Tivity Health, Inc.
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Good afternoon. This is Chip Wochomurka, and I welcome you to Healthways' Fourth-Quarter 2014 Conference Call. Today's call is being recorded and will be available for replay beginning today and for one week by dialing 719-457-0820. The replay pass code is 9216905. The replay may be also accessed for the next 12 months on the Company's website. To the extent any non-GAAP financial measure is discussed in today's call, you will 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 our 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 2015 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. We hereby caution 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 the opening remarks, I would like to turn the conference over to our President and Chief Executive Officer, Ben Leedle. Please go ahead, Ben.

[Ben Leedle:]

Thank you, Chip, and good afternoon, everyone. Thank you for being with us today for our fourth quarter 2014 conference call. I'm here with Healthways' CFO, Alfred Lumsdaine. We'll both make some remarks about our results for the fourth quarter, as well as our outlook and guidance for 2015. Following those remarks, we'll open the call for your questions. We were pleased today to report that Healthways completed 2014 with a solid profitable fourth quarter. Our operating performance afforded us to conclude the year with results consistent with our 2014 guidance. In fact, our fourth-quarter revenue was the highest in Company history. And further, we produced our best adjusted quarterly earnings in three years. Further, our fourth-quarter results were consistent with our expected annual progression that we discussed with you throughout the year. We expect a similar shape of progression for 2015, with both sequential and comparable quarter improvement in revenues and earnings following the first quarter. We expect this quarterly progression to produce at least 800 million in annual revenues for 2015 for the first time in Company's history. We also expect continued growth in adjusted earnings per diluted share. Our market leadership has afforded our business development momentum to continue at a good solid pace. And as evidenced by our 2015 guidance, we have every expectation of expanding our book of business across all our customer markets over the coming year and beyond. We expect to leverage the opportunities before us to achieve our financial objectives over the next three to five years of 10% to 15% compound annual revenue growth, with EBITDA margins returning to a range of 15% to 18% by the end of that timeframe. Now, for a whole lot more detail on the quarter and guidance, I'm going to turn this over to Alfred and have him walk you through the financials. Alfred?

[Alfred Lumsdaine:]

