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spk06: Good day, my name is Ellie and I will be your conference operator for today. At this time, I would like to welcome everyone to the R1 or CM Incorporated 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 this time, simply press the star followed by number one on your telephone keypad. If you'd like to withdraw your question, press star and number one again. Thank you.
spk04: Evan Smith, you may now begin the conference.
spk07: Thank you, operator, and good morning. 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 savings 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, intend, design, may, plan, project, would, and similar expressions or variations. Investors are cautious 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 results and our outcomes may differ materially from those included in these forward-looking statements. And as a result of various factors, including but not limited to economic downturns and market conditions beyond our control, including high inflation, the quality of global financial markets, or the ability to timely and successfully achieve the anticipated benefits of potential synergies of the acquisitions of CloudMed and Clara, our ability to retain existing customers or acquire new customers, the development of markets for our revenue cycle management offering, variability in lead time of prospective customers, competition within the market, and factors discussed under the heading risk factors in our most recent annual report on Form 10-K. Certain results that will be referenced on this call may be rounded to the nearest whole number. We will also be referencing non-GAAP metrics on this call. For reconciliation of non-GAAP metrics to the most closely comparable GAAP metrics, please refer to our press release. Lee?
spk10: Thank you, Evan, and good morning, everyone. As I reflect on the last year, I want to share some of my learnings and why I believe we are in the strongest position in the company's history. I spent a great deal of time with current and prospective customers, learning about their strategies, their needs, and evolving provider market dynamics. The increasing challenges faced by providers has heightened their need for partners that can be flexible in how they deliver value over time. The conversations are centered around needing a partner who has a wide breadth of capabilities with the scale and technology to ensure they realize value quickly while also being confident in future cost, quality, and revenue yield improvements over time. Customers want a partner who has the ability to apply AI and automation to an otherwise labor-intensive process along with domain expertise to help them anticipate regulatory, labor, and technology challenges over time. They want a partner that can evolve with them and their patient's needs to improve the overall patient experience. We believe R1 fits this role with our ability to leverage structured and unstructured data from almost half of the acute and physician market, global scale, and a technology platform that is accelerating the application of GenAI and leveraging our datasets to build large language models and automation into the revenue cycle. I also spent time with our global operations team to support the continued execution and deployment of our end-to-end and modular solutions, including the recent onboarding of our largest new end-to-end customer. Whether a customer wants an end-to-end solution with comprehensive support, a functional partnership across a targeted revenue cycle area, or modular solutions to accelerate, optimize and navigate revenue recovery, R1 has cross-functional teams that are highly focused on performance management and capable of expanding with customers over time. We have the flexibility to enter into more managed services deals with functional and modular capabilities that address near-term pain points for a broader set of customers. This also brings the potential for higher blended margins while establishing embedded opportunities to expand into an end-to-end partnership in the future. I would also point out that our modular solutions, which drive higher margins and are a significant portion of our adjusted EBITDA, are already deployed successfully with more than 500 customers. We believe this is a great anchor for cross-sell and expansion opportunities. As a team, we have also spent time focused on our core operations, stabilizing key metrics for several customers, aligning our global resources to deliver functional solutions at scale, and continuing to advance our technology leadership and initiatives. We believe these efforts will create new opportunities to deliver increased value to our customers further reduce our operating costs and enhance our growth. It has been a productive year and one where I believe we have made significant progress and have built a solid foundation for sustainable growth and strong financial performance over the coming years. Our full 2022 results demonstrate our commitment to delivering value for our customers. We delivered $2.25 billion in revenue, strong adjusted EBITDA of approximately $614 million, with adjusted EBITDA margins of 27%. We delivered double-digit growth driven by the full ramp of new end-to-end customers and continued strong performance in our modular solutions. This growth highlights the market demand for our solutions and our ability to effectively leverage our global operating scale. As we consider 2024, we expect revenue of $2.625 billion to $2.675 billion, and adjusted EBITDA in the range of $650 to $670 million, including contributions from both the Aclara acquisition and Providence commercial contract. As we outlined in our earnings release, our 2024 outlook reflects continued underlying growth across R1's business, including low single-digit growth in our existing end-to-end customer base, offset by customer facility divestitures and previously disclosed customer attrition, as well as continued double-digit growth in our modular revenue. We enter the year with more than 90% of our modular and other revenue target already booked or recurring from 2023. And last, we expect that the Eclera acquisition and Providence contract will provide incremental growth in 2024 and more than $625 million in revenue and one $885 million in adjusted EBITDA by year five. Jennifer will cover the fourth quarter and full year 2023 financial results and our 2024 financial outlook in more detail. But first, I would like to give a quick business update on our 2023 achievements and 2024 focus areas. First, demand for R1 solutions remains strong as the industry continues to face financial pressure, regulatory complexity, and labor challenges. Continued strength in our modular bookings combined with the acquisition of Aclara and the Providence end-to-end deal demonstrates our continued ability to drive growth as well as increased diversification within our business. The acquisition of Aclara and resulting 10-year partnership with Providence represents a significant growth opportunity and marks the first cross-sell of an operating partner relationship into the CloudMed base. This