R1 RCM Inc (RCM) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Accretive Health third-quarter 2015 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's call, Head of Investor Relations Mr. Atif Rahim. Sir, please begin.

Hello, everyone, and welcome to the call. With us today we have Emad Rizk, Accretive Health's President and CEO; and Peter Csapo, CFO and Treasurer. We'll start with prepared remarks from Emad and Peter, and turn it over to Q&A. We will also have Joe Flanagan, our Chief Operating Officer; and Dave Mason, our Chief Strategy Officer, available to answer your questions.

As a reminder, certain statements contained in this conference call may be considered forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. In particular, any statements made about Accretive Health's strategic review process and its ability to improve results, grow the business in a scalable manner, reduce the costs of revenue cycle operations, maximize appropriate fee-for-service revenue, prepare for value-based payments and improve patient engagement 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 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 September 30, 2015, filed with the SEC on November 9, 2015.

The forward-looking statements made on today's call are based on Accretive Health's expectations and projections about future events as of today, November 9, 2015, 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 to reflect actual results or changes in 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. Our third-quarter results reflect a continuous progress in turning the corner on some of the headwinds we have faced. We generated $55.4 million in gross cash, and $3.7 million in net cash from customer contracting activities.

Third-quarter results posted sequential improvement relative to second quarter, and we expect further improvement in the fourth quarter due to our earnings being second-half loaded, as previously discussed. Peter will review with you the details behind the numbers in a few minutes.

Our most important highlight during the quarter was the signing of our first revenue cycle customer in over two years. This is a new win, not an expansion of an existing customer footprint. A four-hospital health system, with close to $700 million in net patient revenue. I am pleased to say we have already begun implementation and deployment of our RCM capabilities and services in this customer.

This was a competitive process, and our differentiated software and services model was key to winning this customer. This win also underscores the traction we are building in the market.

In addition to the RCM deal, we also signed a health system with $2 billion in net patient revenue for physician advisory services. After several quarters of a declining trend, from the implementation of the two-midnight rule regulatory change, we are starting to see stability in the PAS business, and we are gaining market traction in this segment of the market.

We believe the market for our RCM services continues to remain robust, as I have discussed on previous calls. Our selling cycle is relatively long, at 6 to 18 months, but the overall selling environment for our solutions is gradually improving, as health systems recognize our value proposition, and our prior challenges as a company fade in the rear-view mirror. The sales cycle of the recently signed new RCM customer was nine months in length.

The dynamics in the health care industry continue to place pressure on hospital revenue cycle operations, creating increased demand for our services. Complexity in the revenue cycle process continues to increase. The recent transition to ICD-10 is one example of the increased administrative burden being placed on providers. In addition, the ongoing shift from fee-for-service to value-based payment models also increases administrative costs for our customers.

Health systems are becoming larger due to ongoing M&A activity. There is a growing need for services and capabilities that can manage the revenue cycle across the entire continuum of care. These market dynamics create significant opportunity for us.

We have experience working with some of the largest integrated delivery networks in the country. As we continue to rigorously pursue opportunities to expand our business, both with existing and new customers, we have an active sales effort, and we continue to grow our pipeline.

Turning to operations, our Southfield, Michigan, shared service center is now fully operational. I'm pleased to say we on-boarded new business from an existing customer during the quarter into the new shared service center. We have also consolidated our geographic footprint from our other shared service centers into Southfield, which is a showcase facility, and will also function as a training hub for our employees.

On previous calls, I have emphasized our focus on operational excellence and our focus on improving our operating rigor as an organization. We have maintained our momentum in this area, with a focus on performance excellence in order to deliver predictable and consistent results for our customers. We have spent an extensive amount of time this year deploying a standardized and disciplined operating cadence across the entire organization.

We continue to standardize our capabilities across four dimensions: process and methods, technology deployment, analytics, and talent development and training. Standardization across our customer base yields efficiencies and benefits to both us and our customers, and allows us to grow the business in a scalable manner. We are achieving cost leverage while improving operating metrics.

I am very pleased with the results of our centralized operating organization. Of the 21 core operating metrics we measure, all achieved significant improvement in the third quarter, with 17 of the 21 demonstrating double-digit improvement. We are diving deeper into our analytical and measurement capabilities for metrics which directly correlate to a hospital's financial performance.

For example, we have deployed a further set of 144 in-process metrics geared to evaluate root causes of variation and defects in our work flows. I believe that both strategically and operationally, we are achieving good progress in preparing the Company for scalable growth.