Thanks, Ben. Good afternoon, everyone. Thanks for joining us this afternoon. Fourth quarter revenue of $199 million was an increase of $30 million or approximately 18% from the fourth quarter of 2013. On a sequential quarter basis, revenue increased over $13 million or more than 7%. During the fourth quarter, we produced adjusted net income per diluted share of $0.25 compared to $0.08 for the third quarter of 2014, and an adjusted loss of $0.12 per share in the fourth quarter of 2013. GAAP EPS for the fourth quarter was $0.07 per diluted share, which includes $0.03 of non-cash interest expense and a total of $0.15 for two legal settlements. Our cash flow from operations for the fourth quarter of 2014 was approximately $20 million, and capital expenditures totaled approximately $11 million. Cash flow from operations for the fourth quarter was below our expectations, primarily due to the timing of Accounts Receivable collections, which resulted in our DSO at December 31, 2014 increasing by almost 10 days to 59 days, compared with our previous year-end. This increase is related to routine timing and not indicative of underlying collectability issues. Full-year 2014 revenue of $742 million represents topline growth of 12% over 2013, while full-year adjusted net income per diluted share of $0.27 compares with an adjusted net loss per share of $0.19 in 2013. On a GAAP basis for 2014, we incurred a loss of $0.16 per share, which included $0.12 per share of non-cash interest expense and $0.32 per share for the settlement of three separate legal matters. Our cash flow from operations for 2014 was approximately $52 million compared with our original expectation of $75 million to $85 million. And our capital expenditures for the year totaled $43 million. Again, the shortfall in our operating cash flow was primarily the result of the lower-than-expected collections on Accounts Receivable in the fourth quarter that I previously described. For the full-year of 2014, the combination of net debt reduction and EBITDA growth allowed us to significantly reduce our leverage ratio, as calculated under our credit agreement, counted 3.1 times at the end of 2014. So now let's turn to our financial guidance for 2015. Before I begin, I would draw your attention to the presentation materials posted on our website under the link to today's webcast. And I'll refer to these in just a moment. Our 2015 revenue guidance range of $800 million to $825 million is consistent with our longer-term expectations for a three to five-year growth profile, with a compound annual growth rate of 10% or more. There are three factors that we expect will drive our projected revenue growth during 2015. The first factor is retention. We renewed all four of the large contracts or those greater than 2% of the previous year's revenue that were up for renewal in 2014. In fact, 2014 was the second straight year in which we retained revenue at or above our target range of 92% to 94%. The second factor is ramping revenues under existing contracts. Many of our contracts have revenue streams that can expand over time, whether that's through ramping service volumes, expanding service scope, or increasing gain share. The third and final factor driving our projected revenue growth is new business. At the bottom end of our 2015 range, we've essentially included no new business for 2015 that hasn't either been sold or committed and in contracting as of today. So now I'd like to refer to the presentation materials I mentioned earlier that are posted on our website. On slide number three, you'll see a table that provides a revenue percentage breakdown among our five primary customer markets. As you review the comparison of revenue percentage by customer type for 2014 compared to 2015, a key takeaway is that for a second straight year, all of our customer markets are expected to grow. Our expectation continues to be for strong revenue growth off of a small revenue base for our health system and physicians market, and single to low-double digit growth in our commercial health plan, international, Medicare Advantage, and direct-to-employer markets. As noted in today's release, we expect our EBITDA margin for the full-year of 2015 to be in a range of 10.5% to 11% compared to the adjusted EBITDA margin of 10.6% that we achieved in 2014. As our revenues grow, we fully expect to continue to realize operating leverage in the business. However, as we enter 2015, I'd like to highlight one mitigating factor that is offsetting some of this operating leverage. The last four remaining legacy disease management-only contracts, which collectively made up approximately 3% of 2014 revenue, all terminated on December 31, 2014. Because of the legacy nature of the platforms supporting these services, they carried a disproportionately high contract margin compared with our current population health management solutions. While we expect the impact for 2015 from the loss of this business to be offset by the additional leverage in the operating structure that comes from growth, it clearly mutes what would otherwise be greater potential margin expansion. It's notable that we have no more standalone legacy disease management contracts left in the business as we enter 2015. So essentially, the margin profile of the Company has now been fully rebased. Over the next three to five years, we continue to expect that operating leverage from the relatively high fixed cost nature of our scaled operating platform should generate at least 100 basis points of EBITDA margin expansion for every $100 million of incremental revenue. For 2015, we expect to achieve adjusted earnings per diluted share between $0.35 and $0.47, or a growth range of 30% to 74% over 2014. We expect non-cash interest expense of $0.12 per diluted share, resulting in our GAAP earnings per diluted share guidance in a range of $0.23 to $0.35. On slide four, you'll see that we expect to generate adjusted operating cash flow in a range of $80 million to $90 million for 2015. We've moved to guiding on adjusted operating cash flow for 2015 in order to highlight the approximately $14 million of legal settlement payments expected in 2015, that could otherwise obscure the cash-generating potential of the business. We expect 2015 capital expenditures to be in a range of $37 million to $42 million, consistent with our expectation to have capital expenditures run near or even below 5% of revenue, now that we've completed our transformation investment in technology and capabilities. We currently expect that most of our 2015 free cash flow will be applied towards debt reduction. With regard to our debt covenants, we expect our leverage ratio will increase slightly through the first half of the year before beginning to decline, and end the year below 2.5 times. We expect our overall tax rate for the full-year to be approximately 40%. Finally, we expect that our total interest expense, cash and non-cash, will decrease by approximately $1 million in 2015 compared to 2014, and that our depreciation and amortization expense will decrease approximately $4 million as certain intangible assets become fully amortized. So, I'd like to turn now to our expectations regarding the shape of our financial performance in 2015. Given the ongoing dynamic of performance-based fee recognition being heavily weighted to the second half of the year, and to the fourth quarter in particular, we would expect revenue will decrease sequentially in the first quarter of 2015. Thereafter, we would expect sequential quarter revenue growth as a result of the ramping revenues, new contract starts, and the timing of recognizing performance-based fees. We expect that the quarterly progression of EBITDA margin and earnings for 2015 will largely mirror what we saw in 2014. The most influential factor to this progression is the timing of performance-based revenue recognition. Although we expect that the percentage of performance-based fee revenue in 2015 will be similar to that in 2014 at approximately 5% to 6% of revenue, a majority of this revenue is expected once again to be recognized in the second half of the year. As a result of these dynamics we would expect an adjusted loss per share in the first quarter of 2015. From there we would expect adjusted earnings to be positive for the second quarter, with most of our full-year profits to be generated in the second half of 2015. So just a few closing observations. Our unique and proven well-being improvement approach to population health management continues to drive demand for our services. Our solutions are supported by a common infrastructure and platform across our customer markets. In financial terms, this means that with anticipated growth across all our customer markets over the next three to five years, we would expect to gain additional leverage from our cost structure as we grow, and our 2015 guidance supports this dynamic. We believe our expected revenue growth and the resulting operating leverage gives us solid visibility to improved earnings across the multiyear period. So, with that, I'd like to turn the call back over to Ben for some closing comments.

