HMS Holdings Corp
Q4 2019 Earnings Call Transcript

Published: 21 Feb 2020

[Operator:]

Ladies and gentlemen thank you for standing by. And welcome to the HMS Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]I would now introduce your host for this conference call Mr. Robert Borchert. SVP, Investor Relations. You may begin.

[Robert Borchert:]

Thank you, Kevin and good morning everyone. Joining me are Bill Lucia, our Chairman and Chief Executive Officer and Jeff Sherman, our Chief Financial Officer. This call is being webcast and could be accessed via the Investor Relations section of our company website at hms.com.Today's press release highlighting our financial results is posted on our IR website. Bill and Jeff will first provide their perspective on our recent financial operating results and business outlook and then we will open the line for questions. We ask that you please limit yourself to one question and one follow-up, so we can get through the full queue in a timely fashion.I’d like to remind you that the financial results reported today and in this morning's press release are preliminary and are not final until the Form 10-K for the third quarter ended December 31, 2019 is filed. Some of the statements we will make today are forward-looking in nature based on our current expectations and our view of our business as we see it today. Such statements, including those related to our updated full year 2019 financial guidance, future financial and operating performance and future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially. As a result this should be considered in conjunction with the cautionary statements in today's press release and the risk factors described in the company's most recent SEC filings, including our Form 10-K.Finally, we may refer to certain non-GAAP financial measures this morning. Reconciliations of these measures to the comparable GAAP measures are included in our press release posted to our website.With that, I'll now hand the call over to Bill.

[Bill Lucia:]

