Susan DeVore - President and CEO Mike Alkire - COO Craig McKasson - CFO Durral Gilbert - President, Supply Chain Services Jim Storey - VP, Investor Relations.

Lisa Gill - JPMorgan Jamie Stockton - Wells Fargo Securities Jeff Garrow - William Blair Richard Close - Canaccord Genuity Sean Dodge - Jefferies Michael Cherny - Evercore Elizabeth Blake - Bank of America Merrill Lynch Mohan Naidu - Oppenheimer Garen Sarafian - Citi Eric Coldwell - Robert W.

Baird Nicholas Jansen - Raymond James Gene Mannheimer - Topeka Capital Markets.

Good afternoon, ladies and gentlemen and welcome to the Premier, Inc. Second Quarter Financial Results Conference Call. At this time all lines have been placed in a listen-only mode, and the floor will be open for questions following the presentation. At this time, it is my pleasure to introduce your host, Jim Storey. Please begin..

Thank you, Joe. And welcome, everyone, to Premier Inc.'s fiscal 2016 second quarter conference call. Our speakers today are Susan DeVore, President and Chief Executive Officer; Mike Alkire, Chief Operating Officer; and Craig McKasson, Chief Financial Officer.

Susan, Mike and Craig will review the quarter's performance and discuss the outlook for the remainder of our fiscal year.

Before we get started, I want to remind everyone that copies of our press release and the supplemental slides accompanying this conference call are available in the Investor Relations sections of our website at investors.premierinc.com.

Management's remarks today contain certain forward-looking statements and actual results could differ materially from those discussed today. These forward-looking statements speak as of today and we undertake no obligation to update them.

Factors that might affect future results are discussed in our filings with the SEC, including our most recent Form 10-K and Form 10-Q, and we encourage you to review these detailed Safe Harbor and Risk Factors disclosures. Please also note that where appropriate we will refer to non-GAAP financial measures to evaluate our business.

Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release, in the appendix of the supplemental slides accompanying this presentation and in our Form 8-K filing with the SEC, which we expect to file soon. Now, let me turn the call over to Susan DeVore..

Thanks, Jim and hi, everyone. On behalf of our entire management team, I want to start off today's call with a sincere thank you to our member health systems, our suppliers, our business partners and our employees for helping Premier to achieve great financial performance in our second quarter, capping of a strong first half of fiscal 2016.

We believe that this financial performance is indicative of the performance improvement platform that we have co-created with our health system.

Our business model with a diversified set of capabilities to assist our members' quest to improve performance in the dynamically changing healthcare landscape drives our confidence in our ability to deliver continued growth in virtually any reforming environment.

Following a quick review of our financial performance, I'll share my thoughts on how and why we continue to deliver consistent growth and consistent performance in this ever changing business climate.

Mike Alkire will continue the discussion with a review of how we are executing in the market place and Craig McKasson will conclude our prepared remarks with more detailed review of our financials. So, let's quickly review the second quarter performance.

Our providers-centered healthcare solutions company produced 17% year-over-year gain in both consolidated net revenue and adjusted EBITDA, driving an 18% increase in non-GAAP adjusted fully distributed net income.

During the quarter, we experienced significant revenue growth across both Supply Chain and Performance Services, including contributions from our recent acquisitions of CECity and Healthcare Insights and InflowHealth.

Year-over-year growth of 13% in Supply Chain Services net revenue exceeded our expectation, fueled by a 7% increase in net administrative fees revenue and 22% growth in products revenue from our Direct Sourcing and Specialty Pharmacy businesses.

Supply Chain Services segment adjusted EBITDA climbed 11% from year ago, primarily due to net administrative fees revenue growth. In Performance Services, SaaS-based subscriptions and renewals, as well as strong growth in our advisory and research services businesses drove the 27% revenue increase.

We continue to experience growth in the use of our advisory services and research capabilities with particular uptake of our population health services. With efficient and timely integration our recent CECity and Healthcare Insights acquisitions provided meaningful contributions as well.

Performance Services segment adjusted EBITDA jumped 49% year-over-year well above our expectation in large part due to operating leverage from our existing technology and advisory services businesses and contributions from our recent acquisitions. As we've said in the past, the chassis is already built.

Based on these results and our current outlook and assumptions for the remainder of the fiscal year, we are raising our fiscal full year guidance for consolidated revenue, adjusted EBITDA and adjusted fully distributed earnings per share. Craig will discuss the specifics when he reviews our financial results in more detail.

When I think about our second quarter financial performance and look out over the second half of fiscal 2016 and beyond I'd see financial performance and growth that reflects the powerful capabilities inherent in our business model.

I see multiple revenue drivers working in unison as we partner with our members to solve the cost, quality, safety and population health challenges faced by our nation's healthcare providers. At Premier we believe change and challenges help expand the relationships we have with current members, and attract new customers to our company.

So whether they’d be changing payment models, fluctuations in patient utilization patterns, intensifying cost pressures, these market challenges are in many ways the fuel that drives business growth through our integrated solutions platform.

Over our 20-plus year history, we’ve developed a capability for anticipating these changes, and taking the necessary steps to prepare our member health system to respond and to prosper in this environment. Ours is a business model that positions us at the heart of our nation's healthcare transformation. Let's look at population health.

Over just the past few years, we’ve all witnessed the emergence of alternative payment models and population health management. We saw this coming and have worked with both the government and our member health systems toward an effective transition.

At the end of our second quarter, approximately 750 hospitals and health systems across the country were using our population health services and/or technology. And just a few weeks ago, we were named the top value based care advisory services solution in the best in class report for 2015-'16.

When you sum it all up, our key differentiator lies in the fact that our entire organization is built around our ability to understand the trends and their resulting requirements on healthcare providers.

