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spk16: Good morning. My name is Kathy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2022 R1 RCM 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'd like to ask a question during that time, simply press the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star one again. And at this time, I would like to turn the call over to Atif Rahim, Head of Investor Relations. Please go ahead.
spk17: Good morning, everyone, and welcome to the call.
spk14: 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 strategic and cost-saving initiatives or liquidity position or 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, designed, may, plan, project, would, and similar expressions and 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. Our actual results and outcomes may differ materially from those included in these forward-looking statements as a result of various factors. including but not limited to geopolitical economic and market conditions including heightened inflation slow growth or recession changes to fiscal and monetary policy higher interest rates currency fluctuations and other factors discussed under the heading risk factors in our annual report on form 10k for the year ended december 31st 2022 which will be filed with the securities and exchange commission after this call We will also be referencing non-GAAP metrics on this call. For reconciliation of non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. Now, I'll turn the call over to Lee.
spk03: Thank you, Atif. Good morning, everyone, and thank you for joining us. On today's call, we will discuss four key topics. First, highlights from our fourth quarter results. Jennifer will provide additional detail. Next, our 2023 priorities. which are focused on operational execution, then provide insights on commercial activity. And lastly, I'd like to update you on our ongoing investments in technology and automation. I am pleased to report we closed 2022 on a strong note, giving us momentum as we enter 2023. The contributions from our global team members drove fourth quarter revenue and adjusted EBITDA to the top end of the ranges provided on our last earnings call. Revenue for the quarter was $532.8 million, and adjusted EBITDA was $125 million. We saw improvement in payer turnaround times, and I am very pleased with our operational performance for our end-to-end customers and over 500 modular customers. Our Q4 performance sets the stage for continued operational improvement and is one of the key factors behind our 2023 guidance announced a few weeks ago. The completion of the CloudMed acquisition in June 2022 created an extraordinary capability for us going forward, as we believe we're well-equipped to address multiple challenges facing providers. Providers are under incredible financial pressure now more than ever and are evaluating options to reduce costs so they can focus on what they do best, which is care for patients. We operate in a $115 billion end market, which continues to grow roughly 10% annually, and where over 70% of providers still manage revenue cycle processes in-house. Given the current inflationary environment and labor challenges in the U.S., providers are often unable to solve this issue alone. We believe we are distinctly positioned to address these challenges providers face on a daily basis through our operational capabilities, our commercial expertise, and our scaled technology and automation platform. What excites me most is the combination of these market needs and our purpose-built capabilities to solve these complex problems on behalf of our customers. This morning, I want to go through each of these capabilities in more detail. First, let me cover our operation. Our global operation is a key component of the value proposition we deliver to our customers. We are particularly well positioned to accomplish more for our customers for several reasons. First is our global scale and ability to flex resources. Next, our ability to invest where needed to resolve pain points through the claims process. And last is the application of technology and automation to reduce reliance on labor to solve these problems longer term. What positions us well to service our end market is our ability to navigate the complexities of regulatory changes our ability to adapt to changing reimbursement models, and our ability to proactively respond to recent payer dynamics. In the near term, we are focused on operational execution against all cash collection metrics to enable our customers to generate more revenue more efficiently than they would do on their own. In Q4, we saw an improvement in our operational metrics, including modest improvement in AR days, which is the primary cash collection metric we focus on. This gives us increased visibility into our 2023 performance. One of the areas in which we create significant value for providers is around the increased cycle time for claims, which we discussed on our earnings call in Q3. We have seen modest improvement in the last few months, and as claims cycle times have decreased, this has translated to an improvement in incentive fee revenues. This is a win-win for our customers and for R1. We are able to proactively address these deficiencies in a way that providers who do not leverage a global tech-enabled model would be able to accomplish on their own. We are also applying automation to accelerate claim payment resolution. Our 2023 outlook assumes we will continue to see modest improvement in incentive fee revenues quarter over quarter across the rest of the year. Another operational initiative I'd like to highlight as a significant value add for our customers is our continued global expansion. In light of today's labor shortages and increasing cost of labor, providers are facing major challenges in hiring sufficient administrative staff. Our offshore operation creates an avenue to mitigate the inflationary environment in the U.S. by filling administrative labor gaps for our customers. Of note, we are expanding not only in our scaled India operation, but also in the Philippines, where we now have over 1,000 associates. Last, I would like to highlight our class recognition. We are proud to have been selected as number one in class in three categories, ambulatory RCM, denials management, and robotic process automation, or RPA. Each of these offerings addresses some of the most difficult challenges faced by the hospital and physician providers we serve. The class recognition is a key win for R1 that represents our ability to serve the provider on multiple operational dimensions, whether they want an end-to-end solution or a modular offering to drive incremental revenue yield. Next, I'd like to discuss our commercial activity. Our end-to-end customer footprint covers 55 billion of net patient revenue, and we have over 500 modular customers representing over 850 billion of NPR. Collectively, we touch over 900 billion of total NPR across our customer base. This includes 94 of the top 100 systems in the U.S. Our end-to-end and modular offerings are built to deliver value in challenging settings. In 2022, our commercial team meaningfully exceeded targets with over $13 billion in new customer NPR, including Sutter, Scion, and St. Clair Health. We also signed 15 large physician groups and over 600 distinct bookings for modular solutions, while simultaneously creating a strong pipeline for continued 2023 growth. The R1 and CloudMed commercial teams are now integrated under CalHICOT, as announced in January. Our end-to-end pipeline reflects future relationships within both acute physician and provider groups, and we see significant opportunity for long-term growth in our end-to-end footprint. The modular pipeline continues to reflect a high demand for AR, denials, and revenue enhancement solutions, with market conditions favoring several emerging solutions such as 340B and Entry Pay. We expect CloudBed offerings alone will grow revenue by 20% in 2023. I am incredibly proud of the achievements our team has made to execute well and deliver meaningful value to our customers. The last area I would like to discuss is technology and analytics. While our provider customers have made many advancements in their own revenue cycle journey, The reality is that the process is still labor intensive and requires data collection and validation across multiple systems and individuals. The complexity of the revenue cycle, labor constraints, and evolving regulatory and payment landscape mean that errors, delays, and difficulties are bound to happen unless technology is appropriately deployed. Our R1 platform and automation approach provides scale, intelligent automation, and standardization to solve complex revenue cycle scenarios. In 2023, we will continue to advance our technology via investments focused on three primary goals.
