With the decline in our share price following our July 16th announcement, we currently do not meet the $4 minimum price needed to list on either the NYFC or NASDAQ. We are therefore placing the relisting process on hold pending the outcome of the strategic review process.

I want to thank our shareholders for their patience during the restatement, becoming current with our filings and now the strategic alternative evaluation which the Company has undertaken. We acknowledged an unusual situation that the Ascension Health letter has created, but we remain committed to driving operational performance, delivering value for our customers, pursuing growth strategies and maximizing shareholder value.

And now I'd like to turn the call over to the operator for Q&A. Operator?

(Operator instructions). Jeff Garro, William Blair & Company,

Good afternoon, guys, and thanks for taking the questions. I think first I want to ask what can you tell us to give us confidence that you're going to meet that low end of the net cash generated number for the year? If I look back over the last 18 months plus, you're essentially saying that you're going to be generating more net cash over the next six months than you have over the last 24 months.

Thanks, Jeff, for your question. So when we look at our outlook for the rest of the year, we have clear plans in place with our operation folks in terms of driving net operating fee improvements. And so there's various initiatives that were started at the tail end of last year, at the front half of this year, to drive improvements in our net operating fees. So in terms of our projections there, we see a path in terms of the net operating fees. And from an incentive fee perspective, incentive fees are -- as we've indicated on several calls, they're on a cash basis of accounting and so we're just waiting on a collection basis. So what we've had is a shift from the front half of the year to the back half of the year in terms of collecting on those incentive fees, not that dissimilar in terms of some of the collection patterns we saw in 2014.

So given the cash basis of accounting, can you talk about any kind of safeguards you have in place that will make sure that you collect those fees in time and that they're earned and there's not a need for further credits or any other adjustments?

Well, the incentive fees, I mean it's a little different from the credits we discussed on the call. The incentive fees are really driven by the gain share performance of our contracts and the various terms of the different contracts that we benefit from. So many of those we've already delivered those services. We've achieved those results, it's just a matter of getting the cash in the door. And again, as I indicated earlier, we don't count those until we actually get it collected.

From a net operating fee perspective, we have various cost reduction initiatives. And when I say cost reduction initiatives, I'm talking about the costs at our customer sites in terms of driving down the costs, which obviously in our model improves the net operating fee performance. And those have been underway in our models and the performance we're seeing at the sites, there's a path around achieving those in the back half of the year.

Hey, Jeff, it's Emad. What I said in my earlier comments around this operating rigor and cadence, our measurement right now, daily, weekly, monthly, as I said in my earlier comments that if you look at the last four quarters we've been performing probably at the best that we've ever performed, so we feel relatively confident around the performance of the Company moving forward.

Got it. That's very helpful. And then one last one, if I could. I wanted to ask how business development efforts have progressed in light of the pursuit of strategic alternatives? You discussed that you were moving forward and that was going to take some time, but you were feeling better about the pipeline. So an update there would be very helpful.

When the announcement came out I reached out to all of our customers and reached out to all our potential new customers. I reached out personally them. I would say our current customer base were surprised about the events, but were supportive. We assured them that we are not going to be distracted and we're going to continue to execute on what we said we would do on our metrics. With new customers, I have to say that there is -- the couple that were in the pipeline that we were having discussions and doing some analysis are continuing along and were unchanged by the announcement.

Great. I'll hop back in the queue. Thanks, guys.

Thanks, Jeff.

(Operator instructions). [James Ah], [Cowen].

Good afternoon, guys. I just had a question in what do you think Ascension's real goals are in terms of pursuing the -- for you guys to pursue the strategic alternatives?

Well, thanks for the question, James. Again, as I said in my earlier comments, we're not at liberty to discuss that. But more importantly, I can't really speak for them. They have to speak for themselves. I would tell you that -- again, I just want to continue to emphasize to everybody on the call is, our performance has continued to improve significantly in the last four quarters across our entire book of business, which includes Ascension. We've actually continued to perform very well with Ascension and all of our other customers. But, I really can't speak about their strategy and their intent. But thank you for the question. I really appreciate it.

We have no remaining questions. I will now turn the call back over to management for any closing remarks. Please proceed.

Operator, no more questions in the queue? Well, if there are no more questions--.

There are no questions, sir.

I'm sorry?

We have no further questions at this time.

Alright. Well, I'd like to thank everybody for joining the call today and I look forward to updating you in the future. Have a good afternoon.

This concludes today's conference. You may now disconnect. Have a great day, everyone.