Thank you, Robert, and good morning everyone. HMS posted solid revenue and profit growth in full year 2019, with total revenue for the year increasing 4.7% and adjusted EBITDA up 10.6% from the prior year. We also posted record operating cash flow for the year. And this will continue to fuel our ability to further invest in our people, processes and technology and drive HMSs growth going forward.The fourth quarter of 2019 was actually the highest revenue quarter in our company's history. And on an annual basis, we continue to experience top and bottom line growth driven by our product innovation, application of new technologies and expansion of both current and new clients. As we noted in previous quarters, our business can experience quarterly variability.The sequential 4.2% increase in our COB revenue from Q3 to Q4 was an improvement, but not at the level we had expected. This was due to the timing of recoveries related to certain clients as well as yield improvements that did not materialize as quickly as anticipated. As we've discussed in the past, these opportunities are not lost, but merely delayed to future quarters. For example, about $3 million of revenue we expected to recognize in Q4 rolled into January.We continuously work with third party carriers to identify and solve delays, including the system processing issues we discussed last quarter. We're also enhancing our COB growth by leveraging machine learning and automation, enter new product development and other innovative service capabilities to further address our client's needs. In addition, we are benefiting from government policy that is driving growth opportunities for both our COB and payment integrity solutions.As an example, we recently signed an agreement with the State of New Mexico to manage the quality assurance module for their Medicaid Enterprise System or MES. New Mexico is one of the first states to implement the federally mandated program to replace monolithic Medicaid management information systems with a best in class modular approach. The MES program will open up new opportunities for HMS with other states.This QA module includes program integrity, third party liability detection and recovery, fraud and abuse analytics and quality reporting, among other services. Our comprehensive payment accuracy solutions were a natural fit to lead this QA module for New Mexico. And we expect this approach will lead to more flexibility, drive further efficiency and improve outcomes for the state.And while we continue to be the industry leader in Medicaid COB, we are now expanding our footprint in the commercial insurance and Medicare Advantage marketplace to broaden our COB portfolio. In late December, we completed the acquisition of Accent, a leader in commercial and Medicare COB. This combination opens up new coordination of benefits markets for HMS with commercial payers, offering expanded capabilities and numerous benefits for our clients and significantly expands our total addressable market.With the acquisition of Accent, we are now well positioned to deliver consistent high ROI across all addressable market segments. Accent expands our range of edit and audit solutions. And we intend to leverage the best practices from both HMS and Accent across our large client base. Accent also expands our client value proposition by further strengthening our collections and recovery capabilities and by extending our subrogation services, to commercial plans, and employers.The blend of both HMS and Accent expertise, create a complete suite of COB capabilities for cross selling across each respective client base and reach new clients as well. In addition, we plan to integrate certain machine learning and robotic process automation applications into Accent to drive greater revenue yield and cost efficiencies over time. Overall, we are excited about the growth and expansion opportunities ahead of us as we drive the integration and go-to-market strategies.Now our payment integrity business line delivered another strong quarter. And we expect the momentum to continue in 2020 as we are seeing positive trends in solution adoption within our existing client base. We're also seeing expansion of our payment integrity client footprint in both the commercial health plan and government markets. We will continue to develop new innovative solutions to meet the growing demand for payment integrity services and enhance our value proposition and return on investment for our clients.With respect to our population health management business, revenue was up 9.1% sequentially from our third quarter as we refined our go-to-market approach. Our new PHM sales leadership is in place. And we are nearly complete in building our sales team that is focused solely on this business line. Our solutions are gaining traction in the market, so we remain optimistic about the growth potential for PHM. This includes continuing to build awareness of these capabilities with our government clients.As a result of this activity, in the fourth quarter, we signed our second state contract for Elli with the New Jersey State Employees Health Benefits program, which covers about 815,000 lives and generates about 15 million claims each year. New Jersey wanted a creative innovative suite of solutions that offers data aggregation and analytics, as well as pre and postpaid medical claims review, enabling the state to advance its employee health program from a transactional data store to a dynamic predictive data management solution.This was our first sale combining Elli's predictive risk analytics and our payment integrity solutions. And we are the only partner with the solutions and expertise to offer this client the full scope of work. And earlier this month, our Essette platform was named the best care management solution for payers by KLAS, a leading healthcare IT research firm that ranks solution providers. This validates our team's efforts to deliver an efficient, comprehensive platform for care managers.Essette is a key component of HMSs configurable PHM solution and was part of a recent integrated solution sale with our Elli analytics platform. To further strengthen how we deliver, develop and sell high impact solutions to solve our clients toughest problems, we made a few organizational changes this year. We are enhancing our customer centric approach in order to continue to capitalize on the challenging industry trends to help drive HMSs growth. Our commercial and government sales and client engagement teams are now aligned under our Chief Growth Office led by Maria Perrin.Before rejoining HMS a year ago as our Chief Marketing and Strategy Officer, Maria successfully led our markets teams during her previous seven year tenure with HMS. Our COO, Doug Williams, having handed off sales and client engagement is now leading our technology and product teams to accelerate new product development and delivery. This move will also help us capitalize on our Accent acquisition by enabling faster integration of technology into our operations and further drive product performance. Doug, Maria and Emmet O'Gara, who leads population health management, will closely collaborate to drive HMSs financial and strategic objectives for 2020 and beyond.In summary, HMS realized another year of top and bottom line growth and strategic advances. Importantly, we help our clients achieve more than $5 billion in savings and recoveries. We have sales momentum across all HMS solutions and tremendous opportunities for continued growth and expansion.Jeff will now provide additional detail on our fourth quarter and full year performance. Jeff?

[Jeff Sherman:]