spk02: But let me cover the first.
spk03: Our first goal is to automate tasks that are typically done manually in revenue cycle. R1 has been on a digital transformation journey and we are accelerating progress here as we leverage the CloudMed capabilities in addition to those built at Legacy R1. We ended 2022 with 150 million tasks automated, up from 110 million in the first half of 2022. Second, for work that cannot be fully automated, our goal is to make the work as efficient as possible. We call this optimal workflow. To do this, we leverage our deep revenue cycle expertise, as well as more than 14,000 proprietary rules and algorithms, to allow automated and human-centric workflows to operate seamlessly together. For example, our rules identify problems that happen in the revenue cycle, such as inaccurate coding, and automatically route the work to the best-fit specialist so our teams can work transactions on an exception basis versus a manual review of each claim. That specialist has the information they need at their fingertips to suggest necessary corrections leading to an accurate reimbursement. This leads to higher accuracy, fewer denials, faster turnaround times to payment, and ultimately increased revenue for our customers. Our third and last goal is to leverage data and analytics to its fullest potential. With the breadth and depth of data we see, 500 million patient encounters annually, covering 900 billion plus of NPR across our total customer base. We use data and analytics to identify patterns and trends. This allows us to continuously improve the customer experience and our performance. Simply put, we believe our technology investments will enable us to find more revenue for our customers, accelerate cash collections, and mitigate inflationary pressures by reducing their reliance on manual labor to a level that health systems cannot achieve by themselves. In closing, I'm very pleased with our team's performance in the fourth quarter and look forward to continued improvement in our operational results over the course of 2023. In light of our results, scaled global operations, and intelligent automation, we believe we are well positioned to address the challenges providers are facing. I am excited about the long-term outlook for R1 and the earnings power of this company when current contracts are fully ramped. We look forward to executing on that opportunity as well as new wins to drive additional growth. Now I'd like to turn the call over to Jennifer to provide additional details on our financial performance.
spk08: Thank you, Lee, and good morning, everyone. We are pleased to report solid fourth quarter results. with revenue of $532.8 million, up almost 34% year-over-year, and adjusted EBITDA of $125 million, up 31%. For the full year, revenue grew 22.5% to $1.8 billion, and adjusted EBITDA grew nearly 24% to $425.5 million. These results include CloudMed revenue of $126.5 million in Q4 and $260 million for the full year after the acquisition closed in June 22. Excluding CloudMed, organic revenue growth was approximately 2% year-over-year in the fourth quarter and 5% for the full year. Growth was slower than prior years due to lower incentive fees and lower physician revenue. Adjusted EBITDA margin for the year was 23.6%, up 25 basis points compared to the prior year. Now, let's review the fourth quarter in a little more detail. Net operating fees of $344.4 million grew approximately 4%, or $12.4 million year over year, and $20.2 million on a sequential basis. The increase was driven by contributions from new end-to-end customers. Incentive fees in Q4 totaled $25.9 million and declined $9.9 million on a year-over-year basis due to the impact of the payer timeline dynamics we discussed on the last earnings call. While down year-over-year compared to Q3, incentive fees increased $5.1 million. This is due to our operational efforts in response to the increased payer reimbursement timeline. Other revenue, mostly revenue from our modular solution, was $162.5 million. This revenue grew $131.4 million year over year, primarily due to the CloudMed business. On a sequential basis, modular revenue was up $11.5 million due to CloudMed's strong performance in the fourth quarter. Moving to expenses. Non-GAAP cost of services in Q4 was $364.5 million, up $85.4 million year-over-year, driven by cloud meds, costs related to the onboarding of new customers, and operational investments to support new growth. These increases were partially offset by savings across a few areas, including automation, incremental global transitions, and vendor rationalization. Compared to Q3, non-GAAP cost of services was up 37.6 million, primarily driven by new customer-employee transitions that took place in Q4. Next, non-GAAP SG&A expenses of 43.3 million were up 18.6 million year-over-year, primarily due to CloudNet. Compared to Q3, non-GAAP SG&A was down 1.8 million due to the allowance for credit losses incurred in Q3 and partially offset by healthcare and other corporate costs. Adjusted EBITDA for the quarter was $125 million, up almost $30 million year over year. The increase is a result of the CloudMed acquisition offset in part by investments to implement significant new customer wins in the year. Relative to Q3, adjusted EBITDA was up $1 million. This is due to higher incentive fees quarter over