R1 RCM Inc (RCM) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the R1 RCM's Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to introduce your first speaker for today, Atif Rahim, Head of Investor Relations. You have the floor, sir.

Thank you, Andrew. Good afternoon, everyone, and welcome to the call. With us today, we have Joe Flanagan, R1's President and CEO; and Chris Ricaurte, CFO and Treasurer. We'll start with prepared remarks and turn it over to Q&A.

Today's conference call is being recorded. And 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 about our future growth plans and performance, including statements about our forecast for 2017 [or our] expectations regarding relisting our 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 in our annual report on Form 10-K for the year ended December 31, 2016, under the heading Risk Factors.

The forward-looking statements made on today's call are based on R1's current expectations and projections of our future events as of today 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, R1 specifically disclaims any obligation to do so to reflect the actual results or changes in factors or assumptions affecting such forward-looking statements.

Now I'd like to turn the call over to Joe.

Thank you, Atif. Good afternoon, everyone, and thank you for joining us. On the call today, I'd like to review a few highlights from the quarter as well as our accomplishments in 2016 and discuss our goals for 2017.

On the last earnings call, we laid out the groundwork of what to expect in the coming months. I am pleased to say we are executing well relative to our expectations, which gives us confidence in our outlook for 2017. We have an important year ahead of us as we make the turn to sustained profitability in the back half of the year.

The first tranche of the new Ascension business is the biggest and most complicated of the three tranches we are onboarding, and successful deployment of that tranche stands to pay several dividend bends to us, which I will provide more color on shortly.

So let's first spend a few minutes on 2016. In the fourth quarter, gross cash generated from customer contracting activities was $69.8 million and net cash generated was negative $0.4 million.

Net cash was down sequentially because, as you may recall, we had a catch-up contribution related to the renewal of our second largest customer, which benefited our bottom line in the third quarter. Our results for the full year were in line with our guidance, with gross cash generated up $10 million sequentially and coming in at $208.7 million for the year.

In many ways, 2016 was a pivotal year for us, and I'd like to highlight some of our key achievements. We started the year with the renewal and expansion of our agreement with Ascension, our largest customer. This renewed agreement represents a different operating model for us relative to our prior engagement and involved a lot of heavy lifting through the course of 2016. We created a deployment office intended to ensure successful onboarding of the 8-plus billion in new net patient revenue we're absorbing as a result of the new contract. As well as the transition of the Ascension hospitals we already serve to the new contract structure.

We currently serve 89 hospitals, having started deployment at the first tranche of the new hospitals, the Additional Book Ministries or ABMs, as we referred to them last summer. As I mentioned earlier, the first tranche is the biggest and most complicated of the three tranches we are onboarding, and we have numerous learnings, which we intend to incorporate into our finance as we onboard Tranches 2 and 3. We expect this commitment to continuous improvement to result in more streamlined deployment of future tranches.

The deployment office we created is not just limited to Ascension, but has been set up as a strategic capability to onboard new business beyond Ascension in a scalable manner.

In the third quarter, we renewed our agreement with Intermountain Healthcare, our second largest customer. This was an important renewal because in addition to providing greater visibility into our 2020 forecast, it demonstrates the important role we play in working hand-in-hand with our customers and their EHR partners to deliver value from our revenue cycle solutions.

We have a growing list of proof points that our results to outperform hospitals' in-house operations and some of our peers' results, which is something we plan to use to our advantage in marketing going forward.

Our PAS offering posted significant improvement over 2015, with a number of facilities submitting cases to us up 80% year-over-year, driven by competitive wins in late 2016. The momentum in this business continues as we enter 2017, with six new facilities signed up year-to-date, and we expect high double-digit growth in this product line as we onboard Ascension's PAS business over the next couple of months.

We also made great strides this year in streamlining our cost structure. We removed $16 million in annualized costs without compromising operational standards or the quality of our work. In fact, our operating performance has continued to improve as we continue to see opportunities to run our operations in a more efficient manner.

Throughout 2016, we also worked to refresh our senior management team, building a team with a functional competency and scaling, combined with deep domain expertise.

