R1 RCM Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good morning. My name is Lisa, and I’ll be your conference operator today. At this time, I would welcome to the R1 RCM First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent background noise. [Operator Instructions]. Thank you. Atif Rahim, Head of Investor Relations, you may begin your conference.

[Atif Rahim:]

Thank you, operator. Good morning, everyone, and welcome to the call. We’ll start with prepared remarks by Joe Flanagan, R1’s President and CEO; and Chris Ricaurte, CFO and Treasurer. We’ll then turn it over to Q&A. Today’s conference call is being recorded. And as a reminder, certain statements made during the call may be considered forward-looking statements pursuant to the Safe Harbor provision of 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 2018, expected benefits from the Intermedix acquisition and expected new business are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, may, plan, project, would and similar expressions or variations. The forward-looking statements made on today’s call are based on R1’s current expectations and projections all future events as of today only and should not be relied upon as representing the company’s views as of any subsequent date. Subsequent events and developments, including actual results or changes in our assumptions, may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so, except to the extent required by applicable law. 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 included in these forward-looking statements as a result of various factors, including but not limited to the factors discussed under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017. Now, I’d like to turn the call over to Joe.

[Joseph Flanagan:]

Thanks, Atif. Good morning, everyone, and thank you for joining us. I’ll start with highlights from our first quarter results, followed by an update on key developments we have underway. For the first quarter, we generated revenue of a $147.3 million and adjusted EBITDA of $0.3 million. This was our seventh sequential quarter of revenue growth, driven by continued onboarding of new business. Adjusted EBITDA is seasonally low for us in Q1. In addition, we are also incurring significant upfront costs for onboarding new business, as previously communicated. Between Intermountain, Presence Health and Ascension Medical Group, we expect to cumulatively onboard close to $9 billion in annualize net patient revenue over the course of the year. Our experience has shown that making these investments early on in a contract pays large dividends down the road in terms of delivering on our customer value preposition and internal profitability targets. Successful onboarding of new business is absolutely a key priority for us, and the upfront costs are well within our plan. In line with these comments, if you look at the business that is more than one year into deployment, we are achieving our target profitability levels earlier than what we’ve previously communicated in a profitability model for an operating partner relationship. Consequently, we are reaffirming our 2018 guidance, and I am confident we are tracking well to deliver on our profitability and cash flow. We had a busy year to-date. Yesterday, we completed the acquisition of Intermedix. Our stated is to be recognized as the one revenue cycle partner for healthcare providers. Intermedix further extends our position in achieving this. We now have the scale and capability in the physicians studying across all major functions

[Christopher Ricaurte:]

