Atif Rahim - Senior Vice President, Investor Relations Joseph Flanagan - President and CEO Christopher Ricaurte - CFO and Treasurer.

Charles Rhyee - Cowen and Company Matthew Gillmor - Robert Baird.

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the R1 RCM Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Atif Rahim, Senior Vice President of Investor Relations, you may begin your conference. .

Thank you, operator. Good morning, everyone, and welcome to the call. We'll start 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 on this conference call may be 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 2018, 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 our 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, 2017. Now I'd like to call over to Joe..

growth; operational excellence; and strategic capabilities. The first area I would like to highlight is growth. And what I'd like to emphasize there is the signing of an end-to-end agreement and the successful launch of the patient experience platform.

From an operational standpoint, the first thing I would emphasize is delivering a high-quality deployment across the newly-signed business, which further increases our confidence to grow market share. The second operational goal is a meaningful expansion of our R1 Automate capability, which should drive further enhanced productivity going forward.

From a strategic capability standpoint, closing the Intermedix transaction and leveraging the integration process to deliver a highly differentiated physician acute platform to our customers and the market in general. We're encouraged by our start to the year.

We intend to maintain a continued focus on execution and feel good about the long-term prospects of the business, given favorable end market dynamics and the financial visibility that comes with a committed business we have. Now I'd like to turn the call over to Chris..

2017 GAAP to 2016 gross cash generated from customer contracting activities; and 2017 adjusted EBITDA to 2016 net cash generated from customer contracting activities.

The adjustments to EBITDA to arrive at adjusted EBITDA are the addition of stock-based compensation and other costs, such as reorganization-related, transaction-related and certain other costs. Additionally, the cost of services and SG&A numbers are referenced on today's call are on a non-GAAP basis.

A reconciliation of GAAP to non-GAAP financials is available in today's earnings press release. Also, 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 Q4 results. We generated another quarter of positive adjusted EBITDA and free cash flow.

We also generated another quarter of sequential revenue growth, driven by the contribution from the Wisconsin business. Fourth quarter revenue of $140.3 million was up $17.1 million sequentially. We expect modest sequential revenue growth in the first quarter as we onboard the remainder of employees in Wisconsin in the current quarter.

Cost of services in Q4 were $121.9 million compared to $106.6 million in Q3. This increase was driven by the new business in Wisconsin as well as a slight increase in PAS cost. SG&A expenses in Q4 were $12.7 million, down $0.7 million sequentially, since Q3 is a seasonally high quarter for us.

On a year-over-year basis, SG&A expenses increased $0.6 million, driven by the expansion of our sales and marketing efforts. Adjusted EBITDA for the quarter was $5.7 million, up $3.1 million in the third quarter. The sequential improvement was driven by EBITDA contribution from Ascension Phase-1 and Phase-2 additional booked ministries.

We also incurred $1.8 million in diligent costs related to the Intermedix transaction in the quarter. These costs are not reflected in the adjusted EBITDA, but are included in the other expenses line on our GAAP income statement. For full year 2017, revenue and adjusted EBITDA came in near the high end of our guidance ranges.

Revenue of $449.8 million was up more than $241 million relative to gross cash generated from contracting activities in the prior year, driven in large part by the onboarding of new business. Adjusted EBITDA of $4.1 million was $31 million better than the comparable net cash generated number in 2016.

This substantial improvement in adjusted EBITDA was a function of revenue growth and cost efficiencies delivered from onboarded businesses as well as a reduction in SG&A expense. For the full year, SG&A expense was down $3 million to $48.4 million in 2017. Turning to the balance sheet.

Cash at the end of December, inclusive of restricted cash, was $166 million, up from $144 million at the end of last quarter. This $22 million change was driven by a $5.7 million adjusted EBITDA in the quarter, along with a positive contribution from working capital.

For total year 2017, we generated $21 million in cash from operating activities, up $108 million from 2016, which was offset by investing activities to support our new growth and enhance our capabilities resulting in a net usage of cash of $16 million for the year. Turning to our outlook for 2018.

In conjunction with the Intermedix announcement last week, we provided preliminary 2018 guidance. We expect to generate revenue of $850 million to $900 million and adjusted EBITDA of $50 million to $55 million.

