Atif Rahim - SVP, IR & Business Development Joseph Flanagan - President, CEO & Director Christopher Ricaurte - CFO & Treasurer Gary Long - EVP & Chief Commercial Officer.
Matthew Gillmor - Robert W. Baird & Co. Charles Rhyee - Cowen and Company Steven Halper - Cantor Fitzgerald.
Good morning. My name is Matthew, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the R1 RCM Second Quarter 2018 Earnings Call. [Operator Instructions]. Atif Rahim, Head of Investor Relations, you may begin your conference..
Thank you. 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 during 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 and 2020, expected uses of cash, expected benefits from the Intermedix acquisition, expected timing of new business deployment and expected new business wins 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 of 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 turn the call over to Joe..
Thanks, Atif. Good morning, everyone, and thank you for joining us. Our second quarter results speak to the continued momentum in our business. We're pleased to report revenue of $207.9 million, our eighth quarter of sequential revenue growth, driven by onboarding of new business and contribution from the Intermedix acquisition.
Adjusted EBITDA of $9.2 million was up $8.9 million from last quarter and up $12.5 million compared to the second quarter of 2017. About half of the sequential growth in EBITDA came from Intermedix and the other half from increasing profitability from previously onboarded customers.
Exiting 2017, you may recall we talked about being on a path to sustained profitability. We believe we're now firmly on that path. As we look to the balance of 2018, successful onboarding of new customers remains one of our key priorities. We are on track to onboard close to $11 billion in net patient revenue onto our operating partner model this year.
This includes approximately $1.8 billion from AMITA Health, which we announced in June. AMITA was a significant win for us in Q2 and highlights the traction we are gaining in the market.
Successful onboarding of these customers, coupled with the strength of our business model, both from a recurring revenue and recurring EBITDA standpoint, gives us a high degree of confidence in delivering on our 2018 and 2020 commitments. Let me start by discussing our customer onboarding initiatives.
Deployment activities at Intermountain are off to a strong start. As discussed on our last call, we welcomed 2,300 employees from Intermountain to R1 in early April. One quarter-end, we have rationalized more than 20% of the targeted third-party vendor spend and centralized 65% of the billing work relative to our targets.
In addition to our Shared Services center in Salt Lake City, we are on track to launch a state-of-the-art technology and innovation center in the first half of 2019.
This dedicated space will serve as a home for new product development, support collaborative innovation with strategic partners, provide a revenue cycle model office and include a new client experience center.
This unique location will serve as a springboard for initiatives we have underway to drive the health care industry's financial transformation. The next customer deployment we have underway is Phase III of Ascension.
Given the pull-forward of one ministry into the Wisconsin tranche last year and the divestiture of a couple of smaller hospitals by Ascension, this tranche now consists of one hospital with about $370 million in NPR. Deployment planning started in late Q1, and we transitioned employees in July.
We expect deployment for Phase III to be completed by the end of the year. Turning next to Ascension Medical Group. With the contract signed in June, we now plan to begin onboarding the work performed at centralized locations in early Q4 and into the first half of 2019.
For some of the smaller physician groups, where work had not been centralized, onboarding will continue beyond the first half of 2019. Lastly, let me discuss Presence Health and AMITA. We mobilized our deployment teams in March and are well advanced in deployment planning at Presence.
Employee transitions for Presence Health were originally scheduled to begin in the third quarter. But with the recent announcement of AMITA, we now plan to transition both AMITA and Presence employees in early Q4.
AMITA and Presence are on the same geography, and there are advantages to us transitioning the approximately 1,800 employees within the same timeframe. As a reminder, AMITA was not included in the guidance that we provided earlier in the year.
Despite incurring a portion of the upfront cost associated with onboarding AMITA in 2018, we expect to remain on track to deliver on our adjusted EBITDA guidance of $50 million to $55 million for the year. Looking out to 2020, AMITA increases our visibility and drives higher confidence in the guidance ranges that we've provided.
It's important to note that consistent with the operating partner economics we've provided, the $11 billion of NPR from new customer contracts that we are starting the onboarding process in 2018 will not have achieved steady-state earnings levels until after 2020.
In other words, we expect EBITDA to continue to grow exiting 2020 from our currently contracted book of business as we move towards the steady-state profitability levels.
