R1 RCM Inc.

ladies and gentlemen thank you for standing by my name is brent and i will be your conference operator today at this time i would like to welcome everyone to the r1 rcm inc third quarter 2022 earnings conference 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 would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It is now my pleasure to turn today's call over to Mr. Atif Rahim, head of investor relations. Sir, please go ahead.

Thank you, Brent. Good morning, everyone, and welcome to the call. Certain statements made during this call may be considered forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth, plans, and performance, including statements about our cost-saving initiatives or liquidity position, growth opportunities, and 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, plan, project, would, and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All statements made on today's call involve risks and uncertainties. While we may elect to update these looks and statements in the future, we have no current intention of doing so, except to the extent required by applicable law. Our actual results and outcomes with different materially footprints was included in this forward-looking statement as a result of various factors. including not limited to geopolitical, economic, market conditions, high inflation, slow growth or recession, and other risk factors discussed under the risk factors heading in our most annual report on Form 10-K and our quarterly report on Form 10-Q. We will also be referencing non-GAAP metrics on this file. For reconciliation of non-GAAP amounts mentioned to the equivalent GAAP amounts, please refer to our press release. Now, I'll turn the call over to Joe.

Thank you, Atif, and thank you all for joining us today. I'd like to start today's call by reviewing our Q3 results and business outlook, and then discuss the leadership succession plan we announced this morning. I'll then turn the call over to Lee for additional comments, followed by Rachel to cover financials in more detail. Starting with Q3 results, we made progress on our strategic priorities, including integrating CloudMed, advancing our technology roadmap, and onboarding new customers. all of which keep us on our long-term growth and profitability trajectory. However, our results fell short of our expectations for three main reasons. First, the largest impact to Q3 revenue and adjusted EBITDA was lower incentive fee revenue. Two factors are affecting incentive fees. We experienced an elongation in payer reimbursement turnaround times, which in turn impacted several key performance metrics that our incentive fees are tied to, We have initiated a detailed plan to reduce these turnaround times, including the following, increasing our operating standards for frequency of follow-up, engaging with payers via our provider customers to ensure accounts receivable are handled in a timely manner, and via CloudMed, expanding our capacity to respond to a marked increase in clinical review requests from payers. While we are confident that payer turnaround times will improve, we currently anticipate continued impact on our performance into 2023. Incentive fee revenue was also lower than we expected due to volatility in KPI metrics at two operating partner customers where we commenced onboarding in 2021. These customers have unique complexities, which is resulting in us taking longer to achieve our expected performance goals. We have implemented remediation plans and have line of sight to return to our financial performance targets when these customers are in the steady state phase. Most importantly, our long-term earnings potential from both of these customers remains unchanged. Second, net operating fees were lower than expected, primarily due to weaker volumes and consolidation that was unfavorable to us in the emergency department physician space. Third, we increased our allowance for credit losses by $9.5 million to account for financial challenges facing one of our large emergency department aggregator customers, which directly impacted adjusted EBITDA in the quarter. CloudMed performed well in the quarter with revenue of $120.2 million and strong year-over-year growth. Revenue from R1's legacy modular solutions was flat year-over-year. As a reminder, one of the key growth and profit drivers underpinning the strategic rationale for the CloudMed acquisition is the ability to accelerate growth for R1's legacy modular solutions via CloudMed's world-class commercial organization. We've consolidated accountability for Modular, and the teams have made significant progress preparing and launching legacy R1 modules, including entry pay and physician advisory services via the CloudMed commercial channel. Early indications from this activity are encouraging, with a number of large IDNs in active discussions. Based on the positive customer feedback and momentum we're seeing within CloudMed's core offerings, we're excited about the progress being made to fully unlock the growth potential of these combined offerings over time. Let me now provide an update on our customer onboarding activities. Onboarding at Sutter is progressing on schedule, and we have welcomed 800 employees to R1 to date, with roughly 700 employees transitioning just this past weekend. Our teams are focused on operational and technological readiness. We have also added 250 employees to provide incremental near-term capacity and respond to ongoing payer dynamics and to position us for a smooth transition. At Scion Health, training for select leaders and change management activities have been completed on plan and we continue to work through deployment baselining activities. Deployment activities at St. Clair Health are underway and progressing on plan with employees scheduled to transition later in the fourth quarter. One thing I would like to note is that the final scope of work definition at our end-to-end IDN customers can vary until baselinings complete. Geographic dynamics also affect the cost to collect percentage rates due to differences in payer reimbursement rates or local labor costs. To account for this variation, we're updating the illustrative contract economics for our end-to-end IDN operating partner contracts. The most notable change is moving the midpoint of revenue generated per billion of NPR from IDN customers to 4% from 