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spk02: Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the R1 RCN Q4 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. And to withdraw your question, please press star one again. Thank you. Atif Rahim, head of investor relations You may begin.
spk08: Good morning, everyone, and welcome to the call. Certain statements made during this call may be considered forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Mitigation Reform Act of 1995. In particular, any statements about our future growth, plans, and performance, including statements about our strategic and cost-saving initiatives, our liquidity position, our growth opportunities, and our future financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, may, plan, project, would, and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today's call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so, except to the extent required by applicable law. The actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to, the potential acquisition of CloudNet, which may not be completed on our anticipated timeline, or at all, our growth strategy, the impacts of the COVID-19 pandemic, and factors discussed under the heading risk factors in our most recent annual report on Form 10-K and in our latest fall report on 10-Q. We will also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to the equivalent GAAP amounts, please refer to our press release. Information related to CloudNet is based on data available to us and has not been audited and is subject to change. Now, I'd like to turn the call over to Joe.
spk01: Thanks, Atif. Good morning, everyone, and thank you for joining us. I'm pleased to report 2021 was another strong year for R1, with revenue and adjusted EBITDA ahead of our expectations at the start of the year. I'd like to recognize our global team for their continued resilience and hard work through what has been a challenging operating environment. Our solid execution would not have been possible without the tremendous dedication of our 22,000-person strong team. For the fourth quarter, we generated revenue of $398.9 million and adjusted EBITDA of $95.1 million, representing 22% and 52% growth, respectively. return to normal patient volumes new customer wins strong kpi performance and benefits from our digitization efforts all contribute to the strong fourth quarter results on the call today i'd like to cover four topics i'll start with highlights from 2021 followed by incremental color on the pending cloudmed acquisition based on questions we've received from investors I'll then cover our key priorities for 2022, and lastly, update you on R1's ESG journey. 2021 was a successful year for R1 across multiple fronts. In addition to exceeding the financial goals we laid out at the start of the year, we made progress across several areas to position the company for sustained long-term growth. Starting with technology, automation and patient engagement have been two key focus areas over the past few years. We accelerated the pace of automation to 10 million tasks per quarter and exited the year with a run rate of 70 million tasks automated annually, up from 30 million at the end of 2020. We also uncovered new opportunities for automation and currently have an additional 110 million tasks we can automate. We expect to exit 2022 with over 100 million tasks automated, contributing approximately $45 million to our expected adjusted EBITDA for the year. Our automation capabilities now extend beyond robotic process automation, optical character recognition, natural language processing, and machine learning. These extensions enable us to successfully digitize the wide range of complex processes found in provider organizations and develop a more robust capability set, which we characterize as intelligent automation. On the patient engagement front, we formally launched Entry, our patient engagement platform, last August. Entry brings together robust functionality to create what we believe is the most advanced patient engagement solution on the market. empowering patients to search, book, register, and pay for care in one experience on any device. With the acquisition of Visipay, we now own all the components we need for this solution, which provides us with flexibility to drive our internal roadmap. As a result, we've been able to consolidate and centralize roles that were previously fragmented and have achieved operating efficiencies equivalent to over 500 FTEs as a direct result of the entry platform. We're now FHIR API interoperable with the top four EHR systems and the only offering in the market that can support customers' needs to present appointment availability across disparate systems and care settings. This provides opportunities for our customers to win market share while simultaneously driving higher patient satisfaction. Turning next to commercial activity, while we were below our target of $4 billion in new end-to-end NPR in 2021, we are pleased to share that we are in the contracting stage and have increased the scope of business with a $10 billion NPR customer. We are substantively complete on negotiations with this customer, but have not executed the contract pending the customer's internal processes. This continued progression is a positive step, and we expect to execute the contract in the coming weeks. This is an important relationship for us across three key dimensions. First, it demonstrates the continued momentum in the market to transition revenue cycle operations to our built-for-purpose platform. Our platform offers comprehensive technology, global delivery infrastructure, and a best-in-class operating system to drive performance. Second, we believe our track record of successfully onboarding 15 billion of NPR over the past three years under end-to-end agreements is viewed as a strong proof point by prospective customers seeking a reliable partner to address the growing challenges they face. Third, technology was once again a critical driver in the selection process. The investments we've made in automation