Thank you, Bill and good morning. As Bill mentioned, we delivered our highest quarterly revenue number in our history in Q4, when you adjust for the non-recurring reserve release from Q2 of '19 with PI and PHM performing at or above our expectations in the quarter. However, our financial performance in Q4 was lower than we expected due to the timing of COB recoveries related to certain clients, as well as the timing of anticipated yield improvements.COB comprised approximately 65% of total company revenue in 2019 and was up 1.8% for the year. Payment integrity revenue increased 18.3% in the fourth quarter, and was up 12.6% for the full year. PHM revenue increased 3.8% in Q4 and was up 5.2% for full year 2019.Adjusted EBITDA in the fourth quarter was $42.3 million, a decline of 3.8 million from the prior year quarter. As expected, we did see an increase in costs related to ongoing investments in IT and payment integrity teams, which we expect will drive returns in 2020, as well as the incremental costs from the Vitreos and Accent acquisitions. We also incurred severance costs of $1.5 million in the quarter as we realigned our sales organization.For the full year, adjusted EBITDA increased by $7.7 million, with margins improving 20 basis points when you exclude the 2019 Q3 investment gain, and the reserve releases in both years.Fourth quarter adjusted EPS was $0.27 per diluted share as lower COB revenue growth and higher Q4 expenses impacted our earnings performance, this compares to adjusted EPS to $0.31 per diluted share in Q4 a year ago, excluding $0.17 in discrete tax benefits.Full year adjusted EPS increase $0.08 to $1.12 per diluted share over 2018 when you adjust for an investment gain in Q3 of '19, as well as the reserve releases and industry tax benefits in both years.Our cash flow remains strong. Full year operating cash flow was a record 133.2 million and increased 38% from 2018, with free cash flow up 69% year-over-year to $111.6 million. We ended the year with cash and cash equivalents of $139.3 million and total debt of 240 million at December 31, 2019.With the leverage ratio of 0.6 times we continue to have a very strong balance sheet and liquidity profile. This is after our acquisitions of Vitreos for approximately 37 million in September and Accent for approximately 159 million in December, both of which were funded with cash on hand.Turning now to our financial guidance for the year ahead, we expect 2020 total company revenue of $705 million to $715 million, which is 14.5% to 16.2% growth compared to last year when you exclude the Medicare RAC reserve release from 2019. This 2020 growth rate is based on projected double digit growth in both payment integrity and population health management, and low to middle single digit organic growth in our COB business plus the Accent acquisition revenue.We typically see a sequential decline in revenue from Q4 to Q1 across our business lines. But this first quarter will include a full quarter of Accent as well as some COB revenue that we expected in Q4. Therefore we expect Q1 revenue to be similar with the fourth quarter of 2019 and in a range of $160 million to $165 million.We are expecting full year adjusted EBITDA of $185 million to $192 million for 2020, which represents growth of 12.8% to 17.1%. As with revenue, we are normalizing the 2019 adjusted EBITDA for comparison purposes to exclude $8.2 million from Medicare RAC reserve release, as well as $7.7 million investment gain.We do expect increased costs in 2020 as we integrate the Accent acquisition, which will negatively impact margins in the short-term, we are confident in the long-term potential of this acquisition and our ability to leverage and cross pollinate our solutions to drive revenue and cost efficiencies.While we expect to see adjusted EBITDA margins expand organically, it may be tampered for most of the year by higher than normal IT and operational investments we plan to make to seamlessly integrate Accent into HMS. Costs that are clearly non-recurring such as duplicate IT and system integration costs will be added back to adjusted EBITDA, similar to deal costs in the fourth quarter.We continue to believe our business model has inherent operating leverage that can drive annual adjusted EBITDA margin expansion of 5o to 100 basis points over time. And the operational and strategic investments we made in 2019 should have long-term benefits to our margin profile.Moving on to net income, we are projecting $76 million to $80 million for 2020, which is expected to be a10.1% to 15.9% increase over the adjusted net income in 2019. Remember that reported that income in 2019 included $6 million related to the Medicare RAC reserve release, 5.6 million from an investment gain and 6.5 million in discreet tax benefits.Capital expenditures this year will move somewhat higher to a range of $30 million to $35 million, as we continue to invest in our IT infrastructure, including acquisition integrations, build out our big data environment and continue to develop innovative solutions for our clients. We've provided some additional details on our outlook for the year ahead in our press release this morning, which will help address more detailed valid questions. But the key metrics should tell you that we anticipate another solid year in 2020.Bill will now offer some concluding remarks and then we'll be ready for questions. Bill?

[Bill Lucia:]

Thank you, Jeff. HMS is well positioned for growth in 2020 and beyond. We enjoy long standing relationships with our clients and have retention rates in excess of 96% which creates visible long-term revenue. Our large client base and proven track record of helping to bend the healthcare cost curve, continue to offer our greatest growth opportunity and that's cross selling our solutions to expand our footprint across more than 350 managed care plans, over 40 state Medicaid agencies and federal agencies such as CMS, the CDC and the Veterans Administration.Our ability to leverage enormous data assets combined with our proprietary advanced analytics are helping our clients to better understand the healthcare consumer and are impacting both outcomes and costs.As we kick off 2020, we're excited to welcome our new Vitreos and Accent employees and clients to the HMS team. We have a deep bench of healthcare experts and we expect our strategic investments in people, process and technology, along with our focus on delivering increasing value for our growing client base will feel our growth this year and in the future. In closing, we remain committed to delivering top and bottom line growth and I'm confident the entire HMS organization is up to the task of bringing enhanced value to our clients. I'd like to thank our employees, our board and our shareholders for their continued support.Operator, we are ready now for the first question.