One of our other major initiatives in 2016 was the relaunch of the company. This is an ongoing process, and the first stage was completed at the start of the year with the rebranding of the company to R1. Our new name better reflects our identity and value proposition. We want to be the one trusted partner to manage all aspects of the revenue cycle, regardless of reimbursement model or care setting. We are focused on driving results for our customers built on strong relationships.

Lastly, in terms of 2016's accomplishments from a financial perspective, our results in the second half were substantially better than in the first half, thanks in part to the cost reduction efforts we implemented at the end of the second quarter. Net cash generated in the second half was $3.2 million compared to negative $30 million in the first half.

With 2016 behind us, we are now focused on our goals for 2017. Our key goal in the near-term is to complete the next part of our relaunch effort, relisting the company on a major stock exchange. We are far down the listing qualification path with NASDAQ and on track for relisting in the first half of 2017. We will have a better sense of exact timing in the coming weeks.

In addition to relisting, we are also increasing our level of attendance at investor conferences and interaction with investors in general, which we pared back following our delisting.

From an operational standpoint, our most important priority for 2017 continues to be the successful onboarding of Ascension. We are tracking well relative to overall onboarding targets.

At the end of 2016, we completed the transition of employees at Ascension hospitals that we have served over the years, which we refer to as Current Book Ministries or CBMs. To-date, in 2017, we have transitioned the work of 700-plus employees from Phase 1 of the ABMs. We expect onboarding of all Phase 1 employees to be completed this coming April and expect to start seeing meaningful contribution to our top line starting in Q2.

The deployment of our remaining performance stack elements for Phase 1 ABMs is expected to conclude in Q2, which includes moving work to our shared service centers, implementing our technology and deploying standard methods. We are well along the path of executing on these fronts, which should drive profitability and positive cash flow in the second half of the year.

One of the key drivers of improved profitability in the second half will be the transition of spend from third-party vendors to either in-house, at R1 or standard vendors. To provide some context here, there are approximately 300 vendors at the Phase 1 ABMs, and we expect to transition 65% to 70% of the spend with these vendors in-house or to our standard vendors. We'll begin onboarding Phase 2 of the ABMs in the second half, and planning is well underway. As the year progresses, we will continue to update you with developments on the Ascension deployment. The performance we have seen out of our teams as well as the Ascension employees we have onboarded has been very encouraging.

The operating partner model we have with Ascension is a fairly new concept in the industry. While health systems have in the past outsourced portions of the revenue cycle to external providers, including ourselves in the past, this new engagement model with an end-to-end scope, where we have full control of the rev cycle function, is quite unique.

We see this model taking off in the future, and more of the inbound interest we have seen from health care providers is gravitating towards this model. There is the need for a strong operating partner to manage the increasing complexity brought on by a variety of dynamics, namely, evolving payment models i.e. fee-for-service going to fee-for-value or value-based payment models; higher co-pays and deductibles for patients; and finally, provider M&A, which has resulted in the provision of care across diverse care settings.

The changes brought on by these dynamics create an order of magnitude, increasing complexity. We, as the operating partner for these services, can bring to the table a complete package of operational infrastructure, technology and human capital to serve providers' needs. The traditional approach to solving revenue cycle needs, whether it is point solutions, consulting, limited outsourcing or a combination of these, has not evolved to meet today's needs. We've created a comprehensive focused solution solving a specific pain problem for providers. And the proof points of our success are starting to show even stronger than they have before in the form of operating performance and results for our customers.

Our next priority for 2017 is to translate our differentiated performance and customer results from our operating model into growth. By this, I mean incremental growth beyond what we already have under contract from Ascension and other customers. We have added talent to our commercial services organization to ramp-up our external-facing effort. We have a new General Manager of Commercial Services with extensive consulting experience in client management and operational experience at multiple health systems to lead this effort. Over the course of 2017, we feel it is very important to firmly establish that we have the best performance in the industry.

We already have compelling data showing our results relative to hospitals, in-house operations and to our payors, but we believe the onboarding of Phase 1 of the ABMs will provide further proof points of our capabilities and results in the acute care environment.