Thank you, Joe, and thank you all for joining us. I’d like to remind everyone that following the early adoption of ASC 606 at the start of 2017, our GAAP revenue is now comparable to year-ago numbers, and we won’t be using some of the non-GAAP metrics we have used over the past few years. We will continue to present adjusted EBITDA as a non-GAAP metric. The adjustments to EBITDA to arrive adjusted EBITDA, are the addition of stock-based compensation expense, transaction-related costs and certain other costs. Additionally, the cost of services and SG&A numbers are referenced on today’s call on a non-GAAP basis. A reconciliations of GAAP to non-GAAP financials is available in today's earnings press release. Now turning to Q1 results. Revenue for the quarter was $147.3 million, up $7 million sequentially and up $60.4 million year-over-year. The onboarding of Ascension physician business in Wisconsin in a fourth quarter contributions from the rest of the Wisconsin market drove sequential revenue growth in net operating fees. PAS revenue, which is now consolidated into the other lines, grew $400,000 sequentially. Looking now to the rest of the year, we expect a meaningful step-up in the second quarter driven by the contribution from the Intermountain and Intermedix. We expect a further step-up in the third quarter driven by a full quarter of Intermedix contribution, onboarding of Presence Health. We also expect to onboard the Ascension Medical Group in the late Q3/early Q4 timeframe, which should also result in sequential increase in the fourth quarter. From a cost standpoint, cost of services in Q1 were $132.8 million compared to $121.9 million in Q4 of last year. This increase was largely driven by the new business in Wisconsin as well as upfront cost to support onboarding of the Intermountain business and the anticipate Presence Health and Ascension Medical Group business. SG&A expenses in Q1 were $14.1 million, up $1.4 million sequentially, driven by legal costs related to prior litigation and continued investment in sales and marketing as well as our corporate IT infrastructure. We'll continue to remain disciplined in our SG&A structure, with most of the incremental budget for 2018 versus 2017 allocated to sales and marketing efforts. Adjusted EBITDA for the quarter was $0.3 million compared to $5.7 million in the fourth quarter and up from negative $1.4 million a year ago. The sequential decline is a result of expected seasonality coupled with the upfront contract onboarding costs we've discussed. When you look the contribution from the CBMs in Phase 1 ABMs, in other words, contracts that were deployed a year or more ago, the EBITDA contribution from these customers on a same-store basis was up $6 million year-over-year and ahead of pace in terms of targeted profitability margin rates. Lastly, we incurred $2.4 million in other costs in Q1, primarily related to the Intermedix acquisition. These costs are not reflected in adjusted EBITDA, but are included in the other expenses line on our GAAP income statement. Turning to the balance sheet. Cash at the end of March inclusive of restricted cash was $171 million, up from $166 million at the end of December. This increase was driven by the equity investment by Intermountain in Q1, offset by cash used for CapEx and working capital needs. In connection with the Intermedix acquisition, we utilized approximately $105 million in cash from our balance sheet to fund the acquisition and paid for transaction-related cost. Turning to our outlook for 2018. We are reaffirming the preliminary 2018 guidance we provided in conjunction with the announcement of the Intermedix acquisition in February. We continue to expect to generate revenue of $850 million to $900 million and adjusted EBITDA of $50 million to $55 million. This guidance is preliminary as it does not contemplate any major changes from adoption of ASC 606 for Intermedix. We plan to announce the effects of ASC 606 accounting on Intermedix revenue stream on our second quarter earnings call. We continue to expect the majority of EBITDA for the year to come through in the second half, given continued upfront investments in the second quarter to onboard our new business. In closing, I am pleased to say we are tracking well relative to our expectations. We are making the required investments to successfully onboard close to $9 billion in new patient revenue this year and look forward to executing on our commitments in 2018. Now, I’ll turn the call over to the operator for Q&A. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Charles Rhyee from Cowen & Company. Your line is open.

[Charles Rhyee:]

Hey, guys. Thanks for taking the question. Maybe, Joe, talk about sort of - you talked about the funnel and the qualified leads and it sounds great that things are growing again. Can you talk about sort of what the conversations are like? As you know, if we recall few years back, you were in discussions with a numerous field -- things have stalled obviously. Obviously, this year things have started to pick up again. Can you talk about how those conversations are going and what’s changed about it? And maybe talk about to the extent how Ascension has been involved in any of these discussions. That be helpful.

[Joseph Flanagan:]

Sure. I would - in terms of first - I’ll start with just characterizing the conversations and some color around our pipeline growth discussions with customers. One think I would say, Charles, is in terms of a compelling contrast to your question from a couple of years ago, I would say those conversations are much more action-oriented, meaning really a deeper level of discussion and more time, which I view as positive, being spent wanting to understand

[Charles Rhyee:]

Thanks for that. And if you talk about the Ascension, Ascension is evolving in helping - in any kind of the discussions you had with clients, they are along with you at times to talk about sort of the their experience with you guys?