We collect and analyze vast amounts of data from disparate sources and combine them into performance improvement platforms that are critical to provider success in this evolving healthcare landscape. We help them arrive at actionable insights, drive fact based decisions and scale those insights cost effectively across their enterprises.

These decisions help reduce supply chain cost, from pharmaceuticals to medical devices. They improve quality and safety in the delivery of care. They identify areas of waste, over use and misuse and they provide predictive analytics for effective population health management.

Since 2013, we’ve been partnering in this way with Inova, a large Northern Virginia health system. Inova is one of our all-in members using a combination of supply chain and technology offerings as well as advisory services. It's also one of the top health systems in the metro Washington D.C. area, serving more than 2 million people annually.

Through its collaboration with Premier over the past two and half years, Inova has reduced mortality and readmissions, achieved unprecedented A grade in National Patient Safety Ratings at all five of their hospitals and saved more than $250 million in total care costs including more than $50 million in supply chain cost savings alone.

So in short we are equipping our member health systems with the technology, the insights, the advisory services, necessary to succeed in the current or any future reform environment. So these are some of the Premier attributes that explain the how and the why, behind our strong and consistent financial growth.

We believe our second quarter financial performance and the drivers behind this performance tell the story of how Premier is winning in the marketplace.

And more importantly, why Premier in partnership with our members is well positioned to lead the transformation to lower cost, higher quality, population focused healthcare delivery in the years to come. So with that let me turn the call over now to Mike Alkire, our Chief Operating Officer..

Thanks, Susan and thanks everyone for joining today in our conference call. I want to provide a little bit more color as to why we are winning in the marketplace, as well as give you some examples of where and how we are driving growth and innovation. We work together with our healthcare systems everyday to strengthen our relationships.

We are constantly evaluating what they want and what they need and importantly why they chose to work with Premier, understanding and acting on the strength of our relationships provide a roadmap for future success and the springboard for continuous improvement; both of which are necessary components of leadership in this highly complex and rapidly evolving marketplace.

We believe Premier has a number of attributes that differentiate us from our competitors. I want to reiterate three of these differentiators for you today. While you may have heard these points before, reviewing them here is important because they contemplate our second quarter financial performance and future potential into perspective.

First, Premier has significant scale and alignment. We work with approximately 74% of U.S. community hospitals and are majority owned by the health systems that built our company.

Many of our employees are embedded inside these health systems, working to test, prove and fast track solutions in a real world environment through our member aligned channel. They recognize us as their trusted partner. Second, our solutions are data driven and technology enabled by our cloud based PremierConnect platform.

PremierConnect houses our performance improvement solutions that enable our members to operate in an increasingly complex environment, driving cost and quality improvement through their systems over the short-term and population health management solutions over the long-term.

We are continually involving our PremierConnect platform across domains that align our capabilities with the performance improvement imperatives of our members in the areas of cost reduction, quality and safety improvement and population health management.

Significantly our analytics platform is vendor neutral and payer agnostic, so we can acquire, validate, integrate and analyze data from the multiple disparate data sources across our member organizations. And third our solutions are integrated and work across the continuum. Healthcare providers today need more than one-off tools and engagements.

They are looking for integrated solutions that help improve productivity across their entire systems, including physician practices, outpatient clinics and extended care facilities. Comprehensive solutions for today's challenging healthcare environment.

So let give you an example, the Federal government has been aggressively implementing payment and delivery reforms as part of the Affordable Care Act, making deeper value and population health a reality for both health systems as well as physicians. Physician alignment and engagement will be critical to success in this environment.

Premier has been addressing the physician enterprise needs of our members through existing technology capabilities. The strategic deployment of capital to acquire CECity, Healthcare Insights and InflowHealth in the first half of the fiscal year gives us the capability to drive faster and further development in this area.

InflowHealth brings additional expertise and analytics around physician benchmarking and productivity.

Healthcare Insights adds financial management solutions, including service line analytics to enable bundled payments and CECity's ambulatory footprint is essentially a mirror of Premier's hospital inpatients and outpatient quality improvement and reporting capabilities.

Today, we have a truly unique set of offerings that allows our members to build network and measure their overall clinical performance across the care continuum. We are proud of these capabilities and believe they clearly differentiate Premier in the market. Now let's take a moment to drill down into the integration of CECity.

Since this acquisition less than six months ago, we've been generating strong momentum across a number of channels. In terms of sales bookings, our fiscal second quarter was the largest in CECity's history.

We believe this achievement is in part from the growing recognition of and the need for ambulatory provider quality improvement and reporting capabilities, resulting from requirements under the new macro legislation as well as from our ability to rapidly integrate these solutions into the Premier channel.

The combination of Premier and CECity has opened or expanded three channels where we see significant new opportunities.

First, in the area of physician performance management and value based payment reporting, we are experiencing strong demand for the physician quality reporting system product called PQRSwizard both through our e-commerce channel as well as directly through Premier member health systems.

As more providers show in PQRS as penalties increase in the next year, we anticipate the demand to grow further. Second, we are also experiencing success in developing channel partnerships with major EHR companies.

Given Premier's core competency in managing the constantly changing regulatory quality requirements, EHR organizations are selecting us for the unique specialized registry network capabilities we have in place.

These capabilities serve the streamline public health reporting across their broad customer base for the purpose of meeting new meaningful use requirements. Through CECity, we've been working in this capacity with athenahealth since 2014, but just recently also contracted with three other major EHR providers.

Third, we are seeing an increase in the interest and acceleration of research opportunities with Big Pharma. Pharma industry is increasingly being pressured by health systems, ACOs and their population health management delivering models as well as by payers, employers and PBMs that demonstrate the value of their drug therapies.