and entry allow providers to access these capabilities without any upfront capital investments. Having these capabilities embedded in our value proposition is a significant competitive differentiator. We look forward to delivering meaningful financial benefits to this customer as well as an exceptional experience to the patients they serve Additionally, in the past year, we added MedMax and VillageMD as end-to-end operating partner customers and renewed our agreements with Ascension and American Physician Partners for 10 years. With the latest 10 billion NPR, the weighted average life of end-to-end contracts will be eight and a half years, providing significant long-term visibility. We also signed several notable modular deals, including Adventist Health, Memorial Sloan Kettering, the Department of Veterans Affairs, ChenMed, Alliance, Spine and Paint, and Texas Health Resources. The last area I'd like to highlight with respect to 2021 is operational readiness to absorb the growth ahead of us. One of our 2021 goals was to ensure that our operations and deployment teams were fully resourced to successfully absorb $5 billion in new NPR annually exiting 2021. To enable this, we added capacity in our central delivery infrastructure to ensure we can begin transitioning work as close as possible to contract signing. We also invested in data integration tools to accelerate the deployment of our core revenue cycle technology at new customers and implemented processes to drive earlier adoption of our automation tools to improve speed to value. I'm pleased to say our onboarding capacity is currently in the 5 billion NPR range. However, given the current level of activity in our pipeline, we plan to increase capacity to approximately 7 billion as we exit 2022. I'll touch on this in more detail as part of the discussions on 2022 priorities. Turning now to CloudNet, we are very excited about the capabilities that we expect CloudNet to add to our portfolio as part of our vision to be the strategic revenue partner to providers. As we discussed in our announcement last month, CloudNet has capabilities that build on our once existing business and will also help drive incremental value to our customers. There are two key areas I want to focus on today. The first is CloudNet's platform and technology. CloudMed has built a data-driven platform with deep revenue intelligence functionality to holistically address the complex reimbursement challenges that providers face. It includes a robust data set that captures demographic, clinical, and financial data on over 500 million patient encounters annually using a highly scalable cloud-based architecture. This data set spans payers and geographies across the country. To put it in perspective, CloudMed ingests 10 times more data than R1 does today across our existing customer base. This data set enables CloudMed's predictive analytics and machine learning to identify patterns and errors in clinical documentation, claim submission, and payer denials, and thereby create automated rules that generate value for customers. As a result, CloudMed has developed a robust set of solutions, many of which we expect to significantly enhance R1's existing functionality in our end-to-end solutions, and some of which will be entirely new capabilities. For example, CloudMed's results in underpayments, complex claims, and charge capture are superior to R1's, given their deep focus and scale in these areas. Additionally, CloudMed brings to the table solutions that R1 has not developed historically, For example, DRG validation, Medicare cost reporting, 340B reimbursement, and a demonstrated track record of productizing and commercializing automation capabilities sold directly to providers. These would all be net new solutions we expect to add as a result of the pending acquisition. The second point I want to focus on is CloudMed's strong financial profile and commercial engine. CloudMed's 12,000-plus rules generated over $1.7 billion in incremental revenue for customers in 2021. This strong value proposition has resulted in a financial profile with high recurring revenue and 20% plus year-over-year top-line growth in 2021. In terms of scale, CloudMed processed over $800 billion of NPR in 2021 for more than 400 health systems in all 50 states. including 87 of the top 100 health systems. Even with this scale, there is still a significant opportunity to cross-sell additional solutions to current customers, since a majority use only one out of Convent's nine solutions. Their commercial engine has a multi-year demonstrated track record of increasing the attach rate with existing customers and continuing to develop new opportunities across the remaining $1.2 trillion of NPR at health systems and physician practices that are not CloudNet customers today. These attributes give us a high degree of confidence that our modular channel can grow 20% in the medium term post-acquisition. bolstered by strong bookings from CloudMed in 2021 and adding our existing modular solutions such as PaaS, Entry, and VisitPay to CloudMed's commercial engine beyond 2021. We are excited about the opportunities to unlock additional growth and value for providers and remain on track to close the acquisition in the second quarter, subject to closing conditions as previously disclosed. Turning to our priorities for 2022, Our top overarching priority is to successfully complete the acquisition and integrate CloudNet. A high-quality outcome here is of paramount importance to us with three key goals in mind. Post-integration, we want to, one, drive commercial success given our enhanced value proposition, unlocking and accelerating the growth potential presented by the modular channel. Two, establish R1 as the technology and data platform leader in the industry. And three, be recognized as the premier brand to serve healthcare providers' revenue cycle management needs. Integration planning is well underway, and we expect to launch our plans immediately post-cause. Second, we want to ensure that our core execution remains on track and we fully capture the market opportunity