For business we onboarded prior to 2018, we are focused on meeting and exceeding the performance metrics we are measured on and have generated significant improvements in both balance sheet and income statement metrics. Now let me provide an update on Intermedix. Following the May 8 close, we started to execute on our integration plans.
Integration of the product portfolio is progressing ahead of plan, and we are now well positioned to deliver a comprehensive solution to physician groups at Ascension Medical Group and Intermountain Medical Group.
Based on integration activities to date, we're confident we will bring a robust offering to the market, designed to leverage R1 and Intermedix capabilities to deliver market-leading business outcomes to provider organizations.
Intermedix' commercial functions have been fully integrated into R1 and are beginning to yield positive results in both brand awareness and demand generation.
We are also making investments to drive organic growth in Intermedix' core business lines and using the acquisition as a change driver to deliver a differentiated value proposition to Intermedix' historical end markets. These investments are geared at driving our value proposition in the independent and employed physician market along 3 facets.
First, we have a robust analytics platform and we intend to translate this to the physician environment to drive improved visibility and performance. Based on market discussions, we are confident that this platform can differentiate our offering long term.
Second, we are developing a contracting model for large physician groups similar to our operating partner model, where control of the revenue cycle allows us to drive additional cost reduction and a portion of fees that are indexed to our customers' financial performance.
Third, using our integrated technology and global infrastructure, we intend to bring scale advantages to the distributed physician practice environment and, in turn, prepare a practices revenue cycle infrastructure to match value-based reimbursement payment models. Feedback from Intermedix customers has, on balance, been very positive.
They are optimistic about the capabilities that R1, as an operating company, can bring to the table as well as the investment goals we have communicated. Similarly, we are seeing a positive response from R1 customers and has desire to work with R1 more deeply on the physician side.
We continue to see significant potential to drive additional physician services into our acute customer base and to leverage R1's commercial approach to win share among physician aggregators in the market. From a cost synergy standpoint, we're encouraged by the progress we've made in the first few months.
Corporate roles have all been aligned to their respected global functions within R1. We have also communicated the initial wave of facility consolidations and completed the closure of one location in the second quarter. Next, I'd like to update you on our technology road map from product development.
Last year, we started discussing our Patient Experience platform, which combines sophisticated revenue cycle rules engines with a self-service platform for physicians and patients. You can think of this as similar to the airline industry's move towards digital technology.
Customers can go online on their own devices to book appointments and/or update their personal information, make payments and many other conveniences.
Upon arrival, patients can continue to use their mobile devices to check in, can utilize a kiosk to print any final paperwork or a substantial updates to demographic or insurance information are required, they can request a tablet to complete these updates in just a couple of minutes.
On prior calls, we've highlighted self-service patient registration and scheduling functions. Patient check-in has been met with positive user reception as well. About 2 out of 3 patients have elected to use these devices so far, higher than the 60% we originally targeted.
At the recent HFMA Annual National Conference in June, the Patient Experience platform was voted the best new innovative solution. We're pleased to see an operationally successful product be recognized in the market. One of the other initiatives on the technology front is robotic process automation, or RPA.
As part of the R1 Automate suite, we now have a robust portfolio of over 100 RPA bots, and this number continues to grow. RPA automates many of the manual repetitive tasks our employees perform daily.
We believe RPA represents a significant opportunity to materially lower our cost structure and transform our operation to a technology-enabled production system where employees focus on the higher order problem-solving areas.
On the heels of our early successes with RPA, we are now in the process of selecting partners to help scale our RPA capabilities more rapidly. In addition to these new initiatives, I'm pleased to say that we continue to strengthen the applications that have long been at the core of our capability.
For example, we recently released a new set of predictive algorithms in our R1 Decision platform called targeted balance. These algorithms automatically triage low-balance accounts for our end users, helping them extend their productivity from a typical 40 accounts work per day to often over 100 accounts work per day.
In another application, our R1 Physician Advisor, we've also launched an early version of what we're calling case submission intelligence, which applies unique proprietary rules to the process, referring level of care cases to our PAS business.
This solution will help ensure our customers refer the right cases to the right clinical reviewer at the right time in order to maximize the value they gain from our service offering.