[Ben Leedle:]

Thanks, Alfred. I just want to add a final comment before we go to questions. I know you may be aware that we disclosed in late January that our Board is exploring strategic alternatives to enhance shareholder value. Just wanted to indicate to you that we won't be addressing this in the Q&A, and we don't intend to talk any more about it until the Board is finished with its work. So, with that comment, operator, we'd now like to open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Tom Carroll with Stifel.

[Tom Carroll:]

Hey, guys. Can you hear me okay?

[Ben Leedle:]

Yes.

[Tom Carroll:]

On my cell phone, so I want to make sure. So the guidance, could you give us a sense of how you constructed the range on earnings for 2015? I guess maybe the question more is one of headwinds and tailwinds that create both the low-end and the high-end of the range. And Alfred, I think you touched on this a little bit -- but certainly on revenue. But what gets you to the higher end of the revenue range? Is that better adoption of ACO kind of lives, or maybe just chat a little bit about that, if you could.

[Alfred Lumsdaine:]

Yes, I think, Tom, it's really the factors that I mentioned in my prepared remarks. You know, it would be -- so at the low end, we've essentially included no business that isn't either sold or in contracting today. So, obviously, there are particularly with some of our solutions that we've talked about in the past, solutions being sold to health systems, the Ornish program. There are a number of things that now lend themselves to off-cycle sales. So clearly, new business would be one of the things that would drive the -- with the revenue range. And clearly the revenue range is a little tighter than what we might have gone out within the past. You know secondly, you would have things like ramping revenues, the opportunity to drive increased participation through some of these agreements, which come with ramping revenues. And then, as I mentioned, there is also the opportunity for gain share. And how we perform against those metrics on our contracts that offer gain share opportunities would yield potential opportunity to outperform certainly the bottom end of our range. So, you know that contributes to the width of the revenue range. And you start from there and clearly, the width of the earnings range is a function of, first and foremost, the revenue range. And then you have things like our performance against our performance-based revenue recognition. Clearly, that is always a factor in terms of exactly how we end up. We've had good results against performing against our expectations. Sometimes the timing is a little bit hard to predict. But again, exactly how we finish up relative to our expectations would depend on where we end up relative to our earnings range. But I would comment, I think the width of the range is $0.12. I think that's relatively modest in the big scheme of things. That accretes to about a $7 million, $8 million width of a range.

[Tom Carroll:]

So I mean, last year you had, I think, no ACO lives built into your guidance. Does that remain the same today? I mean, other than those that are already kind of in the mix?

[Ben Leedle:]

Yes, Tom, this is Ben. I think the one thing that we would call out which you may have seen a release recently on, is our GenHealth joint venture with Genesis IPA in the Dallas-Fort Worth market. We have secured -- and you have an MSSP contract that we are participating in with them. But we think, even more importantly, have added both MA and commercial contract lives into that equation. So while it's not going to shock the world in terms of numbers, I think it's definitive progress in terms of putting together both a structure and getting the throughput downstream from payers to afford that physician group with our support to stand that up. So that lives there. We've helped put together a clinically integrated network of physicians out in Hawaii who are working with over 100,000 members of the HMSA population through that work. And so we continue to make progress. And so there is a little bit of that in this forecast, but it's not significant enough to where we would call it out at this point and stick a flag in it, as compared to how we thought we would see the market evolve 18 to 24 months ago.

[Tom Carroll:]

Great. And then just lastly, give us a sense of the Dean Ornish interest you have out there. And when you get that interest, are you effectively cross-selling other hospital type products?

[Ben Leedle:]