was a key investment thesis of the CloudMed acquisition. While all the opportunities may not be at this scale, the Providence relationship demonstrates the significant potential within the current customer base. In addition, R1 has already seen initial traction for a go-to-market activity leveraging our flexible model, which we believe will add new opportunities in the near term with solid embedded growth potential over time. As an example, late in the fourth quarter, we signed a smaller NPR customer who was initially interested in our end-to-end solution. Working closely with their leadership, The R1 team assessed their financial needs as well as their operational setup and determined the best path forward for both parties was to enter into a managed services and modular offering partnership. The deal includes full outsourcing of their back office, and we anticipate adding at least four additional modular solutions by the end of the year. Second, R1 continues to apply technology to the revenue cycle to help our customers drive down costs and increase revenue yield. We expect to continue to invest develop, and deploy new technology solutions, enhance processes, and leverage our global scale to address critical issues for the customer base. With more than 500 customers now representing over 1 trillion of covered NPR, we have a growing structured and unstructured data set based on over 500 million patient encounters annually. We believe our global footprint, including approximately 30,000 employees across the US, India, and Philippines, along with access to this real-time performance data, will enable our GenAI and automation initiatives to deliver optimized revenue yield at a lower cost more quickly. We believe GenAI, and more specifically large language models, will power incremental automation throughout many parts of our business and the provider revenue cycle. Our initial focus areas are in denials automation, next action prediction for AR management teams, coding automation, and revenue intelligence rules improvement, which represent some of our largest areas of operational spend. In the most recent quarter, we rolled out several new models, one of which is available to thousands of our AR follow-up staff members. When one of our operators opens an account to work, oftentimes that account has been worked before, perhaps multiple times, and frequently the operator begins by reading the account history to understand those details. With this new feature, the operator is immediately presented with a summary of the relevant details and current state of that account. This is a foundation for predicting what the appropriate next action should be and then automating that action when possible. Third, as I mentioned, legacy CloudMed solutions have been and will continue to be a key driver for the company's growth and profitability, accelerating our technology roadmap and enhancing our opportunity with a larger potential customer base. In addition, the synergy realization from the CloudMed integration is progressing very well. We delivered approximately 30 million in synergies in 2023 and anticipate an additional $20 million from CloudMed Synergies in 2024. We believe this success provides additional confidence in our ability to meet or exceed our Synergy targets for the Aclara deal. Finally, we have executed several initiatives to strengthen our operations and customer service. We believe these initiatives will create a strong foundation for embedded and sustainable growth in revenue, adjusted EBITDA, and free cash flow. In summary, as I said at the beginning of last year, 2023 was a year of execution, and we delivered on several priorities. We stabilized our customer metrics, realized synergies ahead of our targets, strengthened and diversified our customer base, including signing Providence, which positions the company to create a solid growth outlook for at least the next several years. We accomplished all this while addressing several challenges in the base business, which are reflected in our 2024 outlook. We are leveraging the full scale of our global capabilities and deploying both functional models and managed services, which will better leverage our platform and provide greater flexibility to address each customer's specific needs. We believe this better aligns resources, objectives, and responsibilities. In 2024, our team will continue to expand upon these focus areas by, one, ensuring our go-to-market strategy aligns with our customers' needs in order to meet them wherever they are in their revenue cycle journey. Two, continuing to deliver excellent results to our customers who have recently onboarded or who have longstanding relationships with R1. Three, executing against our technology roadmap to drive measurable results. And four, focusing on operational excellence to drive improved financial performance, which in turn will deliver improved shareholder value.
spk11: Now let me turn it over to Jennifer to discuss financials.
spk01: Thank you, Lee, and good morning, everyone. We are very pleased with our financial results for both the fourth quarter and for the full year of 2023, as well as the forward progress we are making as a business. In 2023, we were focused on three key financial objectives. One, continued revenue growth. Two, operational execution and cost discipline to drive margin expansion. And three, improved cash generation and pay down of outstanding debt. We made significant progress across all three objectives, despite some headwinds to the overall business. These results would not be possible without the contributions across our team. I would like to thank all 30,000 plus of our global associates for their continued efforts to deliver results for our customers and our shareholders. This morning, I would like to walk you through our fourth quarter 2023 financial results, our full year results, and then spend some time in our 2024 outlook. We delivered solid results in the fourth quarter with revenue of $575.1 million and adjusted EBITDA of $167.7 million, demonstrating continued strength across our business and the ability to manage cost effectively to drive operating leverage. Revenue in the quarter grew almost 8% year over year. Let me provide a little more detail on the revenue drivers. Our net operating fees of $369 million increased 7% year over year. Growth was driven by the onboarding of new business that annualized in the fourth quarter, as well as continued low single-digit growth in cash collections from our existing end-to-end customer base. Our incentive fees were 24 million and in line with our expectations. Our modular and other revenue posted another strong quarter with revenue of 182 million. Double digit revenue growth year over year was primarily driven by cross-selling solutions to our existing customers. Turning to expenses for the quarter. Non-GAAP cost of services in Q4 was approximately 358 million, down 6.8 million year-over-year, and down nearly 7 million from the prior quarter. The year-over-year decrease was primarily driven by margin maturity across customers onboarded in 2022, combined with synergy realization from the CloudMed