Tivity Health, Inc.
Q4 2012 Earnings Call Transcript

Published: 7 Feb 2013

[Operator:]

Good morning, and welcome to Healthways' Fourth Quarter 2012 Conference Call. Today's call is being recorded and will be available for replay beginning today and through February 16, by dialing [phone]. The replay passcode is 5679724. The replay may also be accessed for the next 12 months on the company's website. To the extent any non-GAAP financial measures discussed in today's call, you'll also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today's news release, which is also posted on the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Healthways' expected quarterly and annual operating and financial performance for 2013, 2014 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You're hereby cautioned that these statements may be affected by the important factors, among others, set forth in Healthways' filings with the Securities and Exchange Commission and in today's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, for opening remarks, I'd like to turn the conference over to the company's President and Chief Executive Officer, Mr. Ben Leedle. Please go ahead, sir.

[Ben R. Leedle:]

Good morning, everyone. Thank you for being with us today for our fourth quarter 2012 conference call. As you know we had some management scheduling conflict that came up after we released our initial call timing. So we do appreciate your flexibility in joining us this morning. I'm here today as usual with Healthways' CFO, Alfred Lumsdaine. We'll both make some remarks about our results for the fourth quarter and for 2012 overall, as well as our outlook and guidance for 2013. Following those remarks, we'll open the floor for your questions. As I have quite a bit to cover today, my remarks will be brief and then I'll turn it over to Alfred to cover our fourth quarter and year-end financial results as well as our guidance in detail. I simply want to frame my comments this morning with the following 3 observations about our business. First, with our fourth quarter and full year results of 2012, we are right where we expected to be in terms of our plan to return Healthways to sustained profitable growth. Second, because of our business development success in late 2011 and throughout 2012, we have a clear view to meaningful revenue growth in 2013. And third, as the contracts we implemented in 2012 and the first part of this year, reach expected annual revenue run rates over the next 6 to 24 months, we expect both further organic revenue growth and significant margin expansion to our quarterly progression in 2013, during 2014 and beyond. We are just at the initial stages of penetrating a market opportunity that is many times greater than any we've ever been afforded in the 30-plus years of history at Healthways. Further, our business development success over the last 18 months evidenced the strong market demand for innovative, integrated, comprehensive population management solutions and in particular, specifically for our Well-Being Improvement Solution. During this time, we signed new and expanded contracts with health systems, employers and health plans, including 5 strategic health system partnerships with Texas Health Resource, Wellmont Health, Mercy Health, Queens in Hawaii and just this week with Carondelet in Southern Arizona. And also including employer contracts with government entities such as the State of Ohio, State of Tennessee, the City of Chicago, and a number of large private employers, like Family Dollar. And finally, our deeply integrated work on behalf of health plans such as BlueCross, BlueShield of Hawaii, HMSA, CareFirst and Wellmark are all clearly contributing to an increasingly favorable market impact for us. These agreements and many others now are the foundation for our return to profitable sustainable growth for the future. The continuing near-term opportunities will health plans, health systems and employers are substantial and we are very well-positioned to continue signing a significant amount of business in all of them. Healthways has accomplished an incredible amount over the last 2 years, thanks in no small part to the relentless work expanding our value proposition in anticipation of the current environment. We have proven that we are resilient and adaptable in an industry subject to rapid and dynamic change. Consequently, as we talked about last quarter, I believe we passed the tipping point on our path to return to long-term profitable growth and we expect to execute on the opportunities that are present and as such, we will gain firm control of our progress towards reaching our growth goals. And now, for a whole lot more detail around the financial mechanics of our business and our outlook for 2013, let me turn this over to our CFO, Alfred Lumsdaine.

[Alfred Lumsdaine:]