presented to us. Our end-to-end pipeline remains extremely active and was up 30% at the end of the fourth quarter compared to Q3 21. on top of the 50% sequential growth in Q3. Two of our key goals in 2022 are to reduce the cycle time to onboard new customers and to increase our onboarding capacity to $7 billion in NPR annually. We expect incremental near-term costs as a result of this, with a significant return on investment given the long-term nature of our contracts. Third, looking to the next stage of automation. As a result of the planned acquisition of CloudMed, we expect to have the broadest coverage on revenue cycle processes automation. We expect our data footprint to increase tenfold, enabling further advancements in machine learning, which will in turn create a more powerful value proposition for customers. R1's automation efforts, which has historically been internally focused, It's highly complementary with CloudMed's capabilities, which are sold directly to providers on a standalone basis. Building on our combined capabilities, we plan to launch a multi-year AI-driven strategy to unlock the full potential this expanded data set presents to us. We expect these efforts will significantly expand automated decision-making and increase the universe of automatable process. Increasing automated decision-making will benefit multiple outcomes, including lower reliance on manual labor, improved revenue yield, faster working capital conversion, and higher patient satisfaction. Ultimately, technology is playing an increasingly important role in our process workflows and is helping us navigate tight labor markets. While we are not immune to the current labor environment, As we sit today, with the efficiencies created by automation and entry, our labor needs are 10% to 15% lower than providers' in-house revenue cycle operations. This technology-driven productivity, combined with our global scale footprint, is increasingly recognized by providers as a superior alternative to their standalone efforts or other solutions in the market. And we believe this is contributing to the growth in our end-to-end pipeline. Lastly, before I turn it over to Rachel, I'd like to update you on R01's ESG journey. In March of last year, we published our inaugural report in which we highlighted how we are enhancing the interests of all stakeholders through our ESG commitments. We continue to build on these commitments over the course of 2021, and I'm particularly proud of a few initiatives I'd like to highlight. With the launch of ENTRI, we significantly advanced our commitment to improve access to healthcare. Our role in the healthcare ecosystem positions us to transform the patient experience by integrating the numerous revenue cycle touchpoints and disparate support systems found across care settings. By combining our innovative technology with our financial advocacy for patients, we are making healthcare simpler by increasing patient access to healthcare, and we're pleased to be removing barriers to high-quality healthcare for patients. Second, we continued to invest heavily in our people. We introduced a number of new learning and development resources, including new educational content for our people leaders to enable them to build effective working relationships and a certification program for our hourly staff to advance career and pay progression. We also evaluated minimum wage floors on a geographically differentiated basis and increased base pay in select markets. with the intent to continue similar evaluations and actions more broadly in 2022 and beyond. Third, we enhanced our protection of vital information with robust internal controls as independently verified through SOC 1 and SOC 2 certifications. I'm very proud of our team for actively embracing and advancing these initiatives, which overarchingly tied to our core mission to make healthcare simpler. We plan to publish our 2021 ESG report in early March, and I encourage you to review a copy on our website. In closing, I'm very pleased with our progress in 2021, which positions us for a strong 2022. With the pending acquisition of CloudNet, we stand to significantly advance our value proposition post-closing and improve our competitive positions. We're very excited about the journey ahead of us and look forward to updating you on our progress on future calls. Now I'd like to turn the call over to Rachel.
spk09: Thank you, Joe, and good morning, everyone. We're pleased to report solid fourth quarter results with revenue up 21.5% year-over-year to $398.9 million and adjusted EBITDA up 51.7% to $95.1 million. For the full year, revenue grew 16% to $1.475 billion, and adjusted EBITDA grew 43.2% to $343.6 million. Adjusted EBITDA margin for the year was 23.3%, up 440 basis points from 18.9% in 2020, driven by higher incentive fees from strong execution, our digitization efforts, and synergies from acquisitions. Reviewing the fourth quarter results in more detail, net operating fees of $332 million grew $60.6 million year-over-year, primarily driven by recovery in patient volume and the onboarding of new end-to-end customers signed over the past 18 months. On a sequential basis, net operating fees increased $23.5 million, primarily driven by recently onboarded customers. Incentive fees of $35.8 million were up $8.4 million over the prior year and down $5.7 million sequentially, driven by strong operational execution and offset in part by a shift in incentive fees from the American Physician Partners contract, which moved to a net operating fee arrangement as discussed last quarter. Other revenue, which consists largely of modular services, was $31.1 million, up $1.5 million over the prior year and up $1.4 million sequentially, driven by improvement in physician advisory services revenue. The non-gas cost of services in Q4 was $279.1 million, up $36.2 million year-over-year and $11.6 million sequentially, driven by incremental costs to serve new customers and offset in part by our automation and digitization efforts. Non-GAAP STNA expenses of $24.7 million were up $1.9 million year-over-year and $1.8 