Joseph Flanagan - President and CEO Chris Ricaurte - EVP, CFO and Treasurer Gary Long - Chief Commercial Officer Atif Rahim - Head of IR.

Charles Rhyee - Cowen Matthew Gillmor - Baird.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the R1 RCM Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will conduct a question-and-answer later and the instructions will be given at that time.

Now I would now like to turn the call to Atif Rahim, Head of Investor Relations. Please go ahead..

Thank you, operator. Good afternoon, everyone, and welcome to the call. We’ll start today with prepared remarks by Joe Flanagan, R1’s President and CEO; and Chris Ricaurte, CFO and Treasurer. We’ll then turn it over to Q&A.

Today’s conference call is being recorded and as a reminder, certain statements made during this conference call maybe considered forward-looking statements pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

In particular, any statements about our future growth, plans and performance including statements about our forecast for 2017 are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, may, plan, project, would and similar expressions or variations.

The forward-looking statements made on today’s call are based on R1’s current expectations and projections about future events as of today only and should not be relied upon as representing the company’s views as of any subsequent date.

Subsequent events and developments, including actual results or changes in our assumptions, may cause our views to change. 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.

Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today’s call involve risks and uncertainties.

Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including but not limited to, the factors discussed under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016. Now, I’d like to turn the call over to Joe..

Thank you, Atif. Good afternoon, everyone, and welcome to the call. Our third quarter results reflect our continued momentum from the prior few quarters. We're pleased to report our fifth consecutive quarter of revenue growth and more importantly a turn to positive adjusted EBITDA and free cash flow.

Chris will cover the financials in detail, but I'd like to make a few high-level comments. Revenue of $123.2 million grew by $23.8 million sequentially driven by the onboarding of Phase 2 Additional Book Ministries or ABMs.

Adjusted EBITDA of $3.1 million was up $6.4 million sequentially driven largely by margin contribution from Phase 1 ABMs which we started onboarding in the summer of 2016. Our core RCM business and our PAS offering are both executing well.

Given our year-to-date performance we are on track to deliver 2017 revenue in line with our $425 million to $450 million guidance range and adjusted EBITDA at the high-end of our 0 to $5 million guidance range. As always, I'd like to thank all our employees for their continued hard work this quarter.

Our progress would not have been possible without the commitment and devotion of our team members, many of whom new to R1. More than 5000 employees have joined R1 since mid-2016 and we are preparing to welcome another 700 in the coming weeks as we onboard the next phase of the Ascension business in Wisconsin.

We have onboarded 54 new hospitals across the Phase 1 and Phase 2 ABMs. These hospitals represent $6.4 billion in net patient revenue or NPR. The successful onboarding of this business is also a function of the investments we made in our deployment capability and corporate scaling.

As we look to expand our business we are well positioned to deliver a differentiated scalable solution of the market designed to provide superior performance at a lower cost. A key component of our differentiated solution and scaling successes is our continued investment in technology.

We have a strong view that a technology enabled services model is ideal for managing the ever increasing complexity of the revenue cycle. We believe the comprehensive nature of our tech enabled services offering delivers better outcomes than standalone software or fragmented services.

We have the broadest technology coverage among and RCM vendors and we continue to investment in strengthening our capabilities to further enhance our value proposition. I would like to take a few moments to discuss some of the technology initiatives we have underway.

On the third quarter call last year we discussed the overhaul of our billing and followup tool called R1 Decision. The improvements we made automated a number of manual tasks and at the same time accelerated resolution rates on accounts billed.

R1 Decision has now broadly deployed across our customer base and is driving significant improvement in one of our key performance metric categories namely AR management both in terms of days and agents.

The next iteration of our automation effort is centered around R1 automate a robotic process automation capability that can automate as much as 70% of the work across a number of high-volume back-office tasks. We are in the early stages of this effort will update you on our progress in the future.