Thanks, Ben. Good morning, everyone. Fourth quarter revenues were $175 million of which $165 million was attributable to our domestic operations and $10 million to international operations. For the full year, revenues totaled $677 million, which included domestic revenues of $646 million and international revenues of $31 million. Total revenues declined about $12 million or just under 2% from 2011 full year revenues of $689 million. Excluding the impact from the wind down of the Cigna business, revenues grew by more than 10% year-over-year. Earnings per diluted share for the fourth quarter were $0.02, which included approximately $2 million or $0.03 per diluted share in restructuring charges stemming from capacity realignment activities, which we said were under consideration during our earnings call in October. Excluding these restructuring charges, adjusted earnings per diluted share in the fourth quarter totaled $0.05, reflecting a break even performance from domestic operations and a $0.05 profit from international operations, both of which were right in line with our expectations and with the implied ranges from our revised full year guidance. With regards to our domestic operations earnings performance I described in the October call, the need to adjust our 2012 earnings guidance due to the near-term impact of signing a number of large, new and expanded contracts, this impact came primarily from 2 factors. First, 2 contracts with existing customers that we were able to renew well in advance of their normal contract renewal point, generated lower revenue in the second half of 2012 than we previously anticipated, but as we mentioned, will significantly exceed our prior revenue expectations for 2013 and beyond. Second, the size, scope, complexity and sheer number of new and expanded contracts resulted in cost in advance of revenues. Some cost impact occurred in the third quarter but the majority of these incremental implementation costs were incurred in the fourth quarter of 2012 or will be incurred during the first quarter of 2013. With regard to the earnings performance of our international operations, the fourth quarter was influenced by the recognition of milestone-based revenue, which was anticipated in our revised guidance. Finally, as expected and discussed on our Q3 call, during the fourth quarter, we completed our work regarding the various types, amounts and geographic requirements for the capacity necessary for our success in 2013. Given the revenue declines associated with Cigna and one other terminating health plan contract, which I'll refer to hereafter as our 2 terminated contracts, as well as the geographic and intervention modality requirements of our new contracts, we appropriately structured a net consolidation of our call center capacity by closing 1 call center location while at the same time expanding another location. An impact of making this capacity realignment was the Q4 restructuring charge of approximately $2 million. Total 2012 earnings per diluted share, including the impact of the restructuring charge, was $0.24. Excluding that item, adjusted earnings per diluted share for 2012 totaled $0.27, which is comprised of $0.26 from domestic operations and $0.01 from international operations. Let me remind you that since the International business segment has moved to breakeven or better in terms of profitability, and considering its small size relative to that of the domestic operations, we do not plan to continue to break out the International business separately as we move into 2013. This decision is in no way indicative of the change in our expectations for growth from this segment but rather it's simply a reflection on the expected comparative materiality of this segment to the total company given our growth expectations for both the domestic and international segments. Cash flow from operations for the year totaled approximately $41 million. This result is below our expected range for the year, which we updated last quarter and the difference is attributable to the timing of billing and collecting on 2 specific accounts receivable related to milestone-based and performance-based revenue. Of these 2 balances, one was fully collected this week and the other one is expected next week. The timing, obviously, will positively impact our expected cash flow from operations for 2013 and I'll touch on that in a moment. Capital expenditures for the year totaled $49 million. So now I'd like to turn to financial guidance for 2013. At a summary level, we expect 2013 to have a financial profile of revenues and earnings growing sequentially throughout the year beginning with a net loss in the first quarter. These expected results are driven by a couple of specific factors. First, we have new business wins that are scheduled for launch at various times throughout the year. Second, following both a strong fourth quarter and a strong full year of recognizing performance-based revenues, we enter 2013 with a portion of these fees tied to target that reset each year and so naturally get measured later in the year for results and corresponding revenue recognition. And finally, a number of our new and larger health plan and health system contracts have an ongoing revenue growth profile driven by growth in the life served or by the staged implementation of service lines over time or in some cases by both characteristics. The result of these factors is expected revenue growth and margin expansion throughout 2013 and into 2014 and beyond. Total 2013 revenues are expected to be in the range of $710 million to $750 million. While this total revenue range implies a growth range of 5% to 11% in comparison to 2012 total revenues, it's important to revisit some of the key dynamics that, as we discussed on the October call, we expect will impact 2013. Our revenue guidance includes the loss of approximately $80 million of 2012 revenue attributable to the 2 terminated contracts. With those lost revenues excluded, our anticipated revenue growth rate would translate to 18% to 25%. Signifying the strength of demand in the market for our solutions. Some of this expected revenue starts at the beginning of the year and is attributable to both new contract starts and to organic growth from existing contracts particularly those for our services to a growing Medicare advantage population. Further revenue growth is expected from expanded and extended contracts with key health plans, as well as our new contracts with multiple health systems that we signed during 2012 and so far in 2013. In most cases, we expect those contracts will see revenues grow over the course of the year as stage services are implemented, as lives being served expand and as performance revenue is measured and