We believe, we have the leading platform to support these type of assessments across the care continuum.

We recently entered into collaborative agreements with Genentech, Merck and Pfizer that are intended to leverage our platform across hospitals and difficult to reach ambulatory providers to assess the effectiveness of care decisions and outcomes as measured by registry collected performance data to improve the health of patients.

We expect these enhanced research capabilities to enable the real world assessment of how new drug therapies perform in specific patient populations to create the best protocols for managing disease.

So staying on the topic of research, we announced last week that we won a key contract to support the implementation of the government’s Million Hearts program.

CECIty is part of the team addressing implementation of the Million Hearts cardiovascular disease risk reduction payment model, which is the first test to determine if financially rewarding physicians, for reducing the risk of first heart attacks or strokes among high risk patients, produces better outcomes.

Now let’s look at some other achievements across our business since our last quarterly conference call. In terms of integrated offerings that span our supply chain and performance services capabilities, we secured two new relationships over the past week.

HealthPartners, which is located in Minnesota and Western Wisconsin has just contracted with Premier for our group purchasing services, an integrated supply chain analytics powered by the PremierConnect technology platform.

HealthPartners is the largest consumer governed, non-profit healthcare organization in the nation, serving more than 1.4 million medical and dental health plan members nationwide. The care system includes more than 1,700 physicians, 7 hospitals, 55 primary care clinics, 23 urgent care locations, and numerous specialty practices.

MercyRockford Health System, a vertically-integrated regional health system with five hospitals and more than 560 employee physician partners in Northern Illinois and Southern Wisconsin, has chosen Premier to provide supply chain services as well as our PremierConnect technology analytics.

Formed in January 2015 through the merger of Mercy and Rockford Health Systems, MercyRockford also operates a wholly-owned insurance company, 80 outpatient clinics, and offers a host of complementary services such as retail pharmacy.

As new members of Premier, both HealthPartners and MercyRockford provide examples of the robust pipeline we continue to maintain in group purchasing as well as across our entire cloud based PremierConnect platform.

Moreover, we believe our integrated capability spanning group purchasing services, integrated supply chain analytics, and our PremierConnect performance improvement platform position Premier extremely well to capitalize on any marketplace disruptions. In the second quarter, 17 health systems contracted for our PremierConnect supply solutions.

PremierConnect supply chain is our cloud based procure-to-pay analytics suite that allows users to integrate, monitor, plan and manage supply chain and financial work streams. This enables smart enterprise wide procurement decisions across the entire healthcare provider system.

We also continue to see growing member participation in our integrated pharmacy programs in the second quarter. We believe this demonstrates that our provider centric pharmacy offerings have strong appeal as health systems turn to Premier for assistance in the delivery of integrated care for their complex and chronic patients.

We are now working with 39 systems that are taking advantage of our provider-centric integrated pharmacy capabilities. In conclusion, Premier’s relationships with member healthcare systems continue to grow in the second quarter.

We solidified our leadership position as an integrated technology and supply chain services platform through which our healthcare systems can continue to innovate new delivery models to reduce cost and improve quality and safety.

I am excited with our recent wins and the future potential our platform holds for both existing and emerging needs for our members and the healthcare community. With that I’d like to turn the call over to Craig McKasson, our Chief Financial Officer..

Thanks, Mike and good afternoon everyone. I’ll begin my comments with a brief overview of our second quarter and then I’ll discuss our raised financial outlook for fiscal 2016 in more detail. This afternoon we reported another strong fiscal second quarter with consolidated net revenues of $291.7 million representing 17% growth from a year ago.

Supply Chain Services net revenue increased 13% to $203.1 million and Performance Services net revenue increased 27% to $88.6 million. The 13% growth in Supply Chain Services surpassed our expectations, driven by our core GPO business where net administrative fees revenue increased 7%.

The year-over-year growth in net administrative fees revenue exceeded our expectations, largely driven by contract penetration in both acute and alternate site members. In addition the ongoing impact of the recruitment and conversion of members, continued to positively impact our growth.

We continue to experience the benefit from positive overall utilization trends as well, although at a more normalized level. Product revenues increased 22% in the quarter. Growth in direct sourcing was primarily as a result of the ongoing expansion of member demand in our glove and apparel product lines.

Specialty Pharmacy growth was driven by continued member support, including the ramp up of newer members that have joined our Specialty Pharmacy program.

In Performance Services, the 27% revenue increase resulted from continued growth of our PremierConnect SaaS-based subscriptions and renewals with all of our PremierConnect domains achieving year-over-year increases.

Our advisory services business also turned in a very strong performance during the quarter, primarily driven by population health and research engagements. From a population health perspective, we are seeing demand in critical areas like clinically integrated network development.

We continue to enhance our research offerings and are developing long-terms strategic partnerships with Big Pharma for large research opportunities.

Helping to fuel our second quarter growth were the contributions from our recent acquisitions of CECity and Healthcare Insights, which remain on track to deliver the combined revenue of $30 million to $35 million that we included in our fiscal 2016 guidance.

Excluding these inorganic contributions, we generated double-digit growth in Performance Services for the quarter. Consolidated adjusted EBITDA of $116.1 million for the second quarter represents a 17% increase from a year ago with Supply Chain Services increasing 11% and Performance Services up 49%.

The increase in Supply Chain Services adjusted EBITDA exceeded expectations and primarily reflects the growth in net administrative fees as well as effective management of operating expenses.

The 49% growth in Performance Services adjusted EBITDA also exceeded our expectation and primarily resulted from leverage we achieved in the quarter given strong advisory services performance, contributions from our recent acquisitions and the effective management of operating expenses.

Because the chassis is built for many of our businesses we do have an ability to generate leverage from additional revenue with lower incremental costs.