acquisition. Non-GAAP SG&A expenses were nearly 50 million. up 15% from the prior year. The fourth quarter included a provision for credit losses of $10.5 million related to our receivables. In particular, two customers account for the majority of the charge due to specific factors in their business and the current macroeconomic environment. Excluding the impact of the provision, SG&A expenses were down 7% year over year, driven by synergy realization, offset by investments we are making in technology. Our adjusted EBITDA in the fourth quarter was $167.7 million, with growth of 33.5% year over year and margins of 29%. Revenue growth, combined with continued cost discipline, and execution of our integration priorities drove these results. Lastly, in Q4, we incurred almost $29 million in other expenses related to CloudMed technology and integration efforts, as well as facility-related charges. Other expenses also includes roughly $5 million of transaction costs for the Clara acquisition we announced in early December. Other expenses decreased by almost 19 million or 39% year over year as our teams progressed through the integration. And as Lee mentioned earlier, we realized more than 30 million of cost synergies from the CloudMed acquisition in year. Our fourth quarter results bring our full year revenue to 2.25 billion and adjusted EBITDA to approximately 614 million. Our full year margin was 27%, up nearly 380 basis points, driven by our revenue growth, mix of revenue across our solutions, continued operating discipline, and synergy realization. Now let me provide a couple of comments on cash flow and the balance sheet. As I previously mentioned, cash generation has been a focus over the last year and we've seen a significant improvement in cash flow in 2023. Cash and cash equivalents at the end of December were $173.6 million compared to $164.9 million at the end of September. For the full year, we generated $340 million in cash from operations, and we are very pleased with our execution in this area. We also fully paid down our outstanding balance of the revolver, totaling $60 million in the fourth quarter and $100 million across the full year. As a result, net debt at the end of December was $1.48 billion with a net leverage ratio of 2.25 times. Our liquidity also remained strong with approximately $772 million at the end of December both from cash on our balance sheet and availability on our revolver. As we announced last month, we completed the acquisition of Aclara in January for $675 million of cash and a warrant to acquire up to 12.2 million shares of common stock. The company funded the cash consideration and related fees and expenses with cash on hand additional borrowings of $575 million in Term B loans, and an $80 million draw on the senior revolving credit facility. Now let me move to our 2024 outlook. For 2024, we expect revenue of $2.625 to $2.675 billion, growing 16% to 19% year over year. gap operating income of $105 to $135 million, and adjusted EBITDA of $650 to $670 million, with growth of 6% to 9% year-over-year. These expectations reflect the 2024 impact of both the contribution of ACLERA and the new contract with Providence. Our guidance also assumes low single-digit year-over-year growth for our base net operating fees, driven by improved cash collections. In the fourth quarter, our base customers were generally at their go-forward run rate of $369 million. Adjustments to this run rate include normal seasonality and the impact of attrition and facility divestitures we expect to occur in 2024. Customer attrition is related to APP and pediatrics, as well as the impact of facility divestitures we expect for two customers, including several Ameda Health hospitals, which were part of the Ascension and AdventHealth JV dissolution as announced in 2022. In addition, we expect Providence to contribute net operating fees of approximately 45 to 50 million for the year, beginning in the second half of 2024. While we continue to have constructive conversations with Sutter leadership on scope and timing, we have excluded any contribution from Sutter Phase 2 in our 2024 outlook. We expect modular and other revenue, excluding the impact of ACLERA, to grow low double digits. This includes the following assumptions. Mid-teens growth for legacy cloudbed solutions and low single-digit growth in the legacy R1 modular business. And finally, we expect Aclara to contribute approximately $290 to $295 million in revenue. We are in the process of determining the classification of Aclara revenue between net operating fees and modular and other revenues, and we'll provide more detail when we report our first quarter results. We expect adjusted EBITDA to be in the range of $650 to $670 million. Within this outlook, we expect Aclara to contribute approximately $25 million to adjusted EBITDA. And based on the upfront investment for the ramp of the Providence new business, we expect the Providence contract to have a negative impact on adjusted EBITDA of approximately 45 million in 2024. Excluding the impact of ACLERA and Providence, four adjusted EBITDA margins are expected to increase approximately 200 basis points. We also expect significant improvement in 2025 adjusted EBITDA margins through synergy realization, and the maturation of the Providence contract in 2025. This outlook also assumes capital expenditures of approximately 5% of revenue, other expenses 105 to 125 million, including a clear transaction and integrated related expenses, interest expense in the range of 160 to 165 million, which includes the impact of the incremental $575 million in Term B loans and the $80 million draw on the revolver related to the acquisition of Aclara. Depreciation and amortization expense of $330 to $350 million. We will update depreciation and amortization guidance in future quarters once the Aclara acquisition purchase price allocation has been completed. As Lee stated, we believe we have established a solid foundation for future growth and performance. We remain focused on the opportunities ahead of us in four key areas. Number one, delivering value for our existing customers. Two, expanding our market position with new customers, including Providence and other new modular wins. Three, operating discipline and execution. And four, automation through technology. We are optimistic that our focus in these areas will allow us to deliver sustainable revenue growth, operating profit, and free cash flow in 2024 and beyond. Operator, I will now turn it back over to you.
spk06: At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. Please limit to questions so we can accommodate others in the queue. Our first question comes from Craig Hettenbach from Morgan Stanley. Your line is now open.
spk14: Yes, thank you. Just starting with CloudMed, any additional color on the next phase of synergies for $20 million this year? What's key to driving that? And then also, there's been some concerns about slowing or moderating growth in CloudMed, but mid-teens growth looks good for 2024. So just wanted to get some more color in terms of visibility you mentioned and key drivers that could help sustain the mid-teens growth in CloudMed.