recognized. As of today, we've signed contracts that, at target performance, fully support the low end of our revenue range. The midpoint of our range would rival an all-time revenue high for Healthways. Further, as we noted in the earnings release, our existing signed contract base is expected to provide not only significant revenue growth in 2013 but is also expected to produce incremental organic revenue growth of over $85 million in 2014 over 2013. This is without signing any new business. Turning to earnings guidance. Total year earnings per diluted share are expected to be in the range of $0.25 to $0.35. EBITDA margins for 2013 are expected to be in the range of 10.5% to 12.5%. Although these margin levels are below historical levels, they are relatively consistent with 2012. To provide further clarity on our margin expectations, I'd like to walk you through the most significant factors that influence our 2013 margins. As with revenue, we expect margins to grow sequentially throughout the year. The first factor impacting our margins is once again the previously noted impact of the approximately $80 million revenue decline from the 2 terminated contracts. We've discussed many times that due to the scale, duration and nature of the legacy platforms, these revenues carried higher than average margins. Second, the implementation cost profile of the sheer number of large new and expanded contracts impacts our expected 2013 margin profile, as these contracts have an ongoing ramping revenue profile that in some cases extends out several years. Because cost began in a much more fully expressed ways than revenues, these contracts are expected to generate expanding margins as their revenues grow. Finally, as previously noted, a majority of our performance-based risk revenue is expected to be recognized in the back half of 2013 and in the fourth quarter in particular. Further, it's important to note that we expect both the absolute and relative impact from performance-based risk revenue to be lower in 2013 than in 2012. This change in our recent trends have increased performance-based revenues is largely attributable to one of the 2 terminated contracts. A few quick comments regarding our International business. All of our individual international contracts are currently profitable and we anticipate will remain profitable in 2013 and beyond. Although we have opportunities internationally that we believe could come to fruition during the year, we have not incorporated the addition of contracts in any new countries into our guidance. So to summarize the total company revenue and earnings profile for 2013, we expect revenue will strengthen throughout the year, quarter-by-quarter particularly in the back half of the year. We expect that the ramping revenues, the timing of recognizing performance-based revenues and the abatement of some of the implementation costs for new large and expanded contracts all lead to earnings that will strengthen significantly each quarter from a budgeted first quarter loss of $0.15 per diluted share. Let me cover a few additional financial expectations for 2013. We anticipate depreciation and amortization expense will be slightly higher than 2012 due to the level of capital expenditures in recent years. And we expect that interest expense will be slightly lower as a consequence of our debt refinancing during 2012. As far as cash flows, we expect operating cash flows in 2013 to be in the range of $70 million to $80 million, significantly stronger than 2012 primarily due to timing issues, particularly the specific AR collections slip from 2012 to 2013 that I referenced earlier. We expect our capital expenditures will be approximately $45 million, modestly down from 2012. We would expect that free cash flow will be applied primarily towards debt repayment. Our debt to EBITDA ratio as calculated under our credit agreement rose to 3.4x at the end of 2012, partly as a function of the restructuring charges. Given the expected quarterly progression of improving earnings throughout 2013, we proactively completed a simple amendment to our credit agreement earlier this week. This amendment carves the restructuring charges out of the leverage covenant calculation and extend the starting date for 2 scheduled step-downs of our leveraged ratio from 4x to 3.5x out by 9 months. Accordingly, the first scheduled step down is now scheduled for the end of 2013. As a consequence, we'd expect to maintain a comfortable cushion under the leverage covenant throughout the year and the year with a debt to EBITDA ratio below 3x, all while maintaining the necessary liquidity to fund our expected growth. I'd like to make a few final comments regarding our performance for 2012 and our expectations for 2013. At the beginning of last year, we established our guidance in qualitative terms around our ability to deliver new and meaningful contracts that reflect the move to a value-based healthcare reimbursement system in the U.S. Our new significant long-term contracts with health plans and health systems, along with the current strength of the sales pipeline illustrate both the demand for our services and our significant success in executing in this environment. It's important to recognize that we are ahead of where we expected we would be in terms of the traction and scope of our relationships particularly with health systems. In quantitative terms, we grew our revenue in 2012 to an extent that largely replaced the impact of the Cigna wind down. And while the loss of the above average margins provided by the 2 terminated contracts, creates a near-term headwind, as we enter 2013, our business concentration risk profile has meaningfully improved. We no longer have the same concentration higher than average margin business, but rather the margin profile across our markets is far more consistent. In addition, much of our business up for renewal the past several years has either move now into much more strategic, longer-term and more comprehensive solutions focused on total population management, or it has been lost with a clear opportunity now to be regained in the future with other entities, primarily health systems that are now beginning to take on significant financial risk in serving attributed populations. Our initial contracts with health systems are in various stages of implementation and are expected to begin delivery of meaningful revenue in 2013, with a revenue and margin profile that will expand over the course of the year and will continue to add revenue and earnings growth in 2014. As a consequence, we believe we are now moving into a period with visibility to sustainable top and bottom line growth. That concludes our prepared remarks, operator. I'd like to open the call for Q&A.