Looking at the bottom line, non-GAAP adjusted fully distributed net income increased 18% to $61.7 million for the quarter, compared with $52.1 million last year, and non-GAAP adjusted earnings per fully diluted share increased to $0.42 per share from $0.36 per share last year.

As a reminder we do guide to adjusted fully distributed earnings per share given our corporate structure and quarterly member owner share exchange process.

This non-GAAP measure calculates income taxes at 40% on pre-tax income as though the entire company is a taxable C corporation and includes all of the company's Class A and Class B common shares in the share count determination.

From a liquidity and balance sheet perspective, cash flow from operations for the second quarter was $116.1 million, compared with $107.8 million last year. Free cash flow for the second quarter was $71.3 million compared with $67.1 million last year and represents 61% of adjusted EBITDA.

We do continue to expect that full year free cash flow will represent between 40% and 50% of adjusted EBITDA. At December 31, 2015, our cash, cash equivalents and short and long-term marketable securities totaled approximately $251.6 million compared with $469.5 million at December 31, 2014.

And we had an outstanding balance of $100 million on our five year $750 million revolving credit facility. We did utilize approximately $315 million in cash during the first quarter along with a $150 million of our credit facility for the purchases of CECity and Healthcare Insights.

We paid down $50 million of that credit facility balance during the second quarter ended December 31, 2015. Now, let's turn in more details about the guidance.

We are raising our fiscal full year consolidated guidance ranges for Supply Chain Services and net revenue by $10 million, adjusted EBITDA by $5 million and adjusted fully distributed earnings per share by $0.03.

This is based on stronger than anticipated year-to-date revenue performance in our Supply Chain Services business and stronger than expected adjusted EBITDA performance in both Supply Chain Services and Performance Services, and is reinforced by our high visibility into overall estimated revenue available under contract.

Our guidance also depends on certain key assumptions in each segment and targets double digit percent gains in organic consolidated net revenue and adjusted EBITDA, revenue from phase two of the partnership for patients' initiative, a one year contract award from the government that began in October, and meaningful contributions from our recent CECity and Healthcare Insights acquisitions.

Additional assumptions underlying our guidance are included in our earnings release issued earlier today.

I would like to note as previously discussed, that we do expect to experience seasonality with CECity’s financial performance, as a result of the annual deadlines for the physician quality reporting system process in the January to March quarter of each year.

As a result, we do expect that business to generate higher revenues in the third quarter of our fiscal year. Our fiscal 2016 full year guidance now reflects year-over-year consolidated net revenue growth of 15% to 18%, comprised of 9% to 12% revenue growth in Supply Chain Services and 31% to 35% growth in Performance Services.

We expect non-GAAP adjusted EBITDA to increase 9% to 14% and non-GAAP adjusted fully distributed earnings per share to increase 10% to 15% from the prior year’s level. Finally, let me provide a quick update on our most recent quarterly exchange, which took place on February 2nd. Approximately 1.6 million shares were exchanged into Class A shares.

As a result, members have now cumulatively exchanged 12.8 million shares out of a potential amount of approximately 32 million Class B shares that are current eligible for exchange following our IPO. We now have 45.2 million public shares and we continue to add additional liquidity inflow over time. Our next quarterly exchange will occur on May 2nd.

With that, let me turn the call back over to Susan..

Thanks, Mike and Craig. So in addition to our financial review and outlook, we’ve shared a number of business wins and developments with you today. And we think this is important for three primary reasons.

First, we believe that it tangibly demonstrates the trusted partnership we have built with our members and shows the many areas that they’re turning to us for solutions. Second, we think these examples provide you, our investors, with a more granular view of the multiple sources of revenue that are driving our business.

And finally, these examples represents a steady flow of business that is the foundation on which we build our guidance expectations. So with that operator, we’re ready to open the line for questions..

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is from Lisa Gill..

Good afternoon, Susan. Thank you so much for all the detail and congratulations on a great quarter as well as the business wins. I just want to make sure that I understand something correctly around the Performance Services. As we think about this quarter and then we think about the guidance you have for the back half of the year.

Is it really primarily just this January to March time frame of what you’re going to see in CECity or is there something else that’s really back half driven as we think about that part of the business?.

So I would say that we think Performance Services is on track doing all the things organically that we expected it to do. The variation we expect really is driven by this reporting cycle in the third quarter..

And this is Craig. The only other thing I would add Lisa which I know you’re aware of is we do have the benefit for the full back half of the year from the partnership for patients contract, which didn’t start until October, so that’s a little more back weighted to the back end of the fiscal year..

And can you just help me to understand like what are some of the key drivers for the margin, I mean the margin was great in the quarter. Obviously the guidance you’re giving is we expect to see strong margin in this business.

So is it just that you’re starting to get the leverage? Is it the acquisitions that you made, I know some of them are higher margin? But how do we think about that margin profile as we move forward?.

It's a great question Lisa. This is Craig. So, as we indicated we had a strong quarter. Adjusted EBITDA for Performance Services at $34.5 million which was again 49% year-over-year growth but also generated an EBITDA margin in the quarter of approximately 40%.

What we traditionally talked about expecting in that side of our business is EBITDA margins to be in the mid-30 but it can vary occasionally from quarter-to-quarter as a result of some of the variability particularly in our advisory services business.

So, as we can have certain revenue recognition come from some of those consulting arrangements, it can cause a little bit of peaks and valleys in terms of the EBITDA margin you might see in an individual quarter. But for the full year we still expect that adjusted margin from that business to be in the mid 30s..

Thank you. Our next question is coming from Jamie Stockton..

I guess maybe first and I can’t remember if it were Susan or Mike that mentioned that. But you said that you had 750 hospitals that were using Premier for some combination of population health services and technology.