spk10: Thanks, Craig. Let me start at the highest level with CloudMed. So as you and others know, this is a business that helps providers identify sources of revenue leakage through broad data, technology, and AI-driven platform that cuts across many use cases and has 500-plus customers, 95 of the top 100 systems of NPR, and has grown really strongly the last couple years. I'll answer your question in a few ways. One, the business had very strong bookings last year, which is our proxy for ARR, which gives us confidence in what Jennifer highlighted in the growth rate this year. The growth comes from all our solutions with particular focus on some of our denials and ARR solutions, which deploy a technology platform to help providers in that area, in a place where we've seen some increases post-COVID. And the market has been very, the customers have been very receptive to our strategy, which is essentially to land and expand, cross-sell solutions into the base. So we feel very confident coming into the year on the growth rate. We expect to have another strong year of bookings and feel really good about how we're progressing that business. You know, over the long run, we haven't given guidance on 25, 26, but we expect continued strong growth. But obviously, over the long run, as the business gets bigger, you could see growth rates changing a bit. On the synergy side, just to back up, we feel, you know, I'm very proud of the teams on what they've accomplished on behalf of the business, our customers. We've achieved our synergy targets in the first two years. largely through solid execution, the experience the business has in integrating, and by the way, also gives us a lot of confidence on execution related to Eclara, just a playbook that has worked across multiple dimensions. So this year, the $20 million, we also feel good about this. The biggest opportunity for us is continued automation, continued deployment of rules and analytics, to drive down costs and identify synergy opportunities and moving resources, really as we incrementally hire resources, doing more of that hiring in our global facilities. That's the main driver of the $20 million, as well as a few other areas we can go into detail later. But overall, I feel very good about both the quality of the business, the receptiveness of the marketing customers for those solutions, and our synergy target. Anything to add, Jennifer?
spk01: No, 2020, the only thing I would add is in 2023, most of the synergies were driven by G&A functions, integration of all the back office systems, and more of the corporate teams, facility rationalization, et cetera. So as Lee indicated, in 2024, most of the synergy realization will come from the operational integration, primarily related to the global transitions. That's helpful.
spk14: And then just a quick follow-up. Leo, I want to touch on just how the strategy has evolved under your leadership, kind of seeing a more balanced approach between growth, focus on margins and cash flow. And if you can just touch on how that shapes kind of your priorities for this year and beyond.
spk10: Yeah, so great question. So let me just step back and say, look, we, the team, feel very good about the fundamental growth prospects for the entire business, okay? That said, we have talked a lot in my first year as CEO about the end-to-end business. And today we have a much more diversified business, right? A lot less customer concentration. The CloudMed business plus the legacy modular business is a much more substantial part of our business. So when I say flexible, you've heard me use that word a couple times. That means meeting providers wherever they are. You heard the example I gave. There are situations where A prospective customer may say, look, the initial thought is an end-to-end engagement. And we may say, just like the example I gave, that what is better for that customer, given their financial situation, given the dynamics, maybe it's the fragmented nature of their technologies and processes, that we should do more of a managed services. Use our coding resources, use our AR follow-up resources, our technology, our global scale, and you all, the customer, manage that. and then accelerate the adoption of CloudMed, right, which is a very powerful solution that delivers significant revenue yield or what a customer would know as revenue integrity, identifying sources of revenue they would not otherwise see due to leakage for many reasons. So that's the main change in strategy. The other thing I would say is, look, the CloudMed business has a lot of experience, a lot of capabilities around data platform, analytics, deployment of AI, So you'll hear me and the team talk about a continuation of the strategy of deploying automation, AI, and technology. Just to give you a little bit of color there, we have a significant right to win in the space of AI and large language models because we are embedded in the customer workflow. So just think of any end-to-end, could be front, middle, back, where you have access to EMRs, the host systems, billing systems, all the data structured and unstructured. The example I gave is in the denial space, because we see the denials, we know what successful claims looks like, we can deploy AI models to respond to those denials, as an example. And I can give you 10 other examples. But you'll see, you'll hear me and Jennifer talk more and more about the adoption of AI, which in turn drives greater revenue yield, lower cost, and just generally increased customer satisfaction and confidence in our growth rates and margin expansion.
spk05: Thank you.
spk06: Next question comes from Jaylandra Singh from TruVist Securities. Your line is now open.
spk00: Good morning and thanks for taking my questions. My first question is on customer health. You guys had another 10.5 million of allowance for losses in 4Q. You called out two customers representing a big portion of that. Can you share how much of your total NPR or revenues these customers represent? And how are you thinking about contribution from these two customers in 24? Are you assuming any reverse of this allowance or even increase? And Lee, beyond those two contracts, if you can comment on generally your customer health in particular.
spk10: Okay, Jalendra, let me start with the last part of your question, then I'll hand it over to Jennifer. We made a lot of progress in 2023. So just to give you the high level on metrics, post-COVID, clearly there's been more payer pressure, changes in timelines on payments. We've actually seen increases in certain areas' denials. But broadly, we have done what we set out to do in 23, which is stabilize core metrics, looked across our scorecards, and you've kind of heard what Jennifer said about our incentives, you know, remaining flat or moderate growth. So overall, we made a lot of progress. Now, that said, take one metric, Shalendra, HDR, which is a challenge across the industry. You can look at a lot of data points post-COVID on days payable, etc., While we've seen those stabilize, they're still elevated post-COVID, right? So depending on, you know, an individual customer, we've seen some variance across customers. So what I would say, Jalendra, is we are not done on performing for our customers. We have more work to do to continue to improve with some of our newly onboarded customers in 21 and 22, where we need to continue to accelerate automation, adoption of technology, integrating the customers' technologies and processes to drive progress in some areas where there's hot spots that, you know, some of our newly onboarded customers. Large customers, Jalendra, we feel very good about the phase one of Sutter. We're performing well for the largest, most mature customers. So lots and lots of good things around metrics. I would also say on the customer engagement side, we are – doing a couple things there. One is deploying our CloudMed solutions as much as possible, which is a high class-rated set of solutions. And we're also just changing our approach on how we engage with customers. I can go in more detail there, Jalendra, but just really thinking about how can we in our end-to-end business be even more customer-centric as we continue to scale the business, adopt new technologies, deploy automation and AI through the enterprises. So that's at the high level. What I would say is a lot of progress in 23, still more work to do in 24. Jennifer?