Yes, I mean I think it might be worth just giving you a sense of how we are approaching the health systems and hospitals with the work that we are doing. And I think the one thing that you would see is, most consistently, health systems have looked, as a first step toward moving to value-based reimbursement by starting with the lives they know they're for sure at risk at all the time. And that's their own employees and the dependent family members of those employees who are on their self-insured health plans. And the opportunity for us to be able to start in a method that we know we have both great performance in and have been doing for quite some time, which is how do deliver these types of services to employers. What that does is it brings in then the conversation about what can they begin to do with us to begin to prepare for the future, and take advantage of the current market? And you've heard us talk about our Care Transitions Solution. You've heard us talk about Ornish. And you've heard us talk about our diabetes services management, which continues to grow. That business is now at 100 hospitals on the diabetes solution side. So we are seeing the uptake. And a lot of that is being driven through -- you know, we made the acquisition of Navvis a few years ago. And the Navvis consulting business is solid. And they are engaged in a lot of the clinically integrated network development in concert with the marketplace, both with health systems and independent physicians and then working with health systems around bundled pricing, and being able to just focus and to help with physician change management leadership. So there is a core bundle of services that we continue to see interest and growth in. Your question was on Ornish. Obviously, we've had a pretty robust pipeline. There is over 50 active deals in process. And obviously not all of those will come to fruition, but I think it's an indication for you that there is serious interest. To date, as of this call, we've sold contracts that are either already active, implemented or going to implementation for Ornish centers in 16 states. With those relationships, we're contracting with larger systems that have quite a reach of infrastructure. Those we're contracting with have over 100 facilities in aggregate for us to go work in. Obviously we are not in all those facilities with Ornish at this point, but it's a testament to kind of the size and the nature of the client interest. And then there is over 30,000 physicians that you can tag to these different contracted settings through those health system partners. And we think of the Ornish Centers -- on a single basis, looking at a Ornish Center, it's an incredibly potent opportunity to reverse chronic disease, and particularly heart disease. And we also see the same things that are being done there as kind of lifestyle medicine. And we think of creating a footprint for Ornish as another network that we can spread across the U.S. geographically. Today, the service areas of where we've established Ornish represent just over 10% of the U.S. population when you think about geographic access to these centers. And that, from that, obviously we would expect about 3% to 4% of the general population to meet the eligibility criteria. So there is a significant footprint that we have now. And I talked on the last call about it being early innings. And so we continue to set up the infrastructure, establish the centers, do the certification, the training, and begin the enrollment of cohorts. That's going to ramp through 2015 as we continue to add both more centers, and those centers come up to what we would think of as kind of operating standards for enrollment. So, obviously, we think it's a big opportunity. Obviously, there is work ahead of us to convert on the footprint that's been created by the work that's been done already. Pretty excited about it. We are seeing -- originally, it was Medicare, and then Anthem stepped up commercially to reimburse for this model. We've seen other commercial health plan payers come behind this, and we would expect for that to continue.

[Tom Carroll:]

Great. Thank you.

[Ben Leedle:]

Yes.

[Operator:]

Our next question is from Ryan Daniels with William Blair.

[Ben Leedle:]

Ryan?

[Ryan Daniels:]

Yes, can you guys hear me?

[Ben Leedle:]

Yes, we can hear you now.

[Ryan Daniels:]

Okay. Congrats on the strong renewals, both for the overall book of business and the big accounts. Can you talk a little bit about what you're seeing for renewals in 2015?

[Ben Leedle:]

Yes, that's a simple one. In terms of the way in which you guys have thought about asking, do you have significant contracts up for renewal, well, you know we think all our contracts are significant. But in the way in which we've talked about them in the past, we have no contracts that would meet the prior communication thresholds that we talked about.

[Ryan Daniels:]

Okay, that's great. And then if we look at the revenue breakdown by different area, the one area that saw very strong growth this year that looks like it's flattening out a bit is the large employer market. So can you talk a little bit about what's taking place there to keep that effectively more in check flat to marginal growth in 2015, versus the pretty significant growth this year?

[Ben Leedle:]

Sure. I think each year it's a little bit of random mix of what comes to bid. We had come off of a prior-year cycle before this last year where there was some very big opportunities of which we won some significant share. Last year, there weren't -- there was as much total business opportunity, but the size of the opportunities, in terms of specifically the number of employees being above 25,000 or 50,000, there were fewer of those in the cycle. But we do think -- and it's hard to measure what kind of an impact it had but our proxy fight last year during the middle of the RFP cycle probably didn't help. But we look at the pipeline today, and we've quantified for you in the past our domestic pipeline a year ago at this time was about $250 million annualized revenues represented. And we're like spot-on, right at about that same level right now. And the employer part of that is -- it may be down a little bit but not a lot. So my comments would be there are some large RFPs in the mix, and we expect to continue to go forward and grow this business. And I think you are just seeing a slight dip, probably from several different factors, including just what was the nature of the business that came out during the last year's cycle.

[Ryan Daniels:]

Okay

[Ben Leedle:]

And we had 95% revenue retention off our entire book of enterprise. So, it's not a function of terminations in any unusual or material way for that employer market. It's really going to be about what kind of throughput we get out of wins and losses, and the RFP effort in this year.

[Ryan Daniels:]

Okay, perfect. And then final question, just on international, you mentioned the proxy battle over the summer, one of the data points that was mentioned there was maybe shutting down the international business. And I'm curious if that also caused you to lose some momentum there, or what your view is on international opportunities as we look forward? Thanks.