[Operator:]

[Operator Instructions] We'll take our first question from Josh Raskin with Barclays.

[Jack Meehan:]

This is Jack here for Josh. Could you start just by talking about the number of opportunities you see in the market? Maybe the relative size of the pipeline compared to what you saw in 2012 and then where are those opportunities coming from?

[Ben R. Leedle:]

Sure. This is Ben. We mentioned in our fourth quarter that we continue to see the same kind of momentum we had reported on in previous quarters. We're probably up 10% in the number of signed contracts over the last part of the year. We shared 34 new extended or expanded contracts. Just to give you a little color around the new business development, we saw in the back half of the year, and I know you saw in a lot of our press releases, there's continued both new and renewed relationships with Medicare Advantage Plans around SilverSneakers and our fitness product. That probably has represented about between 35% and 40% of the new business growth from just a volume of contracts basis. And then, split between employers and health systems, about 1/2 -- the other approximate 50% to 60%, so about 25% to 30% with health systems and then between kind of a traditional health plan and employers making up the remainder. So that's not been an unusual shift. I do think though rather than simply counting the number of contracts, understanding the nature and the scope of a core of these, which we think again called out in both our release and our comments, seeing the market for which we had projected at the same time last year, that we would gain our first contract. So if you go back a year ago, the health system partnerships that I mentioned with THR, Mercy, Wellmont, Queens and now Carondelet, all have materialized essentially over the last 8 months. So we're seeing a rapid ramp in those deep longer-term partnerships where we'll be working with those entities to deliver physician-directed population health approach. It entails quite a bit of service development and infrastructure set up. So we've also noted the nature of the ramp of those relationships both in terms of the scope ramping, as well as then the revenues and margins growing and expanding over time with them. We have a very active pipeline. What we've seen less of in kind of the formal RFP process is smaller employers. Everything else is held stable and or grown as opportunity in kind of that formal bid arena. We have seen a tremendous amount of -- on RFP business development activities. I think I mentioned on the third quarter that we had over 20 of these health system partnership opportunities in queue and we continue to work those. We don't see any lightening of the demand from large employers who continue to look at taking more and more aggressive and comprehensive steps to not only affect the medical cost associated with their workforce, but really to change the overall well-being of their workforce and dependent family members knowing that there are performance issues closely linked related to people's status and well-being. So just continued general push in demand. Some of the factors from that, I do think, are nobody solved the cost -- the rising cost problems. Nobody has reversed the trends of disease and the demand is still looking for solutions that can do that. And so we'll expect to continue to see a robust business development set of activities and expect to yield more wins that are processed as we go to '13.

[Jack Meehan:]

Are there any material contracts up for renewal this year?

[Ben R. Leedle:]

We have typically just reported any contract that represented more than 2% of the prior year's total revenues. We identified, not by name, but we have 3 such contracts that are all up for renewal at the end of the year, in December. So really no '13 impact from a risk perspective on these and those 3 total about 7.5% of 2012 revenue.

[Alfred Lumsdaine:]

I would just interject, none of which individually is over 3% of revenues.

[Jack Meehan:]

Okay. And then just lastly, presuming as far as debt repayment goes in the first half of the year, would I think about using -- all the free cash flow that you generate would go towards debt?

[Alfred Lumsdaine:]

Yes, I think that's fair. We don't have a pipeline, we're not looking at any significant M&A type activity. So debt repayment would certainly be a priority. As we project out our leverage covenant under our agreement, under the revised agreement, we see relatively flat until we get to the end of the year. But again as I mentioned in my prepared remarks, we see a pretty comfortable cushion under the leverage covenant with the changes we made with the amendment this week.

[Operator:]

We'll go next to Tom Carroll with Stifel.

[Thomas A. Carroll:]

A couple of questions. I wonder if you could give us some sense or actually quantify the amount of integration and setup costs that you're expending here or expect to in 2013. So you're giving out an EPS range of $0.25 to $0.35 a share, which includes X amount per share for setup costs. Some order of magnitude there to put a framework around that? And then secondly, thanks again for all the detail on your revenue outlook, it sounds like it's basically the same story from when we spoke in October but now that we got 3 months past us, do you feel, I guess, better, the same, maybe slightly worse given -- on your revenue outlook today than you did back in October? So I guess maybe said differently that would be roughly $815 million in revenue you're talking about, at a minimum for 2014, I guess what's your sense of confidence in that number?

[Ben R. Leedle:]

Yes, Tom, this is Ben. I think obviously, we're as or more confident than we were when we shared those numbers with you at the end of the third quarter and obviously, when we talked about specific periods, there's a lot of revenue growth that comes from the ramping of these contracts throughout the year and also to keep in mind that since we talked last time, we have had some advancements inside of -- in our THR relationship that begins unlocked opportunity for revenue growth that we would have anticipated would occur at some point but couldn't point to time specificity, too, when we talked to you in the third quarter. I'm mentioning essentially, the ACO development on the commercial side for them with BlueCross BlueShield Tennessee in the North Texas market. And what that does for us is brings lives into the economic model inside of that partnership and we have revenues sourcing from other activities and services and I think those were kind of outlined in the more recent release after the second of those ACOs were announced just this week. That actually just strengthens our sense of both the '13 and beyond growth. And the other factor for all that as you know is the confidence around the relative renewal and retention rate of the base that we're entering into the year on which we're confident with as well.

[Thomas A. Carroll:]

How about integration costs?

[Ben R. Leedle:]

Yes, I think, that's a difficult question to answer, not to avoid it certainly. It's simply, when we think about integration and implementation, we're talking to early phases of a contract that have ramping revenue streams. So we're talking a lot of cost that are actually standing up the implementation while revenues ramp overtime. You can't really bifurcate it into a set of activities to say now we've gone live and this is the cost to stand it up because we're also talking the early phases of our work together. Those are cost of services but we haven't seen a fully expressed revenue profile. Every one of those contracts is different in terms of how it ramps. And again not to avoid the question but there's not a good way to say it's this much, with this much drag because you're just talking large contracts that have ramping revenue streams and service lines that come online over time, populations, attributed populations that grow over time and so you'll see expanding margins as those revenues grow with more cost being incurred proportionate to the revenue size early in the contract. Again, not really the way to break it down.