On the second quarter call we discussed an initiative we have underway to transform the patient experience within the revenue cycle. This is important to us because over the course of a typical inpatient visit, patients will touch the revenue cycle 5 to 10 times. These touch points were often the source of confusion and dissatisfaction.

Our goal is to reduce this dissatisfaction and create a highly differentiated experience for patients. Earlier this month we announced a partnership with Phreesia. This picture combines our patient registration rules item with Phreesia's capability to digitally interface with patients.

As consumerism gains momentum in healthcare, we believe the R1-Phreesia integrated patient service platform will become a strategic competitive advantage for us and for our customers.

In addition to the strategic [indiscernible] this relationship also allows us to improve productivity and lower operating expenses at the front end of the revenue cycle process.

We expect this new initiative to help us automate up to 40% of the frontend work related to patient registration over time and we've constructed our strategic partnership in a way that aligns incentives and shares in the value created. The Phreesia-R1 integration is one of a number of big strides we're making in patient engagement.

We're also working to streamline the scheduling and order intake process where we believe we can solve pain points in physicians and patients experiences accessing care. We have pilots underway in this area and plan to share the results on future calls.

In 2018 we plan to broadly commercialize the R1 patient experience platform which incorporates all of these capabilities. One of the other technology initiatives we have underway is to enhance our physician-RCM capabilities and build a fully integrated physician acute platform.

We redesigned some of our patient rules which were designed for the inpatient environment to be lighter, more nimble and easier to use for high throughput physician practices. We've re-architected in our AR management tools to optimize physician receivables management.

We see a meaningful opportunity to deliver performance improvement in the physician environment similar to what we see on the acute side. This rollout coincides with the onboarding of the physician business in Wisconsin where we expect to drive meaningful improvement in operating performance.

To summarized, technology is a critical element of our offering and we continue to look for opportunities to drive enhancements to our customer experience as well as productivity through investments in technology. We will update you on these and other technology initiatives on further calls.

Turning now to our growth initiatives, on the last call we announced the appointment of Gary Long as our Chief Commercial Officer. Gary has now been on the ground for about three months and is making progress ramping up our sales and marketing efforts. He is here with us today and will be available to answer questions during Q&A.

I want to highlight some of the actions underway to enhance our commercial efforts. Recall on the last call we indicated our intent to be more externally focused given our progress with Ascension. Our first task therefore has been to mobilize our leaders and managers to focus on growth and support the sales organization.

This is a cultural mindset change that Gary has been driving throughout the company given his past experiences in developing commercial organizations on a large-scale basis. Second, we watched a comprehensive assessment of the current state sales and marketing organization to build upon our strengths and make investments where needed.

Based on this assessment we now have a clear roadmap to add capacity and enhance capabilities where required. Finally, we are installing a robust measurement and accountability system to ensure increased activity translates in the ultimate objective expanding our customer base.

There are a couple of relevant proof points on our progress that are worth sharing. On the talent front we have filled key positions in the sales, marketing and product management organizations. This organization is critical in our lead generation and close process for both end-to-end and modular deals.

Second, our activity level in engaging with prospects is up significantly. Since Gary joined us we have had a number of initial discussions with health system leaders and have received strong feedback on our value proposition which has further strengthened our conviction on our growth potential.

In addition to the focus on sales and marketing efforts we also continue to see interest in our newly expanded product portfolio. As a reminder, we have historically not proactively marketed our core RCM modular capabilities outside of our PAS offering and we recently launched five additional modules across the revenue cycle in July of this year.

We recently announced that Intermountain Healthcare selected our Revenue Capture Modular. Intermountain is a longtime customer and saw the value in our recently introduced offering to compliantly capture revenue within its new implemented patient accounting system.

We are excited with this recent win and others earlier in Q3 and think there is substantial room for us to grow in the modular market. I am pleased thus far with the shift toward a more externally oriented footing for overall business.

Early pipeline indicators would support this assessment as the number of qualified pipeline opportunities have grown 75% since the beginning of Q3. We continue to be encouraged by the quantity and quality of conversations we are having on both end-to-end and modular opportunities and expect this to translate into new wins in the coming year.