4.5%. Importantly, margins remain unchanged across key phases of onboarding new customers, and we continue to expect 30% contribution margin at steady state. Onboarding of the physician customers we announced earlier this year, Kepler, Vision, Samsung Clinic, and EPPA are also progressing on schedule, with Samsung due for completion by the end of the year. Collectively, we're in the process of onboarding more than 8 billion of new NPR, and I'm pleased to say the deployment teams have been focused on meeting their deliverables as planned, preparing us for successful long-term relationships with our new customers. In light of our third quarter results, as we look out to the fourth quarter, we expect the factors I discussed earlier to continue to pressure our financial performance. While we expect modest recovery and incentive fees from Q3 levels, our expenses will be higher because we will incur incremental costs to respond to the challenges I highlighted above. We also expect net operating fees to be impacted by lower volumes than we had forecasted across both acute and physician customers. We are therefore lowering our 2022 revenue guidance to a range of $1.79 to $1.8 billion and adjusted EBITDA guidance range to $420 to $425 million. As we turn to 2023, while we're in the budgeting process and will not be providing formal guidance until January, our current view is that 2023 EBITDA is expected to be 10 to 15% below consensus estimates. Several key drivers for this updated view are as follows. We will be increasing our investment to ensure execution on our operating partner contracts exceeds our and our customers' performance goals. We expect this approach to maximize the long-term earnings potential of these contracts. We are assuming a longer ramp to higher growth for legacy R1 modular solutions than previously expected. However, as mentioned, the CloudMed commercial engine is exceeding growth expectations, and early indications from customers around the legacy modular solutions is very encouraging. We continue to believe there is meaningful future growth to unlock in these offerings. We expect higher technology investments to support our long-term growth strategy around a consolidated platform and data architecture. Finally, we are taking a cautious view in our budget assumptions for 2023 on a couple of environmental factors, namely the effect of inflation as well as consumer payments for patient out-of-pocket expenses. Given that we now expect lower results in the near term, it's important to emphasize our continued confidence in the four key drivers that underpin our long-term growth and earnings trajectory. First, we believe we have the best value proposition in the industry with a strong competitive position, as shown by the $13 billion-plus in new NPR signed onto our end-to-end platform in 2022. CloudMed's industry-leading revenue intelligence platform has unparalleled scale, serving 40% of the provider NPR across the country. Second, end market dynamics also remain strong. We believe R1 is better positioned to address ongoing macro challenges as a result of our technology coverage, global scale, and investment in automation. This is evidenced by our continued pipeline growth at our end-to-end offerings. In fact, our end-to-end pipeline is up more than 50% in Q3 compared to Q2. We also remain on track to commence onboarding of at least $9 billion in new NPR in 2023, inclusive of Phase 2 at Sutter. Third, we have a compelling financial model with high recurring revenue, a long runway for margin expansion via our automation efforts, and a strong balance sheet to fund future growth. Fourth, the integration with CloudMed is going very well, and we continue to be positive about the strategic rationale for the combination. We are seeing early signs of customer benefits, including additional revenue yield opportunities for our end-to-end customers associated with CloudMed solutions and benefits to our modular channel from best-in-class commercial engine and the ability to leverage CloudMed's technology and data platform across our infrastructure. Before I turn it over to Lee, let me discuss the leadership succession we held this morning. To provide some background, our board regularly discusses succession planning from a corporate governance standpoint. And given my tenure at the company, I have been actively involved in these discussions. As I approach 10 years with the company, including nearly seven in my current role, the board and I determined this is the right time to execute an orderly succession plan and turn the helm to new leaders at the company. I'm very pleased that Lee Revis, president of the company, will succeed me as CEO effective January 1st. John Sparby, chief operating officer, will succeed Lee as president, also effective January 1st. Lee will immediately assume the CEO elect title to facilitate his transition into the new role. Following the transition, I will continue to serve on R1's board of directors and serve as an executive advisor to Lee and the board to assist in the transition. Lee has extensive data and technology experience, strong leadership experience, and a deep understanding of the revenue cycle industry. As part of the CloudMed transaction process, I could see that Lee was the right person to succeed me as CEO. Since his appointment as president, we have been working together to ensure his broad-based engagement within the organization, meeting customers, and learning our business. I could not be more excited about the impact Lee will have in the coming years given his demonstrated track record of business performance, technology expertise, and proven ability to build high-performing teams. The board and I are confident that he is the right person to lead our company forward. I know R1 will be in capable hands under his care and stewardship. In closing, I'm very proud of what we've accomplished at R1 over the last seven years, from overhauling our operational infrastructure to advancing our technology roadmap and adding some of the leading health systems in the country onto our platform. It's been an exciting and fulfilling journey. Our accomplishments would not have been possible without the tremendous efforts of thousands of R1 team members across the globe. And I want to end by saying a heartfelt thank you to everyone for their help and dedication along the way.