[Thomas A. Carroll:]

So it's less activity specific and more just the economics of the contracts, is what I think I'm hearing you say.

[Ben R. Leedle:]

Yes, I think that's a fair way to look at it. It's not like 5 years ago if we took a fully insured MCO population and went live, you would have a relatively full expressed revenue stream the day that you went live. And with these contracts, you're going to see dramatic revenue growth over time but I don't want to imply -- Tom, I want to be careful, I don't want anybody to infer that we're, in essence, taking losses early in the contract, sure, there is an implementation period that might be 90 days to a go-live point and that's some amount of cost and that's not a lot different than the profile we had with, again, with MCOs in the disease [ph] management days but we move relatively quickly I would say on larger deals 180 days, you're probably talking to move to a breakeven point on the contract.

[Thomas A. Carroll:]

So with the kind of maturation of a lot of this new business you're bringing on this year, where would you expect to be in terms of an EBITDA margin run rate by the end of this year?

[Ben R. Leedle:]

Yes, that's a very fair question because we've come out -- obviously, we've got a range of 10.5% to 12.5% for the full year, but we've been very clear that we're going to see sequential margins that expand over time. I mean, I wouldn't be surprised if we're not -- I would expect quite candidly that by Q4, we're mid-teens.

[Operator:]

We'll take our next question from Brooks O'Neil with Dougherty & Company.

[Brooks G. O'Neil:]

Clearly, you guys are to be congratulated for building the pipeline of new business and the visibility in terms of the future outlook. Just curious if you could update us on how you feel about adding additional new contracts as we go forward from here relative to the potential that big new contracts might actually put us back into this mode we've been in, in the last few quarters, where there's potential down the road but there's a big drag for us to get by to kind of get there.

[Ben R. Leedle:]

Yes, I would respond, Brooks, this way I think, and we've answered this question following our Q3 call several times, and that is we signed a lot of new deals, transformative deals, I would call them, last year with health plans and with health systems. Those, as we've said numerous times, come with ramping revenue streams. We clearly anticipate signing more of these types of deals in 2013. And so we're certainly factoring our expected signings into our guidance range, and that's why, purely from a revenue standpoint, relatively wide range, from $710 million to $750 million, and relatively wide margin range, from 10.5% to 12.5%. You could almost argue the more new business you sign, the higher your revenue might be and the low -- you might be on the lower end of that margin range. Long way to say, I think we've covered that in the guidance ranges we've established. We certainly don't want to be in a position where good news is bad news in 2013. And we're getting experience with how these contracts come on, so I think we've covered in our ranges not that -- I would love to be in a position where we signed even more than we might have expected. But clearly, we've got a really strong pipeline. We have experience with executing out of that pipeline. And I think in our guidance expectations, we would certainly anticipate that would cover what we might foresee coming out of the pipeline.

[Brooks G. O'Neil:]

Good. I assume based on your comments that the strength in international in the fourth quarter should not be -- we shouldn't expect it to be sustainable going forward as in 2013?

[Ben R. Leedle:]

Certainly not at the levels that you saw. Again, the $0.05 per share certainly of earnings certainly had a healthy component of milestone-based revenues that don't necessarily repeat every quarter. But again, we feel like we've moved to a period of breakeven from an international standpoint with growing revenues over time. So I think we're very confident. But you're right, I would not take the $0.05 and run that out. Clearly, the international component is in the $0.25 to $0.35 of our guidance.

[Brooks G. O'Neil:]

Sure. And then I have one sort of philosophical question. I'm just curious, and we can take it up offline if it'll take too much time. But I'm curious, as you work with the health systems out there, obviously, we're hearing a lot about ACO development, health plans are doing it, and everybody else is doing it. My question is, what are the health systems anticipating and thinking they can deliver in the new paradigm in terms of how it'll work for them for revenue, for profit and deliverables to patients in the new world? And what are you helping them achieve from a transformation perspective?

[Ben R. Leedle:]