quarter and higher revenue from CloudMed in Q4. These increases were offset by cost of onboarding new customers. Lastly, in Q4, we incurred $47.4 million and other expenses. These expenses were primarily related to the CloudMed integration costs and to completing the build-out of our new business services center in the Philippines. Now, I'd like to comment on a few areas of the balance sheet. Cash and cash equivalents at the end of December were $110.1 million compared to $131.1 million at the end of September. CloudMed integration costs and higher AR balances due to timing of payments from certain customers drove the use of cash in Q4. These payments were subsequently received in early January. Net debt at the end of December was $1.7 billion. Net debt leverage for credit agreement purposes was three times, and we have liquidity of approximately $609 million at year end. This liquidity includes cash and cash equivalents and availability under our revolver. We expect our net debt leverage to decline over the course of this year. Now, looking forward to 2023. As previously announced, we expect to generate revenue of $2.28 to $2.33 billion. and adjusted EBITDA of $595 to $630 million. Embedded in our outlook are the following factors. One, an expectation of 20% year-over-year growth at CloudMed. Two, operational improvements, which should generate higher incentive fees quarter over quarter. Three, operational cost improvements as our new business matures. And finally, a realization of call synergy through the year as we continue the CloudMed integration. I would also like to provide an update on the overall CloudMed integration, which is progressing very well. We have integrated our organization across each function. Our corporate systems, including core HR and finance systems, are mostly consolidated. And last, the overall organization is working to transform its delivery model to best serve our customers. We previously provided guidance that we expected to realize 15 to 30 million of cost synergies in 2023. We now expect those savings to be towards the higher end of the range. We also remain confident in our ability to realize significant revenue and cost synergies longer term. In Q1 23, we expect adjusted EBITDA growth of approximately 5% relative to Q4 as we continue executing against our priorities. Overall, we are very pleased with our Q4 results and our operational performance. As Lee mentioned, 2023 will be a year of execution as we implement new end-to-end wins from 2022, continue to generate strong modular growth from CloudMed, and largely complete the integration of the CloudMed acquisition. Now, I'll turn the call over to the operator for Q&A. Operator?
spk16: Thank you. And again, everyone, to ask a question, please press the star and the number one on your telephone keypad. And first, we will go to Charles Ree of Cowen.
spk06: Good morning. Thanks, Lee and Jennifer, for all that. Hey, I just wanted, Lee, just to follow up on your comments that what you're seeing in the market here. It sounds like what you're saying is you're seeing improvements in the AR days and the increased cycle times for claims has declined from last year. Is that coming from your end, you know, putting more resources in, or are you seeing improvements on the payer end first?
spk03: Yeah, thanks, Charles. So, we are seeing moderate improvements on the payer end, and then, you know, our ability to impact it is very positive. So a couple of points here I'll make, Charles. We're seeing moderate improvement. We're seeing staffing slowly improving on the payer side around claims processing. We are deploying resources, to your point, against our customers on this dimension, as well as automation. We expect the trend to continue in 23, so really moderate improvement on the payer side. And our 23 guidance assumes that. The other thing I point out is, you know, the reason we're applying relatively conservative assumptions in 23 is our customers renegotiate with payers in the first half. So we see potentially positive impact in 24.
spk06: Okay, that's helpful. And as we think about the 1Q guidance, Jennifer, you said about 5% up sequentially. Related to incentive fees, though, should we think about that the same? Because I know I think... Lee, you said you kind of assume incentive fees themselves improve modestly through the year, but from 4Q to 1Q, how should we think about that?
spk08: From 4Q to 1Q, I would assume that incentive fees are fairly flat quarter over quarter, starting at the beginning of the year, and then they will improve modestly quarter over quarter through the year.
spk06: Great. I'll hop back in with you. Thanks.
spk16: And now we will take a question from Michael Trini of Bank of America.
spk13: Good morning, and thanks so much for taking the question. I want to talk about the pipeline. Clearly, 22 was a record year. We all know the logos you put up. As you think about into 23 and maybe even building beyond that, how do you think about your ability now, especially Lee being in the CEO seat, or I guess desire now, to continue to take on customers. And is there any changes, especially given the activities on the payer side that you saw at the end of 2022 that are continuing, that give you pause or any changes in terms of the way that you want to work on phasing in new customers as they come to you?
