R1 RCM Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good day, ladies and gentlemen and welcome to Accretive Health Q2 2015 Earnings Call. I will now like to turn the conference over to Atif Rahim, Head of Investor Relations. Please proceed sir.

[Atif Rahim:]

Hello everyone and welcome to the call. With us today, we have Emad Rizk, Accretive Health’s President and CEO and Peter Csapo, our CFO and Treasurer. We’ll start with prepared remarks from Emad and Peter and turn it over to Q&A. As a reminder certain statements contained in this conference call may be considered forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. In particular, any statements made about Accretive Health’s strategic review profits and its -- its ability to reduce the cost of revenue cycle operations, maximize appropriate fee-for-service revenue, prepare for value based payments, increase capacity to service customers, generate specified level of cash from contracting activities and add new business are forward-looking statements. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today’s call involve risks and uncertainties. Our actual results and outcomes could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the factors set forth Risk Factors in annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC and June 23, 2015 and our quarterly report on 10-Q for the quarterly period ended June 30, 2015 filed with the SEC this evening. The forward-looking statements made on today’s call are based on Accretive Health’s current expectations and projections of our future events as of today, August 05, 2015 only, and should not be relied upon as representing the company’s views as of any subsequent date. While the company may elect to update these forward-looking statements at some point in the future, Accretive Health specifically disclaims any obligation to do so to reflect actual results or changes in factors or assumptions effecting such forward-looking statements. Now, I’d like to turn the call over to Emad.

[Emad Rizk:]

Thank you, Atif and good afternoon everyone. I’d like to thank all of you for joining us on the call today. I am pleased to say with today’s 10-Q filing, we are timely with our SEC filings and have returned to a normal quarterly reporting cycle. The team has truly come together and made tremendous progress in turning the quarter on several significant challenges we faced over the last year. In addition to returning to a normal cadence with our SEC filings, we have rolled out new data authority, strengthened our technology infrastructure and continue to improve our operational rigor. Almost all of our internal indicators performance has improved as has customer satisfaction. From a financial report standpoint, we are on track to deliver cash from contracting activities from the lower end of our $30 million to $40 million guidance range we previously communicated. Also, as we indicated on our last call, our earnings are expected to be second half loaded due to seasonality in the business. I will keep my comments on today’s call brief as I recently spoke to you just a month ago. Before I get into our results, let me say a few things about our strategic review process we announced on July 16th. The process is ongoing and we expect it to be a thorough one. I will note that there is no such timetable for its completion. We are working closely with our financial and legal advisors as we move through the process. As a reminder, we cannot give any assurances that the process will result in the completion of any transaction or other alternative. And we cannot provide an update or discuss details until the Board deems further disclosure is appropriate. And so while I appreciate that you may have questions about the process, I hope you can understand that we cannot make any further comments on today’s call and would like to keep our focus during the Q&A session on the operations and financial results of our business. During this process, we are committed as ever to serving all our customers and continuing the strong momentum we have built over the last year in improving our operations and infrastructure. Our dedicated employees both on-site at customer locations and off-site at our offices and shared services center remain focused on driving improved performance for our customers. Our investments in our technology and shared services capabilities are on track with our 2015 goals and by new shared service center in Michigan is due for opening this week. This will increase our capacity to serve our customers and I’m happy to say one of our customers has already indicated an interest in explaining the use of shared services with us. The dynamics in the healthcare industry continue to place pressure on hospital’s revenue cycle operations, creating increasing need for our [indiscernible]. This creates opportunity for Accretive and we continue to pursue opportunities to expand our business with existing customers and add new customers to the company. Before I turn the call over to Peter, I would like to remind you all of you again of the confidence I have in our people and our organizational ability to provide unmatched services to our customers. Our goals are unchanged, reduce the costs of revenue cycle operations, maximize appropriate deeper service revenue, prepare for value-based payments and improve patient engagement. The combination of our technology, personnel and share-service centers uniquely positions to deliver solutions and results to improve operations for our customers. As I said before, we continue to be focused on operational and performance excellence. Our business performance continues to get stronger and I would like to personally thank all of our employees for their continued focus on our customers and their dedication to our business. With that, I would like to turn the call over to Peter, for a discussion of our financials. Peter?

[Peter Csapo:]