million sequentially, but down 75 basis points year-over-year at the percent of revenue, reflecting our cost discipline, despite incremental costs to support new customers and acquisitions. Adjusted EBITDA for the quarter was $95.1 million, up $32.4 million year-over-year and $5.8 million sequentially. Adjusted EBITDA margin improved 475 basis points year-over-year, driven by strong operational execution, contribution from new customers, and lower costs as a result of our automation and digitization initiative. Lastly, we incurred $11.9 million in other costs in Q4, primarily related to strategic initiatives and COVID-related expenses. Turning to the balance sheet, cash and cash equivalents at the end of December were $130.1 million compared to $158.7 million at the end of September. While we generated $46 million in cash from operations in 4Q, the sequential decrease in our cash balance was driven by the use of $27 million for share repurchases, $24.3 million for debt paydown, $18.3 million for CapEx, and $10.7 million for deferred payroll taxes related to the CARES Act. For the full year, we generated $264.8 million in cash from operating activity, up from $61.8 million in 2020, which reflects our adjusted EBITDA progression. Net debt at the end of December was $645.5 million, compared to $640.8 million at the end of September. Our net debt to adjusted EBITDA leverage ratio at the end of December was 1.9 times, down from 2.1 times at the end of September. Our liquidity position remains very strong overall, with cash on hand and availability under the revolver of approximately $500 million. In 2021, in addition to financing the acquisition of Invipay, we were purchased 2.6 million shares at an average price of $21.62 and voluntarily paid down $40 million of our revolver. In 2022, we expect to revert to a normal historical pattern with cash generation at a low point in Q1, primarily due to the payment of incentive compensation and taxes related to the vesting of employee equity awards. Turning to our financial outlook, 2022 guidance on a standalone basis for R1 is an expected revenue range of $1.66 to $1.7 billion and adjusted EBITDA range of $385 to $405 million. Our guidance assumes patient volumes at approximately the same as pre-COVID levels and upfront costs associated with onboarding $4.5 to $4.8 billion in new NPR. As Joe noted, given the ongoing activity in our pipeline, we will likely be increasing our level of investment in 2022 as our pipeline progresses into contracted business. We expect adjusted EBITDA to ramp up in the second half, as was the case pre-COVID. In the first half, we started incurring upfront contracting costs associated with a $10 billion NPR customer. We expect these costs to be in the $2 to $3 million range in 1Q. Additionally, we expect approximately $5 million in higher employee health care costs from depressed levels in 1Q of 2021. With this in mind, we expect 1Q revenue of $375 to $385 million and adjusted EBITDA of $85 to $90 million. We will continue to provide additional color on our quarterly progression on future earnings calls and will be providing updated guidance post the completion of the CloudMed acquisition. In closing, I'm proud of our team's continued strong operational execution and disciplined processes in forecasting and cash management, culminating in a balanced and strategic approach to capital deployment. We entered 2022 with strong momentum and are positioning the company to meet customer demand while delivering on our commitments to our stakeholders. Now, I'll turn the call over to the operator for Q&A. Operator?
spk02: Thank you. And just as a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Charles Rhee with Calendars.
spk04: Hi, this is James on for Charles. So with the announcement of CloudMed, the medium and long-term adjusted EBITDA targets were raised, but the operating partner model said the EBITDA margin contribution was left unchanged at 30%. Can you help us think about what the potential upside is there? um as a result of the cloud acquisition uh particularly with respect to intelligent automation where you know it seems like there's considerable opportunity and it's a strategic focus in 22. yeah um james this is joe thanks for the question um we're you know one thing is um uh we're we're still pretty early
spk01: in the integration planning and ultimately post-close, the detailing out of more hardened, longer-term business plans. So I would put that out for context and color. The second thing I would say is, as part of our progression of planning and highlighted in my comments, we are increasingly encouraged i.e. bullish on the intelligent automation potential longer term. And as I commented, when you think about contribution to our operating partner constructs, three levers of value that we think that can positively impact. One is just pure operating efficiency, the automation component of that. Two, the decision-making quality from the automation as opposed to the human, we think that will result in higher revenue yield and translate into KPIs. And then third, just cash conversion cycle time. And as you know, as we convert cash faster, that flows through in our base fees. So what I would say, where we're at right now, Our confidence is increasing, albeit we're still not closed on this transaction and we're doing high level integration work as you would expect. But I hope as we progress through the close, and we get into the more detailed planning in the second half of this year, going into 23, we're able to provide some updates along the lines of your questions. That's a thesis that I have. I think Lee shares that thesis, and I'm excited to get through the close so we can work more quantitatively on the potential returns from that opportunity set.
spk04: Okay, great. And can you go into more detail on the primary drivers that are expected to reduce the cycle time to onboard new customers and how that should impact the financial profile of the operating partner model? Like, should we think about year one margins improving and acceleration and the ramp to steady state?