spk01: Sure. On the allowance specifically and the size of the customer, I would say one is small, another is midsize. It is one end-to-end customer and one modular customer. And as far as continuing to do business with them and what the outlook or the guidance assumes. We do expect that we'll continue to still do business with them in 2024. However, they both of the businesses are doing a bit of restructuring in their business. And so that's factored into our guidance.
spk00: Okay. And then that's helpful. And then my follow up, and I completely understand you guys might not be willing to comment on the new mountain filing. But Lee and Jennifer, you had experience of successfully running a private company, and now you're running a public company. Just curious about your general views on executing on R1's strategy and approach and creating long-term shareholder value as an independent public company versus contemplating other options to create near-term shareholder value.
spk10: Yeah, what I'd say, Jalen, you're right. I can't comment on a lot of the specifics. Here's what I'd say. Look, we are very confident as a team of the prospects of the business. There is a high level of end market demand in both end-to-end managed services and cloud med, macro growth across the industry, and needs, especially for providers who may be struggling with financial pressure, high labor, inconsistent adoption of technology, payer pressure, et cetera. So I and the team feel very confident of running this business in any context. So what I would respond specifically to The question on the letter that came, you know, our board received the letter, is reviewing the request. We will evaluate that letter, the proposal, and we would, as any public company, work with our advisors to determine the course of action that is most beneficial to our shareholders, customers, and employees.
spk00: Great. Thanks a lot.
spk06: Our next question. comes from Stephanie Davis from WorkBase. Your line is now open.
spk03: Hey guys, thanks for taking the questions. I have, you know what, let me start with an AI question, because Lee, I feel like you really want to talk about that, and I'll get to some questions on Twitter. But could you tell us a little bit more about what your cost structure could look like as you kind of build out your AI solution, and how much of it is going to be more near-term investments on the engineering side or the LLM investment side versus the kind of cost fields you can get as you don't have to have as much hiring to build out.
spk10: Yeah, so let me start with the strategy and then, Jennifer, if you have any questions on cost structure add-in. Look, the reason I am excited, Stephanie, and the team is very excited, is we see a massive value unlock for our customers and shareholders today. on deploying large language models into our systems, tools, and technology. The examples I gave are all exciting, and they barely stress the surface, Stephanie. So denials, automating appeals, running the first pass, reducing the need for additional auditing and follow-up that has immediate implications to our own cost structure, automating summarizing charts, and deploying that in our coding business has immediate value to customers on accelerating cash collections and value related to our cost structure. AR follow-up sounds benign, Stephanie, but these are thousands of workers we have that are following up on claims and having the ability to summarize the claim through a large language model on claims we see from that payer in that setting in that geography reduces the work time for any individual AR follow-up person in our system, and that leads directly to increased cash collection, revenue, speed to revenue, and obviously our overall cost structure. A couple other things. We've partnered with Microsoft. We feel very good about that partnership. We have a robust roadmap. This has become at the top of our roadmap, along with automation, along with deployment of data and analytics from our CloudMed business, and continued net new product innovation that we haven't spent that much time talking about, Stephanie. But this is... area gives us a lot of confidence on more rapid deployment of products, shipping new products to our customers, into our operating systems, and it's just something we're very excited about. Jennifer, any thoughts on cost structure?
spk01: As far as an early investment, Stephanie, you're right. It's going to be in two areas. Investments in data to make sure that we can consolidate the data and we have clean data to be able to deploy in the models. and then engineering to build those large language models and make sure that they're operating and we're getting the benefits out of it. Longer term, as Lee mentioned, some of the specific use cases is where we have the largest number of people in coding and auditing, and then on the back end, the backend in follow-up, where we have thousands of people that are doing AR follow-up in some capacity, whether it could be responding to denials, follow-up with payers. And as we deploy these models and we see opportunities to be able to automate that, we'll be able to grow, and the incremental margin on that will be much higher. We're still in the early days, so we're monitoring it very closely, but we feel very good about the opportunity there.
spk03: That's helpful. And then on the Sutter Health side, there's a lot that makes their phase two deployment a little bit more unique, right? They're an epic system. They have had a management changeover. Could you give us a little color on kind of what the timeline could be for that and what some of the biggest holdups are? And if there's any potential they would want to keep the front end in health?