spk03: Thanks, Mike. Let me touch on the first part, just the state of the pipeline, and then make sure I get to the second part of your question on phasing. So the pipeline is very strong. and specifically I'll talk about the end-to-end pipeline and maybe touch on the modular pipeline. I've personally been engaged along with Kyle in several discussions the last few months and anecdotally with systems that are considering outsourcing, we're hearing the same things. Significant financial pressure, lack of tech investment or the ability to invest in tech across their enterprise. and then continued labor challenges. So anecdotally, we continue to see demand for end-to-end solutions. The other thing I'd add that's unique relative to the integration of CloudMed is we have even more avenues to drive the pipeline. So one is we have 94 of the top 100 systems within CloudMed with at least one solution sold. That gives us close visibility with the head of revenue cycle of each of those organizations And we're able to see where there's needs on the end-to-end space. The other piece is, this is touching on the modular pipeline, which is also very strong, predominantly CloudMed, but also some of the R1 legacy modular solutions. We are able to cross-sell the R1 legacy modular solutions into the CloudMed base of hundreds of customers. So those are things I'd point out. Now, to your second question on phasing, it's difficult to predict when we have demand and how that paces. But to the extent we can, our pipeline is pretty balanced between large IDNs and physician groups. So we feel very good about the capacity we've added and the ability to hit the $4 billion of new NPR in the back half this year.
spk13: Got it. And then I'll leave it there for now.
spk17: I'll let other people hop in. Thanks. Okay. Thanks.
spk16: And now we will go to Glenn, Cynthia, or Jeffries.
spk04: Yeah, thanks for taking my question. I also wanted to sort of follow up on the pipeline, Lee. Last year, the company signed $13 billion in new sort of end-to-end business, and at the time, you know, increased its onboarding capacity, I think, to $9 billion. Can you just sort of give us an update on sort of where you are in terms of onboarding capacity, how much of the $13 billion You know, maybe you've already brought on how much of that would come in in 2013 and, you know, how should we think about, you know, the setup as it relates to 2024?
spk03: You know, let me touch on just the operational components of your question, and then I'll let Jennifer add in. So, just stepping back, we have, on the end-to-end side, $55 billion of NPR in our end-to-end space, of which, call it $19 billion. It's still in some phase of onboarding, right, which we've talked about before. It's why we're so confident in the earnings power of the business with, you know, essentially 100% customer attention and ability to onboard that over time and drive to our EBITDA numbers. The thing I'd point out, the largest implementation, obviously, is Sutter. Myself, the team, we're all very, very close to that. It's very much on track. Phase 1 largely complete with centralized functions integrated. Phase 2 is the backup this year with additional tech integration. So, and then I would also add there's several other integrations happening that we're very close to. So, operationally, we feel very good about keeping those implementations on track. Jennifer, do you want to mention capacity?
spk08: Sure. So we, you know, we publicly said that we had $13 billion in new business in 22. We are currently onboarding $8 billion of that. And if you think about the remaining five, it will be late 23 going into 24. So you will really see the impact of that in 24. Okay, perfect.
spk04: And Jennifer, I just wanted to follow up on the 1Q guidance again. Based on sort of your target for roughly $131 million in EBITDA and Q1, that's only about 21% of your full year guide if I use the midpoint. Now, I know there were a number of things that may be impacting that one Q number. You call that maybe lower than normal incentive fees. You know, maybe there was some incremental onboarding costs. You know, there's been some integration issues we've talked about in the past. Could you maybe just comment on that 1Q number and how we should think about, you know, the ramp as the year progresses, just sort of given some of the embedded costs we knew from the past couple quarters? Thanks.
spk08: Sure. So, embedded in Q1 is, as I said earlier on the KPIs, relatively flat to Q4. We will see some increases in base fees. CloudBed is growing 20%, so we'll have some growth from that. So that's really what's embedded in Q1. As we move through the year, to your point that it was 21% of full EBITDA, there are multiple drivers that are going to continue to increase EBITDA as we move across the year. So number one is new business. As I said, we're ramping the $8 billion. That margin will continue to mature as we get it in and we onboard and ramp those customers and then begin the cost takeouts on that to improve the margin. Two is Although incentive fees from Q4 to Q1 will be relatively flat, we do expect modest growth quarter over quarter through the year on incentive fees. CloudMed growth will continue, so it's the strong bookings that we had in 22 are implemented. We'll see continued growth as we move through the year. And then the last piece, we mentioned cost synergies. So $15 to $30 million of cost synergies, we expect to be on the higher end of that range. And those synergies will be realized through the year and will drive incremental EBITDA quarter over quarter.
spk17: Okay. Thank you very much.
spk16: And now we will go to Stephanie Davis of SVP. Hey, guys. Congrats on the quarter, and thank you for taking our questions.
spk07: I was hoping you could give us an update on some of the internal turnaround initiatives on staffing and tech. Can you give us a quick highlight of what's been done so far since you've taken the reins? What's still running thin and kind of what's on the docket for 2023?