I'm sure many of you have questions about the effect changes brought about by the new administration in Washington, D.C. may have on our business. There is still a lot of unknown in terms of potential changes to the Affordable Care Act, et cetera, and we have not seen any change in the tone of conversations we are having with prospects.

Going back to my earlier comments, what we see is complexity in the industry continuing to increase, combined with increased uncertainty on how the RCM platforms will need to evolve based on future potential regulatory reform. These dynamics are driving health care providers to look for ways to ease the burden placed on them as well ensure their RCM strategy and associated operations have the required agility to deal with the future uncertainty.

What I can say at this time is that we are confident in our positioning and our ability to meet hospitals' revenue cycle management needs.

Before I turn the call over to Chris, I just want to reiterate how pleased I am with the progress we've made in the second half of 2016 and my excitement for what's to come in 2017. We hope to complete our relisting in the coming months. We're making solid progress towards sustained profitability. Our Ascension rollout is on time and on track, and I firmly believe that we'll continue to see this strong momentum continue throughout 2017.

With that, I'll turn the call over to Chris to discuss our financial results. Chris?

Thank you, Joe, and thank you to everyone for joining us on the fourth quarter call. On January 1 of this year, we early adopted a new accounting standard called ASC 606, which pertains to revenue recognition for contracts with customers. This new standard will greatly simplify our financial reporting, starting with the first quarter of 2017 results. Until then, we need to continue to use the non-GAAP measures we have historically referenced.

Today's press release provide the reconciliation of these non-GAAP measures to our GAAP results. As a reminder, we use two non-GAAP measures to supplement our GAAP results and to provide a better view of our operations. The first, gross cash generated from customer contracting activities is our reported GAAP revenue plus the change in deferred customer billings. The second, net cash generated from customer contracting activities is our reported net income before interest, taxes, depreciation and amortization, share-based compensation, reorganization-related expenses and certain other items as well as a change in deferred customer billings. Essentially, this is our adjusted EBITDA plus change in deferred customer Billings. The numbers I'll discuss on today's call are on a non-GAAP basis.

Turning to our fourth quarter results. We saw a sequential ramp in our top line as a result of onboarding Ascension CBM employees to our payroll during the quarter. This was in line with our guidance on the third quarter call. And gross cash generated from customer contracting activities for the quarter was $69.8 million, up $10.1 million from $59.7 million in the third quarter. Excluding the effect of the catch-up from the Intermountain renewal in Q3, it was $16 million up sequentially.

Our PAS offering also performed well, up $0.6 million sequentially. Cost of services in Q4 were $58.1 million compared to $43.6 million in Q3 and $35.5 million a year ago, driven by cost-related employees we onboarded from Ascension CBMs during the quarter.

SG&A expenses were $12.1 million, down $0.5 million sequentially. As discussed on the last couple of calls, we anticipated seeing SG&A moderate from first half levels as a result of our restructuring actions taken at the end of Q2 '16.

On a year-over-year basis, SG&A was up $2 million because of lower incentive compensation in the year-ago quarter. For 2017, we expect SG&A to be in the $11 million to $12 million range per quarter.

Net cash generated from customer contracting activities in the fourth quarter was negative $0.4 million, down from $3.6 million in the third quarter due to the catch-up contribution I referenced earlier. In the year-ago quarter, net cash generated was $27 million, and the significant year-over-year decrease is a result of customer terminations and contract renewals earlier on in 2016.

For the full year 2016, gross cash generated from customer contracting activities was $208.7 million, down 9% from $230.2 million in 2015, primarily due to customer attrition and the reduction in the scope of services from certain customers, offset on part by the onboarding of the Ascension later in the year.

Cost of services for the year were $184.1 million versus $154.2 million in 2015. The 19% increase resulted from the transition of Ascension employees to R1 late in the year.

SG&A expenses for 2016 were $51.5 million compared to $49.6 million the prior year. While we drove actions to reduce SG&A expenses midyear, severance of $3 million related to an executive departure drove the year-over-year increase.