That's a big set of questions. Let me try to wrap it with kind of our experience both in the work we're doing in the business development pipeline but also in the 5 relationships that we've established over the last 8 months that are strategic long-term efforts. What we're seeing is obviously an entire marketplace, not just the health systems, look to be positioning for what are the required capabilities and competencies to afford a pay-for-value reimbursement system versus just simply the gathering of volume around fee-for-service. And everyone understands and knows that this is not a light switch, and there's lots of different factors that are coming into play. And so part of this is just simply in their market-specific set of conditions, what is happening around consolidation and integration, what is happening with changing reimbursement models and for what parts of the market, meaning what lines of business historically that we look at in the payer world are more likely to move first toward this, how big is the employer demand to trade off choice and richness of benefits in exchange for a much tighter framework to assure that the care and support of people's health is going to pure hands but equipped in a way to optimize the results. So there's a lot of current work, and part of this is what we're being asked to do, is to really strategically assess all that and layout a plan over time that at best projects all the different factors and the implications of timing. And I do think one of the challenges for anyone that's been purely a fee-for-service entity in the healthcare system is that is your economic engine today. And the pay-for-value will come in and phase gradual steps before it hits a real tipping point. And there has to be a lot of caretaking done to gauge and manage both of those reimbursement streams in a -- and models in a way that affords these organizations to remain healthy and viable. There is a change management requirement to take place, and we mean that capital C change in terms of not only the hospital or health system's organization but particularly, in supporting how physicians go about the work that they do. So we're being asked to help bring tools, processes and a model that affords primary care physician-directed population and health management, which is different than simply servicing the demands of inbound visits that they might have everyday in a fee-for-service world. And with that comes data, technology, services integration and the redefining of role and responsibilities for the physicians, the health systems and new extender resources, both centralized and market specific, and both driven by different levels of human talent and expertise, as well as self-directed by consumers with technology in a virtual way. So the steps that are being taken, obviously, is some of this pay-for-value is showing up with measures of quality improvement, some of them are related to population health improvement, and obviously, others beginning to target the fundamental economics of the underlying costs and utilization. So we're also being asked to strengthen and prepare the specific service lines within facilities in inpatient and outpatient, particularly around chronic disease populations, and a whole idea of pre-acute, acute, post-acute transitions and making certain that new models where in a Medicare book of business these hospitals are at risk now for readmission, and setting up business models where we're putting in our software and infrastructure and people to manage the acute, the post-acute transitions and being at risk with them to avoid the penalties that would come from unnecessary or mitigable readmissions. And then finally, I think everyone is trying to project and look, Brooks, to what does -- what do exchanges mean to them in their world. So you've got the federal activity in some states in collaboration with those states, you have private exchanges that are being afforded by different stakeholders and entities. And the bottom line, we all know, is the cost of product in that environment is going to be markedly different than what the historic commercial cost basis is for products and service. What's still not final and clear is all the policy and regulations around least common denominator requirements of components. That still has to merge, but I do think these health systems are really active in making their decisions about how do they participate with current payers. In an exchange environment, could they, should they, would they put products out on those exchanges themselves. And if they did so, what additional capabilities are they going to need to be successful in doing that? And again, timing becomes very important in all of these things. And so knowing that a lot of that is still in development, it's an aspect that we're being asked to help on every dimension [ph] work with. And then there is interest from the health systems, and I say that at large, both in work that we're doing, as well as in the business development pipeline, where understanding how the health systems in a local market can have deeper, tighter relationships with large self-insured employers, as well as mid- and small-book employers, that make up the commercial market that they serve and finding a way to create a greater value, whether that's independently with us or whether that's in concert with payers in that marketplace. And I think we'll see a mix of those things. But we certainly bring kind of a turnkey capability, as you know, into that marketplace from years of doing this work with health plans, PBMs, and direct to contract with large employers. And then finally, an interesting thing is, is that I do think more of the marketplace understands that there's only so much leverage and value that you can create out of matching individual consumers with their health to the right experts. And part of our health over time is obviously influenced by who we spend our time with and where we spend our time and what those relationships and environments are like. And the work that we've invested in over the past 3 years with Blue Zones, where we've taken this model and scaled it, and I don't know whether you've seen the recent release [ph] in terms of the second year outcomes at these cities, we can see very clearly that the mission-based vision and work that these health systems have long stood for in terms of helping to improve the health of their communities, has now a very scientific and scaled approach that we can bring into this equation in order to affect the broader community in which they're serving the general citizenship. So there's multiple streams of both activity and capability that we're bringing. I would tell you -- I think we were questioned a lot over the last few years about what the heck we were doing with some of these things, and the neat thing that we're seeing is all of those investments and innovation are now being brought together to create a very differentiated and significant partnership on behalf of these health systems.

[Operator:]

We'll take our next question from Ryan Daniels with William Blair.

[Ryan Daniels:]

A lot of macro color already, so let me jump into a few on the model. As we think about the cadence of revenue ramp through 2013, I know you've indicated that the back half will be substantially larger, but do you have any color -- I think in the past, you helped us a little bit with maybe percent of revenue to think about in one half versus the second half, just to kind of get our models in alignment going forward.

[Alfred Lumsdaine:]

Yes, good question. Ryan, I think the -- clearly, the front half -- or the back half will be much higher because we talked about some of the factors that we're seeing with performance-based revenues, which are largely -- will be recognized in the back half, talked about the ramps under some of our other contracts. And so that definitely yields a substantial -- if you want to call it jump from -- it won't be a linear line in terms of revenue recognition to the back half. I would -- and I'm just doing some math in my head. I think you could see as much as I'd say 55% of our revenues in the back half of the year, 45% in the front half, something in that ballpark.

[Ryan Daniels:]

Okay, that's helpful color. And then if we think about 2013, I think you said in your prepared comments that the revenue at risk would actually be lower than 2012. So one, is that definitely the case? And then number two, if we think about the revenue ramp, is it then more just depending on ramping the existing book of business versus those performance fees, such as the visibility is actually a little bit higher than it might otherwise be?