[Ben Leedle:]

Sure. So actually the international pipeline in terms of development has -- the pipeline has gone up about 25% from where it was last year at this time. So it was about $100 million in the pipeline at this time last year, Ryan. And there is about $125 million in there today. As we've said, the likely throughput can be chunky and hard to predict in time. We have clear, strong business development activities in Western Europe, Asia, South and Central America; continue to grow in Australia, as you've seen this past year, with more opportunity ahead; and the Middle East. And I just think it may be easy to look at international and ask the question, it's 4% a couple of years ago; it's 4% this year; it's 4% next year. You know, it's going to grow, we think 20% next year in terms of the way in which we are looking at the business. And the size of some of the opportunities in that pipeline could cause significant jumps in growth. It's just hard for us to predict within a year where those will be. So as Alfred pointed out, the $800 million number includes for today, those clients that are contracted and those that are committed in final contracting. And beyond that, for international we would be including nothing in the range forward on the numbers that we shared. So, just a reflection that just harder to predict, don't want to get out ahead of ourselves, but this is something we are committed to, and making really good progress.

[Ryan Daniels:]

Okay, thanks for the color and congrats on the strong end.

[Ben Leedle:]

Thanks.

[Operator:]

Our next question from Jefferies is Dave Styblo.

[Dave Styblo:]

Sure. Good afternoon. Thanks for taking the questions. First one I want to come back a little bit to the EBITDA margin progression from here. I know it's not as expanding as much as normal, given your revenue ramp because of the business falling off. Can you give us a better sense of what the margin profile on that standalone disease management is? I guess if I triangulate and go through some back-of-the-envelope math here, it seems like the margin on that would have to be well north of 30% in order to get to the midpoint of your guidance on that standalone business. Is this -- am I in the right magnitude of how profitable that business was that's falling off?

[Alfred Lumsdaine:]

It was significantly more profitable. You could even think of it probably in terms of twice at the EBITDA margins. There's puts and takes through a lot of things, and even measuring EBITDA at a contract level is difficult. But you could think of it at a contract margin perspective from -- of being sort of twice what our typical margins would hold.

[Dave Styblo:]

Okay.

[Alfred Lumsdaine:]

It's a significant impact to the dynamics we're talking about. Obviously, at the midpoint of our EBITDA margin guidance, our margins would be growing 20 basis points roughly of expansion. So we would see some. The offset here to what I'm talking about from the dynamic of these four loss contracts was clearly much larger than 20 basis points.

[Dave Styblo:]

Okay. So if I just isolate the rest of the business, excluding the standalone, that in itself still falls -- would have -- as we looked into 2015, still would've generated the at-least 100 basis points of margin expansion for every $100 million of revenue, which is basically what that business is almost doing. It's about $90 million of core revenue growth. So on that, we should expect to see close to 100 basis points of margin improvement at least, is still what you would expect on that portion?

[Alfred Lumsdaine:]

Yes, again, I think there's -- I don't want to get too prescriptive on the exact numbers because there are puts and takes, but I think absolutely from directionally, you are thinking about it correctly. And how we think about it is all consistent.

[Dave Styblo:]

Okay. And just from -- this may be a nuance and warning of language, but the three to five-year longer-term guidance that you've been talking about, I think you've kind of been on that path and speaking to that since the back half of 2013, maybe even the summer of 2013. I'm just curious, has anything changed in that, or are -- is there any sort of push-out in terms of when you expect to achieve that, the three to five years? Or if we go back to the end of 2013 in that timeframe, it seems like we would be a little bit more on track than where we are from here. So I'm just curious to hear your comments about reconciling where we were a year ago versus now.

[Ben Leedle:]

Yes. I think the comments that we put out would be, think of 2013 as a base. 2014 would be year-one in that three to five-year period. So, 2015 would be year-two in that timeframe.

[Dave Styblo:]

Okay, that's helpful. And then just moving over to SilverSneakers, I think the contract with Humana runs through the end of 2016. I'm curious if you are starting conversations there, what the status is, if there's any indications about if there will be any sort of changes there? And then more broadly, Humana has had some very nice MA growth. Obviously, you guys get paid a little bit more on swipes for SilverSneakers. But curious, how much of a tailwind are you seeing or perhaps participation rates increasing in that segment?