Net cash generated from customer contracting activities in 2016 was a loss of $26.8 million compared to a positive $26.4 million in 2015. This decrease was due to a decrease in growth cash generated from customer contracting activities and an increase in operating expenses. As noted earlier, we have a negative $30 million net cash generated during the first half and made significant improvement to deliver positive $3.2 million in the second half.

Turning to the balance sheet. Cash at the end of December, inclusive of restricted cash, was $183 million, down from $203 million at the end of the third quarter. This change was driven by a $28 million reduction in customer liabilities, specifically accrued service costs and customer deposits, partially offset by the change in accrued compensation and benefits. In 2017, we expect a further $10 million to $15 million reduction in working capital-related customer liabilities.

To close out my commentary on 2016, a couple of additional comments I'd like to point out. First, we purchased $360,000 worth of shares in the fourth quarter as part of our board authorized share repurchase program. And we have continued to purchase shares in this current quarter.

Second, we've remediated the material weakness in internal controls we had for the last couple of years. With this behind us, the next major milestone ahead of us from a public company standpoint is relisting on a major exchange, which, as Joe has mentioned, we expect to have more color on in the coming weeks and expect to be listed in the first half of the year.

Turning to 2017. I want to reiterate the guidance we provided earlier this year. For the full year, we anticipate revenues between $400 million and $425 million. GAAP operating loss of $25 million to $30 million and adjusted EBITDA of $0 million to $5 million.

Our 2017 guidance marks significant anticipated improvement over 2016. The expected top line improvement is driven by the onboarding of the Ascension contract, and we expect revenue to start to ramp-up in Q2 as we onboard Ascension ABM employees in Q2 through Q4 of this year.

Similar to prior years, we expect our profitability to be weighted more to our second half. While our adjusted EBITDA guidance is positive for the full year, we expect the first half to be negative and expect to be positive from an adjusted EBITDA and cash flow standpoint in the second half.

In closing, we remain very comfortable with our 2020 outlook and continue to anticipate revenue of $700 million to $900 million and adjusted EBITDA of $105 million to $135 million, with greater than 90% visibility to the low end of the revenue range from customers we currently have under contract.

Now I'll turn over the call to the operator for your questions. Operator?

(Operator Instructions) We'll be taking our first question from the line of Jeff Garro from William Blair. Your line is open.

Joe, I want to ask about the overall demand activity. You seem to indicate some solid demand for non-Ascension hospitals, so I was hoping you could describe what you see as the overall increase in market demand versus demand increases related maybe a little more specifically to your internal efforts, if you've heard any anecdotes from prospects.

Yes, what I would say is we're seeing increased interest and increased activity in our discussions on growth, and we segment growth and we look at our growth pipeline in two ways. One is growth outside of our current contracted customers, and then growth inside of that installed base but in excess to what we have under contract today. And so we see increased activity in both of those categories of our pipeline, if you will, with additional color that I would say we have several opportunities in the contracting phase related to incremental growth across our existing customer base. And so it's just some color along those lines, but we see increased activity in both of those categories.

On the incremental growth outside of those customers we currently engage with today, what I would say is we are seeing increased activity in the end-to-end model. But what I would say is those discussions, as you would expect, are going to be long sales cycles, they're going to be lumpy. And so from a short-term standpoint, they're harder for us to forecast, but we're confident that deals do get done over the long term. Meaning, the next couple of years.

And we commented on our PAS business as well and the growth we're seeing in that, and I would say that is a proxy for a part of the market. Now I would emphasize that as you think about how we can engage with potential customers and drive value for them, we have the ability to engage across all frameworks. Meaning, in a full control, full outsourcing type engagement on an end-to-end basis, which I just commented on. But equally important and I don't want to lose sight of the fact that we've cut our teeth as a firm when it was founded engaging on an end-to-end basis without full control.

Some examples of that, if you look at how our Ascension relationship started, it started in that mode of operation and after a couple of renewals, translated into a full control relationship. If you look at our Intermountain relationship, it started as a co-managed end-to-end coverage, and we're on our second renewal now in that type of operating framework. So we feel really good about the flexibility we have to sell into the market, whether that buyer is ready for a full control outsourcing relationship, a full control and a co-managed environment or in a modular way. And we think that's important to note.