Building on our recent successes, we will continue to advance our robust technology portfolio and innovation initiatives as part of what we call the digital transformation of our business.
This effort leverages key levers for driving intelligent automation, including our software portfolio, digital self-service solutions, robust analytics, robotic process automation and cognitive automation, combining machine learning with our RPA solutions. We plan to have more information on this initiative on our next call.
Overall, I could not be more pleased with the level of innovation that our technology and operations teams are driving together. It's these innovative solutions and many others that help us continue to gain greater productivity and efficacy out of our operations while strengthening our competitive positioning to help us win new business.
Lastly, let me touch on our commercial efforts, which continued to gain traction in the second quarter. In addition to the HFMA innovation award for our Patient Experience platform, our end-to-end solution received Peer Review status by HFMA.
The market receptivity of our ongoing efforts are paying demonstrable dividends in greater awareness of our company, brand, as well as demand for our technology-enabled service. This type of broad-based recognition is helping drive a continued progression of our qualified pipeline of modular and end-to-end enterprise opportunities.
In addition to the growth in our qualified pipeline, we are encouraged that in many of the one-on-one discussions with large health systems in the country, our value proposition resonates with what's on the minds of key decision-makers. In closing, we continue to be very optimistic about the business.
We're focused on onboarding the new business we have announced this year as well as the continued execution at previously onboarded customers. Based on the discussions we are having, the end markets remain very favorable, and we are encouraged by the momentum in our pipeline.
The focus we placed on technology innovation is starting to yield dividends with our customers and earning recognition in the industry. We see a lot of room to drive further innovation.
Our efforts to date with RPA are promising, and we believe automation technology has the potential to drive a step change in our cost structure and further differentiate our value proposition. Now I'd like to turn the call over to Chris..
Thank you, Joe, and thank you all for joining us. I'd like to remind everyone that we will be referencing non-GAAP metrics on today's call. The cost of services and SG&A numbers exclude stock-based compensation and D&A expense. Adjusted EBITDA excludes stock-based compensation expense, transaction-related cost and certain other costs.
A reconciliation of GAAP to non-GAAP financials is available in today's earnings press release. Now turning to Q2 results. Revenue for the quarter was $207.9 million, up $60.6 million sequentially and up $108.5 million year-over-year.
The onboarding of Intermountain Health and a partial quarter contribution from Intermedix drove sequential growth in net operating fees and incentive fees, consistent with R1's revenue recognition under ASC 606. On a standalone basis, Intermedix contributed revenue of $27.6 million in the second quarter.
The adoption of ASC 606 does not result in any material adjustment to revenue recognition with respect to Intermedix's revenue stream. The other revenue line grew $4.1 million year-over-year, driven by our new modular services offerings. From a cost standpoint, cost of services in Q2 were $181.1 million compared to $132.8 million in Q1.
This increase was largely driven by the onboarding of Intermountain and the inclusion of Intermedix as well as upfront cost to support the onboarding of Presence Health and Ascension Medical Group. SG&A expenses in Q2 were $17.8 million, up $3.7 million sequentially.
The increase was almost entirely driven by the addition of Intermedix, as we remain disciplined on our SG&A expenses for R1 stand-alone. As we've discussed in the past, most of the incremental SG&A expenditures we have planned for 2018 was related to the expansion of our sales and marketing efforts.
Adjusted EBITDA for the quarter was $9.2 million compared to $0.3 million in the first quarter and up from negative $3.3 million a year ago. The sequential and year-over-year increases were driven by previously onboarded customers and contribution from Intermedix, offset by cost associated with onboarding new customers.
Lastly, we incurred $13 million in transaction-related expenses and other costs in Q2, primarily related to the Intermedix acquisition. These costs are not reflected in the adjusted EBITDA but are included in the other expenses line on our GAAP income statement. Turning to the balance sheet.
Net debt at the end of June, inclusive of restricted cash, was $338 million compared to net cash of $71 million at the end of March. This change was driven by the use of cash and debt raised to fund the Intermedix acquisition and the transaction-related expenses.