spk01: Yeah, I think that's the way I think about it. So the reason we're putting a high degree of priority on reducing deployment cycle times is twofold. One, speed to value for our customers. That's very important. And two, speed to value or speed to earnings on our deployment. So those two attributes, you'll make that a high priority from my standpoint, and that's why you hear us talking about it routinely on our update calls here. A couple of things I would highlight. Well, let me start with where are we at right now in that journey. As we said, our prior deployment cycle time was around 12 months. As we sit right now, we've been able to bring that in to 9 to 10 months. And there's some variability on that depending on the complexity of footprint. What I mean by that, James, is if we have a more distributed set of hospitals or a more distributed um emr construct that we're integrating into that's going to push us a little bit higher if it's more concentrated we'll be closer to the lower end of that range so good progression over 2021 on compressing that some things that contributed to that. One is we're centralizing our core data operations practice. Now, this includes integration, interoperability, data warehousing, analytics, and government of data integration. The reason that's so important is the data ingestion into our technology is a key dependency in us achieving our steady state operating system. The second area I would highlight that we've been working heavily on is centralizing our IT program management. You have to remember, as we transition these teams of revenue cycle operators, provisioning identity management, access management into our systems, but also back into the customer's host systems, is a key variable that we have to work through, and it has a high degree of complexity around that. We've centralized that activity. We've deployed new software programs that automate a number of those tasks. So those are a couple things that I would highlight. in the category of compressing cycle time looking in currently and looking forward. And I do think we should be in a position over the course of this year to update based on those progressions, update the speed to value or speed to economics thresholds that we have previously communicated to kind of round out my answer to your question, James.
spk04: Yeah, and just as a follow-up to that, in the updated revised outlook provided last quarter, I mean last month, long-term and medium-term, is this shortened cycle time embedded within that? No.
spk01: All right.
spk04: Thank you.
spk02: Our next question is from Vikram Kasababatla with Baird. Your line is open.
spk05: Yeah, thanks for taking the question. You talked about the plan here to expand onboarding capacity, the $7 billion exiting this year and some of the incremental investment associated with that process. I'm wondering if you can quantify the magnitude of that investment in 2022 and the extent to which that's been contemplated in the guidance for this year. And then just as a follow up to that, you talked about some of the momentum in the end-to-end pipeline, but I'm curious, given that it seems like it's going to take some time for you to expand capacity here, Is it reasonable to think that you can sign additional NPR in 2022 beyond the one large $10 billion customer, or do you think you're going to have to wait until you get more visibility into the onboarding timeline and process associated with that contract? Thanks.
spk01: Yeah. So let me take the first question in terms of how should we think about the investment envelope associated with the increase from $5 billion of onboarding capacity to $7 billion. When we increased capacity from $3 billion to $5 billion, you may remember in our Q3 of 20 call, we referenced that investment envelope to be in the $7 to $8 million range. We are definitely getting scale leverage in this. The investment envelope to go from five to seven will be less than it was to go from three to five for all the reasons I just commented on with James and as you would expect. With size, we get efficiency. So as you think about that envelope directionally, the first thing I would say, it's a no-brainer for us. The return is almost immediate and on a longer-term basis. the returns are an order of magnitude greater than that investment. And as we think about our full year guidance range, we're early in the year. I am very, very encouraged. We can comment on Q1 in a second. I am very, very encouraged with core execution on our KPIs and on our cash conversion right now. And so Rachel and I will work over the next couple months As we go into our Q1 call, we should be in a position to give additional color. But we're going to work hard to absorb that in our current guidance range. If we can't, we'll update you on that. But as I said, I am encouraged with the team's focused on execution here over the first couple months. And that's probably a bigger driver for us than this nominal investment in raising capacity. Now to your second question, you always hear me talk about capacity as nominal capacity. The reason I say that is, In the short term, we are able to flex that up. So we've demonstrated when we were running at $3 billion of nominal capacity, if demand presented itself, we're able to flex that for a period of time. It's just we can't maintain that higher level over multiple years in a row. So as I look at this year, we are able to sign and responsibly onboard additional NPR in addition to the contract that we're in the process of executing and planning around. And so really this is us looking at the demand the market presents itself this year, but also looking into next year and on a multi-year basis. That's really what drives us around our medium range capacity planning. We're always running with capacity in the short term, and we intend to do that. That's why we're proactive on our modeling and planning around demand and supply. So yes, we are able to sign an additional business and start deployment of that additional business in addition to the large contract we've talked about.
spk02: Great. Thank you. Our next question is from Sean Dodge with RBC Capital Markets. Your line is open.
spk06: Yeah, thanks. Good morning. Maybe on the technology initiatives, Joe, you mentioned those expected to contribute $45 million of EBITDA savings to this year. How does that compare to what you exited this past year at? And is this net of, I think before you mentioned continuing to ramp spending on tech initiatives this year to further accelerate innovation, is that $45 million net of that planned increase in spending?