[Alfred Lumsdaine:]

Yes, both good questions. So as far as performance revenues, we do think it will be lower this year. And again, I think I mentioned that's a trend that we have been seeing the last couple years, a trend of increasing amount of fees at risk for some of our new contracts. That is largely attributable to one of the 2 terminated contracts, which carried a high percentage of fees at risk and where we had actually performed into a gain share that we expected. And so with that -- with those revenues coming out, we will see a lower percentage almost certainly for the full year. At the same time, I do think the trend continue -- will continue. I think this is just a break in it for a specific reason, where we'll see fees at risk going up, particularly with some of our health system contracts, as we look at some of our business structures there.

[Ryan Daniels:]

Okay, that's helpful. And then maybe, Ben, one for you. If we look at the book of business, I think one of the things that impacted the revenue growth, which would otherwise be extremely robust in '13 is the loss of the 2 terminated contracts, so I'm not quite sure how to phrase this, but if you look at your existing business model now that you're signing this very long-term strategic agreements with health plans, like Blue Cross Blue Shield Hawaii and CareFirst, and you're signing these very long-term strategic agreements with providers that may be looking to enter exchanges or ACOs, do you actually feel better about the stability kind of your book of business such that maybe the revenue growth isn't consumed by client losses going forward? It just seems like there's a nice stabilization in your book of business.

[Ben R. Leedle:]

Yes, to your comments, as we signed more of those longer-term relationships, not just longer term but the scope of those relationships are very broad. We're bringing everything we are capable of today and being asked to do more. We believe that those commitments are based in a deep alignment on strategy about the near-, mid- and long-term market, which we think affords ourselves the kind of relationships that -- when you have customer-vendor relationships, the depth of the relationships, no matter how hard you work on them, are more susceptible to swings in market shifts and near-term shifts [ph]. And the opportunity to have the CEO-to-CEO and suite of relationships that come in these partnerships, I think, do bring not just a sense but a real stability in terms of the -- how enduring our business is in terms of going forward. And I think a lot more reduced risk for the kinds of turbulence that you've seen over the last 3 years, where we'd sell as much as we were losing and the revenue line looks stagnant at the top. And I think we've positioned ourselves now where we're not starting out the year trying to fill a huge bucket with a new business for the year, and that affords us then to begin to grow. And it's that visibility that we have to both parts of the equation, what the top line growth looks like on the business we've already sold, the new business that we think is out there to go in and our a likelihood of winning a strong fair share of that for us, but as importantly, servicing the customers we have at any and all levels and retaining those clients at a differentially higher percentage than we have over the past 3 years.

[Alfred Lumsdaine:]

And, Ryan, I wanted to come back to your previous question because I don't think I've fully answered the second part, which was of the revenue ramp, what is the more significant contributor, is it revenues ramping under existing contracts or BIE recognition? Yes, I think I touched on, we'll have a lower amount of fees at risk, and I think that you could infer, and it would be accurate, that the revenue ramp is the more important of the 2 in terms of contributing to the overall shape of the year. But obviously, the performance-based revenue recognition is an important contributor, as is new business starting that we've already sold and will sell this year that will start before the end of the year. Those 3 factors are all important. Probably the ramping revenues under sold business is the single most important item.

[Ryan Daniels:]

Okay. And then I'll ask one quick one. I think this is a follow-up to your commentary on Brooks' broader question. But can you just talk a little bit more about the ascension [ph] announcement, the Carondelet announcement, is that more of a kind of a Navvis, if you will, type of consulting agreement to assess the potential to bear more financial risk and quality risk or analyzing kind of the capabilities of that organization given what they have today to do so and if they should move forward? And then if they move forward, have you seen kind of the ability to have early foot in the door to partner with them to expand those capabilities?

[Ben R. Leedle:]

Yes, I think it's more than just a simple consulting effort. I think the work that was done that afforded us to reach agreement with them really is we're their expected partner, getting clarity about what first [Audio Gap] is what's been contracted for. And we would expect successful transition from the assessment and planning to then the implementation of our capabilities with theirs in their marketplace. So it's not -- unlike kind of the stage work that we're doing with Mercy and Wellmont, and it's like the first 6 to 7 months of piece of work that we did with THR although that was in-house in a longer-term commitment at the back end of that. And we think the majority of the marketplace really likes the opportunity to be able to jointly develop, assess the marketplace and see the detail, the plan laid out and to make sure that the phasing of that is balanced against their specific market conditions. So yes, I think you've characterized it right. That's not just the Navvis team that would be working on that, it's a Navvis-Healthways effort, and we do expect that, that would yield a broader and more specific relationship in terms of the services we'd be providing.

[Ryan Daniels:]

That's not -- and I apologize, I'll do one quick one. That's not in your thoughts on kind of the $85 million in revenue ramp from the existing business, are you assuming that turns into something or things like kind of upside model?

[Ben R. Leedle:]

No, no, no. Things like -- we did a release with Texas Health on the 22nd of January. And then on the 5th, we released again with them on the ACO. And we -- so that was part of the $85 million because it was run rate base of contracts coming into '13. Any new contract, like Carondelet, would not be in that $85 million.