This guidance contemplates the Intermedix transaction closing in the second quarter and no major changes from the adoption of ASC 606 for Intermedix. Given the moving parts related to the new business wins and the Intermedix transaction, I'd like to provide some color on the quarterly revenue and adjusted EBITDA progression in 2018.

As I mentioned earlier, we expect a modest sequential increase in revenue in the first quarter, followed by a meaningful step up in the second quarter as we onboard Intermountain and assuming a mid-quarter closed for Intermedix.

In the third quarter, we expect a further step up in revenue due to a full quarter of Intermedix contribution and revenue from onboarding Presence Health and Ascension Medical Group. Finally, we expect a modest sequential increase in the fourth quarter.

From an adjusted EBITDA standpoint, we are expecting to bear approximately $25 million of upfront cost associated with onboarding new business. This investment is front-end loaded in 2018, and we consequently expect the majority of our adjusted EBITDA contribution to come through in the second half. A quick note on reporting going forward.

Starting with Q1 '18 results, we plan to consolidate revenue from our other services fees line into RCM services other line. The other services fee line has historically consisted of PAS revenue. Given the modular nature of PAS, we feel it's more appropriate to consolidate it into the RCM services other line.

In closing, I'm pleased with the progress we made in 2017 and feel we are well positioned to deliver our commitments in 2018. Now I'll turn the call over to the operator for Q&A.

Operator?.

[Operator Instructions] Our first question comes from the line of Charles Rhyee from Cowen and Company. Your line is open..

Hey. Thanks, guys for taking the questions. Congrats on the year. Want to start out, just talking a little bit Intermedix as it relates to Ascension and the rest of the physician business.

I might have missed it back on the Intermedix call, but does Intermedix already serve the Ascension physician business?.

No. Charles, this is Joe. Intermedix doesn't currently serve the Ascension business that we're aware of..

Okay. Because you're saying that there is - can you just remind me what you said early about the closing conditions that it's got to help in onboarding Ascension, is that what you had said? Just because that is what you just said. Thanks..

Yes. No problem. Let me parse that in two separate ways, Charles. The first as it relates the closing condition. As part of the closure of Intermedix, the completion of the contract with Ascension Medical Group is a closing condition for that transaction. So that's that piece of it.

Now stepping back a bit and I would say, much more strategically, part of the rational as we think about Intermedix is this broad theme that it definitely accelerates our growth trajectory. One part of that is it expands our market, $60 billion to $100 billion.

The second part of that and at the heart of my comment vis-à-vis Ascension deployment is the capacity that Intermedix comes with will help us accelerate the onboarding of the Ascension Medical Group contract.

And so they've got infrastructure, human capital, transactional capacity at a different level as it relates to the physician platform than we do today. And so that's the strategic logic or the threat, if you will, along those lines..

Okay. That's helpful. And can -- you talked about the funnels growing.

Can you give us a sense on what the pipeline currently looks like? How -- what the activity level is, either both at -- obviously -- at the core business and then also any kind of qualitative information around the Intermedix pipeline currently?.

Charles, let me start with just our core offerings as they exist today. And what I would generally say is, we're very encouraged with the pipeline. And breaking that down -- we're very encouraged with the size of the pipeline and the progression of those opportunities through the commercial discussion process.

The second thing I would say is, the amount of activity, both us pushing as well as interested parties pulling on discussions, is increasing, which we're encouraged with. And then the final thing, as I commented, there is a healthy and increasing amount of activity as it relates to our enterprise offering or operating partner relationship.

Those are hard for us to predict. They take time. But that is definitely a dynamic we are encouraged by, but equally encouraging is the pipeline for our modular solutions.

And one thing I would comment on, as we've build out our commercial organization, starting with Gary Long, and then he's done a very nice job at -- in the Q4 time to complete the buildout of his core team. They've been doing quite a bit of activity on our PAS business.

Now our PAS business doubled going from '16 to '17, and we expect it to increase again from '17 to '18. So we're encouraged with that business. That is a modular offering. It is indicative of what we think we can do with some of the other modular capabilities we put it into the market in the second half of '17.

And I'm encouraged with the activity there because it really complements our operating partner offering nicely. It complements it from a margin profile, it complements it from a progression of profitability, meaning that it progresses much, much faster to terminal profitability rates.

And from a capacity standpoint, it also complements from an allocation of capacity, et cetera. So we're quite encouraged on that. Now as you would expect, it's hard for me to comment in a lot of specificity as it relates to the Intermedix commercial activities just given normal constraints, and we'll provide much more detail post close.