spk03: Sure. Let me just kind of, Stephanie, just step back and just talk through priorities, and then specifically address operational execution, including tech. So, as I step back, you know, and privileged to lead a great business that foundationally has a large market, $115 billion, growing very well with an end market that needs us now more than ever. The things I'm personally focused on are very execution-oriented. So number one by a mile is customer engagement. I've personally been involved, along with Kyle, John, our president, Jennifer's been engaged with our current and prospective customers. So that's very much top of mind for me, the number one priority. Related to that is operational execution. That includes, to your point, staffing up to address any operational customer issues. That includes the point Jennifer made about executing on synergies. The third piece for me is tech enablement. I believe that there's a huge opportunity For us, given that we are already deeply embedded in the customer workflow, I've personally visited several facilities. And when you see the impact of once you're embedded, the ability to apply all the pieces I talked about, whether it's data and analytics, AI, machine learning, and what we call optimal workflow to prioritize tasks on behalf of our customers, whether that's front end, middle, or back, it's huge for us. And the fourth thing, Stephanie, that I've personally been focused on is driving people and culture and creating an inspired organization, which in my mind is very easy to do given our mission, which is to help providers do what they do best. So those are the big pieces. I'm happy to go deeper, Stephanie, in any area.
spk07: You know, this is a weird area to go deeper in, but it feels like one of the biggest issues with kind of your staffing needs is that there are still a lot of – there's tight labor markets. So with that in mind, would you ever want to utilize some of these new AI tools like ChatGPT as a call center efficiency or assistance tool as part of this DTO strategy? That's a crazy thing.
spk03: No, no, no. That's a good question. The short answer is yes. So just to step back, one of the areas we feel like we're uniquely positioned is to address a tight labor market, an inflationary labor market, because of our ability to deploy resources not just in the U.S., but also in India and the Philippines. Now, that said, we're constantly looking for efficiencies. I was asking our operators about this very question, because obviously this is in the news a lot. For sure, we're going to be a fast follower on applying those kinds of tools across our business, including our operations center. The thing I'd point out on the whole concept of AI is we are uniquely positioned because of this underlying foundational piece, which is we already have the underlying data and what I would call models, or we've previously called algorithms. So through CloudMed, and the N10 business, we see 500 million patient interactions a year. So therefore, we're able to see across all 50 states, all payer types, all care settings, and are able to apply or build models that can then automate processes. So when I talk about automation, or you've heard me talk about intelligent automation, that includes the concept of having the underlying data and models to drive repeatable process and then reduce the need for labor, to your point.
spk07: Super helpful. Thank you, guys.
spk17: Thanks, Stephanie.
spk16: And next we have Scott Schoenhaus of KeyBank.
spk02: Hi, Lee and Jennifer. I wanted to dig more in on the CloudMed side of things. So you mentioned now you have 500 modular customers with $850 billion of NPR, a strong pipeline, and expect 20% growth this year in CloudMed. You know, it was up, I think you said 11.5% sequentially in 4Q. How should we think about the cadence of this growth throughout the year? Is there any seasonality or timing of upselling that we should be thinking about?
spk03: Scott, let me start with just how things are going at CloudMed and then hand off to Jennifer to talk about some of the sequential growth questions you had. Here's what I'd say, just stepping back. This is a business that is essentially a safety net for providers, identifying opportunities for incremental revenue yield through coding inaccuracies, lack of people or technology investment, and with a frictionless implementation that is easy for customers to consume. And when you add in that we already have the majority of the top 100 us systems with at least one solution sold a big part of our strategy is cross-selling our solutions into that customer base so a couple things i point out just to directly answer your question one is we're we're meeting our financial targets and feel very good about 2023. second is integration is going very well on the people side with the organization largely integrated, the commercial organization integrated, I mentioned the cross-sell opportunities there, the back office integrated, and tech integration going very well. So those are the pieces. A little bit of color I'd add here. You know, the interesting thing that's happening in the market is with labor shortages, we are seeing significant demand for AR and denial management solutions, both on the clinical administrative side. So that is a distinct capability we have of deploying a repeatable process and identifying areas around AR and denials. The other place we continue to see demand is a very tech-enabled solution around coding accuracy. So across our solutions, we're seeing a lot of demand that supports the 20% growth assumption into 23. Jennifer, do you want to talk about?
spk08: Yeah, there's not really a lot of seasonality in the CloudMed business. The growth comes from implementation of booking. So it's really commercial expansion on new wins. And, you know, that happens. There may be some lumpiness in the timing of bookings through the year, but we haven't seen a lot of seasonality in the overall base business. So, and think about our implementation timelines are usually around, call it, three months. So, from the time we win a deal until we get it implemented is roughly 90 days, and then it starts generating revenue.
spk02: That's really helpful for all that color. Thank you. Just my follow-up is then what's the current EBITDA contribution or margin profile on this business currently? I remember when RCM bought CloudMed, legacy margins were running at 43%. You know, if we assume 20% growth on this business, this would imply some nice contribution this year, considering the ongoing consolidation efforts you guys are doing.
spk08: Yeah. You know, as we continue to integrate this business, we will not have a full margin profile for it. So as I mentioned, from a Synergy perspective and integration update, we've already integrated a lot of the corporate functions. So those are getting pulled into the overall R01 functional areas. But the way to think about, and we haven't disclosed CloudMed separately from an EBITDA perspective for a full year, but the way I would think about it is those margins are in line with what we what we're seeing in 22 and then obviously as we continue to realize synergies in 23 we expect those margins to increase the savings are realized thank you very much and next we have delindra singh of tris
spk10: Thank you, Ian. Good morning, everyone. So first, a quick clarification on the comment earlier around expectations for incentive fees being flat in Q1 versus Q4. Can you help us understand, given your investments in technology and some modest improvement from payer side as well, why do you not expect any sequential step-up there in Q1? And are there any sequential offsets on incentive fees we should be aware of?