Could you just at a high level talk about what they’re using today and maybe what you would like to see them incrementally adopt in the future? Where are we today with these facilities? What are the really needy things incrementally that you feel like you can go knock out? If you can touch on that, that’d be great..

So first thing I’d say is they’re using a lot of advisory services. So they’re building clinically integrated networks and all the things that go with actually being able to build an ACO or build the infrastructure to take on bundled payments.

And that then connects them to PremierConnect and our domains where we help them with the analytics and the technology for not only the regulatory reporting for ACOs and those kinds of entities. But also the financial analytics and the technology that go with figuring out how you transition in bundled payment from fee for service to pay for value.

So we have bundled payment analytics and technology. We have risk stratification. We have advisory services. We have our PremierConnect technology platform that helps them do all the reporting they need to do.

And we also have the collaborative where we’re bringing 100s of them together and they’re sharing their models, they’re sharing their contract templates and they’re doing all that stuff through us..

Should we think about the opportunity with those facilities as being largely addressed at this point and it's really about taking your offering into the rest of your client footprint?.

No, I actually think it's both.

So, within the 750, it's taking them from step one, which is an assessment of where they are to step two, which is build the clinically integrated network, to step three, being an ACO, to step four, or three or four, to be in a bundled payment and to have all the capabilities that go with that to then step five and six, and seven, which is around how do you manage the care of the patients.

I’d say we’re in early innings even with the 750, and we’re continuing to sell it across the rest of the footprint..

That’s great, and maybe just one more. You have this large combination going on with MedAssets and Novation.

Can you just talk about whether you’re seeing anything in the marketplace as a result of that? Is there, are there going to be situations where those two organizations or maybe primary and secondary GPO with some health systems and there is going to be opportunities to get in incrementally if as a result of health systems not wanting to be too completely aligned.

If you could just touch on that, that’d be great..

So we are seeing opportunities and in fact the two that we talked about on the call the two new supply chain relationships are both coming from entities that are part of that consolidation.

So, we think that with the strength of our balance sheet and the ability to be nimble with the integration that we’ve already done for years where our supply chain and our clinical businesses are already integrated on a platform.

And we think the end to end capabilities we have, both on the supply chain and the quality and regulatory and improvement side. We have a scale and we’re seeing opportunities where folks want that integrated set of solutions and think there might be quite a bit of disruption in the marketplace..

Thank you. The floor remains open for questions at this time. [Operator Instructions]. Our next question is coming from Jeff Garrow..

Congratulations on another nice quarter and thanks for taking the questions. I want to ask that the release mentioned that your guidance reflects outperformance in the first half of the fiscal year.

But maybe you could discuss how the drivers of that first half outperformance might provide very high visibility for the second half of the fiscal year?.

This is Craig. So Jeff, we always provide at the beginning of our fiscal year kind of our estimated revenue available under contract and understanding how we’re performing. And so that continues to improve throughout the year, which is what gives us confidence in the back half results that we anticipate to achieve.

What I would say relative to CECity’s contribution that obviously we’ve talked about the PQRS reporting period and what we anticipate in the third quarter as a result of that.

The pre-signs ups that we’ve seen so that PQRS business have gone very well, very much in line with our expectations and the guidance that we set forth for that business to deliver this year.

And then we’re continuing to experience the high retention renewal rates that we always expect and anticipate which gives us a lot of confidence in the back half of the year and our ability to achieve the guidance ranges that we’ve updated today..

And then as a follow-up to that. I would say in the quarter the net administrative fees -- the year-over-year growth declined as you forecasted. But it declined at a more moderated pace than we had expected.

So should we expect a continued moderated glide path through the rest of the fiscal year or would you anticipate a more dramatic fall off?.

It's a good question, Jeff. So as we’ve talked about before when we established our guidance for the year, we anticipated mid single-digit growth this year. We did fully expect given year-over-year comps that the first quarter would be the most dramatic or significant growth level, which it was.

We expected that to normalize in the second quarter and then I think you will continue to see that in the third and fourth quarter more so as a result of year-over-year comp comparisons.

But we still fully expect to see mid single digit growth in the back half of the year with the current utilization patterns and trends that we’re experiencing across the acute and ambulatory footprint..

Thank you. Our next question is coming from Richard Close..

Thanks for the question. You’ve really called out strength in advisory services here numerous times and opportunities with population health going forward.

Can you talk a little bit about maybe the one-time nature with respect to those advisory services and just the composition of revenue in performance recurring versus non-recurring and how you expect that to trend over time?.

So why don’t I start and then you can talk about the financial recurring, non-recurring. So we view this population health as one of many doors in.

So if they join the collaborative, there is a collaborative fee for that Richard, that continues multi-year and then out of that comes relationships for specific things that they need to build on that journey to build the infrastructure for population health.

So for us it's not -- it may be individual engagement but they get built upon one at a time and they become more and more integrated. They also pull through technology and pull through analytics and sometimes pull through opportunities over on the supply chain side as well.

So although it's individual engagements, they are part of this larger sort of multi-faceted advisory and technology capability, we meet them where they are and then we take them to the next level and so it's a continuing set of relationship..

And this Craig, I think as we have talked about in the past, our Performance Services segment is typically comprised of about 60% of the business being technology and 40% being advisory services. We are continuing to see that ratio in terms of the performance of the business.

Obviously the technology side from a recurring perspective is much higher given the SaaS subscriptions and the longer term nature of those. In advisory services I would point out that a subset of that business is the collaboratives we talk about, which is more subscription based recurring revenue.

And then the -- I’ll say advisory component that's more complicated in nature maybe be episodic although as Susan discussed it does highlight and create new opportunities for extensions and expansions to those programs. But it's not pure recurring like you would expect in a technology SaaS-based offering..