[Joseph Flanagan:]

They are. But again, maybe in a comparing contract, if I do that over the trailing 8 quarters, I would say second half of '16 and the bulk of '17 Ascension was heavily involved with us as we were relaunching the company and reestablishing credibility with our market. And they were unbelievably helpful in that period. They continue to be helpful when we need their support or when we want to have a reference, discussion, et cetera. But equally, I would say, and I would characterize this also as very encouraging from my vantage point, as Gary has built out his commercial organization and built out the processes and the human capital to drive the growth in the pipeline, I'm encouraged that more and more of our discussions are driven off of those efforts. And we always have the support and willingness of Ascension to engage and just share their learnings that have occurred with us, both positive and where those areas of improvement, which I think is a very credible perspective to our target customers. But Gary has done a very nice job, again, to build out the commercial engine in the channel, and he's more and more carrying those discussions with the support of the company and the capabilities and the value prop we have to bring to the market.

[Charles Rhyee:]

Great. Thanks. And maybe one last question then this. When we look at the balance sheet and the cap structure right now, we saw this preferred stock out there with the paid and kind on the coupon. Can you remind us of how many is left on the pick, the paid stock, and anything there you guys do maybe to kind of restructure this? Because I feel sometimes away that the complexity of the cap structure makes it difficult for some of the market to kind of get the arms around a little bit. Anything that you share with us would be great.

[Christopher Ricaurte:]

Yes, Charles. This is Chris. I'll talk to the timing, and it goes out to 2023. So 5 years left. And Joe can talk a little bit about the second half of your question.

[Joseph Flanagan:]

Yeah. Charles, from a cap structure evolution -- and we fully understand the questions and the thoughts around this from a broader investor base. What I would say, we're focused right now, and we see just a great end market and we feel really good about our value prop, so we're focused right now on driving growth and that growth we think is the lever that we're in full control of as a management team to drive earnings and offset the evolution of that cap structure, if you will. But as we progress through the balance of this year and head into the term from ’18 to ‘19, we’ll continue to engage in those discussions at our board and look at some the opportunities and the thoughts on evolution of the cap structure. But right now our primary focus, and we’re very encouraged by our competitive positioning, by the end market and by the capability the company has is really just to drive the growth of the business on the top line and the bottom line from that perspective.

[Charles Rhyee:]

Okay, great. Thanks a lot, guys. Appreciated.

[Operator:]

[Operator instructions] Our next question comes from the line of Steven Halper from Cantor Fitzgerald. Your line is open.

[Steven Halper:]

Hi, good morning. Could you just talk about the terms on the debt deals that you completed for Intermedix?

[Christopher Ricaurte:]

Sure. So there was a first lien debt, the seven-year term with that LIBOR plus 525 basis points, and so that was the $270 million. And there was a subordinated debt, which was a combination of the Ascension, TowerBrook and Intermountain, and that was that 14%, and again a similar term. So those are the two pieces that add up to the $380 million of debt.

[Steven Halper:]

And the private debt with Ascension and Intermountain, that’s a pick as well, right?

[Christopher Ricaurte:]

It’s a pick. It’s a pick [Indiscernible], but that’s the option of the company to pay that in lieu of paying cash. So our expectations we’ll pay cash. But in this case, it’s that optionality.

[Steven Halper:]

Okay, good. That’s helpful. Thank you.

[Joseph Flanagan:]

Thanks, Steve.

[Operator:]

There are no further questions at this time. Mr. Flanagan, will turn the call back over to you.

[Joseph Flanagan:]

Thank you, operator, and thank you, everybody, for joining us. To close out the call, I’d like to say that given the upfront investments we have made, we are in a very good position to onboard the new business that’s been contracted and committed to us. We expect dividends from these investments to start flowing through over the coming quarters, in line with my comments and Chris’s comments, and we’re looking forward to integrating and broadening our offering and solution set. We look forward to keeping you updated on the ongoing basis - on an ongoing basis as we progress through the year. I just want to say thank you very much. And operator, we can close the call.

[Operator:]

Thank you. This concludes today’s conference call. You may now disconnect.