CapEx in the quarter was $11.9 million, primarily related to purchases of software licenses and computer equipment. Interest expense in the quarter was $5.8 million. We elected to pay interest on the subordinated debt in cash and did not exercised the payment-in-kind option available with the sub debt.
We expect to use cash from operations to start paying down the debt in the mid 2019 timeframe. Turning to our outlook for 2018. We are reaffirming our prior 2018 guidance. We continue to expect to generate revenue of $850 million to $900 million and adjusted EBITDA of $50 million to $55 million.
Importantly, we are absorbing a portion of the upfront cost associated with the AMITA Health contract into our 2018 guidance range. As discussed earlier, the adoption of ASC 606 did not have any material effect on Intermedix's revenue stream.
Looking out to the third quarter, we expect a sequential increase in revenue in the third quarter driven by a full quarter of Intermedix contribution. We also expect a sequential increase in the fourth quarter as we onboard Presence, AMITA and part of the Ascension Medical Group.
In closing, I'm pleased to say we continue to make good progress in delivering our 2018 financial commitment.
Consistent with our 2018 guidance, adjusted EBITDA is expected to tick up in the second half of the year, given some of the typical seasonality in our business, even as we more than offset the cost we will incur related to onboarding new customers. Now I'll turn the call over to the operator for Q&A.
Operator?.
[Operator Instructions]. Our first question comes from the line of Matthew Gillmor with Robert Baird..
I wanted to ask one about guidance first. You mentioned you're holding it even with some cost from AMITA.
Can you may be give us some sense for how meaningful this cost or what kind of drag that creates? And then also what's offsetting that? Is that outperformance with the margins that are ramping from the NPR you onboarded last year or maybe better synergies at Intermedix? Just sort of what's the offset?.
Yes. Matt, this is Joe. Thanks for the question. I think the way you should think about the costs that we're absorbing is in line with the models that we've laid out in the operating partner relationship in that 0 to 12 month range, and we've got about ¼ of that, that we are absorbing. That will progress a little bit into 2019.
While haven't provided guidance on 2019 kind of from our internal views, we still are on plan kind of given some of that bifurcation of onboarding cost at the end of 2018 to start of 2019 to our internal views on the progression in 2020.
The offsets, again, as we talked about on other calls, we are encouraged on some of the Phase I/Phase II deployments that were reaching target profitability levels earlier than we had anticipated and communicated in those models. Now -- but what we talked about is we want to see that demonstrated in some different environments.
And as we progress through some of these, AMITA, Presence, AMG, deployments, if we see that profitability progression hold, in line kind of with what we've demonstrated we can do on the Ascension originally through careful planning, we'll update those accordingly.
But that really is the general offset kind of to the absorption and maintaining guidance..
Got it. And then one on the pipeline. I was hoping you could expand on some of your comments and provide some initial details, so just update in terms of activity levels. And then specifically, I did want to ask about what the HFMA Peer Review designation means in terms of how that can be used in the marketplace..
Yes. So from a pipeline standpoint, Matt, what I would say some color on the pipeline, first thing I would say is broad-based.
And what I mean by that, it covers a range of size of health systems and, encouraging from my standpoint, is broad-based in terms of the offerings, meaning we've got a fair amount of activity and growing kind of every month and every quarter in our modular offerings.
I would highlight our RCS offering, this revenue capture service, as one that seems to be meeting the key needs of that segment of the market. And then equally important, we still have a healthy amount of activity related to -- and I would say increasing in discussion intensity, related to the end-to-end operating partner model.
And so I think we're encouraged by the breadth of activity and the range of interest kind of in some of the offerings that we put into the market. The other way to think about this, I would say, is we had increasing engagement of our operators in these commercial pursuits, and the reason I highlight that is very, very important.
That's a signal of the progression of those discussions. Because as you can imagine, the early phases of that commercial pursuit is generally led by our sales team and by our associated product management teams that look at the solution architectures and the detailed frameworks of those offerings.
As we progress in specificity and the opportunity and the qualification, we involve our operators to get engaged with the respective teams on the customers around assessments and real quantification of value creation, and so I'm encouraged.
It's increasingly something that we're having to manage carefully as our operator capacity and how we allocate that to commercial pursuits and how we allocate that to running the business. I think that's an important kind of signal and some color on the activity in the pipeline.