spk10: Yeah, Stephanie, let me just talk about this is a great topic. Let me let me start with the first phase is a fulsome phase that looks not too dissimilar to the Providence engagement. So the entirety of the middle and back. OK, so just and that's the first thing I just want to remind everyone. This is a very comprehensive engagement. You'll notice Stephanie that as we articulated how we're moving forward with Providence, we did not phase it on purpose. We have a lot of learnings on how to contract, how to deploy, integrate with a net new customer. You'll hear us do that going forward. The second thing I'd say is there's always room to improve, but phase one from an operational metric standpoint has progressed very well. A couple advantages, if you will, of that deployment is it was a centralized revenue cycle, strong executive leadership and support, and we already have, in particular through our CloudMed business, experience with Epic. So regarding phase two, what I'd say, and just as simply as possible, is we continue to dialogue with executives, the most senior executives at Sutter. We have not assumed anything in our 24 numbers, and we'll keep you updated each quarter, Stephanie, but there's no new news. But overall, I look at this as an opportunity in our customer base, just as there are opportunities with all of our other end-to-end customers.
spk04: Awesome. Thank you, folks. Our next question comes from Charles Frey from TD Cohen.
spk06: Your line is now open.
spk15: Yeah, thanks for taking the questions. Jennifer, maybe we just wanted to dive into the guidance for this year. Obviously, a lot of moving parts here. with customers coming in and out and some, you know, pause here on the Sutter side. But, you know, assuming nothing changes from here and, you know, how should we think about what underlying sort of fundamental EBITDA growth for this business is? Because, you know, I would think particularly Lee, with all your comments around the opportunity with Gen AI, we should see continued margin expansion. You know, I would imagine, you know, a lot of that discussion happened in the sort of post when you guys were talking about long-term margin targets. You know, maybe can you give us a sense, you know, I think, Jennifer, you said at one point that this is at least a 15% plus EBITDA growth kind of business. Is that still sort of in your mind frame or particularly with Gen AI, could we expect to see actually faster growth over time?
spk10: Why don't I start, Charles, and then Jennifer, you go. The way I frame it is the following. So you're right, Charles, you're hearing me be very optimistic about the long-term prospects of the business across all areas, end-to-end, managed services, and cloud med. The way I think about it is, and you've heard us say this before, but just to frame it, it's base business maturity. You heard, Jennifer, what you said about the end-to-end base business. the addition of CloudMed and other modular services, which is incremental to EBITDA and growth. And then you get into this kind of the topic we just talked about with Stephanie is the continued adoption of technology, which is a significant unlock for value for our customers and additional margin. Then we have synergies, continued CloudMed synergies, and that's the other factor. And then last, it's Eclair and Providence. So the combination of onboarding both the acute and physician business, the assumptions we made this year, you know, potential for us to do even better there in 24, but certainly confidence in 25. And then synergy realization for Aclara, which is really, you know, as you know from what we said, not a ton in 24, but a high confidence in 25 and 26. So those are the pieces and parts. Overall, we feel very good about what we've said in guidance and have a lot of confidence in the business. But Jennifer, any specifics?
spk01: Specific to EBITDA growth, if you look at the 2024 guidance, the core margins for R1 are improving. And I think that's indicative of the margin maturity continued growth on the modular side with higher margins and synergy realization, as Leigh indicated. And then the drivers on the other side where we're doing a bit of investment is on the Providence new business where there's a significant investment in year. And the Clara business, which is admittedly operating today at a lower margin than what our core business is. And we expect significant synergy realization over the next couple of years. As far as AI, We're making a lot of investments in the business right now. A lot of those investments will begin to pay back in 2025. So there's not a lot of contribution from AI, significant contribution from those AI investments that we're making in 2024. Most of that will come in 2025 and beyond, which is part of the reason that we feel good and very confident in the long-term growth.
spk15: And if I could follow up, so if we think, you know, not to jump too far ahead, but if we think up to next year, right, we're going to get back sort of the tailwind from, you know, no onboarding costs related to Providence. We're going to get another half year of net operating fee contribution. Obviously, there's a margin to that. Synergies related to Aclara. Is it hard not to think that we're going to have a significant uplift in growth as we get through this sort of kind of rebasing year?
spk01: We haven't given longer-term guidance on 25, but that's the way we're thinking about the business generally. There will be a lot of growth coming from maturity of the Providence contract as we annualize some of the investments we're making this year and then start to see some of the benefits, incremental benefits for AI and some of the automation in the future.
spk05: Great. I appreciate it. Thanks.
spk04: Our next question comes from Daniel Grasslite from CT.
spk06: Your line is now open.
spk11: Hi, thanks for taking the question. I'd like to focus on Providence revenue recognition and investment this year, really the cadence. How should we think about that as the year progresses? And then do you have any visibility at this point on the cadence of the pediatrics attrition?
spk10: So let me start with Providence, just the kind of high-level, Jennifer, then I'll also cover pediatrics, and if Jennifer has anything to add. So just to remind everyone, this was a flagship win, you know, very sophisticated buyer, very strong, experienced executive team, and a commercial contract to close in January for the acute and physician business, $14 billion of NPR, not including the Swedish business. comprehensive engagement for the entirety of the middle and back. We are very much on track with regard to onboarding. We are applying lessons learned from the last large EPIC onboarding, which was Sutter. The teams are working very well. We are meeting daily, have a lot of just operational checkpoints on making sure that onboarding goes really well. And All the data we have points to a high level of confidence on meeting our timing goals. Guidance assumes revenue second half. Jennifer, any additional comments on timing?