But what we are encouraged with is the combined value prop, not only to our existing customers, but we are very encouraged with the combined value prop into some of Intermedix' core markets. And we're excited to get the transaction closed.

And one of the first orders of business will be for Gary to go deep and build a comprehensive go-to-market strategy that includes, what we think will be a more compelling value prop into their end markets..

Okay. That's helpful. So then maybe Chris -- maybe and I segue, but Chris can you -- or Joe, now that we've kind of hitting the ground running more and things are sort of or operating more in a normal basis and things are kind of heading on the right direction. Can you -- and clearly, you've given us the guidance here.

Can you give us a sense on where do you think the longer-term profitability targets are reasonable for this business? And you can exclude Intermedix for now, if that's easier in terms of, let's say, sort of gross margin profile for the business, EBITDA margin profile for the business. Anything around the physician if you can add.

But just as we kind of think about beyond this year and as we continue to grow the business, can you talk about kind of the leverage potential here? And what we kind of expect in the long run?.

Thanks, Charles. Let me start, and then I'll turn it over to Chris to add some additional color to my comments. And as I answer your question, I'll index off of the 2020 view that we provided with the Intermedix announcement.

The first thing I would say is -- and this isn't incorporated in our prior investor communications where we've laid out the phases of progression for our operating partner relationship over time and kind of where we see those model contracts achieving terminal profitability.

What I would say is, in 2020, just given we're launching 8.8 -- roughly $8.8 billion of additional NPR over the course of this year, in 2020, the business will not be matured in that terminal profitability, in line with our prior communications.

And we would direct the specificities to some of those communications, and we still feel comfortable with those projections. So we still see off of committed business in line with our models margin growth coming out of 2020. That's the first comment, I would say.

The second comment I would say is, why are we so focused on automation? And really for us, we see that as an additive lever that has some very compelling potential impacts on our models, both in terms of cost, but also in terms of the accuracy and the velocity, which directly impacts our income statement and balance sheet metrics, which is another lever on how we earn money.

We earn money two ways. We either improve the revenue performance for our customers, and we also earn money by reducing the cost to collect. And we think that automation lever is potentially transformative and additive to some of our models.

And that's why in my comments I mentioned, we've injected, Chris and I, a high degree of emphasis in terms of the objectives we put on our operating and technology teams to really use 2018 as a year to significantly expand. And we think there is plenty of opportunity to do that. Let me turn it over to Chris just to provide additional color..

Yes. I mean, if you just take our base business and excluding Intermedix and you talk -- you think about adding AMG, you think about adding Presence, you think about adding Intermountain, that base business now, we see once it's stabilized -- and as Joe mentioned, 2020, we still won't have optimized IMH and AMG.

So if you look past 2020, there is still margin expansion there. We're now in closer to the -- on the high end of the mid-teens on that base business and then you add the Intermedix business, which has an actually higher-margin rate. Now you're getting close to the high-teens in terms of exiting in terms of stabilized margin rate.

And as we said, we've got -- as we look at '18, we've got about $25 million of onboarding cost. So '18 really is in a good proxy for with the margin rates just because of all of that onboarding cost that we have..

And maybe the final....

And -- I'm sorry. You just made clear.

You're talking about EBITDA margin, you're talking about gross margin?.

EBITDA..

EBITDA..

And may be the final thing, Charles. I should emphasize when you look at 2020 guidance, that does not assume any new operating partner relationships outside of what we've already communicated. And as it relates to Intermedix, it largely assumes that attrition -- customer attrition is offset by growth.

Now we think the market and our intention is to continue, as I said, to drive that Intermedix platform as well as drive the modular offerings, which are really in the early stages outside of our PAS business, which is growing very, very nicely..

Great. I’ll stop there. Thanks a lot of guys..

Our next question comes from the line of Matthew Gillmor of Robert Baird. Your line is open..

Hey, thanks for the question. I wanted to pick up on the R1 Automate comments. And I think I understand conceptually sort of what this is.

But maybe Joe, I was hoping if you give us an example or two, for where the R1 Automate would -- to have the most impact on the business just so we understand it a little bit better?.

Yes. There -- I mean, there is many examples, but let me -- and I'm just going to quickly try to think of one that's easily digestible. So one example that's pretty basic, but hopefully, it can convey or visualize the opportunity we see. In our preregistration process, this is when we have a central team reaching out to schedule patients.