Then the final thing I would say relative to market conditions and discussions in our pipeline, I can't emphasize enough the importance of differentiating on performance. Our market checks, supported by discussions with customers as well as supported by independent advisory checks that we've had done, signal that the market really is looking for high-performing solutions. And there's an element of frustration that the current options available today are not delivering compelling proof points that are differentiated on performance. And that's why I emphasized in some of my comments and will continue to emphasize this on a going forward basis, we feel really good about our ability to differentiate on performance, and we expect to increase that dialogue on a going-forward basis and communicating along those lines.

That's great. All very helpful. So I just have a quick follow-up, really, as to the timing of health systems that are outside of your current installed base making a decision on an outsourced model, whether that's the fully outsourced or a more co-managed offering. Based on your current pipeline, are you expecting any of those health systems to make a decision in 2017, recognizing it's a longer sales cycle, might be more towards the end of the year? Or should we be thinking more 2018 for any of those net new outsourced offerings?

Sure. The way we thought about 2017 and the way we built our external guidance and our internal operating plans is not really assuming that any of those discussions translate in 2017. So I would say that at the -- as an opening comment or as an initial comment. I would say, absolutely, we would hope that some of the discussions we're having that are encouraging translate in this year, but it hasn't been incorporated into our external guidance nor in our internal plans, so to say. So that's the way we think about it. Definitely, as we look towards 2018, we see those things translating, and we'd love to get them done in 2017, which would be upside to our current plans and current views.

Understood. And maybe a couple quick modeling questions for Chris. First, I was hoping you could set our expectations for revenue seasonality in 2017 given that this first tranche of Ascension hospitals is the largest. You talked about a ramp in Q2, but any color you can provide beyond that into the back half of the year.

Yes, I'll make a couple of comments on that. So one, of the -- within the revenue guidance, Joe mentioned 100% of that is contracted. Within that 100%, 90% of that is -- 90% plus is already executed. So we'll deliver that.

In terms of the ramp, it will ramp up quarter-by-quarter. We're not providing the quarterly ramp at this time. The tranche 1 will be complete by the end of this quarter in terms of that, and then we'll begin tranche 2 in the second half of 2017.

Got it. Then one last one for me, also for Chris, more on the model. The gross margin percentage has been volatile throughout 2016, and we certainly expected a trade-off with higher revenue and a lower gross margin percentage with the fully outsourced model. I'm hoping you can provide some more details and whether we should look for another dip down in the first half of 2017 before ramping up in line with revenue for calendar 2017 versus -- go ahead.

Yes, I would expect another dip down in the first half of '17 as we onboard tranche 1. And as we indicated in our JPMorgan conference, the first year, typically, we see a degradation on our margin as we onboard these tranches, and then after year one, they start to deliver profitability. So tranche 1 will be fully deployed, so we'll start to see that profitability in the second half of '17. That will be partially offset by the onboarding of tranche 2. But we will see positive -- we expect to see positive EBITDA in the second half of '17.

Just for the whole portfolio, are you expecting that the gross margin percentage to expand year-over-year, '17 versus '16?

Yes, for sure. We expect it to expand '17 over '16.

Our next question comes from the line of Charles Rhyee from Cowen and Company. Your line is open.

Really just like -- I guess, just a couple of follow-up questions. One, you talked about the next few weeks to get filed, can you just give us a little bit more color, is -- all the people work in? What are you just waiting for, like a response from the exchanges? Or have you decided on which -- have you decided on which exchange plan to go with?

Yes, so the first thing we had to do was file our K to meet one of the thresholds. That obviously has just been filed. Then that has to be reviewed, and we expect a response in the coming weeks on that. We met the thresholds that were required. There's two thresholds. One was exceeding the $2 stock prize, which we have for over 90 days, and then there was stockholder equity threshold that was met with the filing of the K as a result of adopting the new Rev Rec Standards. So those are really the two things that were -- that needed to be met and reviewed with NASDAQ. Then once they've reviewed that, we expect to get a response, as I said, in the next weeks or so.