spk01: Yes, it's net of that planned increase in spending. And the way to look at the $45 million contribution, we exited 2020 with $20 million in contribution. And in 2021, we were clearly ahead of that. So you can think about it somewhere between that bookend of the 2020 exit and the contribution in 2022 that we've talked about. And I think more importantly, when you look at this in the context of my comments on the call, Sean, and you think about every discussion we're having with providers, the number one or a high priority focus of that discussion is really around supply and demand constraints on labor. And so when you break down, there's obviously the financial impact on this, But I can't stress enough the value prop benefit that we have in the current environment. And so as a direct result of two technology niches, one is core automation, and the second is our entry platform. In our current run rate, we've automated roughly 1,800 equivalent FTEs and around 550 registration, whether that be local or central registration staffs off of our PX platforms. So when you think about that, that's what manifests itself in, as purely from technology, we're probably closer to 15% lower labor requirements than the providers on a standalone basis. And in today's environment, that is a very, very important attribute of our value prop, and we're seeing that play through in commercial discussions.
spk06: Okay. And then on QuadMed, when you announced that deal, you quantified the expected cost synergies, and in your prepared remarks, you talked about some of the revenue opportunities that come along with that, too. Is there any I don't know, quantification you can give us of what the deployment of CloudMed could mean just for your current clients alone. So what I'm thinking about is how big of a lift could there be to net operating fees as you deploy this across your end-to-end base? And how much can this help kind of ratchet up your performance or incentive fees?
spk01: Yeah, there is a very... On two-folds. On the scope of work we have contracted in our end-to-end arrangements, there is a quantifiable lift that we will be in a position to talk about. And the reason I I'm hesitant right now to go into specific details on that. It's just with an appreciation for we haven't closed this transaction yet, and there's certain dependencies we have to work at a more deeper level with the CloudMed team on triangulating that against our contracts. But headline, there will be an impact on Lyft in our current contracted scope of business. Now, in addition to that, CloudMed has solutions that are incremental in scope and of high value to our current end-to-end customers. And so that's another component. It will not show up in the KPI fees or incentive fees. It will show up in net new growth into those end-to-end contracts. What I'll tell you is we've already had a fair amount of inbound interest from customers to explore those opportunities for additional capabilities. And those are in the areas that I commented in my remarks, 340B technologies and solutions and some of the others I would highlight. Okay, great. Thanks again. Thanks, Sean.
spk02: The next question is from Stephanie Davis with SVB. Your line is open.
spk09: Hey, guys. Thank you for taking my questions. I was hoping you could walk us through how much management mindshare the $10 billion wind ramp will take. And since this one was at part of the end of year pipeline for 2021, is there still an opportunity to ramp at a similar pace as you have in prior years for other new winds? Or is this going to be a bit more balanced?
spk01: Yeah, so management mindshare, what I would say, Stephanie, is the management mindshare has been very, very intense over Q4 and Q1, or Q3 and Q4 and into 2020. January here. And that's evidenced, I think, a little bit by Rachel's comments on our Q1 guide. So we've got $2 to $3 million of pure external advisor fees that have been working with us on this contract negotiation and ultimately to get us in a position where we are today. That's just a data point to give you a sense of the complexity, and it's logical that this is a complex agreement given its size and magnitude. So I would highlight that as an area where management has had a fairly sizable increase in involvement, attention, et cetera. As we look to deployment One of the things I would say is I don't want to call it routine, but we're very prescriptive on that. And so I wouldn't highlight that necessarily as an outlier in terms of demand. I would more highlight the complexity of contracting business such as this. Now, to the second part of your question, we have been intentional, so I'm very encouraged where we're landing. We should be able to, and I think the market potentially presents this opportunity to us to bring on and contract independent of this outlier customer win or customer engagement, to contract in line with what we've historically guided to. That will be a stretch, no doubt. But if the market or the pipeline activity that we see converts, we are in a position to serve that over the course of this year. And that's why I want to exit this year with the $7 billion, because I can stretch the teams over the next 12 months. It's very hard to responsibly stretch the teams over eight quarters at that elevated level of activity. But I feel like we're in a good position and we've got a good plan on how we're thinking about this.
spk09: Understood. That's very helpful. On the guidance point, we have touched a bit on the margin impact in 1Q. I also noticed that the 1Q guidance is a sequential shutdown in revenues as well. Are there any puts and takes to call out driving up?
spk01: No, I think from a revenue standpoint, the only thing we've got is the normal variability in Omicron and provider volumes. Nothing there that is necessarily unexpected or a surprise for us that – that gives us, it's in line with our plans. The main things I would highlight and Rachel commented to these on Q1 is just higher healthcare costs on a quarter over quarter basis that we've known it's in our plans incorporated for, and then two to $3 million of incremental spend on advisors to work through this large contract That's also planned for. That's not repetitive in nature. So those are the two things I would highlight. When you look at beneath that, we feel really encouraged on core earnings and core execution.
spk09: Understood. The more question about the late impact of Omicron utilization. Thank you, guys. Appreciate it. Thank you.