spk01: As far as the phasing, from a revenue perspective, we do expect that revenue will ramp second half of the year, 45 to 50 million of net operating fees in the second half. And as far as the investments that we're making, we're starting to make investments right out of the gate. We're starting to ramp resources so that we can deploy and be ready for the transitions that we expect to happen mid-year. So those investments will start in Q1. As far as ACLARA, obviously that revenue, will begin to be recognized at the time of close as an existing business. So the 290 to 295 of revenue will begin mid-January. And we've adjusted for the timing of close in that 290 to 295 estimate for the year. And there's not a ton of seasonality there, so you can phase that across the year. And can you remind us? Sorry, go ahead. I was just going to say as far as pediatrics and the transition, our guidance assumes a mid-year transition. The reality is there may be some things that transition earlier in the year but go a little longer, so I don't think it's going to be everything transitions at the end of Q2. I think there will be some things that will begin to transition in Q2 but will go into the second half of the year as well.
spk11: All right. Got it. Okay. Okay. Can you remind us how many employees you have now in the Philippines and how much more juice there is left to squeeze at a margin by further shifting folks to the Philippines in 24?
spk10: Yeah. So, look, this is an area that we don't get to talk about that much, Daniel, so I'm glad you... brought up the question, but this is a very valuable global center for us that helps diversify outside of India. We have just over 2,000 people in the facility, historically mostly focused on customer service, front end, patient registration, and so on. We've actually had some really good successes with some of our large customers deploying technology, leveraging that facility. This is for sure an area we will continue to expand and will deliver opportunities for a lot of value to our customers that deploy not just front end, but also customer service. And we're also diversifying outside of other areas. So we are realizing the value of that facility as it matures, just like India did 10 plus years ago. As it matures, that facility is able to take on more and diversified parts of customer workflow. So overall feel really good about the strategy there.
spk05: Got it. Thank you.
spk06: Our next question comes from Sean Dodge from RBC Capital Markets. Your line is now open.
spk12: Yeah, thanks. So your earlier comments on EBITDA growth, if we bridge that into cash flow, Jennifer, you mentioned stronger performance in 2023. And then through 24, you've laid out the EBITDA guide and gave much more detail on CapEx and other items. I guess if we bake all of this in, how should we be thinking about free cash flow trajectory both into this year and then any updates to how we should expect that to unfold over the next couple of years and maybe what the big drivers of that should be?
spk01: On the cash flow front, We said last year that we expect cash flow for the core R1 business before Providence and Aclara to be in the mid-30% from a cash flow conversion as a percentage of EBITDA, and that's still the expectation. We had very strong cash flow the second half of this year, so we feel very confident in that. There are some investments, as we indicated. on the Providence new business that will bring down that cash flow conversion in 2024 for Providence as we invest early on in that revenue contract. And then Eclera, with the integration, we expect that it will be a drag on free cash flow in 2024 as we have transaction costs in the first half of the year, we have higher interest expense associated with the debt, and we're going to be integrating the business and realizing costs associated with synergies as we begin to execute on that. So the cash flow in 2024 is in the 2020, percent plus range for 2024. But as we move into 2025 and beyond, we would expect that we continue to improve on what we would look at as that core free cash flow conversion of the mid 30% to continue to increase that. And we've said that that cash flow conversion target is in the 50% plus range. So we still don't think that there's any reason why we wouldn't be able to get to those cash flow conversion rates.
spk12: Okay, great. And then for this year's guidance, 2024 guidance, can you share what you've assumed or baked in there in terms of credit allowances? There's a lot of noise there in 2023. Should 2024 be more normal? And then what does normal look like now you think going forward?
spk01: It will be improved. Our guidance assumes that it will be improved off of 2023, but I do think it will still be a bit elevated from a historical number. What new normal looks like is probably in the range of 10 million a year. in that range, and that's what's assumed in the 2024 guidance. So some improvement coming off of 2024, but still higher than historical, or 2023, but higher than historical.
spk05: Great. Thank you, Jen.
spk04: Question comes from Evercore Partner. Your line is now open.
spk02: Hi, it's Elizabeth Anderson. So thanks for the question, guys. One question I had, can you talk, Lee, maybe about that customer approach change you referenced in your other question? It'd be helpful to hear a little bit more details about that.
spk10: Yes, Elizabeth, it's simple. One is just from a go-to-market standpoint, being a lot more flexible on how we meet the needs for customers. Two is continuing to leverage the CloudMed customer position, market position, to expand into managed services, expand into end-to-end. Three is flexible contracting. So, Elizabeth, this is, you know, kind of think about providence, right? Could we have pushed harder on the front end? Could we have pushed harder on some expansion opportunities? For sure, but it's being flexible in what the customer wanted to do and not phasing anything and just leaving some of the expansion opportunities for later. The thing I specifically mentioned is, look, as the business has scaled, from an operation standpoint, really thinking about how we scale to the next phase of NPR. You can imagine our business over time being a lot more than 70 billion of NPR, right, with just natural tailwinds at the market level. So how do we continue to scale what has historically been a centralized operation? And at what level can we be more customer-specific on the operational side? On the customer-facing side, We've also scaled. So this means we have to be more aggressive about hiring talent that is customer-facing, be a lot more customer-centric in our approach, be more systemic or systematic on how we engage with customers, the level of executive that engages. And this is about expanding our talent pool. And the other thing I would highlight, Elizabeth, as I didn't mention, is deploying a more data and analytic approach and highlighting to customers this macro dynamic that's happening around payer mix and how that factor is somewhat in our control with some of the payer escalation processes we have, but to some extent is a macro dynamic we can help arm our customers to address and paint a picture for them that R1 is best equipped to help them through these, but there are for sure macro dynamics that are maybe less in our control. So I could go deeper in that, Elizabeth, but that's at the high level what I'm talking about.