And then once you get their response, how long is the actual listing? Or is that pretty much simultaneous? Or is that -- how much longer after that?

Very shortly after, about a week.

Okay. And did I hear you correctly? Did you say you can buy back stock today? Or did I mishear you guys?

We are buying back stock under a 10b5-1. But obviously, we're in a blackout period. There's a schedule that we have to follow. After the blackout period, we can continue to buy stock.

Okay. Is there a max that you guys are -- I guess, is that a formula? Or do you guys are just individually kind of figuring out? Or --

No, we're not going to disclose that, but there is a schedule in that 10b5-1. So that's already been figured out. There's no -- and we obviously can't change that schedule. And then going forward, we -- again, we'll continue to look at buying back stock as a possible usage of cash versus other investments in the company or inorganic activity. And as we look at those, we'll look at what's the best for the -- in terms of a shareholder return.

Okay. In terms of the -- going back to the earlier question on pipeline, Joe, can you talk about what the outside Ascension days, when you're looking at that -- and I understand that it's -- usually, it's a little hard to predict. But any kind of -- if we look back, right, I mean you had a pipeline or the company had a pipeline and people just really kind of slowed down and at first it seemed to be centered around the statements and then that came out and then, obviously, it's being centering on Ascension.

What is the main message you're hearing from clients or potential clients on -- is there -- I guess, the question is, are you seeing any kind of activity slow down? Or I guess, well, let's say, the reverse. Is activity accelerating back to what you'd call a normal kind of pace versus the slow pace that we've had or like non-existent pace we've had for the last few years.

Yes. I would say, Charles, activity is increasing, and it's headed towards a normal pace that we would expect. And the limiting factor on the acceleration to that normal pace is really our internal rebuilding of the go-to-market approach. We referenced some leadership we've added in the most -- in the recent 90-day period. We expect to add more infrastructure and leadership in a very calculated way as we rebuild our go-to-market channel, which is absolutely by design and kind of by plan on the heels of our rebranding.

So again, activity is accelerating, no doubt about it. I'll comment on kind of the discussions and some of what we're hearing in a second. I don't want to characterize we're at a normal pace yet. We're well on our way to a normal pace. What I would say is the limiting factor on us getting to that normal pace is not a shortage of opportunity for activity in the market, it's really us going through this process to rebuild in the right way for our model the commercial channel. That started with us saying -- us building out a commercial services organization that is able to price, is able to assess, is able to commercially contract in the various offerings we talked about before. But as we think about the first half of the year, we're absolutely active on continuing to add the right talent profile and the right capacity to drive that activity.

All right.

Specific to some of the discussions that we're hearing, one is -- it started with wanting to learn more about Ascension and kind of how they came to the conclusion. We've commented that -- on that on prior calls. I would say of late, we've had quite a bit of positive response on the positioning of the company and the branding of the company and the focus on driving performance and demonstrating performance at scale.

That's one thing I would emphasize is if you look at our history, but if you also look at our peers, I would argue that there's still an opportunity to demonstrate the ability in an outsourced relationship to perform at scale as opposed to in a one-off situation. And I think we're starting to get some good discussion and good dialogue along those lines. So again, I'm very encouraged with general momentum and activity. And as we said, that gives us confidence as we look at that long-range guidance that we put out.

Okay, that's all for me. And maybe my last question then is around the new accounting standard. I might have missed it, just to clarify, when can we expect to shift over to that new metric? Is that for the upcoming fiscal year -- for the current fiscal year? For the accounting, the revenue recognition?

The new Rev Rec is effective 1/1.

Okay. And I'm sorry, I haven't had the chance to flip through the K. Will you give us a -- sort of like a pro forma for the prior years? Or do we have to just -- or do we just kind of go off the new model just going forward?

There won't be a comparative to the prior year because otherwise, we'd have to go through a full restatement, which, obviously, we don't want to go through. So there won't be a comparative to the prior year. There will be no non-GAAP revenue metric anymore. The GAAP revenue will be the only revenue that we report. But yes, so it will be comparable to the current non-GAAP measure.