Lastly, I'd like to update you on the status of our deployment at Ascension. With the Wisconsin business scheduled to begin onboarding in the coming weeks we will be more than 85% along the onboarding curve leaving less than 1 billion in NPR to be onboarded in mid-2018.

Our performance at Phase 1 hospitals where deployment was completed in May is slightly ahead of our internal expectations. These ABMs are driving positive EBITDA contribution and we expect to drive steady improvement in margins going forward.

We continue to make progress on third-party vendor standardization and have rationalized 84% of targeted vendor spend for Phase 1 up from 77% last quarter, For Phase 2 we started the onboarding process in June we've completed all employee transitions and are on track to complete our deployment activities in early 2018.

As part of the Phase 2 onboarding, we transitioned a shared service center in Indianapolis previously run by Ascension over to us. This turnkey transition adds 350 seats to our shared services capacity and onboard's talent into shared services setting to perform billing, followup and other functions.

We've also started to make progress with respect to vendor rationalization. With the learning from Phase 1 we've accelerated the vendor transition timeframe by about 30 days for Phase 2. To date 10 percent of vendor rationalization is complete for Phase 2. Wisconsin is the next phase of Ascension we are preparing to onboard.

As a reminder, Wisconsin comprises of $2.2 billion in NPR 1.7 billion of acute NPR and $500 million of physician NPR. This is in addition to $400 million of acute NPR we have historically served in this market. The integration and deployment work we are doing is in a complex environment with 20 acute locations and over 110 physician clinics.

There are also a variety of EMR and practice management systems in place including Cerner, Epic, athenahealth, Envision, Meditech and Centricity. This will enable us to showcase one of our key technology strengths which is the ability to integrate across multiple host systems.

Our technology is EMR agnostic and the complexity in Wisconsin is precisely the type of environment where we can generate demonstrable value for our customers. The work are doing in Wisconsin is a clear demonstration of our integrated physician acute capabilities.

Some of the benefits we expect to generate through our approach our improved patient scheduling across the health system, lower leakage of value based risk revenue and lower administrative burden on physician practices. The dynamics in Wisconsin are not too dissimilar from what we see in many other parts of the country.

Multiple IT systems and point solution vendors at the same health system with the provider on the hook to integrate the various systems and service providers. This results in sub optimal outcomes at many levels.

Our service offering addresses these challenges by establishing a strong operating partnership, optimizing technology and bringing commercial infrastructure with scale advantages to the table. Our ability to contract on a flexible basis with fees tried to our customers' performance is a strong value proposition.

We see a meaningful opportunity to expand our physician footprint with our integrated offering and in turn benefit health systems and their key stakeholders. In closing, I'm pleased with the progress made this quarter. I continue to remain very optimistic about the future.

Our competitive position is strong and we continue to make improvements to our offering to enhance our value proposition and positioning in the market. We have an exceptionally talented and devoted team in place to continue to build on the momentum from recent quarters and to drive the company's growth.

I look forward to updating you on our progress in the future. With that, I'll turn the call over to Chris to discuss our financial results.

Chris?.

2017 GAAP, 2016 gross cash generated from customer contracting activities and 2017 adjusted EBITDA to 2016 net cash generated from customer contracting activities. Our adjusted EBITDA measure is now also comparable to other companies in our peer group.

The only adjustment to EBITDA to arrive at adjusted EBITDA are the addition of stock-based compensation and other costs such as reorganization related and certain other costs. Additionally, the cost of services and SG&A numbers I'll reference on today's call are on a non-gap basis.

Table 8 in today's earnings press release provides a comparison of 2017 revenue and adjusted EBITDA to the prior year non-GAAP measures we reported.

Now turning to the Q3 results, we're pleased to have made the turn to positive free cash flow and adjusted EBITDA in the third quarter and look forward to generating another quarter of positive free cash flow and adjusted EBITDA in the fourth quarter. The improvement we generated on a sequential basis in 2017 is attributable to a couple of factors.