[Operator:]

Our first question comes in Ryan Daniels with William Blair.

[Ryan Daniels:]

Hey guys, thanks for taking the questions and all the detail. In regards to the Q4 shortfall, I appreciate the 3 million that's built into January, but I'm a little more curious on the yield improvement you mentioned a few times it did not manifest. Can you go into a little bit more detail about what drove that and how quickly you think you could advance the yield improvement to increase that again?

[Jeff Sherman:]

Sure, Ryan. So we did see a 4.2% sequential increase in our COB product line from Q3. And we did have discreetly about $3 million in COB revenue that we could track that was rolling into the first Quarter. We also ramped up some additional resources to capture incremental COB yield and product revenue in Q4 and we do expect those benefits incurred to COB throughout 2020. I think the opportunity to capture the recovery of newer revenue, as Bill mentioned, is not lost, but delayed. And as we focus on our yield activities, it's sometimes just hard to predict the ultimate timing of when those come through. We said last quarter we expected – we said in Q3, we expected some to hit in Q4 and some to roll onto Q1 and that's certainly how it played out in the quarter.

[Ryan Daniels:]

Okay, good performance. In regards to the population health management business, can you give us a little bit more update on the sales force investments? I know you mentioned some of the restructuring in the quarter, but you said there's still some left to be done. So what's the update on how far along you are in the hiring process and then maybe a little color on what pipeline looks like today? Thanks.

[Bill Lucia:]

Yeah, thanks, Ryan. This is Bill. So we've hired the sales leader – we build the sales team, we may have one or two additional positions that are solely dedicated to PHM. We still continue to expand our entire go-to-market sales and client engagement team however, but the PHM team is almost fully staffed and the key was building. So we've had a pretty strong resurgence in the sales queue for PHM, really across all of the three unique product segments that create our integrated suite.

[Ryan Daniels:]

Okay, thank you.

[Operator:]

Our next question comes from Jailendra Singh with Credit Suisse.

[Jailendra Singh:]

Hey thanks, thanks a lot. I want to clarify on the Accent deal, how much was contribution from that in fourth quarter? And what are you expecting for 2020 on revenue and EBITDA from that transaction and if you can provide any color on how that contribution is spread across PI and COB business?

[Jeff Sherman:]

Sure, this is Jeff. So Accent has a solid history of really driving operating profitability and cash flows. In Q4, we had a little bit over a $1 million in revenue. And we said when we acquired Accent that it generates approximately $50 million of revenue. And that's what we're expecting in 2020. At this point, from a reporting perspective we're putting all the accident revenue in our COB product line.

[Jailendra Singh:]

So what is your implied PI business growth? Just trying to understand you hit a strong growth in Q4, just wondering if you are expecting those kind of growth to continue in 2020 in PI business?

[Bill Lucia:]

Yeah, if you look at our PI revenue, I mean, we – in the average there are just dollar growth in the last two years. We've averaged 29 million in revenue grown over the last two years. In the last year. If you normalize for the reserve release, we saw almost 12% growth in PI. So the PI number is in a clean number, does not include any revenue from Accent. We are continuing to see good momentum in that business, both at the commercial level, the Medicare RAC level and our state our PI business, so we are seeing strength across the PI product mix.

[Jailendra Singh:]

Okay and my follow up –

[Bill Lucia:]

And do expect for 2020 to see double digit PI growth.

[Jailendra Singh:]

Got it, okay. And then my follow up on – there has been some confusion around your contract with the United Healthcare in the COB business. I know you guys don't want to talk about individual contracts. But can you give any update on in terms of how the scope of that contract has changed over the past 12 months? And how do you think of that relationship in the future?

[Bill Lucia:]

So we don't discuss specific client wins, our losses or revenue contribution, but we can say that we still work with United Health and Medicaid COB and we have a number of service lines that we do work for. As we've consistently said, we welcome competition. Our clients will evaluate their service provider relationships from time to time. And we believe we should be judged based on a long-term performance and ability to execute on our growth opportunities. In past instances where we've lost some work to competitors under bidding or some other factor, many of the clients have returned to HMS given our long-term success at delivering greater value in a high rates of ROI, from their COB program and added more services. We also think that the addition of Accent and over 500 staff members clearly augments our collection recovery capabilities and will continue to help us diversify our revenue in both from a market and product perspective.