[Ben Leedle:]

Yes. I'll take the first part of your question. I think we are not going to speak to any individual contract negotiations or conversations. You know we have an excellent relationship with Humana, and obviously, we try to renew all our contracts early. But again, we would not speak specifically to any individual contract renewal. With regards to the tailwinds from the membership growth, clearly you know we've read probably the same things you have. And clearly we work very closely with our customers too, relative to what they are saying and in planning our business. And we've incorporated the best thinking into our planning as we put together our guidance for the year.

[Dave Styblo:]

Okay. And then just broadly, I mean, as you look at that segment, do you see participation rates changing across it? If you could go back to that question?

[Ben Leedle:]

Yes, we think there is -- we have an opportunity to drive participation. We -- I think our expectation is for very small participation increases over time

[Dave Styblo:]

Okay. Thanks, guys

[Ben Leedle:]

Thank you

[Operator:]

Our next question is from Brooks O'Neil with Dougherty & Company

[Brooks O'Neil:]

Good afternoon. I am hoping you could give us a sense for whether the performance fees you earned in the fourth quarter were pretty consistent with your expectations?

[Ben Leedle:]

Yes, they were.

[Brooks O'Neil:]

And could you help us to have a feel for whether the fourth quarter would have been profitable sort of on the core outside of the significant contribution of the performance fees?

[Ben Leedle:]

Yes, absolutely. If you normalize because, on an adjusted basis, Brooks, we are profitable for the year, so if you smoothed out the performance-based fees, we would be profitable every quarter on an adjusted EPS basis.

[Brooks O'Neil:]

Good deal, great. That's fantastic. Can you just help us with a little bit of color about why these last four DM contracts terminated? I mean, did you decide you didn't like that business anymore? Or were you not performing well for them? They are probably…

[Ben Leedle:]

No, I don't think it's any different than some of the other changes that you saw as we shed contracts from that business over time. I think this is the last tail. And I can tell you and the clients would confirm it, that it's not performance based. These are just strategic decisions that people are making as it relates to their specific markets, and how they see where the responsibility and what form the responsibility for chronic care management ought to exist.

[Brooks O'Neil:]

That makes sense to me. Okay. And then I guess just lastly, and I know you've talked about some of this, but can you just help us to have a feel for sort of where the hotspots are in the overall sort of market environment that you see, in terms of where the big opportunities are as you enter 2015, both domestically and internationally, in terms of the -- sort of some of the parts of the business?

[Ben Leedle:]

Yes. So there is strong demand from us in helping to leverage in lots of different ways digital solutions that are oriented to the consumer that can be leveraged in different models. So we have health plans helping to use those solutions to front end their work in the exchanges. We are seeing physicians and health systems use it as a way to extend their relationship, away from just classic episodic interaction to more continuous interaction with their stakeholder consumers. And so, I think you will continue to see the theme of how can you help get Americans engaged not just initiated or activated, but sustainably engaged around a responsibility and a role in helping to improve their health. Whether they have severe disease and conditions, or whether they are walking around with no symptoms of anything but good and vibrant health, that there is an interest to connect with people and align them with a brand that affords them to grow equity in that brand as the entity that's going to help people with their health long-term. And so we continue to see interest in that from large employers, from the health systems, from physicians and from health plans. I think the idea of what we've described as kind of no remorse solutions, meaning they work just fine for the different parties that are engaged in a fee-for-service environment. And they also happen to be represented infrastructure and competencies that are going to be needed to manage risk. And so, our Care Transitions Solution, which is the acute/post-acute care management care coordination and integration with primary care; the Ornish program; the Blue Zones Programs -- those are all of high interest, and we expect to help fuel some of that growth that we laid out today. And then I think there really is a deep and growing interest outside the U.S. in the capabilities of coordinated care and health and wellness. And we'll continue to expect to see demand and throughput like we've seen over the last couple of years with different types of organizations. Probably the one that gets missed by The Street, because it doesn't contain immediately significant financial throughput, was signing up with Australia's largest life insurance company that has access to 3 million lives through employers and pension funds. Well, that's a different kind of channel partner for us, to go sell all of our capabilities through. And it just happens to be a wholly-owned subsidiary of a Japanese conglomerate, where we've continued to see interest come out of Southeast Asia for these coordinated care programs too. So sometimes just connecting the dots and understanding where demand, and who the different parties are that are taking place on the international front would begin to give you a sense of the type of growing both interest and we think, what will be throughput for us in that regard.

[Brooks O'Neil:]

Great. Could I just ask lastly if you've seen any significant changes in the competitive environment or what any significant competitors are doing to attack the market?