One, the Phase 1 ABMs we onboarded in mid-2016 are starting to drive positive contribution to our bottom line and two, our top line has grown thanks to the onboarding of Phase 2 in mid-2017 and Wisconsin in the current quarter.

Third quarter revenue of $123.2 million in the third quarter was up $23.8 million sequentially aided by the onboarding of Phase 2 ABMs as I just mentioned. Our PAS offering has also performed well with revenue of $8.3 million up $0.2 million sequentially during – by volsume growth and competitive wins.

We expect continued sequential growth in the fourth quarter as we ramp up Phase 2 and on board the Wisconsin business. Cost of services in Q3 were $106.6 million compared to $91.9 million in Q2. This increase is driven by $6.6 million compared to $91.9 million in Q2.

This increase is driven by costs related to employees we onboarded from Phase 2 Ascension ABMs during the quarter and cost associated with onboarding our new shared services center in Indianapolis.

We expect our gross profit to start to ramp up meaningfully over the course of 2018 as we implement our productivity playbook for the business we have onboarded. SG&A expenses in Q3 amounted to $13.4 million up $2.6 million sequentially due to the seasonality and expansion of our commercial efforts.

On a year-over-year basis SG&A expenses increased 0.8 million due to expansion of our commercial office. We expect SG&A expenses in the fourth quarter to revert to around the $12 million mark. Adjusted EBITDA was $3.1million for the quarter compared to negative $3.3 million in Q2.

The sequential improvement was driven by the EBITDA contribution from onboarded ABMs. In Q3 2016 net cash shown from customer contracting activities was $3.6 million driven by a catch-up contribution related to the renewal of our contract within a mile [ph].

We also incurred $1.4 million in acquisitions and related diligence costs which are excluded from adjusted EBITDA but included in the other expenses line on our GAAP income statement. On prior calls we discussed our strategic intent to expand our capabilities via acquisitive activities.

In the third quarter we began to conduct due diligence on acquisition related activities. This process is ongoing and while we cannot provide any additional details today we intend to update you in due course as appropriate. As previously mentioned, physician RCM is a strategically important area for us.

Our core target customers, which consist of complex multisystem healthcare providers have been acquiring physician groups and they face growing pressures to optimize the infrastructure to support those physicians.

Consequently, we are focused on acquiring and developing scale and capability on the physician side especially frontend practice operations. Turning to the balance sheet, cash at the end of September inclusive of restricted cash was $144 million up from $134 million at the end of last quarter.

This $10 million change was driven by the positive $3 million adjusted EBITDA on the quarter along with positive contribution from working capital improvements.

Turning to our outlook, we continue to expect revenue of between $425 million and 450 million for 2017 and adjusted EBITDA of approximately $5 million which is at the high end of our guidance range.

Given our year-to-date results this implies revenue of $115 million to $140 million and adjusted EBITDA of $6 million to $7 million in the fourth quarter. Lastly we also expect to be free cash flow positive in Q4. In closing, I'm very pleased with the execution that drove financial results for the third quarter.

As we look out to 2018, we expect to provide guidance for the year in early January. As we have stated in the past, we expect to exit 2017 at an annualized revenue run rate of approximately $650 million. Now, I'll turn the call over to the operator for Q&A.

Operator?.

Thank you. [Operator Instructions] And our first question is from the line of Charles Rhyee with Cowen. Your line is open..

Hey, thanks for taking the questions guys and then congrats on the quarter here. Just if you could expand sort of your comments around looking at M&A and I guess the question being I think earlier this year right you picked up some new incremental business from Ascension sort of on the physician's side of the market.

May be in [indiscernible] you could maybe help us understand sort of what areas are you looking out to add to sort of the platform?.

Yes, Charles this is Joe and I'll take the question. I think, and the way I'll answer it is really starting with some of the comments we provided on past calls and that view has not changed in terms of our strategic and times.