We have maintained our focus on executing against the four main drivers of our value proposition, which are: reduce the cost of revenue cycle operations, maximize appropriate fee-for-service revenue, prepare for value-based payments, and improve patient engagement. Our goal is to continue to improve our operating rigor and execution. I would like to thank all of our employees for their continued focus on our customers and dedication to our business.

Lastly, let me say a few things about the strategic process we announced in July. The process is ongoing. It is very thorough. We will update you as soon as practically possible. We are working closely with our financial and legal advisors as we move through the process. As a reminder, there is no set timeline for completion, and we cannot give any assurances that the process will result in the completion of any transaction or other alternatives.

While I appreciate that you may have many 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. 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. As I walk you through our third-quarter 2015 results, please note I will be referencing non-GAAP measures. I would like to remind you that a reconciliation of our non-GAAP measures to the most comparable GAAP measures is included in this afternoon's press release and in the appendix to the presentation accompanying this call.

We use the following non-GAAP measures to supplement our GAAP results and to 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 a 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 our customers, with GAAP revenue recognition typically deferred until substantially later than when we deliver services, bill, and collect cash from our customers.

Now, turning to our third-quarter results, gross cash generated in the third quarter was $55.4 million, a decline of 6%, or $3.5 million year over year. Approximately half the decline was attributed to compression in the PAS business, while a portion of the remainder was attributed to customer attrition in our RCM business.

As Emad mentioned, we are seeing some stability in the PAS business, after eight quarters of declining trends. Despite the year-over-year decline, gross cash generated in the third quarter increased sequentially $8.2 million, an increase of 17.3% relative to the second quarter, primarily due to improvements in net operating fees.

In our RCM business, our incentive fees in the quarter were negatively impacted by delays in cash receipts, primarily from our largest customer. Since then, as of the third quarter, we have collected $3.7 million in incentive fees, which we had anticipated receiving by the end of the third quarter, and will now benefit our fourth quarter.

Cost of services declined 6.8% year over year, or $2.9 million, to $39.7 million, primarily due to reduced volumes in the PAS business. Despite the 17.3% sequential improvement in gross cash generated, cost of services remained flat sequentially to the second quarter due to improved leverage in infused management costs in RCM, and improved cost leverage in the PAS business.

SG&A expenses declined 7.4%, or $1 million year over year, to $12 million, again primarily driven by reduced support costs for the PAS business. We also achieved reductions in certain corporate expenses from cost-reduction initiatives from prior years. SG&A expenses declined $2.1 million sequentially from the second quarter, due to a reduction in administrative expenses, while increasing spending in our sales marketing and strategy area.

Net cash generated was $3.7 million, or $300,000 above the prior year, driven by lower costs of services and SG&A expenses, as previously mentioned. Net cash generated improved $10.3 million sequentially from the second quarter from increased gross cash generated and cost improvement, also as previously mentioned. Our business demonstrated sequential improvement in financial metrics this quarter, which provides the necessary momentum heading into the fourth quarter.

Our cash balance at the end of September was $137.7 million, up from $121.9 million at the end of June, driven by cash collections for net operating fees. The end of the second quarter is the seasonally low point for our cash balance. Our balance sheet continues to be debt free.

Our current full-year 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 prior calls, 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 $5 million to $7 million, excluding costs related to the ongoing strategic review process, which we expect to be in line with customary costs incurred in such a process. In the third quarter, we incurred $1.3 million of costs related to evaluation of our strategic alternatives. The bulk of these costs were legal in nature. Now, I'd like to turn the call over to the operator for Q&A. Operator?

Thank you.

(Operator Instructions)

Jeff Garro, William Blair & Company.

Good afternoon, guys, and thanks for taking the questions. I wanted to ask a little bit more about the new customer that was added. Maybe you could talk a little bit more about the competitive process. What other types of vendors or consulting firms or other types of solution providers were bidding for that business, and what you really felt was the differentiating factor for you guys in the end?

Thanks, Jeff. Good afternoon to you, also. It was a very competitive process, as I said in my comments earlier. It took about nine months. We competed against, I would say, across the entire gamut, which is technology organizations, revenue cycle, out-sourcing organization, and also consulting organization. It was a two-phase process that basically was wide, that included multiple vendors. Then it was narrowed down to three, and then eventually because of our services and our software, we were able to have the winning response. We are very happy with that.