Our next question comes from the line of Matthew Gillmor from Robert Baird. Your line is open.

I wanted to ask about some of Joe's comments on Ascension. I think Joe said that the first tranche was more complex than later tranches. Can you give us some sense for why is it more complex? And then what are some of the lessons learned that you're going to apply to the later tranches?

Right. I think dimensioning complexity, I would say more than size. Although on size, this is the biggest. The second tranche is big as well, but it's much less complex. The complexity of the first tranche really comes with the number of markets and the fragmented, if you will, footprint that we're absorbing, which means we're working through multiple different local entities, multiple different employee groups, as we commented. The vendors, the number of vendors that make up that non-payroll spend is a much broader spread in this first tranche that we're onboarding.

As we look at future tranches, like I said, Phase 2 is also a large tranche, but it's a much more concentrated footprint. It includes the Indy operations, Indianapolis operations, which is very consolidated and is providing services, not only for that market, but it's also providing some services today for other markets. That just makes it a little bit easier for us to onboard. So that's some comments along that line.

I think lessons learned, there's a number of them, and we pride ourselves in kind of a commitment to continuous improvement. The first one I would say is calculating the cost to collect. And this is something that I think is not really well understood as you hear cost-to-collect figures thrown around in the industry. When you have to contract and price on that cost to collect, there are a lot of moving parts in that, and a lot of work and effort has gone into that in the first phase. I would say as we look forward, we're starting that calculation much sooner in this phase we're in right now or as we think about planning for Phase 2. That's the first major lesson learned.

The second lesson learned I would say is, as we think about the technology deployment, proactively working with the IT organizations of the customer and of the local operations to make sure we have windows and agreement on those windows to get our tech deployed. Now I'm encouraged with the speed with which we've gotten tech deployed, the tech applications deployed on Phase 1, but I think we can definitely shorten the cycle time there.

And then the third one is, as we think about the absorption of the work, just proactively adding capacity in our central infrastructure. Now that, we've already acted on because in this first phase, we were really almost a cold start. But as you would expect, we've added more capacity in line with the lead times in 2016. So as we go into 2017, we feel much better about our physical infrastructure, our data infrastructure from capacity as well as our human capital component because we've proactively established a bench, if you will, for human capital that allows us to absorb work and not be exposed to pure lead times on adding that capacity. So I'd say it's across those three areas, primarily.

Okay. That's really helpful. And maybe a second one on just renewal activity for '17. You obviously had some really important renewals in '16, but can you maybe just provide some details in terms of what portion of the book renews this year or any kind of important clients we should be looking to?

No material kind of portions of the book that are up for renewal in 2017.

Okay, good. And then last one, just a quick kind of cleanup. For -- and I guess, this is probably in Chris' domain. With the new Rev Rec, are you going to give the same revenue buckets in terms of the non-GAAP gross cash generator? Will that be the same as we go into '17 or will that change?

That will change. It's just going to be GAAP revenue, so it's going to be GAAP revenue. And before, we were deferring, obviously, quite a bit of our revenue; with the new GAAP revenue, 99% of our revenue basically will be recognized as build and earn. So we won't really defer hardly anything of our revenue.

Yes, I was going to say I think I understood that component. I guess what I was asking, are you still going to give a net operating fee and incentive fee and the other and then the sort of the other services fees, the fees for advisory?

Yes, yes.

Okay. So you'll give those buckets, but they'll be GAAP.

Yes, exactly.

(Operator Instructions) And that's all the time we have for questions today. So I'd like to turn the call back over to Joe Flanagan for closing comments.

First, thank you for everybody's participation. I would -- on today's call. I'd emphasize, we're excited about 2017, and we feel really good about the execution coming out of 2016 that we only intend to build on as we progress through 2017. No doubt about it, it's a busy year. There's a lot going on as we commented on the first half, and we've got a total commitment to continue to update all of you with the right metrics over the coming quarters. And along those lines, we look forward to seeing many of you at the upcoming investor conferences and various road shows that we intend to invest time in, in the coming months as well.

With that, thank you, and operator, we can close the call.

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