One of the things we continue to emphasize on and our confidence continues or conviction continues to grow is along the lines of the smart integration for our target customers between the acute setting and the ambulatory setting.

And so with that backdrop on the physician platform is very important for us and while we have managed and we have run sizable physician business over the years, we feel that's an area that it makes sense for us to look at strategically and if the opportunity presents itself to address that inorganically which is as you know very hard for us to predict, but from a strategic lines that's how we're looking at it and as we progress through the Wisconsin deployment and continue to refine our value prop and understand more and more where the costumers need us to go to support their strategic intensions our confidence is only growing along those lines.

Now there are other areas where we have strategic intent, that's much we think, that's much smarter for us to fill those needs via partnership. So the Phreesia partnership looking at the technology that digitally interfaces with the consumers that's a capability we think is very smart for us to have access to, but have access to it via a partnership.

And that's how you see - that was behind the logic on that announcement and a little bit of a compare and contrast in terms of how we look at those two capabilities as an example..

That's helpful.

I mean it is there a way you help us size may be or I guess some sort of a sizing of a deal, like how big and in round numbers would you say you're willing to go up to in terms of maybe leveraged that you’re willing to take on?.

Yes, I mean, I don't want to, I'm not ready to comment on it along those lines, but what I would say Charles a couple things. We've got very good visibility to our future earnings and that's nothing new, but I would just remind you along those lines, we put out guidance on 2020. And that your guidance only assumes what we have under contract.

It does not assume growth, which we fully intend to layer on over the coming quarters. As Chris commented to you we're going to be updating 2018, but it will be in line with that trajectory working to 2020. So we've got good visibility on our earnings based off our contracted business.

And as we think about what that means vis-à-vis our inorganic plans, the only thing I would say is we're not really looking for projects. As we look at the market and the opportunities there is some value that comes with some scale.

Now we don't know if there's a fit and all those things we have to work through, but that is how we think about it per se..

Okay, that's helpful.

And then maybe if we think about growth and obviously doing a good job you're bringing Ascension on it looks like we're basically ahead of schedule and when we think about the pipeline then, I think in the past when you announced [indiscernible] Brooke Ascension deal, you guys had made comments about increased participation particularly from the Ascension side to help drive some of that.

Can you give us an update on so where we're at with the pipeline particularly reaching out to potentially new customers and maybe give us a sense on the participation and the level of involvement from Ascension in that regards? Thanks..

Yes, I'm going to start kind of provide some initial thoughts and then I'm going to have Gary who's with us here provide some additional context more specific to the pipeline and how it's progressing, but one thing I would say Charles is, as we've progressed through the course in 2017 and demonstrated the ability to deploy at scale with Ascension and in fact add and pull in the deployment, the discussions we've been having with non- Ascension customers have been very much along the lines of seeing that evolution and the proof points that come with that progress.

Now as we shift those discussions I think very favorable as we look to 2018 is the fact that we have some embedded capacity that we can actually work with which is very important for customers that are thinking about their own deployment in the capacity allocation that needs to be dedicated to the complexity of those new deployments.

And I would say that's been favorably received and has been an increasing element of the discussion as we think about maybe more specific framing and analysis on potential pathways for some of those pipeline opportunities.

Specific to Ascension, they've been active with us when we've needed, but I think equally if not more important is just the proof points we're able to talk about vis-à-vis that which stand on the wrong [ph] in many ways.

And so I think the combination of that progress as well as the characterization by Ascension when needed and it’s and they've been very proactive and very willing to engage along those lines has helped a lot to progress some of the pipeline opportunities.

But let me have Gary comment a little bit more specifically on the nature of discussions inside the pipeline..

Yes, sure. It's a great question. A lot of the interest that we've been getting has been us seeking out prospective customers in the marketplace who are experiencing similar issues to the ones of our existing customers.

And as you described there's nothing better than proof that we are having demonstrably all performance improvement inside of our current customer base. So that word travels pretty fast in the marketplace. So we've had a good bit of conversation with prospective customers who are now evaluating their particular situation.