Great. Also for this new customer, what was the primary driver that was fueling their look to outsource their revenue cycle? Any type of financial distress, or was it the ICD-10 deadline, or any other kind of internal or external factor?

Again, a good question. It's the same as across the entire market right now, Jeff. It's mostly around cost and revenue enhancement. As we look across the industry and the complexity of the reimbursement that's occurring, it's increasing a great deal of their cost to collect. Many of our customers are feeling the pressure, especially this year, and will be for the next couple of years. We're seeing a continuing trend to out-source. The two drivers was number one, drive down the cost in terms of cost to collect; and also have an enhanced revenue collection process.

Got it, very helpful. Last one for me. Maybe you could discuss your pipeline a little bit further, whether you're seeing more activity there, and whether there were any customers in the pipeline that were waiting to see if you guys would sign a first customer for the first time in two years here? Is there any possibility that this signing's going to open up the floodgates for additional new customer wins?

We continue to have significant discussions with prospective customers. I would say that some have elected to delay their decision until they have further clarity to our strategic process. Others do feel that they could continue on with discussions with us. We get a combination of both. On the PAS side, we are not seeing the strategic process really impact our funnel in PAS.

Great. Thanks again for taking the questions.

Thank you.

Matthew Gillmor, Robert Baird.

Good afternoon. Thanks for taking the questions. I had a few numbers questions, and then a quick clarification on the new RCM win. Was the customer base stable outside of that new win? What I'm looking at is last quarter you reported 79 hospitals with $16.5 billion of NPR. Now you're reporting 83 with $7.2 billion. I wanted to confirm that there wasn't any other change in the customer base besides adding this new customer?

The customer base does continue to be stable. We've had some M&A activity that will -- that basically, sometimes we transition customers off to an M&A activity. But currently our customer base is stable.

Okay, great. Then maybe one for Peter. You're expecting a pretty meaningful increase in the gross cash generated in the year and. Can you remind us what the factors are that contributed to that sequential step up? Going forward, should we expect a similar sequencing on a quarterly basis next year, or will the contracting changes smooth that out?

In terms of the sequential increase from the third quarter, fourth quarter, obviously it is quite a big pick-up from the previous quarters. But we also saw that this past quarter. If you look from Q2 to Q3, as you heard in my comments, we improved the net cash by a little bit over $10 million. We've got another big jump as we head into the fourth quarter.

A lot of it is tied to delayed collection of incentive fees, as you are aware. We are on a cash basis of accounting for our incentive fees. A lot of that has shifted into the later part of the year, as we've had various commercial-related discussions with our customers. We also had various net operating fee enhancements that we expect to garner in the fourth quarter from various initiatives that we've been driving at from the beginning of the year, and really will yield benefits in the fourth quarter.

That's the primary drivers that we have as we think about the fourth quarter and the pick-up there. Our teams are out in the field working all these various things on a daily basis. We know we've got a good plan around it, in terms of bringing it in -- and not dissimilar from the plan we put in place in terms of driving the third-quarter results.

Okay. Then maybe last question for me on the -- there was a notable increase sequentially in the amount of CapEx. I think the presentation referenced some investments in software. Can you frame up where those investments were, and maybe what the priorities are in terms of internal investments for the Company?

A big portion of that, there were two primary things driving it, as we indicated in our previous comments. One was a large software purchase that relates to our analytics capabilities. Another one was the CapEx related to opening up our -- a new shared service center outside of the Detroit market. We also had some internal-developed software that was capitalized. We've since last year put in place the appropriate level of rigor necessary to be able to capitalize software, so we've done a little bit of that. The two primary things were the shared service center and analytic software purchase we made.

As it relates, one additional note as it relates to the shared service center, we did have a sizeable tenant improvement allowance that we received back from the landlord. However, that does not go as a CapEx offset. It goes on to our balance sheet, and gets amortized down over the life of the term of the lease.

Okay, thanks very much for taking the questions.

Sure.

(Operator Instructions)

Charles Rhyee, Cowen and Company.

Yes, thanks guys for taking the question here. Maybe going back to the pipeline question real quick. You might have mentioned it, forgive me if I missed this. What would you say is -- how would you look at the quality of your pipeline right now? You're saying the new deal you just signed took nine months to get across the finish line. Maybe asked a different way from earlier, what would you say your mixing of pipeline looks like that is similar to this kind of deal, where you feel that can get across the finish line in a relatively short period of time, versus others that you think are still stuck in a holding pattern?