[Jailendra Singh:]

Okay, thanks a lot.

[Operator:]

Our next question comes from Matthew Gillmor with Baird.

[Matthew Gillmor:]

Hey, thanks for the question. Maybe going back to the COB timing issues, either. I guess this is probably for Jeff. But can you give us a sense for how much revenue you think was impacted by these timing issues in the delay with the yield improvement? I guess you got some of that back in the fourth quarter. There's a couple million dollars in the third quarter. And I guess ultimately, I was curious sort of how you're factoring in the revenue that's sort of still tied up into the future guide into 2020.

[Bill Lucia:]

Yeah, Matt, so we've said we're guiding to low to mid single digit COB revenue growth for 2020 and 3 million that we noted was – ones we're – just the – clearly, we had dollars in our queue – revenue in our queue that was not delivered in Q4. That was going to be delivered in q1. So that was specifically tied down on a client by client basis. On the yield side, we always have yield initiatives, we're working on any given quarter and expect to capture, more revenue from some of the activities that occurred in Q4 that will be driving into Q1 and future quarters. So the 3 million was just dollars we could discreetly track on work that had already been done that was just waiting to be processed from carriers. The yield activity is spread out more over time.

[Jeff Sherman:]

And Matt, I would just also add that – so our early indicators from the activities that we perform are driving our competence in this growth, but the other thing I'd add is that we've had a built a robust COB sales queue because we're now also focused on the large dental Medicaid carriers as well as the behavioral health carriers that serve Medicaid under carve outs. And then we've been offering COB services to our clients on their capitated encounters, as well as we see a number of these large IPAs as potential customers for COB in certain markets.

[Matthew Gillmor:]

Okay, but fair enough. And may be one on the New Mexico announcement, can you maybe just take a step back and sort of remind us how the MMISR approach works with your relationships and how that compares to this MES program and how that changes – how you're contracting with these Medicaid payers so we can sort of understand that opportunity with this transition?

[Bill Lucia:]

So, yeah, that's a good question. So many years ago, CMS proposed what was it then called MITA, which is the Medicaid Information Technology Architecture and it was to build – it was meant to build modularity, so that states good buy best in class solutions and that they would be easily integrated typically through HL settlement or other interfaces with each module. The states have now begun to adopt that many years later. It's now called MES or Medicaid Enterprise Systems, but it's a modular approach to buying. New Mexico was one of the first to buy this specific module. And they bundled a number of services that we of course were well equipped to deliver. The contracts are typically depending on the state and in this case significantly larger over time. But what we're planning to do – and not every state is planning to carve out typical Medicaid third party liability as a separate module. So some states will continue to procure our services as usual. Other states will actually procure modules that may be just third party liability. They may incorporate a number of services like New Mexico did. Net-net, we see this as a positive for growth because when you're in this model, you're selling a much larger contract typically, along with implementation fees, and the states get paid a higher match rate from the federal government because it's a technology related sale.

[Matthew Gillmor:]

Okay, great. Thanks very much.

[Operator:]

Next question comes from [technical difficulty].

[Unidentified Analyst:]

Yeah, thanks for taking the question. I just want to start off on the margin outlook for 2020. If I look at the guidance, it looks like it doesn't really imply much margin expansion year-over-year and I know in your prepared remarks, you talked about still looking at about 50 to 100 basis points annually from a long-term perspective. So maybe if you can just reconcile that a little bit and talk about some of the specific puts and takes to profitability next year. That'd be great.

[Jeff Sherman:]

Yeah, if you look at our – we looked at the range of margins just on the reported EBITDA, you can see a range at or slightly above where we finished 2019 because I said on the call a couple things. Number one for Accent, the Accent acquisition, we're going to have some costs that are going to impact margins in the short-term, but that we believe will certainly help drive long-term growth. We also ramped up some costs for IT, and some of our operation teens in the fourth quarter moving into 2020 as well. And so the 50 to 100 basis points we said is on a long-term basis, what we expect to be able to drive margin performance. We did about 20 basis points in 2019. And certainly think as we hit the strategic objectives that we're going after, we're going to see margin improvement. In the year, we'll see it somewhat temporarily depressed from the Accent acquisition, but certainly expect the long-term trajectory of the acquisition to be very positive for the company.