And we're pre-registering them in advance of their visit, financial clearance, demographics, there is clinical protocols that are included in that preregistration process. For us to set that up, somebody has to go in and create a shell account for that patient in the EMR.

And they're pulling information of the scheduling system, and they're manually creating a shell account, so they can then load information into that as part of the registration process. Just one very small example. We've been able to fully automate the routine to create that shell account.

And so that as you can imagine, reduces all the manual keystrokes and labor costs and inaccuracies that come with just human variability of doing that. Now from our vantage point, we've catalogued all of our processes. We've stratified those processes in a 2-by-2 matrix, basically, high cost or low cost, easy to automate, hard to automate.

And we've got a backlog of processes that we're in the process of working through and just getting automated. And so I'm encouraged with the potential, and I'm also encouraged with the approach and framework that we have. I would say, it's utterly practical and driven by our operators, which I think is a positive thing.

And gives me confidence that it'll translate to the ledger, meaning, we'll see the efficiency come with that in addition to some of that marketing trends that we're hearing a lot of rhetoric on appropriately so in the marketplace given the potential impact..

Got it. That's helpful. And I also wanted to get an update on the front-end transformation pilots. And if I heard you correctly, I thought you mentioned that you're going to start to roll that out to the client base. And I know there is some connection here with the Phreesia tablets and the new patient experience platform that you announced.

But can you give us a sense for how those pilots are going and maybe if the premise of my question was off, but how it compares to sort of a traditional front-end process and what it means ultimately for your clients?.

one, a world-class scheduling platform; and the second is the Phreesia platform.

And what that connection allows us to do is create a solution that automates the interface between the scheduling and the registration process and allows us to enable customers in multi-modes to self register, but have access to all of the detailed logic that has historically sit outside of Phreesia, but in our core rules engine.

And we're doing this in the acute care setting, which adds a layer of complexity that is not normally seen in the outpatient setting. So that is the overall architecture that's encapsulated. The second thing is, as I said before, we're very, very encouraged by the results.

And I would say, this is another technology influx that has the potential to be additive from our current profitability models we've communicated. If you look at -- as I said in my opening comments, patient self-registration is more than 2 times what we expected. And physicians that self-schedule their patients in the acute care settings.

So essentially, physician offices are not having to pick up the phone, call a scheduler, sit on the phone, wait for a scheduling slot. They're able to instantaneously schedule their patients. That is again running upwards of 45% and well over 2 times what we thought the physicians would use.

That has additive benefits as you can imagine with referrals, retention for the providers. And so there is some additional economics that the providers want as part of this solution, which increases the value prop. Final comment Matt, we're in the process of deploying that broadly of the pilots within Ascension.

And we expect to have it fully deployed across the Intermountain architecture in 2018, which is a significant amount of technology deployment that will be ongoing. And we expect to only increase and extend the value prop as we get more and more experienced over the course of '18..

And then last question for me. I know you have lots of opportunity in the hospital side and on the physician side now with Intermedix. You're onboarding some post-acute NPR with Intermountain.

And I was just wanted to get sort of your perspective on, is there a larger opportunity in the post-acute market? Or should we expect you all to stay within the hospital and physician side, just given that opportunity in front of you?.

No. I think it's important -- we intend to take advantage of Intermedix experience as well as if you look at the Intermountain scope of services, which includes post acute as well as the Ascension Medical Group. We intend to build a capability that competes very, very well serving that post-acute market.

We think it's important just given strategically where our customers need us to be, and we also think it's right in line with our brand commitment of being the one of the revenue cycle partner regardless of setting of care.

And we think -- the best way to build that competitive capability is on experience, and we've got a lot of committed business to work through that, we think, will only add to the experience that Intermedix is also bringing to the table..

Great. Thanks very much..

Thanks, Matt..

We have no further questions in queue. I'd like to turn the call back to Joe Flanagan..

Thank you, operator, and thank you, everybody, for joining us. To close out the call, I'd like to say we're excited about the year ahead. We've been building the company to scale up to what we have ahead of us and feel very well positioned to execute along those lines.

And the final thing, I would say as we close the call, we are really excited to update you on an ongoing basis as we progress through 2018. Thank you very much, and operator, we can close the call..

This concludes today's conference call. You may now disconnect..