spk08: Sure. You know, some of the incentive fees will build through the year. So there's some seasonality. So at the beginning of the year, you know, we may have some of them reset their annual metrics. So they kind of build as you go through the year. So that would be one piece of it. We have applied a lot of resources and labor to stabilize those incentive fees. But just given starting at the beginning of the year, and we ended Q4 really strong on incentive fees, that we do expect to start the year off flat. Lee, anything to add on technology that you want to add on, just kind of in depth?
spk03: Yeah, the only thing I'd remind you, Jalinda, is part of this is labor, but part of this is also, especially with regard to some of the pair dynamics and high dollar claims, some of the more complicated clinical denials. is not just applying labor, but applying automation more aggressively, more targeted for our customers in general, but also it's applied to some of the KPIs, especially around AR days and so on. So for sure, we're also applying technology.
spk10: Okay. And then my quick follow-up, I'm sorry if I missed this, but any update on the two clients you called out last, Earnings Call, Mednex, and LifePointe? I believe you previously expected trends to stabilize during first half. Is that still the expectations? And how do you think about the margin ramp at these two clients in general for this year and next?
spk03: Yeah, so let me tackle the first part of the question. And Jennifer, you can talk about margin ramp. So no change in lender is still very positive on progress on all the key cash conversion metrics on both customers. So I've been personally involved in both and very, very close to all the issues there. And what I would say is similar theme, we're increasing capacity in the short term at both customers. We're increasing automation capabilities of both customers. We're also closely engaged on making sure we are integrated with their respective technologies. And still no change. I expect both to be at some level of normal, if you will, by the end of the first half. Do you want to touch on any points on margin?
spk08: MARY JO GIOVACCHINI Yeah. I would just say on the labor that we've applied against our operations, we continue to keep the same-think about the same rate through the first half of the year. as we stabilize and make sure that the metrics are moving in the right direction and that we're performing and seeing signs of success. So first half of the year, we would have higher labor against that. And then as, you know, this will be part of our incentive fee improvement through the year. This is part of what's baked into that modest improvement quarter over quarter through the year as we stabilize and start to see the impact flow through the financials.
spk10: Thanks a lot.
spk16: And next we have Sean Dodge of RPC Capital Markets.
spk15: Yep, thanks. Good morning. So maybe staying on the incentive fees for just another moment. Jennifer, you said the expectation is those continue to improve modestly each quarter beginning after Q1. Just to put a little finer point on that, you know, I guess before Q3 last year, incentive fees were running in the neighborhood of $30 million per quarter. Is that the level we should think about being the target by year end or with the completion of some more client implementations in the interim? Is there the possibility there for something even higher as you execute towards that and exit the year?
spk08: Yeah, that's a good way to think about it. You know, with the modest improvement being in that $30 million range and, you know, by the time we get to the fourth quarter, The other piece is as we onboard our new customers, those incentives will start to kick in the back half of the year. We've assumed, you know, modest incentives because it usually takes a few quarters after we go live where we're still baselining all of the metrics, and then we start to measure the performance against those baselines. So those incentives will, you know, think about those kicking in slowly Q3 and Q4.
spk15: Okay, that's super helpful. And then in addition to the payer delays, you also mentioned some other market headwinds. And I think you've said before, patient self-pay is becoming a more meaningful portion of collections. I think the number on the last call, if my memory is right, was something like 20% of the collections you do is from patients. Are you seeing any changes in collectability or any kind of difference in trends there? you know, outside of these kind of payer dynamics or payer delays?
spk03: John, no change when we've assumed in our 2023, just no changes, continued moderate expectations. On the self-pay dynamic, this is actually a small part of our business. So we call it less than 5% of our total business is actually self-pay. It's what we've assumed in 23 is continued same trend across the board.
spk17: Okay.
spk08: And Sean, on the market, Sean, I was just going to say on the market dynamics and the market headwinds, really that's implied labor. So both at the payers, which is driving some of the elongated timelines, as well as our customers.
spk17: Okay. That's a good clarification. Thank you. Thanks, Sean.
spk16: And now we'll go to Anne Samuel of J.P. Morgan. Thanks for taking the question.
spk09: You know, you have a lot of moving pieces in the gross margin this year with incentives, volatility, cloud net integration, and synergies. I was hoping maybe you could help us with just how to think about the underlying trend in the gross margin outside of all those pieces and just what the expansion opportunity looks like there.
spk03: And what I'd say is the main driver, and just touching on both parts of the business, tech is the biggest driver on this dimension, on gross margin. So I'll just use climate as an example. You know, even though we are already high EBITDA margins, there's still an opportunity to apply more automation, more technology around optimal workflow to that. And on the end-to-end side, it's the same thing. So you see, you know, over the last couple of years, we have talked about our Automation Center of Excellence. We're continuing that, if anything, doubling down on how we apply automation and AI. So that is really the biggest driver. Anything to add?