And we're continuing dialogue with them as we find potential fit, so quite a bit of activity going on and we're pretty pleased with the growth of our pipeline today..

May be you could may be just clarify a little bit just on to the last part, can you give us any sense on how much closer you feel to, so you are see closing some of these, than we did sort of in previous periods? Thanks..

Yes, I think what I would say is as we looked at 2018. We would, initially we've characterized in the past a couple of things. We will be layering on growth forecasts into our 2018 view and that's a sign of just visibility we've created over the back half of 2017.

And we fully expect to continue an increased momentum on the modular front and that will probably be a bit more predictable for us in terms of timing and pace and that will be included in our January updates.

And then Charles, what I would say is, we'd be disappointed if we don't close more end-to-end deal in 2018 outside of Ascension that we continue to work through, so that's really the way we think about the visibility and translation of the current pipeline..

Great. Thanks a lot guys..

Thank you, Charles..

Thank you and our next question is from the line of Matthew Gillmor with Baird. Your line is open..

Hey, thanks for the question.

Just maybe one follow up to what Charles was getting at, could you maybe just characterize the pipeline in terms of the types of health systems you're talking to are these single hospital systems or larger systems?.

This is Gary. Hi Matt. The types of customers are typically the larger more integrated health delivery systems that typically have large revenue cycle operations.

They're the ones who really I think experience a lot of the market dynamics that are going on today, you know they're operating many of them in markets where there's a lot of competition both for their services and within the employee base that they're trying to pull from and we're all aware of the downward pressures that have been forced upon the health system organizations and then they are trying to navigate that so many of our conversations are with those types of organizations..

Got it. That's helpful.

Thank you and then I wanted to ask another one on the Phreesia partnership and I guess they've been known for their warrants tablet and it sounds like you'd be creating a new product then integrate some of your capabilities, but can you provide some more details on sort of how that product looks and how that will be distributed to either prospective clients or clients that you all have in common? And then lastly, if you had any comments you can make in terms of the financial arrangement between the two companies?.

Okay, yes let me let me spend a little bit of time Matt on the partnership with Phreesia and the solution we see an opportunity to deploy into the marketplace. Let me start with we have a core technology platform called R1 access it.

It has a sophisticated set of rules inside of the acute care setting that look at all of that logic and defect detection engines around pre-registration, registration, point of access, prior balance, calculations, residual estimate calculations, et cetera.

We then have a very sophisticated and we have a number of resources that are managing the scheduling and order intake process and which as you know, there is a constant communication between that scheduling and order intake process and the pre-reg and registration process and all the rules and demographic checks that have to occur back and forth between those two settings.

Our ability to encapsulate that logic inside of the Phreesia platform and digitally deliver it to a patient in the form they need now that may be a tablet in the access of the hospital, it may be on a mobile device in a pre-registration, in pre-financial clearance process, et cetera.

And so really what we're looking to do is to take the value that we have in some very complicated rules and sophisticated engines and marry that up with the capability Phreesia has to interface with the patient in a much more favorable way and bring that to the market.

As we said, a key component of this and on our roadmap is the technologies and potential that we can create around the scheduling in order intake process and that becomes increasingly critical as we think about risk based contracts and some of those types of inflection points that we see occurring and continuing to increase.

I don't want to get into the financial relationship, only to say that it's balanced, it's appropriately incentivized between us and also the health systems..

Okay, thanks very much, I appreciate it..

Great..

Thank you and this ends our Q&A session for today. I would like to turn the call back to Joe Flanagan for his final remarks..

Thank you very much everybody for joining the call. The thing I would emphasize as we close is, we remain very encouraged by the progress and the progression whether it be from a capability standpoint or from a financial standpoint and we look forward to continuing to update you on future calls. Thank you very much operator..

And ladies and gentlemen with that we conclude the program. You may all disconnect. Have a wonderful day..