Okay. Thank you. And as a follow-up with respect to CECity, you talked about I don’t know it was Mike or yourself Craig talking about it was the largest bookings quarter they have had in their history.

Is there any order of magnitude you can give us in terms of either the year-over-year growth or overall size of the bookings in the quarter?.

Yes, this is Craig. We are not disclosing specific numbers. I can tell you it was a significant increase over what they have booked in the past and the bookings are in line with the trajectory of revenue guidance that we have provided..

Thank you. Our next question is from Sean Dodge..

So on PremierConnect Supply Chain seems like it has been very helpful in winning some engagements recently including the queue that Mike had highlighted in his prepared remarks. How should we think about the monetary benefits that accrued at Premier, over time for deals like these. It seems they expand multiple revenue buckets.

So there's certainly a software subscription component.

But is there also a pretty significant advisory project there too to get them implemented and then I would suspect that the real benefit of these over the long run is the significant levels of GPO contract penetration that they could potentially drive?.

So this is Mike, I’ll take the first part and then Susan and Craig can certainly add on. As you think about these conversions they offer a number of obviously accretive revenue streams.

First is, during the conversion there is often signing advisory services to help organizations try to deliver those cost and quality imperatives that they have set out as part of the relationships that they create with us, so that’s number one.

Number two, there is that technology element that we have with the PremierConnect Supply Chain and that starts with analytics around how they most appropriately use our portfolio, all the way to analytics around benchmarking pricing and then the whole focus around technology enablement of their process or the workflow and managing their supply chain.

And then finally over time, obviously we are looking at opportunities to bring down costs by driving higher levels of penetration into our contracts and so you will see utilization obviously going up of our contracts, which will net out for better pricing for them and then higher net admin fees for us..

And then on the admin fee growth, Craig mentioned the conversion of new members as a driver. This is the driver we’ve been mentioning going back multiple quarters now.

How big of a contributor was this to growth in this quarter? And how long is the tail here, or how long can the conversion of new members continue to be a pretty significant driver of growth?.

So this Craig. Our expectation is that we continue to add new members, regularly on a quarter-over-quarter basis. So we would expect there always to be a tail, if you will, of growth coming from the addition of new members.

But the majority of our growth is definitely coming from contract penetration of our existing members, growth in both acute and ambulatory settings, is driving a lot of our growth augmented by the recruiting and conversion of new members that we have coming on to the portfolio..

Thank you. Our next question is from Michael Cherny..

Good evening guys, and thanks for all the color so far. So I think it was Jamie that asked the question about the competitive dynamics in the market, given the pending merger of [indiscernible]. I may be want to take that question in a different way.

If you can go back some time a little bit, the last time we really had any type of meaningful consolidation market I believe was the MedAssets-Broadlane deal. If you think back then and obviously you guys were private at that point.

Can you talk about just some of the challenges, other players, customers that your competitors have in the market at that point? And maybe just give us a little bit of anecdote for what we can expect that the potential for you guys to potentially use this disrupter, use the merger to perhaps gain share?.

So that was quite a number of years ago, and the way we saw it play out. One, it heavily leveraged MedAssets and we think made is more difficult to acquire and build future state capabilities. Secondly, it disrupted the market where people with a merger of two very different cultures said well we ought to just go look and see what’s out there.

And so, our portfolio in this end to end supply chain capability that we have, stood out pretty differently.

And so I think if we look at our market share and the market share sort of taking position that we’ve had over the last eight years I guess it's been since the Broadlane deal, we think this is sort of a similar but larger scale disruption in terms of trying to bring four cultures together because you’ve got the UHC the VHA, the Novation and now the MedAssets technology portfolios, culture.

And so we think it's an opportunity to take an integrated already built platform of capabilities to the market to people who are interested in looking..

Thanks Susan I just love playing the look-alike game as much as I can. And then Craig one question for you, given the growth in Performance Services and given the inorganic investments, I would expect at some point that you might see a step up in the R&D spend for the organization.

As you think about that teeny-tiny line item right now, is there any time in the future where you can vision it being an important component of spend, or is this the type of area where you can essentially just maintain along with what you have and you don’t have to reinvest back in the platforms?.

It's a good question Mike. Couple of comments with respect to R&D. Number one, I would highlight that we do obviously have a lot of capitalized software that is R&D that’s just from an accounting perspective capitalized. And so you really -- the way we look at I would call it gross R&D is expense plus the capitalized component that you see.

The second point I would make is that we do [narrowly] define our research and development expense bucket to include expenses that are directly tied to just development. I think if you look at other organizations in the marketplace they may capture things like data management and other components.

We do not currently put those into our R&D expense line. And so we kind of got to look at the definitions as you compare what others are doing.

Broadly to answer your question, we are always going to continue to innovate and look for new ways to enhance and augment our capability sets to deliver the most value as possible to our members, but trying to do that as effectively and efficiently as we can from an expense stand point..

Thank you. Our next question is coming from Elizabeth Blake..

Good evening and thanks for taking my questions tonight. Craig you were calling out higher contract compliance driving the GPO performance this quarter.

How long can that continue to increase on the acute care side?.

So we still think there is a lot of opportunity to continue to drive additional contract compliance, particularly with respect to some of the, what we would call non-traditional categories that are more emerging, so if you think about facilities, IT, purchase services, areas of that arena.

But we also do also continue to see opportunity in the more classical med search categories to drive additional penetration.

And a lot of that can come from the application of the PremierConnect Supply Chain analytics that Mike just discussed a couple of minutes ago in terms of an ability to pull through penetration as we enhance their ability to understand the opportunities where they may not be taking advantage of our contracts..