[Unidentified Analyst:]

Okay, great. And maybe just to follow up on the Accent acquisition there, I appreciate some of the commentary gave on the impact of 2020 and the guidance, but maybe just from a long-term perspective as well, can you just give us some color on how we should think about the growth rate and the profit profile that business made relative to your COB business and how to think about the trajectory as well. That'd be great.

[Jeff Sherman:]

So we certainly acquired the business, they had margin profile similar to HMS. We are expecting a little degradation as we do some integration work this year. I can tell you, the management team is very excited. We've spent some time with the leadership of Accent and we see a lot of opportunities as Bill noted in his prepared remarks, for cross selling, up activities as well as just using each other's intellectual property and edits on our existing customer base, which will require no incremental selling. So we think the long-term potential is very positive. We'd already identified the commercial in Medicare COB market as an area we were going after. We already started that in the third and fourth quarter and some of our ramp up our resources was actually internally going after some of those markets. The Accent acquisition clearly are accelerated our move into this space and really helps us address a piece of the market that we were addressing and a much more significant way. And finally, I would say just from a competitive standpoint, Accent brings more collection and recovery expertise, and resources to HMS that we can use across our customer base as we're looking to recover claims that we've identified or paid by the wrong payer.

[Bill Lucia:]

I like to just add on the margin side So we – a few years ago, we talked a lot about building our engineering team of Six Sigma Black Belts, which had run around the company and over those years have sustained cost growth or actually reduced costs, operating costs. We now have built an artificial intelligence, machine learning and robotic process automation lab within HMS. And while we see that having tremendous impact on the Accent operations, we are continuing to add that technology to each product area within HMS, which over the long haul will have a significant impact on our ability to grow margins.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Jamie Stockton with Wells Fargo.

[Jamie Stockton:]

Hi, good morning. Thanks for taking my questions. I guess maybe just to circle back to COB and how that business is performing. It seems like the first half of 2019 was very smooth. The second half was pretty choppy. Is there just a ballpark way that you think we should view the productivity of that segment versus what should normally be expected, maybe not the perfection, if you could call it that that we saw in the first half in '19, but a normal level? I mean, is it operating 5% below what to normally be expected or 10, just anything on that front would be great.

[Jeff Sherman:]

Hi, Jamie, this is Jeff. So there's a lot of variability in COB and we've tried to give some color on that on a quarter-to-quarter basis. Q1 and Q2 of '19 were two of our strongest COB quarters in the company's history, and we have typically seen COB variability on a quarter-to-quarter basis from anywhere between $5 million to $10 million. And really it is because of number one, the data we get – when we get data and number two, our third party carriers that are processing claims that we're sending to them, of which we don't control. And so I would say on a quarterly basis, there's variability that we talked about, we guide in an annual basis. If you look at our COB revenue – if we looked over a three year basis, we've grown it a little bit over $15 million per year over the last three years. On a two year basis, that's more like $11 million.I think the variability inherent in the business on a quarter-to-quarter basis is a challenge. That's why we try to give annual guidance, and I'd say continue to focus on the things that are going to drive COB. And as we've said in our prepared remarks, we think we have – still have a lot of you a lot of yield opportunities in COB. We have new sales in the pipeline for areas like dental and behavioral claims that we haven't historically gotten as much as well as adding new clients. And then I would say further supplementing that with commercial to commercial and Medicare COB. So I'd say it's a mature product line, but the variability quarter-to-quarter is a challenge, we understand that. Our goal is to just keep driving it as much as we can. And over the long-term, we continue to see growth and that growth has a positive impact on earnings performance.

[Jamie Stockton:]

Okay and then I guess maybe just one other quick one on the Accent, business, is there any seasonality in that business that we should expect? I mean, if we look at COB historically it's obviously been stronger, seasonally in the second half of the year than the first half, just anything on that front would be great.