What I would say is from an HFMA peer evaluation review, some things that go into that. That peer evaluation review is really at -- for our end-to-end capability. There's an 11-step process. It includes a panel review. It includes current customers and prospects and industry experts. So it is truly a pretty holistic evaluation process.
And another important data point is less than 2 in 5 submissions meet the requirements to get certified. And I think we're one of the few that had certification from that body on an end-to-end basis for our offerings.
So given the relaunch of the company in January of 2017, it's been a huge priority for our commercial team to make sure we are active and recognized by the industry evaluating parties that give credibility and an independent view of our value proposition.
And I think that helps quite a bit, as you can imagine, as we go and engage with new customers, especially given we're really in the early innings of relaunching the company when you kind of reflect back on that January 2017 event that we had..
Our next question comes from the line of Steve Halper with Cantor..
Given your comment about 2020 now includes AMITA and you talked about the $11 billion of net patient revenue won't be at steady-state profitability in 2020, so what kind of changed? Is it just taking a little bit longer? And I'm implying that excluding AMITA, you would've had to tweak those numbers down a little bit for 2020.
Am I thinking about that correctly?.
No. I don't think so, Steve. The first thing I would say is, and I keep referencing it, I think it's important, in our operating partner model, we put out the progression of margin on those deployments. So we've segmented kind of in the first 12 months and then we have a 12- to 24-month period and then a greater than 24-month period.
So one thing I would reference is those models. Those are the models that we're generally using and we feel very, very comfortable with from a forecasting standpoint. Now if you think about what's going on with AMITA and Presence, first, there's a very small delay. It's a matter of 4 to 6 weeks.
And we proactively decided to do that because it, frankly, streamlines our deployment from a cost of deployment standpoint.
And as you can imagine, it minimizes confusion and complexity of the employees that were transitioning, meaning AMITA and Presence are in similar geographies and so the ability for us to communicate with those employees in one time, in a standardized way just helps us to have a very systematic progression in their eyes which is important for us over the long term.
So there's not really a material impact on that. What you just got is of the $11 billion we're onboarding this year, you have a fair amount of that by design that is getting onboarded at the end of this year, in Q4 essentially.
So what that says is, essentially in 2020, you're just entering that 12- to 24-month period, and so you're just starting to get in the profitability range. We see a -- and that's why it's just within the range of the guidance we've provided. And it doesn't mean that our non-AMITA business is not performing at the levels we just talked to.
Too far from it. In fact, to my earlier comments, we are seeing some favorable progression in Phase I and Phase II of margin rates on Ascension, which yes, as we see that play through, we'll make sure we communicate the implications externally of that.
But I think the very, very important note is, in 2020, the contracted book of business is not all mature. There is a sizable portion of that, that is really in the early phases of deployment and, therefore, in the early phases of profitability progression. So as I commented in my formal remarks, we do see margin expansion as we exit 2020.
And I think that's the most important thing. And that's where you start to see AMITA play into our overall -- the overall profitability that this contracted book of business will yield..
[Operator Instructions]. Our next question comes from the line of Charles Rhyee with Cowen..
Joe, going back to sort of the pipeline, and I appreciate the comment that you gave in terms of what you're seeing out there, but maybe can you give a sense on maybe how much you think you could actually convert in the next 12 to 18 months? I know, I think last quarter, you guys discussed a 300% increase in the qualified leads.
Just trying to get a better sense of how we should think about that going down the funnel into, actually, book signed business..
Yes, I mean, I've got Gary Long here with me in Chicago, our Chief Commercial Officer. So let me make a few comments, and then I'll have Gary provide a bit of comment as well.
As we've said before, it is very hard for us, despite how scientific we tried to be and we want to be on that categorization of our pipeline, to predict the ultimate decision to contract on these end-to-end relationships. So I would say that at the onset.
That being said, as I look to 2019, from a capacity to deliver standpoint and then from a pipeline potential that supports a view, we really, on our internal views, would be disappointed if we're not communicating some form of an end-to-end partnership filling up the first half of '19.
And that's really the activity that we're working on right now on the pipeline is looking to allocate that capacity to the right opportunity in the first half of '19, preferably kind of in the first quarter, but I think definitely in the first half. Now the size of that, it's only hard for us to predict.