spk02: The next question is from Michael Cherny with Bank of America. Your line is open.
spk03: Thanks for taking the question. Maybe if I can follow up on that line of questioning, is there any way for us to quantify where you see the Omicron impact for 1Q? And along those lines, Rachel, I know you had said you expect return to normalized utilization over the course of the year. When essentially do you hit that run rate? And is there anything built in on any potential catch-up in utilization, which I know has been a point of contention given some of the delays on elective procedures and other areas?
spk01: Yeah, the Omicron is really not, it's really geographic for us. That's how I would highlight it. I think, and it's something, because of the nature of our, Michael, the nature of our base fee lags, we have a lot of visibility on this. So, you know, we're we're basically working three to four months in arrears on that lag and the visibility we have. So we're generally encouraged um with what we're seeing right now and and it's right in line um with um uh with kind of how we how we expected volumes to play through uh one thing i would highlight to the positive is we are seeing the ed care setting uh uh come up nicely that's the one uh if you look at this from a a care setting basis. That's the one area that's lagged, and that is progressing nicely. And it's good to see that pick up and whatnot. But that's really kind of how we see Omicron right now. In some of the geographies, that's the driver on some of those base fee revenues.
spk03: Got it. And if I can, with regards to the pipeline, you talked about the opportunity for further wins. I assume there'll be a number of competitive RFPs. Clearly, you can't go out and pitch the CloudMed capabilities because the deal's not closed. But how does that factor in, given the component that you can essentially go out and promise, or at least signal the fact that you're going to have a more robust deal? tech platform that's going to be bolting on? And does that do anything in terms of delaying potential decisions on the part of customers until they see exactly how it works together?
spk01: No, I would say it potentially, you know, in every discussion I've had with customers, that pending transaction has been viewed very, very favorably. It's been viewed favorably at the C-suite level, and it's also been viewed favorably at the at the revenue cycle leader level. Some of the commentary that we're hearing is, one, CloudMed is a known entity, and as a testament to the CloudMed team, highly, highly regarded by the providers for what they do. We're hearing that across all of the commercial discussions that we're having. The second thing is, as customers think about our value prop, as part of that transaction, they have a high degree of confidence that they're going to get a scaled, efficient, automated operation that helps them address some of the challenges that we've talked about And they're going to get the best revenue intelligence technology platform to ensure they maximize their reimbursement. And the combination of those two things in the eyes of the providers, what we're hearing is very powerful. So that, you know, from my standpoint, if anything... It helps in that commercial discussion. I have not seen any feedback where it may delay or put a commercial discussion in a wait-and-see mode.
spk06: Got it.
spk02: Thank you. Glenn Santangelo with Jefferies. Your line is open.
spk00: Oh, yeah, thanks for taking my question. I just want to follow up on Vikram's previous question regarding your onboard capacity issue. It kind of sounds like, Joe, that you can clearly add some additional capacity, but, you know, assuming you bring this 10 billion customer on at some point this year, you know, we're just trying to get a sense for you know, what your capacity is after that. I mean, I think you said that your overall pipeline is up 30% from the fiscal third quarter, which is great. I was wondering if you could maybe comment on the magnitude of that pipeline and maybe how big the late stage deals are in particular and when you think you can start to capitalize on that given the constraints you have.
spk01: Yeah. I don't want to get into too much detail, so I'm going to keep it just kind of kind of out of respect for where we are. But just think about that contract will be onboarded over a phased approach over a couple of years. And I think that's a great thing because what that does is it allows us to have capacity in our current year and in next year to support the market opportunity. And so my hope is that we can, you know, if we think about a three to five billion-dollar range. Near term, it'll be closer to the three, but as we progress over the course of the year and add this capacity and the flex that we have, to be able to have that kind of window of additional capability and capacity to support new NPR. And so that's the way I think about it. We will phase this large outlier contract and that phasing combined with the raise from five to seven should put us in a position over the course of this year and next year, if you think about that two-year planning horizon, to hopefully be able to support kind of kind of additional business in that range. Size of pipeline I'm not going to get into, but what I would say is activity and progression of activity from my standpoint looking out over the course of this year would support that incremental contracting activity.