Okay, great, that's helpful.

And then you all called out the [formal] relationships on the research side, could you may be remind us and may be just an illustrative example would be helpful, how does a relationship [indiscernible] then play?.

So for the most -- this is Mike. So for the most part we set up relationships with pharma on a fee-for-service basis, leveraging our data tools and wrap around capabilities to help them, however they see fit in the area of real world research..

I think, we talked a while back about repositioning research to have larger scale, multiyear kinds of relationships and we've been building those and I think from a financial perspective our goal is to design real world research projects that are unique and differentiated and longer term and larger size..

Okay, that's helpful. Thanks and congrats on the quarter..

Thank you. Our next question has come from Mohan Naidu..

Hi, Susan, how are you?.

Great, how are you?.

Pretty good, thank you very much for taking my questions. Maybe you or Mike on CECity, you guys talked about a record quarter.

So that seems to be a very fast turnaround, I guess, your fast cross selling to your Bs or is it the demand that was a bit or existing that came through and the nice timing in the quarter, how should we think about that?.

So, we think it's so [cool] because, first we took it to our channel and it's individual physicians on our health systems and if you think about it, Mohan, only about 30% of physicians are filing regulatorily yet. The penalties are going to get bigger over time.

So we think that percentage is going to increase in direct physicians and in health systems where we can combine all their quality reporting now and regulatory reporting on the hospitals and physicians.

But it brought to us three or four other channels; one is the channel with Big Pharma and suppliers, the other is the channel with EHR vendors that we've formed some relationships with and the channel of government contracts as well.

So, it's not only the Premier channel of member health systems but it's these additional channels that are ramping up very fast..

Okay, that was very helpful. May be one follow-up for Craig. Craig, I think you tried address this or Lisa's question I think on the EBITDA margin.

And looking at specifically on your Performance segment the big ramp up on EBITDA margins, can you help us understand the magnitude that came in from maybe the growth in advisory services versus the lift that you got from maybe the acquisitions contribution in the quarter?.

Yes, Mohan. So, we don't separately disclose all the individual elements. I do think you will see drivers in our 10-Q that will be filed tomorrow, but what I'd say is that, we had consistent performance from our IPS business, our technology business continuing to deliver good consistent performance.

We did have solid experience from the acquisitions delivering on the path that we would expect for the guidance ranges against that we put out of $30 million to $35 million in revenue from CECity and Healthcare Insights for this fiscal year and adjusted EBITDA contributions of $7 million to $9 million for the fiscal year from those two acquisitions.

And then we did have, I'll say stronger than average quarter from advisory services in the second quarter..

Okay, great, thanks a lot for taking my questions..

Thank you. Our next question is from Garen Sarafian..

I guess at this point, sort of a big picture question given the market volatility.

With China slowing down and other parts of the world even less certain in the U.S., commodity prices not going up certainly, how is that changing your sourcing strategy and how much of a good guide has it been since your last earnings call? I'm just trying to get a better understanding of how much of a factor there can be in and what the lag time would be to see the positives of the negative?.

So, this is Mike and then Durral you can add in.

So obviously when you look at what's happening in the petroleum market and if you see the substantial reduction on the rates of the barrel of oil, it gives us the opportunity to spend time with those suppliers or rather have a large raw goods cost of petroleum in their products and we have the ability to go back and obviously find opportunities to bring cost down.

So we're pretty much all over that. As it relates to China, it's pretty much no different than what we've been doing in terms of constantly looking -- this is obviously in our direct sourcing model, constantly looking for the best manufacturers who deliver us the highest quality products at the lowest cost.

And these provide us opportunities for us to go back to the market to look for those additional manufacturers..

I would say just Mike to add on to that. In that production area, we’re looking at all countries in that Asian market, because as oil prices, as labor prices, as commodity input prices change, obviously hedging.

So I don’t think we’re over-concentrated in China versus anywhere else that it really gives us more leverage as Mike you outlined to move production in product manufacturing where we need it. I would say to the degree that commodity prices on the whole change.

We do and instances will tag our pricing to actually indexes as well, so that as those indexes change, we are allowed to take updated prices on those products..

So the rule of thumb so for example every $5 change in available oil it impacts earnings then as many times? Is it guidance....

We don’t have a specific correlation at that level..

And I guess maybe just keeping with that theme, just as a follow-up, how is the market volatility impacting, how you view M&A? I know that you guys have very strict guidelines as to the return it has to achieve. But with the volatility I could see it both as a positive or a negative.

So just wondering how you’re viewing it?.

The good news I think for us is that we have all kinds of financial flexibility with our balance sheet and with our platform and with the depth and breadth of our offerings today. And so for us we continue to have the same corporate development focus. We continue to have a big pipeline.

We’re hoping that the volatility will bring the prices down in some cases to more reasonable levels. And so we continue to be as active as we’ve always been..

Thank you. Our next question is coming from Eric Coldwell..

Good afternoon. Thanks very much guys. Just a couple of quick ones. First one on CECity the incremental March revenue seasonality associated with PQRS.

Should we be thinking more about the incremental margin drop draw on that revenue? Is it a net positive because of the higher revenue stream or are there additional work loading case load activities that would subsequently raise OpEx, let’s say so we shouldn’t get really aggressive on the margin profile of that stream?.

This is Craig. It's a good question, Eric. It's really a balance. Obviously to the extent that as the e-commerce channel is utilized that actually you would see the pull through to margin, because it's a very low touch approach in terms of how that revenue comes through the model.

But to the extent that we’re actually doing larger scale engagements with our healthcare providers across their system there is obviously a little bit more touch. So, I would expect incremental contributions but not wide dramatic swings that it's not all through that e-commerce channel..