Nominally, we tend to use kind of a $3 billion NPR range, and that's just driven by kind of a mix of size of systems that we have in our pipeline and kind of factoring those in. But maybe I'll have Gary provide a few more comments, Charles, on this because I know it's important topic..
Yes, Charles. The pipeline has been referenced throughout the year, has continuously grown in size and quantity. It's matured in terms of those deals and progressing through what we would look at in terms of our funnel. And so we feel really good about where we're positioned as a business, getting into more opportunities.
And then the opportunities that we're in are really qualified, meaning that the client or prospective client has identified, actually, a need and a desire to actually make a decision at some point. So that only gives us great encouragement. Now these things are not necessarily [indiscernible]. It is competitive.
So we have to earn our stripes in those opportunities. But we feel really good about our position, as Joe had mentioned earlier, just based on the little engagement we've had..
Just to follow up then. Maybe a question on the guidance, just to go back in terms of [indiscernible] sort of a sequence, so the cadence of guidance. You guys did EBITDA about $9 million, which is better than we were expecting. Joe, if I recall, about half of that came from Intermedix.
So we think next quarter, looking at a full quarter of Intermedix, call that around $9-ish million, let's say, you did about, let's say then, $4.5 million from rest of the business.
So excluding Intermedix, should we expect -- what type of random profitability do you expect in the rest of the business? Because if we stick to sort of the -- the initial guidance you gave, which was around 2.5x net leverage sort of run rate in the fourth quarter, kind of assuming more of a $30-something million EBITDA in the fourth quarter, which will suggest if you kind of back out the contribution of Intermedix, we still expect most of the profitability to come, at least the core part of the business, in the fourth quarter.
Is that sort of the right way to think about things?.
Charles, this is Chris Ricaurte. So first, let's -- I just want to go to the 2.5x. I would use more of a 3x in terms of exit that you should be looking at if you're trying to back into the EBITDA that gets to that. So I would use more of a 3x, so first of all.
And we're not going to provide guidance on quarters, but we do expect a ramp from our -- we'll call it our core R1 standalone business, excluding IMX.
And we expect that both in the second or the third and the fourth quarters, so we expect that to build, and primarily just due to the seasonality that we see every year from increased collections that we get from the hospital system. So we do expect to see that ramp..
Okay, that's helpful. Okay, that makes sense. Joe and Chris, you guys talked about -- you rationalized about 20% of the third-party vendor spend at Intermountain.
Can you give us a sense of what the total spend typically, either at Intermountain or in general, a third-party vendor solutions have for when you're doing sort of this -- the co-located model before you move to like sort of the full outsourcing model?.
Charles, the third party, in general, what we see is -- whether it's co-managed or a full partnership, if you just think about the cost to collect to run that revenue cycle, whether we have full control of that cost to collect or whether we're in a co-managed rate relationship where we have to influence kind of the actions to optimize that cost to collect, the third-party spend, as a general matter, is roughly 20% of the total.
So if the cost to collect is $100 million, you've got about $80 million that's really tied up in internal labor, if you will, and $20 million tied up in third-party spend. And the third-party spend could be procured services or procured technology. In general, that's kind of the buckets that falls into.
We feel really good about our operating model to optimize that. Looking at Ascension and all of the markets that we've deployed, we've rationalized over 250 different vendors.
And we have a steady-state view of the right number of vendors, including ourselves, as a key service provider and technology provider that's required to run the revenue cycle in the most efficient way and the most effective way possible..
That's helpful. So in the case of Intermountain, you say you've rationalized 20% of that 20%.
When you look at Ascension, at least may be Stages 1 or 2, what is sort of that steady-state that you expect to get to, like 80-20, 60-40? Or what's the right kind of mix that you would typically expect to see?.
Yes. The way to think about it on Ascension Phase I and Phase II, we started with 400 vendors kind of plugged into all those different locations. I think we're sitting right now at about 65 vendors, I think. It's directionally in that line. And we expect to get it to about 20 vendors.
And now within those 20 vendors at an end state, you have to remember that we're covering a huge portion of that services.