spk02: Got it. That's super helpful. And I was wondering if there's any more detail that you can provide in terms of how you feel about the pipeline for incremental new deals as we think about 2024 and potential timing on that. I appreciate the additional color on the 4Q one.
spk10: Yeah, just the interest of time, Eliza, very good. So good across all fronts, end-to-end modular. You know, we've learned a lot of lessons from NEST last year about not projecting a deal, but, you know, a couple of pieces of color. The land of large, large deals, $10-plus billion, is less and less. Some of those choose end-to-end partners. I do think the next phase of deal is something in the couple billion up to $5 billion range. But we have a healthy pipeline on both the end-to-end side, and I expect another strong year of bookings on the CloudMed and R1 modular side.
spk02: Thank you.
spk06: Our next question comes from Vikram Kasava from Baird. Your line is now open.
spk09: Great. Thank you for taking the questions. I wanted to ask about the incentive fees. It looks like those stepped down sequentially in the fourth quarter. I was curious if you could talk about the drivers there. I know you called out some one-time factors on the previous conference call, but just wondering if we can get some color on how that ultimately played out relative to your expectations and what the guidance assumes for incentive fees in 2024. And then on a related topic, just wondering if you could talk about just what you're observing more broadly in terms of payer reimbursement timelines. I think in the past you've suggested that You're starting to see signs of stabilization. Just curious if that's still the case or if you're seeing any signs of it getting particularly better or worse. And I'll leave it there. Thanks.
spk01: Sure. On incentive fees, last quarter we had some one-time items that increased our incentive fees in the quarter. And so we had reflected that we knew we would have a decrease quarter over quarter in incentive fees. Incentive fees landed right in line with our expectations, so there was no surprise there. Those one-time fees were really twofold. One was related to an acceleration of some incentive fees for a contract that ended in Q4, and it accelerated so we had extra, if you will, incentive fees in Q3. And then one was where we had a reclass based on a contractual change where it's just a reclass from out of incentive fees and into net operating fees. So it was just a movement but no change to either total revenue or EBITDA from that perspective. So that's the change. As we look to 2024, we do expect that payer reimbursement timelines, first of all, they stabilize in 2023. We saw some very modest improvements, kind of quarter over quarter, a little bit of puts and takes across the quarter, but very modest improvement year over year. And I would expect the same for 2024. I don't think there's going to be significant improvement in payer timelines. I would love to be pleasantly surprised there, but that's not what we're assuming. So we expect that those will remain stable to where they were in 2023. And then as a result, I expect, you know, given our run rate in Q4 for our existing customer base is kind of at a run rate, I would expect that incentives are relatively stable and consistent with what we saw in 2023. Okay, thank you.
spk04: Our next question comes from Bank of America.
spk06: Your line is now open.
spk13: Good morning. This is Alan Lutz at B of A. One of your largest customers reported really nice revenue growth in the most recent quarter, and it seems like the utilization environment seems to be improving more broadly. How should we think about your guidance for low single-digit growth of core customers that's embedded in the guide? How does that compare with 2023?
spk10: I'd say the short answer, Alan, is kind of what you're saying. We expect volumes or utilization to be very similar to 2023. Each provider is unique. We have a different base of business than what you might see at a macro level, especially related to some of the public providers. We have projected low single-digit growth in cash collections, which, as we've said before, blends volume, acuity, and mix throughout our customer base. So low single digits, is there upside? We'll see, but we're pretty confident in our projections just as we were in 23rd.
spk13: Great, thank you. And then, Lee, I guess on strategy, it seems like there's now a greater focus on managed services and modular. Has that changed the way that Salesforce is speaking with prospects in 2024? Thanks.
spk10: Yeah, look, it's changed the way we think about prospective customers. And I think the major changes, and I'm glad you asked the question, Alan, I haven't articulated this, is being very thoughtful about what customers we take on. So being thoughtful if a customer has highly fragmented technologies, processes, systems, isn't centralized from a revenue cycle, that we are going to be very thoughtful on how we take those on. It doesn't mean we can't handle complexity. but we may project longer onboarding. We may err towards managed services, which is essentially let the customer keep control but deploy our AR, coding, other resources with global scale and technology, and probably be more aggressive on deployment of CloudMed, which drives one very important metric around revenue integrity and that can help them with one of the bigger problem areas around denials and AR.
spk04: All right.
spk06: Thank you so much. This closes our question and answer session for today. I'd now like to hand back over to Lee to close the session. Thank you.
spk10: Thank you, everyone. What I want to say in closing is we believe we've established a solid foundation for future growth and performance. We remain focused on opportunities ahead of us. As Jennifer articulated, one is delivering value for existing customers. We want to really focus on customer satisfaction, deploying, continuing to expand our base business with our existing customers. Two is expanding our market position with new customers, including Providence and other new modular wins. Three is operational discipline and execution as we continue to expand our global footprint. And fourth, and this is the part that you'll hear me and Jennifer talk about a lot more, is automation through technology with specific focus on AI. So we are confident as we execute on these areas, we will deliver for our customers first and foremost and deliver sustainable growth, EBITDA, and cash flow for our shareholders. Thank you.
spk04: This concludes today's conference call. You may now all disconnect. Thank you.
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