[Jeff Sherman:]

I'd say there's a little bit similar – a little bit of seasonality, but not anything that's going to move the number materially on a quarter-to-quarter basis. But I think it's fair to say you probably feel that's strong in the second half than the first half, but not dramatic.

[Jamie Stockton:]

Great, thank you.

[Operator:]

Our next question comes from Donald Hooker with KeyBanc.

[Donald Hooker:]

Great, good morning, so I guess as I'm thinking about your guidance here, it seems like 2020 sort of reset year a little bit for EBITDA margin. So we're going to resettle at a new level, a little bit lower because of some of these investments that are going to grow the business after 2020. So I guess when I hear you saying 50 to 100 basis points of EBITDA margin expansion, can I induce from that that 2021 and '22, we're going to see that type of margin expansion right away or are there going to be ongoing costs to integrate that go into 2021?

[Jeff Sherman:]

Well, first to be clear and yeah, we've given a range of both adjusted EBITDA and revenue, if you took our high adjusted EBITDA range over our low revenue range that we provided, you'd have 60 or 70 basis points of margin improvement. So we're not guiding to specific margin improvement, we think 50 to 100 basis points is achievable over time. And that's being impacted in 2020 because of some of the acquisition costs that we are making. So I think we still believe it's an achievable goal. We're not giving specific margin guidance this year. We're giving a range of EBITDA and a range of revenue. And I think on a go forward basis, we still believe that that number is a number we can achieve over time.

[Donald Hooker:]

Okay, and then maybe my follow up would be on the Accent acquisition. It sounds like it gets you guys into some new interesting markets for some of your businesses, COB and others. What is a realistic expectation for investors with respect to when there might be some revenue synergies when you can start walking your services into a new client base? Is it a couple years out? Is it where we start to see it maybe towards the end of this coming year? Can you walk us through your thinking there?

[Bill Lucia:]

Yeah, I think our view is probably within six months or the back half of this year we expect to see some synergies. Again, I think we're not baking a lot of those into our thoughts right now, as we think about revenue, but we still think there's a lot of opportunity there for synergies and are already starting our game planning on that with the Accent management team, all of which have come over, by the way in the HMS legacy COB management teams.

[Donald Hooker:]

Okay, thank you.

[Operator:]

And next question comes from Richard Close with Canaccord Genuity.

[Richard Close:]

Great, thanks for the questions. So if I back out the 50 million from the revenue regarding Accent for 2020, you guys would have come in below our expectations. So as I think about your 2020 guidance, what's the level of conservatism there? Obviously 2019 was a little bit more challenging with some revenue guidance adjustments. So just trying to see where you guys stand in terms of taking a more conservative nature based on timing and yield, as you say, and just see where potential upside might exist.

[Jeff Sherman:]

Sure, Richard, so again, if you start with the range of 705 million to 715 billion and that gives you total growth of 90 million to 100 million. So as you say, if you back out Accent at 50 million, that leaves your organic revenue growth of $40 million to $50 million, which is roughly 6.5% to 8%. Now, I already noted that our COB revenue growth has averaged 17 million on a three year basis, year-over-year, 11 million on a two year basis and our PI growth is averaged $29 million a year over the last two years, so I'll let you opine on the conservative side of it. We grew organically a little over 4% this year. So that's definitely – it's definitely a step up in organic revenue growth. But we've got a lot of initiatives in place, both from a sales side, product development side and a yield side that we believe can generate this revenue growth. And also, we were ramping up the sales efforts on our PHM. We're starting to see some cross pollination of sales with PHM and some of our other products. So I think we believe these are revenue numbers that are realistic and that that we can achieve.

[Richard Close:]

Okay. And then with respect to PHM and just thought process there maybe the growth hasn't been as robust as maybe we all have thought since the acquisition. So what's your confidence level in terms of a double digit type of growth rate going forward and just thoughts in and around the uptake of that offering?

[Jeff Sherman:]

Well, I think we identified the sales issue really as kind of our bigger – our biggest challenge. We're continuing to see good adoption and good receptivity of the product in the marketplace. We are seeing more government sale. We came into 2019 saying Elli was not going to be material for the year and that these are longer sales cycle for the government client base, we're starting to get traction there as well. So as Bill noted, our asset care management platform was a key, IT was awarded best in class by KLAS, K-L-A-S for the year. So we think that they inherent overall product mix that we have is very strong. We are continuing to invest in technology to integrate the three technology platforms Eliza, Essette and Elli into one configurable platform, so that work should be done in the first half of this year. And so I think we're definitely optimistic that we have a lot of opportunity there.