Thanks, Emad and good afternoon everyone. For the benefit of those of you who may be new to Accretive Health, let me provide a quick overview of our non-GAAP financial measures. We used two non-GAAP measures to supplement our GAAP results and provide a better view of our operations. The first measure we use is growth cash generated from customer contracting activities, which is our reported GAAP revenue plus the change in deferred customer billings. The second measure is net cash generated from customer contracting activities, which is our reported net income before interest, taxes, depreciation, amortization, share-based compensation, restatement related expenses, reorganization-related expenses and certain non-recurring items as well as the change in deferred customer billings. Effectively it is our adjusted EBITDA plus the change in deferred customer billings. These two measures are primarily how we internally measure our financial performance and we believe it’s important for investors to look at our results on this non-GAAP basis as well. The reason we use these non-GAAP measures is that our business model generally entails entering into three to five year contracts our customers, with GAAP revenue recognition typically deferred until substantially later than when we deliver services, bill and collect cash from our customers. We typically invoice our customers and collect cash on a monthly or quarterly basis. At the same time, our direct costs of delivering services are expensed as incurred. The effect of our deferred revenue recognition is that we experience large variations in our GAAP revenue and earnings, with significant upswings in periods where we have revenue recognition events which are typically at the end of a contract or renewal, when we reach agreement with customers on the value we generated. For revenue that is not recognized until we have reached revenue recognition criteria, the amounts billed and cash collected is added to our deferred customer billings in the customer liabilities account on our balance sheet. When revenue recognition occurs, deferred customer billings are reduced by this amount. Now let me walk you through our second quarter 2015 results based on our non-GAAP metrics. I would like to remind you that GAAP to non-GAAP reconciliation is included in this afternoon’s press release and in the appendix of the presentation accompanying this call. Gross cash generated for the second quarter was $47.2 million, a decline of 16.4% year-over-year. Our core RCM business was impacted by customer losses over the past 12 months and we also granted $5.5 million to credits to potentially expand future profitability opportunities with customers by transitioning off of a legacy pricing model to resolve a customer issue and to remove their earlier termination of the contract. We are also impacted by the timing of incentive fee collections which we announced is collecting in the third and fourth quarter. As a reminder, we use a cash basis of accounting for incentive fees. Other service fees which comprise mainly of a physician advisory service, PAS, revenue declined $2.9 million during the second quarter due to the protracted compressions since the implementation of the Two-Midnight Rule in the fourth quarter of 2013. We are seeing some stabilization in the PAS business, but remain very cautious until various regulatory decisions are finalized over the next several quarters by CMS. Cost of services declined 11%, $39.7 million, primarily due to reduced volumes in the PAS business and reductions in infused management expenses due to initiatives to optimize allocation of resources deployed to our customer site. SG&A expenses declined 9.7% year-over-year to $14.1 million as we’ve reduced support cost for the PAS business and reduced certain corporate expenses due to the continuation of the cost reduction initiatives started in prior years. Net cash generated was negative $6.6 million or $2.8 million below the prior year, driven mainly by the decline in gross cash generated and partially offset by lower cost of services and SG&A expenses as previously mentioned. Our cash balance at the end of June was $121.9 million, a decline of $10.1 million from the end of the prior quarter. The end of the second quarter and early part of the third quarter is a seasonally low point for our cash balance. We utilized cash in the quarter to pay accrued 2014 performance incentives and had capital expenditures of $5 million related to investments in technology and the new shared-service center in Michigan. Turning to our outlook, our guidance remains unchanged at $230-$240 million for gross cash generated and we continue to expect net cash generated to be at the lower end of our $30 million to $40 million guidance range. Additionally, as discussed in our last call, we expect gross and net cash generated to be higher in the second half of the year, due to the seasonality of incentive fee collections and improvements in net operating fees. We expect one-time costs of $69 million, excluding costs related to the ongoing strategic review process which we expect to be in line with customary costs incurred in such process. Lastly, I’d like to provide an update on our stock exchange relisting process. We previously anticipated being relisted soon after we were current with our filings. With the decline in our share price following our July 16th announcement, we currently do not need the $4 minimum price needed to list on either NYSC or NASDAQ. We are therefore placing the relisting process on hold pending the outcome of the strategic review process. I want to thank our shareholders for their patience during the restatement, becoming current with our filings and now the strategic alternative evaluation which the company has undertaken. We acknowledged unusual situation that the health letter has created, but we remain committed to driving operational performance, delivering value for our customers, pursuing growth strategies and maximizing shareholder value. And now I’d like to turn the call over to the operator the Q&A. Operator?

[Operator:]

[Operator Instructions] And our first question goes to Jeff Garro with William Blair and Company. Please proceed sir.

[Jeff Garro:]

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

[Peter Csapo:]

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

[Jeff Garro:]

So given that cash basis of accounting, can you talk about any of the safeguards you have in place that will make sure that you collect those fees in time and that they are earned and there is no need for further credits for further credits or any other adjustments?

[Peter Csapo:]

The incentive fee is a little different from the credits we discussed on the call. The incentive fees are really driven by the gain share performance of the contracts and the various terms of the different contracts that we benefit from. So many of those we were ready to deliver those services. We’ve achieved those results just a matter of getting the cash in the door and again, as I indicated earlier, we don’t count those until we actually get it collected. From a net operating fee perspective, we have various cost reductions initiative and when I say cost reduction initiatives, I’m talking about the costs at our customer site in terms of driving down the costs which are obviously in our model improves the net operating fee performance. And those have been on their way and in our models and the performance we are seeing at the sites there is a path around achieving those in the back half of the year.

[Emad Rizk:]

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

[Jeff Garro:]

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

[Emad Rizk:]

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

[Jeff Garro:]

Great. I’ll hop back in the queue. Thanks guys.

[Emad Rizk:]

Thanks, Jeff.

[Operator:]

[Operator Instructions]. Our next question comes from James – with Cowen. Please proceed.

[Unidentified Analyst:]

Good afternoon guys. I just got a question in what do you think Ascension the real goals are in terms of presume the – for you guys pursue the strategic alternatives?

[Emad Rizk:]

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

[Operator:]

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

[Emad Rizk:]

Operator, there are no more questions in the queue? Well, if there are no more questions – I’m sorry.

[Operator:]

We have no further questions at this time.

[Emad Rizk:]

All right. I’d like to thank everybody for joining the call today. And I look forward to updating you in the future. Have a good afternoon.

[Operator:]

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