spk08: The only thing that I would add is we've had a significant amount of new business on board this year. And as you know, the margin on that business is negative the first year as we make the early investments in those clients. and then it will ramp over three years to the target margin. So given the amount of new business that we've had, that's put a little bit of a damper on the gross margins, but we do expect that those will increase in the coming quarters. Great. Thank you.
spk17: Thanks, Anne.
spk16: And next we have Elizabeth Anderson of Evercore ISI.
spk11: Hi, this is Samir Patel. I'm for Elizabeth Anderson. Congrats on the quarter. I had a quick question just on your guidance. Are you embedding any additional credit allowances for the year? And related to that, have you been able to collect on any of that charge that you took in Q3?
spk08: Sure, I'll take that one. No additional reserve taken on the allowance for credit losses. Specific to that customer, they do have a payment plan and they are on track. making the payments in accordance with that plan. So it's something we'll continue to monitor, but we are in close contact and staying in touch with that customer, and they're obviously still an active customer and making changes that they need to internally, but all signs are positive right now. Our 23 guidance does not assume that we take any additional reserves, but we'll continue to monitor.
spk11: Cool. Thanks. And, uh, Jennifer, you mentioned quickly CloudMed bookings. Can we expect any additional disclosures going forward on CloudMed more on like a quarterly basis or is it sort of as is?
spk08: Um, no, we will probably continue to, uh, provide some, you know, as we continue to integrate the business, obviously just looking at the CloudMed piece becomes more difficult. We're integrating the CloudMed business into the broader modular business within R1. But if you think about the modular piece, which is really that other revenue, most of it is CloudMed. So I don't know that we'll continue to disclose and call out CloudMed specifically, but it's really most of that modular piece anyway.
spk11: Got it. Thank you so much. Appreciate it.
spk16: And next we'll go to Craig Henrich of Morgan Stanley.
spk12: Yes, thanks. Question for Lee, just around the opportunity to perhaps re-accelerate growth in some of the legacy R1 modules and, you know, like Visipay and anything to note around under Kyle's leadership, things that you're doing from a cross-sell perspective in the module business more broadly.
spk03: Yeah, Craig, great question. So I would just lead off with, you know, having... worked with Kyle and seen the commercial model he built over the last five years at Legacy CloudMed, I'm very confident on this front. So, he built a model of revenue cycle experts that can have very deep discussions with our customers coming from the same you know, pedigree as Kyle from, you know, early entrance into the end-to-end, and in our case, in the cloud-based side, the revenue integrity space. So the first thing I'd say is having seen lots of sales models in my career that he's built an incredible model that is geared towards a balance of cross-selling into our customer base, as well as driving net new business in some markets we haven't been as focused on over the last couple of years. The Other thing I would say is we are excited about the legacy R1 modular solutions. And just as an example, the patient payment business we built, R1 bought a couple years ago, VisitPay. We're actually very excited about that. And the ability to have deep conversations with a customer base or the 94 of the top 100 that In many cases, R1 hasn't accessed those and hasn't been able to have those discussions. So we're very excited about the patient payments piece. Also, very positive on physician advisory solutions. So there's just a lot of opportunity to take those R1 legacy monitor solutions and start to have the discussions and build the pipeline. And just anecdotally, we've already had at least one key win in the patient payment space selling into the CloudMed base. when we're also seeing the pipeline build across the board.
spk12: That's helpful. And then just as a follow-up, any comments on what you saw just from a utilization perspective in the marketing Q4 and how you were thinking about utilization as it influences your guidance for 2023? Jennifer, you want to take that?
spk08: Sure. We saw low single-digit growth. in the back half of NQ4 specifically and embedded in our guidance is roughly the same utilization rate going forward. So, think about that as low single digit growth.
spk17: Got it. Thank you.
spk16: And now we'll take a question from Jack Wallace of Guggenheim.
spk02: Hey, good morning. Thanks for taking my questions. Congratulations on the quarter. Most of them I've been asked and answered, but I want to touch on the pipeline comments that Lee made. About $4 billion of incremental NPR wins to be had on top of the $5 billion of Sutter expected to be implemented in the back half of the year. How's that $4 billion of NPR, how much of that is a cross-sell from legacy CloudMed customers and how much of that is a de novo new customer expectation? Thank you.
spk03: Jack, what I would say is that it's hard to tell, like, what materializes back half. But I would say anecdotally, what I'm seeing is, I mean, just by definition, any large IDN is, you know, 90 for the top 100 are CloudMed customers. So just I'll give you an example. Jennifer and I and Kyle were on a prospect meeting just the last few days and this customer happens to use our DRG validation and our interpayment solutions. So they already have a knowledge base of what we can do for them to drive incremental revenue yield. So now, whether that converts or not, look, there's a lot of steps involved in any of these complex negotiations. And that, by the way, is another example of we heard verbatim the themes around financial pressure, inability to hire, inability to invest in technology. And part of our pitch, if you will, is we are very well positioned to resolve some of those issues. But the moral of the story is they already know CloudMed. And so any IDN, and really the six of the 100 are, you know, we're still trying to go get them. They tend to be academic medical centers, tend to be in the Northeast. So that's that. On the other side with the de novo, it tends to be a physician group customer, which just by definition, the CloudMed journey was very much focused on IDNs above, call it, $2 billion of NPR. We, in the last 18 months, made a push in the physician group space. So that's where you get a lot of net new customers, if you will.