[Operator:]

We'll take our next question from Scott (sic) [Sean] Wieland with Piper Jaffray.

[Sean W. Wieland:]

You talked this quarter about new data analytic capabilities in some of the IT companies in the area of population health management. So could you compare and contrast your services from those being offered by the likes of Cerner?

[Ben R. Leedle:]

Sure, and so here's what I will tell. I'll speak to ours, and you can tell me whether or not it addresses your question. I think that there is a relatively common set of techniques, mathematics, artificial intelligence and plenty of smart people in the country that are working on how to take data and use it for very specific forecasting purposes. And I think the easiest way I've tried to help people understand the difference is that the power of those type of models and analytics are not only about the smart people that you have to have to do that and to have them understand which family of analytics techniques you want to apply to the data. But there is really the question of what data do you have because those techniques are improved in terms of their output based on the volume, the diversity and the nature of the data sets that you're feeding it. And in terms of volume of data, we believe, in the traditional healthcare sense, when you think of demographics, medical, pharma, lab and clinical information, we have as much or more than anybody, anybody else in the marketplace. And that just stems from the nature and the type of business that we've had and the fundamental underlying value proposition, which was we really only get paid if we create an impact of differentiation and it got measured by base-lining and tracking all of those data elements over time, and we got them for huge populations. I would tell you I really believe that over the last 5 years, we have also created a new establishment in the world of data and science, and that is the measurement of well-being and taking self-reported data and learning how that data both stands independently and works on an integrated basis with all the other types of data that everybody is using. And what we discovered is it clearly creates a differentiated view both in terms of the accuracy of the prediction, as well as the preciseness in which to take the forecast down to individuals in a population and to be able to understand relative risk ranking for lots of different factors and not the least of which is forward-looking costs and utilization, and tie those back to actions that can be taken in support to either intervene, to change the trajectory that they're on. Simply put, we have advanced a science with well-being factors that we think is extremely powerful. It's part of what these health system partnerships are responding to, and it puts the analytics on a completely different grid. Think of energy source of electricity and then alternatives, this is an alternative, and we think it's just simply better. And the marketplace is responding and reacting to it as well. We know that's a unique capability, science and analytic tool set that nobody else has because our relationship with Gallup is exclusive, and the work that we've done on that has a 5 years head start. So I think it's important because not only did the analytics point out the opportunities and where to take action, it's also kind of your diagnostics of progress and your feedback loop to refine and modify an intervention set that everyone is looking for, that can be a efficient and scalable in order to create the change of those different trajectories. Sean, let me stop there and see if that helps give you a sense of where we think we're positioned. I can't speak for anybody else's -- any competitor, sources of their analytic prowess or tools. I just know what's helping us win favor in the marketplace, and the deep, deep science and credibility that's been established around the work that we do in that regard.

[Sean W. Wieland:]

No, that's really helpful. So would you see yourself as -- I mean, if I was a health system looking at population health management, would I be thinking... [Technical Difficulty]

[Operator:]

[Operator Instructions]

[Sean W. Wieland:]

I think I'm having phone problems. No, I'm good. Thank you.

[Operator:]

We'll go next to Scott Fidel with Deutsche Bank.

[Shawn Bevec:]

This is Shawn Bevec in for Scott. Can you share with us your mix of contracts between health plans, health systems and employers, and then maybe the relative profitability of each of those 3 segments more broadly? And then also are you targeting opportunities in any one of those segments more than the others, or is it more of a balanced approach?

[Ben R. Leedle:]

Yes, and so answering this question, I think it's important to note who do we contract with and how that breaks out. About 80% of our business is with health plans. Now those can be with different lines of business, so commercial, Medicare Advantage, Medicaid Risk, and realize that in that 80%, about half of that, maybe more, is really on behalf of distributing our capabilities in partnership with those health plans to large self-insured employers. So the other 20% is a mix of government, municipalities and health systems and directly with employers.

[Shawn Bevec:]

And then maybe the relative profitability of each of those 3 segments, can you touch on that a little bit?

[Alfred Lumsdaine:]

I think I mentioned that a little bit in my script. Do we have -- we've had this transformation of some higher margin business over time. We have a profile today that's relatively consistent across our markets, not to say that it's exactly the same. We -- clearly, with the start of some of the large new health system contracts at this point in time, that market would carry a lower margin through -- and it pressures our overall margin profile for the reasons we've talked about. But as we look over the term of those contracts, we see margins that are very comfortable, maybe a little bit higher than our market averages. So we see very good consistency across our market today -- markets today in terms of margin profile.

[Operator:]

This does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Leedle for any additional or closing remarks.

[Ben R. Leedle:]

Just real simply, thank you for being on the call this morning and adjusting schedules to match our schedule as well, for -- also, for your questions, and we look forward, Alfred and I and Chip, to take in on any additional questions you have. We're here all day today, and look forward to connecting with you in the coming weeks and months.

[Operator:]

This does conclude today's conference call. Thank you for your participation.