So a big portion of the rationalization of third-party service vendors, as an example, is just the insourcing of that work into our delivery infrastructure as well, you have to remember, the third-party bolt-on technology vendors. Take the patient access technology. We run a fully functioning patient access technology, and that's very competitive.
We don't sell it stand-alone, but we do replace it one-for-one contract modeling software. We run a very competitive contract modeling capability software and the services wrapper. That is typically, from what we see, outsource relationships, and we insource that. Again, just to provide some additional examples. So there's a large percentage.
And that's contributing, frankly, to some of the attaining earlier profitability than we had targeted, the success we've had rationalizing vendors kind of faster than we had originally planned..
Okay, that's helpful. Sorry, just two more questions, the first on Intermedix. You talked about -- you did mention that client response is, on balance, positive. That would seem to suggest that some clients responsive are not.
What kind of concerns have some -- have clients brought up in the case of that people do have concerns?.
Yes. I would say what we see on Intermedix is, on balance, positive. Where we -- I wouldn't call them negative. I wouldn't say we've had any negative discussions on the acquisition of Intermedix from their current customers or their general end markets.
What I would say in some of the discussions we've got the typical M&A questions you would expect us to hear, so do we understand their business? And one thing I would emphasize, and I continue to be encouraged, all lines of the Intermedix business, we understand kind of the operating systems and the value prop weaving the historical R1 very, very well.
And in fact, the ability for us in a customer meeting, and I've been to a number of them with Gary, the ability of bringing Gary and I to quickly engage with those customers kind of on their environment, just based on our general understanding of the cycle, I think we quick were able to address that.
The second question I get, and I would say this, it's generally in line with the M&A thread of questions is what is our intention to invest in their technology. And given all of my comments on the call just now, hopefully, you can understand, we are committed and we are very bullish on our ability to scale technology in the rev cycle.
And so I think we've got a great dialogue with customers on that. And then the final thing is just employee churn, and I think we've done a good job. Most of the questions from customers are not on the corporate functions. They're on their customer relationship interfaces.
They're on the domain expertise that lies within the business unit leadership, whether that be the easy business, the office space physician business, the EMS business. And we're very stable, and I think we've done a lot of work to make sure kind of the key leaders in those roles are encouraged.
They've been engaged, and we're sitting with those customers. So generally, we have not seen any big concerns, call it collateral damage as a result of our acquisition of Intermedix, apart from it. What we have gotten is just the normal M&A-type questions you would expect us to get from customers at a general level..
And so my last question here is -- obviously, when I think about the key questions that we typically get from investors who spend time working on and really looking at RCM in more depth is the sort of the cap structure, which is obviously a little bit complicated given the history of the company.
Can you discuss sort of the tenor of any recent discussions you've had with TowerBrook and/or Ascension about possibly simplifying the cap structure as -- it seems like it's sort of a little bit of a limiting factor, I think, to a certain extent, but at least some investors to get comfortable with and/or able to invest into..
Yes. It's not lost on us at all. Obviously, as you know, Charles, we entered -- myself and Chris have engaged in a lot of these discussions as well with our key investors. The first thing I would say, what we can control, as a management team, is growing this business, top line and bottom line. You heard me make some comments about RPA.
We think that's a really powerful lever, potentially for us to drive further earnings potential. And as I've said, the majority of my time, Gary's time and, increasingly, operator's time is on growing this business. So I would highlight that. That's something we can control, and we're very focused on that as it relates to the cap structure as well.
The second thing that Chris and I have been, well, working on is, as you think about the stability of this business and in terms of the predictability of the scale, you kind of -- all comfort level, the earnings potential, I think that's an important factor in our discussions potentially, over time, with TowerBrook and Ascension.
So making sure in our various operating mechanisms, whether that board reviews, whether that be monthly operating reviews, that we're getting our key stakeholders comfortable, that based on the deployment and based on all the moving parts, we have a very good predictability on this business, which Chris and I feel very good about right now.
And I think that's a contributing factor in the calculus over the long term, so to speak. So those are 2 areas we're very focused on. And I would emphasize we are acutely aware of kind of what the questions that you're feeling, Charles, and your peers are feeling as well as we, the management, are feeling.