spk02: Gotcha. Thank you, Lee. That's really helpful. And then, Jennifer, this one's for you. Just thinking about the incentive fee guidance for the year and just trying to extrapolate this going forward, Historically, some of the incentive fees got to about the 12% of base operating fees. I'm thinking back in 21, thinking about what is a reasonable expectation for a high watermark for that percentage once the book of business is at a mature level. Obviously, you're going to be adding new customers every year, so on a blended basis, you won't be fully mature, but on a mature contract, what is that kind of a reasonable high watermark?
spk08: Yeah, it's hard to give a specific percentage for individual contracts only because every deal is different. And so some customers want to minimize the variability in quarter over quarter that they would incur. And so by nature of the contract, it's going to be lower. So, you know, it will vary, but typically in our contracts, we have some sort of incentive fee in all of them. Now, historically, the KPI revenue has actually been in the, you know, 5% range of total revenue, so fairly small percentage of revenue. As CROBMED continues to grow, I would expect that that would decrease over time a bit if you're looking at it against total revenue. But, you know, specific to 2023, if you think about by the time we get to the end of the year, that $30 million in the quarter is what's reasonable.
spk17: That's really helpful.
spk02: Thank you, and congrats again.
spk17: Thanks, Jo.
spk16: And then we'll go to George Hill of Deutsche Bank.
spk05: Good morning, guys, and thanks for taking the question. I'm going to take a shot at a few numbers questions here, which is, first, Lee and Jen, have you guys quantified what the pipeline opportunity looks like for 23? And then, Jen, it sounded like you were saying the synergy target might exceed the $85 million target prior. I just wanted to double-check that. And then my last question would be, can you talk about CapEx expectations and cash flow outlook for 23?
spk03: Yeah, George, thanks for the question. So we have quantified internally pipeline, but we haven't disclosed that publicly. What I would say, having, you know, looked at different models around pipeline and how those convert to new deals, specifically cloud meta, but I've also been involved in businesses with much larger deals. I would say I feel very comfortable with the model, the pipeline model, and our ability to convert this year, but also in the long term. The only difference I'd point out is, George, that the end-to-ends obviously are highly complex. These are very sophisticated negotiations, so have longer sales cycles. Whereas the Cloud Med deals tend to be super quick sales cycles, especially if you're talking about a new booking with a current customer. So I have to be cognizant of that as I assess the pipeline. But overall, I feel very positive about what I see. Jennifer?
spk08: Sure. Specific to the synergies, the $15 to $30 million... range that we gave for realization in 23, we believe we'll be on the high end of that range. But we're still on track for the overall $85 billion of synergy. And then specifically CapEx and cash flow. On CapEx, think about it as the 5% to 6% range of revenue in 23. And then on cash flow, We have lower cash flow conversion in 22, primarily driven by transaction costs associated with the CloudMed transaction. In 23, our cash flow will still be lower than what normal steady state would be because we're spending investments to integrate the business. And part of that is cost to achieve the $85 million of cost energies that we expect to get longer term. So we'll still continue to have a fair amount of integration costs in 23. But as we get into 24 and beyond, I would expect that cash conversion to improve significantly.
spk16: And now we will go to Richard Close of Canaccord.
spk01: Great. Thanks. Congratulations. Jennifer, you know, maybe looking at the guidance and to wrap a bow on everything that's been said here this morning, can you just, like, give us some thoughts and what gets you to the high end, what gets you to the low end, what has to happen on each of those?
spk08: Sure. You know, what gets us to the high end of the range? We've talked about base fees is the largest piece of our business. So, there are a lot of moving pieces here, but we've assumed low single-digit growth for utilization increases. And so, to the extent that utilization is higher than that, that could be one driver to being at the higher end of the range there. The other is incentives. You know, we've assumed modest improvement with higher labor costs to get those incentives. So, you know, to the extent that we see earlier wins on that, we see payer timelines coming down faster than what we've assumed, then that could be another large driver. We feel really confident on the CloudMed. We have high visibility into the 20% growth there. Obviously, if bookings come in much higher first half of the year, we could see some incremental revenue there, and then we have a lot of visibility into the cost empties, so I do think that they'll be in that range.
spk17: Okay, thank you.
spk16: And with that, that does conclude today's question and answer session. I would like to turn the mic back to Lee for any additional or closing comments.
spk03: Thank you. First of all, I want to say thank you, everyone, for your questions and just add a few closing comments. First thing is we are entering 23 confident in our ability to deliver on our commitments for the upcoming year. You heard the themes today. We're very focused on operational delivery and execution. We believe we're well positioned to address some of the end market dynamics we discussed today, which then create significant commercial opportunities, both on the end-to-end and modular side. And we are very focused on advancing a technology agenda to drive cost efficiencies and value for our customers. Thank you all for joining us today. We look forward to updating you on our progress on future calls.
spk16: And this does conclude today's conference call. We'd like to thank you again for your participation. You may now disconnect.
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