spk00: That's really helpful. I appreciate that. Maybe if I could just follow up one question on the full year 22 guidance. I think in your prepared remarks, you talked about the tech initiative adding $45 million in EBITDA this year. But if I look at your overall growth in EBITDA in fiscal 22 over 21, that's almost fully explained by this tech initiative. And I was kind of wondering what that implies about – you know the the organic growth of of the base operation sort of taking into consideration your growth in npr you know customer volumes hopefully continuing to prove uh improved through the end of the pandemic here the natural maturation of contracts and i i think what we're all trying to understand is the the arguably the lower than expected q1 guide maybe there's some incremental expenses in there hard for us to know how much of it
spk01: is one time versus recurring and and why you're comfortable with the ramp and and how we think about that organic growth underneath uh underneath all the details that you've given yeah i mean if you look at our our year-over-year uh guidance um i mean a couple of things one in one queue from my standpoint that's all kind of one time in nature and encapsulated in in those two areas that we've commented on a couple times here The second thing is when you look at year over year, what you have to understand is we have in our business, the amount of onboarding that we anticipate to be doing this year, those will all be in the early stage deployment phases. So there is a significant amount of investment that will be occurring and is encapsulated in our guidance as part of that. The second thing is you have to remember inside of our guidance, and we've talked about this before, we have on the Ascension renewal on a year-over-year basis in this 2022 year, it's a transition year, meaning as part of that renewal, there's some price compression, but that price compression is more than offset with contractual agreements that Ascension gave for us. So that goes into the equation as well. And then you have the maturation of contracts and impact of automation. So it's really a number of those holistic levers that are playing into And the $45 million, just to kind of give a sense of that, that $45 million on automation is cumulative since we started reporting that in 19. It's not incremental to last year in year. So when you look at all that, that's the qualitative waterfall, if you will.
spk00: Super helpful. Thanks a lot, Joe.
spk01: Yeah.
spk02: Again, as a reminder, please press star one to ask a question. The next question is from Donald Hooker with KeyBank Capital Markets. Your line is open.
spk07: Great. Good morning. Maybe one question for you is, you know, we're talking a lot here this morning about capacity, which is a good problem to have. But, you know, it sounds like your pipeline is strong. You have some big deals coming on. I mean, is there any reason why $7 billion is what you're shooting for? Why not 10 or 15? It sounds like it doesn't cost a lot of cash or money, expenses to ramp up that capacity. Can you just maybe give us some texture around some of the other limiting factors in terms of capacity? Why can't you raise that more?
spk01: We could raise it more. I think what we want to, you know, Don, is have a, I'll call it a prudent posture or a disciplined posture on kind of capacity and titrating that against our pipeline. So when we look at our pipeline and we look at the growth, what really drives Rachel and I's kind of decision to say, yes, we will release these funds to the teams to start to increase capacity is really that late stage activity and making sure we see that because the nature of our business given the complexity and the complicated decision making framework around these agreements We just think it's the right approach. I mean, I could look at the total pipeline and think about theoretical convertibility, and I could get to a higher number, no doubt about it, Dante, to give you the bookend of that question. But what we really try to look at is striking a good balance when we're going to spend money on adding cost to the organization, we do that against the backdrop of a high degree of confidence. And so we really look to the later stage activities and use that as the input to make a decision over the near term. And so, you know, I don't... I don't think there's a lot of doubt. There's not a lot of downside in my perspective on this investment and capacity. It could be that we have to raise it again at the end of the year, but that'll be a good problem to have.
spk07: Indeed. And maybe a different question, and I'll jump off, but it sounds like you've had some good traction and you're very optimistic on your modular solution businesses. including, I guess, CloudMed at some point in time here when that closes. Is there any signs or hope that some of these modular deals could evolve into larger co-managed or operating partnerships? I think you caught out like Adventus and a few others in recent quarters that sound like some big potential relationships that could evolve into bigger dollar revenue opportunities. Can you maybe talk about how that's going?
spk01: Yeah, I think there is that potential for sure. The one thing I would highlight, what we want to be in a position to do to the providers is meet them where they are in their journey. And what I mean by that is there are some provider organizations that are ready to engage in an end-to-end strategic partnership over a long term. And, you know, we have a great offering in that regard. is a segment of this market that will want to engage with scaled companies such as ours, and they will want to start with a modular approach, but they want to know they've got a partner that can evolve over time. If they determine, and I stress if they determine that the right progression for them is into a more strategic partnership, And I really am excited about our positioning. We are uniquely positioned in that regard needs to be the competition. Meaning with the pending acquisition of CloudMed, we have a world-class modular channel and a comprehensive set of solutions But that partner, when they engage, or that provider, when they engage on that dimension, also has the additional benefit that at any point in time, they can engage us in a discussion on a broader strategic partnership. And I think that'll play well. And, Don, that should... end up in conversions over time based on us being a good partner and serving them against what they need in terms of an engagement model in the near term.
spk07: Okay. Thanks for your thoughts. Appreciate it. Thanks, Don.
spk02: We have no further questions at this time. I'll turn the call over to Joe Flanagan for any closing remarks.
spk01: First, Chris, thanks for all your help moderating the call, and thank you, everybody, for joining us today. I'd like to close just by thanking the entire R01 team for their continued focus on delivering for our customers and strong financial performance. We look forward to executing on the growth opportunity ahead and updating all of you accordingly on future calls. So thank you very much.
spk02: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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