And we just have to progress kind of over time. And most importantly, control is firmly on our control, which is growing this business. And we're encouraged and we're very optimistic on that as we kind of head in to the second half of '18 and into the first half of '19..
And we have a question from Matthew Gillmor with Robert Baird..
I had two follow-ups I was hoping to address. The first one is probably for Chris, on the revenue progression.
I just want to make sure I understood that the main difference in terms of the revenues from the second quarter to the third quarter has to do with a full load of Intermedix, which I think would be around $20 million, and then the rest in the fourth quarter would be Presence, AMITA and Ascension Physician Group onboarding.
Is that correct?.
Matt, we may have lost Chris. He's remote today.
Chris, are you there?.
No, no. No, I have that, Joe. Yes. So yes, Matt, so I think that is correct. The only thing you need to add is the seasonality that we typically incur. So typically, the term is just going to be higher in terms of revenue generally. But what you said is correct.
We will get additional revenue from IMX, and we will get some additional revenue in the fourth quarter, not as significant, but from Presence and AMITA..
Okay. And then the -- I want to ask a follow-up on the RPA side, and Joe had mentioned that, that could create a step function in margins.
And I just wanted to confirm that that's not something that's included in the 2020 guide? And then I was also curious about the company's ability to retain the benefits from that versus getting shared back with clients. And that's probably a function of how differentiated it is versus competitors.
But I just want to understand that dynamic in terms of your ability to retain that margin enhancement..
Yes. Let me take the last part of that question first. Based on our contractual frameworks, we retain -- we don't have -- in our operating partner relationships, which is the bulk of our revenue, we don't have any more cost-sharing mechanisms. So in essence, the impact of that on a cost standpoint would be retained by ourselves.
Now I want to emphasize, there's also -- as you think about RPA and as you think about RPA connected to machine learning, and the way we talk about this internally is we need to drive the next wave of yield improvement. Today, yield is generally driven across the industry.
You've got a suite of workflow applications, and you've got a suite of rules engines. Both workflow applications kind of serve up, if you will, VPACs to operators that then have to kind of do something, and that ecosystem generally drives yield.
From our standpoint, as you think about RPA and as you think about RPA connected to machine learning, we think about it 2 ways. We've got to use machine learning to drive the next wave of yield improvement. And that is -- that has a big, big impact on our customers financials. And they retain the bulk of that yield improvement.
We do retain a percentage of that, which is systematic and clear in our contracts, but that's the way we think about it. The cost reduction, we retain. And I think what we want to do, and that's why we alluded to it, it does have the potential to materially change our cost structure.
The focus that we have -- we're not in the position to comment on what that may be and how that cost reduction may get allocated over time. But what we are doing right now is we're on the heels of validation of the application of this technology in our environment. So we referenced we have 100 bots running.
We're very comfortable to invest in scaling this technology, meaning there is a return on that investment. The phase of this progression that we're in right now is selecting an external partner. We are in the final phases of that. We will then progress through an assessment of our entire cost infrastructure globally.
And at the conclusion of that, we will lay out our plan to systematically scale this technology. And I would hope and I would expect that, on our next call, we're in a position to kind of walk you through kind of that assessment and that progression with the right amount of specificity. But as a general matter, we're encouraged.
We feel like this technology has been more than validated based on our efforts to date. That gives us confidence to invest aggressively into the scaling, and there is definitely a return on that investment. We just need a few months to get that work done to update you all..
Okay. And then just to confirm, if it does provide some margin benefit, that's not something that's explicitly contemplated in the outlooks that you've communicated..
Yes. We have, obviously, productivity included in our outlooks. And so depending on how big that opportunity set is that we identified as a result of RPA, there's the potential for us to have incremental impact from this technology in our outlooks. But it's to be determined based on kind of the assessment we have to do..
There are no further questions. I'll turn it back over to Joe for closing comments..
To close out the call, I just like, first, to say thank you to everyone for joining us today. As I mentioned in my comments, I feel we're tracking very well relative to the goals we set and are very optimistic about our future, given the ongoing initiatives, technology growth, et cetera, that we discussed on the call.
And so with that, we look forward to updating everybody on the progress on our future calls, and again, thank you very much for joining today. Operator, we can close to call..
This concludes today's conference call. You may now disconnect..