Thanks, Charles. This is Emad. I would categorize our pipeline as probably being the most robust since I have been here. The number of discussions that we are having with customers, the quality of the discussions in terms of where the discussions are taking place, mostly at the C-suite level, I would say that it cuts across small hospital systems like this one, and also larger ones, and as I mentioned in my previous calls, some academic medical centers. We are seeing a relatively strong pick-up in our pipeline, interestingly.

The strategic process, as I said earlier, it did impact it a little bit, but some others are not. It is robust, and we are having some deeper discussions. We're also having some discussions where we're doing some analysis in terms of cost savings and revenue and some modeling. It is a very robust pipeline -- on the revenue cycle side.

On the PAS side, we're actually seen a slight tick up. As I mentioned in my earlier comments, we've seen a stabilization of the decline. We have some active pipeline customers right now that hopefully and potentially can close in the fourth quarter. I'm pleased where the pipeline is right now.

Going back, and I know you talked about it in the earlier part of your comments around PAS, what is changing the environment here that's evened out, and is starting to look -- I thought the two midnight rule is still in effect until next year? Did something change that I might have missed?

I'll let Joe, our Chief Operating Officer, talk a little bit from his observations on the ground. I will tell you that yes, the two midnight rule is still there, but we are also starting to change the structure of our contracts with PAS around volumes and around floor pricing. We are seeing that. With that, I'll turn it over to Joe.

Complementing Emad's comments, just one comment or one data point relative to PAS stabilizing. If you look at our current revenue for FY15, about 20% of that revenue will come from clients that we have signed in 2015. There's been a healthy re-mix of the installed base, so to speak. As we look forward, that contributes heavily to the stabilization and up-tick that Emad commented on. In addition to that, our appeals volumes on a weekly basis, current volumes are 17% above Q2 exit rate. Again, another data point on that portion of the business.

As it relates to the two midnight rule and the regulatory impact that has, even with the desire to simplify the statusing decision that's made by us or by our clients, of the cases that are referred to as, we still overturn 40% of the statuses that we get. That gives us confidence that there is still a high need, and our customers still have a high need for specialists to complement their internal organizations. That's a pretty high turn conversion rate, or overturn rate, inside of this new regulatory environment. As we look at that, even with the regulatory changes, we still see the demand for these services going forward.

Okay, and you just mentioned that the appeals volume was up third quarter over second quarter by -- I think you said 17%. Is that a one-time event, or do you think that's a more sustainable rate of improvement -- or activity, I guess?

I don't think it is a one-time event. I think it's structural. It's a weekly basis against a trailing average. That contributes to my comment on it being structural growth.

Okay, great. My last question would be around the new contract win. I know you talked about moving to value-based care, trying to have your solutions more geared toward this shift to value? Is that in the new contract with this client win? Is that going to be around -- is it modeled around value-based reimbursement? Thanks.

Thanks, Charles. I was going to add one thing to what Joe said. Let me answer this question first. We are continuing our efforts in value-based reimbursement, or preparing our customers for value-based reimbursement. We are having discussions right now. Some of them are actually in the late stages, and hopefully we can close one in this quarter coming up. We have another very large one that we're also in late stages of discussions. We are continuing that product line in terms of developing software and services for that. This particular customer, it was just revenue cycle. It was not value-based reimbursement, although we do see that potentially maybe we can up-sell with some of our current customer base value-based reimbursement.

Now that you mentioned value-based reimbursement around also PAS, one of the things that I mentioned, I think a couple of quarters ago, is the integration of clinical and financial processes. As you move into value-based reimbursement and you start to see denials tick up, those denials are both administrative and clinical. One of the things that we're also going to leverage our PAS capabilities to also help us in value-based reimbursement, and help us with clinical denials in the middle. We are becoming more integrated and more comprehensive as we offer our revenue cycle solutions.

Great. Thanks a lot.

Thanks, Charles.

Thank you. At this time, I see no other questions in queue. I'd like to turn it back to Mr. Emad Rizk for any closing comments.

Thank you, operator. In closing, I want to say that I'm very pleased with the market wins that we've had this past quarter. I look forward to our fourth quarter and hopefully getting more traction in our fourth quarter. But most importantly, I'm very pleased with our operating performance and our continued operating excellence across our book of business. With that, I'd like to thank all of you for joining us on the call today, and we look forward for updating you on our development in the future. Thank you, all. Have a good afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day.