[Ben Leedle:]

No, you know, Brooks, we just see the large health plans and their components, you know Healthagen and Optum, continue. We see them essentially at every turn, particularly in the large employer market, the large municipalities -- so, state and city employees, and those types of opportunities. We do see them out in the provider space as well. And it's as complex a competitive environment as it is a collaborative environment. And in one market in one instance, we are competing with them, and in another market, we are being asked by a buyer who has brought us both to the table to collaborate and work together to deliver what they need, so plenty of competition. There are smaller organizations and start-ups that always are of intrigue to the marketplace. And then there are giants that we compete with every day. And we're in that middle zone, which affords us really the fact that we are independent. We're not a health plan and we're not a provider. And so that puts us in a little bit different light. But we can bring scale to help regional marketplace constituents get the kind of efficiencies in doing this work that allows them to compete against larger organizations as well. So we are in a unique spot. The competition feels like it comes from every possible direction, and it's because it does. And so -- and then we don't expect it to sit still. We expect new entrants to continue to come on the scene. And we continue to expect our competition to get better and better and better.

[Brooks O'Neil:]

Well, that makes sense. I want to congratulate you on your efforts to come back. I think you are back and I wish you well in the future.

[Ben Leedle:]

Thanks, Brooks.

[Operator:]

We’ll take our next question from Josh Raskin with Barclays.

[Josh Raskin:]

Hi. Thanks. Just the lapsed DM contracts. I was wondering -- are those coming out of the employer group or out of the commercial health plans that you've got?

[Ben Leedle:]

Those were all commercial health plan agreements.

[Josh Raskin:]

Okay. Okay, so the employer group -- all right, so that's not accounting. So the health plan business would be up significantly, more obviously including those?

[Ben Leedle:]

Clearly be up more, yes.

[Josh Raskin:]

Yes. And then the MA growth, I'm positing [ph] about a 5% increase in 2015, just using the percentage as a total that you guys gave. Is that all SilverSneakers, or -- and I'm just curious, the MA program has been growing a little bit faster than that. I think you guys showed 10% growth in the business last year. So I'm just curious is that sort of conservatism, because you don't really know how many people, what sort of utilization you get, or do you think that's -- or is there something else in there that's not MA SilverSneakers type of stuff?

[Ben Leedle:]

Yes, I'd just call your attention; the table in the supplemental information is rounded. If you go back, and they are probably closer to 6%, but you are close on what we put out there for the Medicare Advantage plans. And then to your question, Josh, on predominantly that growth is SilverSneakers. But we are selling broad care model solutions into the MA space with some deep regional clients. And we are also cross-selling solutions other than SilverSneakers to SilverSneakers clients. And I think we've shared about 20% of our SilverSneakers clients also have one or more other Healthways solutions engaged with their population now. So that's probably the difference of what you are noting in terms of the trends you are seeing.

[Josh Raskin:]

Got you. And then last segment question, just the systems hospitals, physicians’ growth, obviously a huge number there. I'm curious how much of that is actually signed and contracted? It sounded like, at the low end all of it. So I just want to make sure that's consistent with that segment specifically. And then are there performance fees that need to be earned in that segment, or is that really all just contracted and ready to go?

[Ben Leedle:]

There is some performance guarantees. There is not the kind of claims based reconciliation methodologic fee risk that you would see classically with the health plans, both commercial and MA, with that group. But there are performance guarantees. Most of those tend to be either process or progression, or some type of targeted volume of the services taking place.

[Josh Raskin:]

Is it similar to the 5% to 6% of the overall business within that segment? Is it 5% to 6% or is it lower?

[Alfred Lumsdaine:]

You know, it's probably going to be, candidly, maybe -- yes, probably right there, maybe even slightly higher. Obviously in the MA side there's very little revenues at risk.

[Josh Raskin:]

Okay. And just the last question, the AR increase obviously, the cash flow from Ops number for next year is relatively strong. I was wondering if there was some sort of quantification of what that AR build is, and then is that what's causing sort of that $80 million to $90 million? Is that a good run rate, or are you guys assuming that it takes time for that AR to come down?

[Ben Leedle:]

Yes. No, I mean, I think it's a good run rate. Obviously, it's a little bit difficult to predict precisely, or we wouldn't have been so off this year in terms of saying a DSO that jumped on us 10 days. We aren't expecting it to get back to 2013 and year-end levels. But we would expect an improvement from where we ended 12/31/14. But again, it's one of those things you can get cash collections the first week of January that change the profile significantly. So the thing we are confident of is that the primary reason was the timing of AR collections and not underlying collectibility issues.

[Josh Raskin:]

Okay, got you. Thanks, guys. Congrats.

[Ben Leedle:]

Yes. Thanks.

[Operator:]

Our next question is from Mike Petusky with Barrington Research. Please go ahead.