And if I could shift gears to the two recent wins, HealthPartners and MercyRockford that you cited, you mentioned that those stemmed from some of the disruption in your competitor M&A. I want to step back a little bit.

And given the long selling cycles that we’ve historically seen in this channel, I am curious whether you can inform us on whether those were potential customers you’re talking to before the combination news hit the tape many months ago or were these conversations that came up afterward? And if afterward, was it a result from that news or was -- how would you weight the impact of the disruption in the channel as a deciding factor for those two account wins?.

So as you know those wins take some time to have health systems work through the analysis and the details. I will say the VHA-UHC combination was announced many months ago. And so there were some disruptions associated with that.

I think that as these were being evaluated, I think the discussion around our end to end supply chain capabilities and the differentiation of that along with the suspected or potential future disruption. We’ve been competing with both of them individually for a long time. And so now it's just the added disruption of the two of them coming together.

I think the true differentiation is what is driving these wins because we can bring analytics, GPO, physician preference, direct sourcing, all our clinical and population health bundled payments, thus to the table and that’s a very different story..

I missed it just a quick technical item.

Did you mention your retention rates for Supply Chain Solutions and Performance Services on the call, if so I missed if you could reiterate that would be great?.

Eric, this Craig. We didn’t restate the retention rates, we just stated that we continue to experience the high retention rates. You have seen us previously talk about at our Investor Day last October. So, 97% kind of three year average for GPO retention and 94% SaaS institutional renewal rates and we continue to experience those..

Thank you. Our next question is from Nicholas Jansen..

A lots have been asked, but I want to dig a little bit deeper into the guidance. You beat consensus by $11 million or so of EBITDA in the first half of the year.

The guidance raise was only about $5 million and then you look at the level of range about $19 million for the full year which would mean $19 million for the back half and I think this time last year you only had $5 million to $10 million guidance range. So I am just trying to put all these pieces together.

It seems like you have very good underlying momentum but then you look at the guidance and then it appears a bit conservative. So just trying to get a better sense of some of the moving parts. I would assume that you can build off of the first half of the year but just wondered if there is any specifics there that would be helpful? Thanks..

Sure, Nic. This is Craig, a couple of comments and then Susan and Mike could add any color if they want to. So first of all I would highlight that we didn't narrow our guidance range last year until the third quarter.

So we would have had a broader range at this point in the year still as we are half way through the year but continuing to evaluate how the full year will play out. From the standpoint of the range and where we are at in performance, we did have a very strong first half.

We do continue to see utilization normalize in the GPO and so we are continuing to keep an eye on that and make sure we don’t get over our skews in terms of expectations of what utilization could do as you.

Again we see it all over the board and we analyzed our utilization but if you look at what some of the public hospitals are talking about in terms of their performance et cetera we are trying to just keep that in perspective.

And then I do think the year-over-year comps again as I have mentioned in terms of what we are kind of competing against in terms of growth year-over-year, given that we had started to get the benefit of the lot of the conversions we have talked about, of bringing new members into the fold a year ago, and the utilization trends we were seeing.

So we are confident in our ability to hit the revised guidance range that we have put out. We think that with the right type of industry drivers and continued execution by us, we certainly have an ability to achieve at the upper end of that. But it is the revised guidance range that we are putting out..

That’s very helpful Craig.

And then lastly on CECity it's seems like there is some new and expanding opportunities that you kind of delineate outside of PQRS and just wanted to get your views of, were they already doing some with this background work before you acquired it? Have you guys accelerated some of these opportunities? I just wanted to get a better sense of where we are on some of these newer initiatives? Thanks..

So we have been working with CECity, probably eight to 12 months before we actually did the acquisition. So we have been building synergies with them in the market over that period of time. I think it actually helped us in that we knew one another. So that when we did come together we really could figure out how to leverage one another's strings.

So when we were going to pharma, we had a very unique capability around our data and analytics. they had a very unique capability around their registries and putting that together provided us a very unique opportunity to go to pharma in a different way, a much stronger way than if we had independently gone..

And they did not do a lot in the IDN and the health systems space. They did a lot with physicians individually. They did some things with suppliers, some things with EHRs, but not big in the IDN space which we thought was a big, big channel for us to bring to them..

Great look forward to hear more about it..

Thank you. Our last question is coming from Gene Mannheimer..

Thanks for taking the question and congratulations. Two quick ones, you called out or rather you referenced three new EHR providers that you are partnering with.

Can you tell us who those are? And second question, the EBITDA margin in Supply Chain looks like is down about a 100 basis points year-on-year and was hoping you could sort of reconcile that for us? Thanks..

With respect to Supply Chain Services adjusted EBITDA margin, we do continue to have the normalization in that segment that you are going to see as we grow our product businesses at a faster pace. So it's really business mix shift.

If you actually look at the individual components of our products versus our GPO activity both of those maintained and actually exceeded the margin in the second quarter and on year-over-year basis. So as we have talked about in the past that’s really business mix as we grow lower margin product businesses where we are taking title to product.

And so as a result, the resulting EBITDA margin is going to be lower on that at a faster pace than the more mature and larger GPO business that operates at a very high EBITDA margin..

And on the question of CECity and the EHR vendors, we can say athena and three additional EHR vendors..

Okay thank you..

Thank you, I would like to turn it back to the management for any closing and final remarks..

So thank you all for spending time with us this evening. We are more than half way through fiscal 2016 and we look forward to the rest of the year with confidence in our business model and the integration of our acquisitions and in the relationships that we continue to build with our healthcare providers.

We are looking forward to talking with you again in May when we will report fiscal third quarter results and I am sure we will see and talk with many of you before then. Thanks so much. Operator you may now close the call..

Thank you. This does conclude today's conference. You may now disconnect and have a wonderful evening..