[Bill Lucia:]

Yeah, and the pipeline has been building particularly – the nice thing about the blend of the product lines is, while Eliza still has a significant amount of transactional revenue, we are attempting to sell more, were more SAS or PMPM type deals, but both Elli and Essette are typically fast solutions. Sometimes within implementation fee or it's basically spread out in the PMPM or PMPY fee. But the sales opportunities we're saying in both Essette and Elli are with larger entities. So we're really, we're really optimistic about that.

[Richard Close:]

Okay, thank you.

[Operator:]

Our next question comes from Charlie Strauzer with CJS Securities.

[Unidentified Analyst:]

Good morning. This is Brendan on for Charlie. I just want to ask you about the cadence for your guidance, just looking at – you mentioned a little of the revenue that rolled in from 4Q, but just looking at each quarter and specifically, the first quarter to just how we should think about the guidance play across quarters for the pretty typical year in regards to that. Thanks.

[Jeff Sherman:]

Yeah, so we gave a range of 160 million to 165 million for Q1. And again, we have typically seen a fairly significant drop from Q4 to Q1. And then I would expect that the remainder of the year to play out as it typically does with us building more revenue back half of the year versus the first half of the year.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our last question comes from David Windley with Jefferies.

[Unidentified Analyst:]

Hi, good morning. This is [technical difficulty] Fox on for Dave. I guess, real quick on COB, there's been this shortfall now for a couple of quarters. Last quarter, you had indicated that you expected most of that to come in 4Q, but you might recoup a little in fiscal '20. And now, it seems like that's pushed out a bit. So I guess the question is, to what extent is this just a rolling effect of these delays? I mean, how do you get past this bottleneck and what's kind of your time outlook for that?

[Jeff Sherman:]

Well, we as we have given guidance for the year, we said low to mid single digit revenue guidance. So our view is – we certainly have the discrete roller we talked about from Q4 to Q1, and all the things that we are working on to drive COB yield and including new product enhancements, and new client fills, we believe will allow us to achieve that revenue growth in 2020. Again, a lot of moving parts in the COB business on a quarter-to-quarter basis and certainly, we've seen good growth over time, our growth was a little bit lower, and we're certainly lower in 2019 than we expected, we think the initiatives we have in place, we will get back to kind of more normalized low to mid single digit revenue growth in 2020.

[Unidentified Analyst:]

Got you, that's helpful. And then real quick, I know that between Accent and Vitreos and the hiring in PHM, I think you'd mentioned over 500 staff members just from Accent. Can you kind of speak to your labor investments in nominal terms both in G&A and direct costs kind of year-over-year, and what's embedded in the guidance?

[Bill Lucia:]

Yeah, most of the increase is really coming in kind of a couple of buckets. Putting Accent aside for a second and just the incremental cost of adding that staff, most of the increase is coming in our operational areas COB payment integrity, and then in IT a very little on the SG&A side, but most of the increase really is in the operational side to both deliver – product deliver, as well as improve yield and position the company for IT investments. Even on the PI side, we have ramped up staffing and we still have a lot of edits that are awaiting client approval. So we have findings, identified edits in our queue that are just awaiting for customer approval for us to actually deliver the savings. So that's another thing that gives us confidence on the PI side that we're going to see – continue to see the strong growth we've seen there.

[Unidentified Analyst:]

Got you and then kind of the ramp in G&A from Accent as a result of hiring, bringing on 500 people?

[Bill Lucia:]

Well, most of those – most of the cost there will not be in G&A, most of the cost there will be in our operating cost line.

[Unidentified Analyst:]

Got you, okay. Thank you.

[Bill Lucia:]

The vast majority is really is operational costs and above the SG&A line and the total operating cost line.

[Unidentified Analyst:]

Okay, very helpful. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like turn the call back over to Mr. Lucia for closing remarks.

[Bill Lucia:]

Well, thank you all for attending our call and we look forward to speaking to you again on our Q1 earnings call.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.