[Mike Petusky:]

Good evening, guys. Good job. I heard what you said about the 2% or more contracts. I guess I just want to clarify, though or make sure I understand the typical percentage of your book of business that's up for renewal, though is still consistent with what it's been historically, right?

[Ben Leedle:]

Yes, I mean, so if you just start with, we have, on average, three to four contracts, you are going to get 25% to 30% if everything went to its full terms. As you know, part of what we think we've been successful with is a method and approach with our account teams to start early on renewals. And we have a pretty good success track record of that. And I think that's evidenced in both the client renewal and the revenue retention that came out of the last year. So when we -- we're not saying it's a wildly unusual year with respect to what would have happened per the exact schedules on those contracts the way they were written. We've done a lot of work early that's taken some of the chunks off the table, and allowed us to renew and extend. I mean we had probably close to 80 contracts this past year that were extended and expanded. And so some of those, obviously, would have been contracts that might have come up at somewhere in this year or at the end of this year. So that just advantages us, I think going into the year that we don't have anywhere near the kind of concentration for that renewal, like we did last year where there were four contracts representing 20% of the prior year's revenue.

[Mike Petusky:]

Okay. So it almost sounds like you are saying maybe that you have gotten a little bit ahead, and maybe they are slightly less percentagewise in total than normal? Is that what I'm hearing, or am I reading too much into it?

[Ben Leedle:]

No, that's probably right. We don't go out and quantify each year in total about the terminations. We've tried to look at customary and ordinary part of our business is contract renewal. And the metrics that we think are critical, are we able to maintain north of 92%, 93% renewal rates and revenue retention rates even higher that afford the growth you put on top of this to get you the kind of growth that everybody is looking for.

[Mike Petusky:]

Right. Okay, great. And then I guess on the longer-term EBITDA margin goals, you guys obviously had a great year in terms of improving gross margin. When you look out over the next couple, two or three years, I mean, how would you kind of assess how much of that improvement comes from the SG&A line versus the gross margin line?

[Ben Leedle:]

Yes. I mean, I guess I'll put it into two buckets, so to speak. It's going to come from both, Mike. It's clearly going to come from the SGA&A line, which has a healthy dose of fixed cost component. But inside our cost of services, we bucket things between what we would call direct cost and indirect cost. We see the direct element as being relatively steady-state. We're not going to see -- you're not going to see leverage there. But we will see indirect -- or I mean leverage across what we would call our indirect cost line, which a healthy chunk of which is our technology, which has a significant fixed component to it. So, it will come from both elements. Does that make sense?

[Mike Petusky:]

It does. I was wondering is there any help you could give in terms of one being -- obviously, this year, gross margin was a bigger driver. I mean, do you have any color you can add to…

[Ben Leedle:]

Yes, I think just because of the size, it will be the bigger margin. So I would -- the bigger component -- I would -- it's probably a 60%, 40% type of split if you are looking -- if I had to sort of estimate where it's going to come from. I mean, over time, again SG&A, the S part of SG&A is not going to have as much of a fixed component as the G&A components, which are highly fixed. And again, though, there is a big chunk of our cost base is technology, science; our research and development capabilities that scale fairly significantly. So, again, I would put that at the bigger -- again, not dramatically so, but it would be -- if I had to say 60%, 40%, two-thirds, one-third, that's how I would break it down.

[Mike Petusky:]

And just the last quick one, I sort of missed it. The $250 million, I thought I heard $250 million pipeline. Was that a pipeline for employers, or just pipeline domestically? What was that figure?

[Ben Leedle:]

Yes, this is Ben. It was $250 million in annualized revenue represented by the opportunities in the domestic pipeline across all our markets. And then, internationally, $125 million, I guess, across the rest of the world. So, the pipeline for the enterprise sits right at around an opportunity of $375 million. And we've given you guys that kind of information, because we think it, over time, allows you to kind of see what demand and what fluctuation in that demand is taking place. And so I shared a year ago at this time, really the domestic was spot on where we are right now. And international was slightly lower so international pipeline has expanded by $25 million.

[Mike Petusky:]

Got you. All right, really great progress this year, guys.

[Ben Leedle:]

Thanks.

[Operator:]

At this time, there are no further questions. I'd like to turn the conference back over to Ben Leedle for any closing and additional remarks.

[Ben Leedle:]

Just appreciate you guys' time. If there is any follow-up calls, Chip, Alfred, and I are available and look forward to talking with you. Thanks for joining.

[Operator:]

Ladies and gentlemen, that does conclude today's presentation. We appreciate everyone's participation.