Ladies and gentlemen, thank you for standing by, and welcome to the R1 RCM Q1 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your speaker today. Mr. Rahim, Head of Investor Relations. Please go ahead, sir..

Good morning, everyone, and welcome to the call. Certain statements made during this call may be considered forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

In particular, any statements about our future growth, plans and performance, including statements about our strategic and cost-saving initiatives, our liquidity position, our growth opportunities and our future financial performance are forward-looking statements.

These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, may, plan, project, would and similar expressions or variations. 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. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law.

Our 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 potential impacts of the COVID-19 pandemic and the factors discussed under the heading Risk Factors in our annual report on our latest Form 10-K and in our latest report on Form 10-Q.

We will also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. Now I'd like to turn the call over to Joe..

one, comprehensive deployment of our PX technologies solution across the acute and ambulatory environments; two, expansion of our scheduling scope and certain patient-facing services through our global delivery centers; and third, approval around a broader application of technology and use cases for automating key functions within our operations.

As noted in my first point, Ascension will be standardizing its technology footprint for digital engagement and will now utilize R1's complete PX technology solution for both the acute and the ambulatory settings of care. Important to note, this technology expansion also includes a full suite of patient payment capabilities.

In addition to the strategic expansion, we have extended our master services agreement with Ascension through April of 2031. We expect this extension to be net favorable over the term of the agreement relative to our prior contract. In addition, the weighted average contract life for our end-to-end contracts is now 9 years.

This gives us a high degree of visibility as we think about making long-term investments to support future growth. Turning now to LifePoint. Onboarding continues to progress on schedule. We initiated Phase 1 onboarding in January and commenced Phase 2 in April.

To date, we have welcomed over 700 employees from LifePoint to R1, and the technology integration for Phase 1 hospitals is currently underway. We expect to commence Phase 3 in July, with the goal of completing all deployment activities in mid-2022.

On a related note, we are pleased to have welcomed David Dill, LifePoint's CEO and President, to R1's Board. Deepening our strategic partnership, his depth of health care expertise and broad vantage point will be invaluable to the company. Next, I'd like to turn to our automation effort.

We are highly committed to this effort as it presents an opportunity to fundamentally transform the industry by reducing the latency and inefficiency that exists in the revenue cycle management infrastructure today. The 15 million tasks we automated by early 2020 delivered approximately $20 million in EBITDA benefit last year.

We now have 40 million tasks in production, up from 30 million as we exited 2020. These 10 million incremental tasks cover 8 new routines and demonstrate an accelerated development pace. The modular nature of our development approach allows us to develop new routines at a faster pace by reusing and adding to existing automation code.

Additionally, the investments we have made in additional core capabilities beyond just RPA, including optical character recognition, natural language processing, expert rules and machine learning, workflow integration and analytics have expanded our automation coverage of any given workflow.

In closing, we remain very excited about our business prospects going forward. To recap the key messages from today's call, our team continues to perform exceptionally well, and this is translating directly to our financial performance.

With our Q1 results, we are off to a strong start for the year and look forward to continued strong execution going forward. End market dynamics remain very favorable, and we have a high degree of confidence in adding $4 billion in NPR from new end-to-end deals in 2021.

VisitPay rounds out our PX platform via a market-leading consumer payment platform and establishes a leading position in the broader consumer payments ecosystem. Our expansion of the Ascension agreement is a meaningful validation of our PX technology solution, and the extension is net favorable at least to our prior agreement.

We continue to invest heavily in automation, and the modular nature of our development approach allows us to develop new routines at a faster pace. Now I'd like to turn the call over to Rachel..

Thank you, Joe, and good morning, everyone. We're pleased to report strong first quarter results with revenue of $342.6 million, up 6.9% year-over-year; and adjusted EBITDA of $80.4 million, up 30.5% year-over-year.

Adjusted EBITDA margin for the quarter was 23.5%, up 430 basis points from 19.2% in Q1 2020, driven largely by significant higher incentive fees. Reviewing the first quarter results in more detail.

Net operating fees of $286.1 million increased 1.9% or $5.2 million year-over-year, primarily driven by revenue from new customers and partially offset by anticipated COVID-related volume pressure. On a sequential quarter basis, net operating fees increased $14.7 million, driven by a continued recovery in patient volumes.

Incentive fees of $29 million were up $12.2 million over the prior year and $1.6 million sequentially, driven by strong operational execution.

Other revenue of $27.5 million increased 20.6% or $4.7 million year-over-year, driven by contribution from SCI, which was somewhat offset by lower revenue from physician advisory services due to COVID-related volume decline.

The non-GAAP cost of services in Q1 was $242.8 million compared to $237.6 million last year, driven by costs associated with serving new customers and onboarding LifePoint. Importantly, our automation digitization efforts continued to drive efficiencies, which help keep cost of services flat sequentially and down 330 basis points year-over-year.

Non-GAAP SG&A expenses of $19.4 million were down almost 9% year-over-year, primarily due to lower travel and marketing costs as well as corporate cost control actions. On a sequential basis, SG&A costs decreased $3.4 million, as Q4 results included $1.6 million of payroll taxes related to the vesting of employee stock awards.

Adjusted EBITDA for the quarter was $80.4 million, up $18.8 million or 30.5% year-over-year. This increase was largely due to higher incentive fees further magnified by our automation and digitization efforts, helping lower costs.

Lastly, we incurred $13 million in other costs in Q1 related to the rationalization of our real estate footprint, ongoing COVID-related expenses and costs associated with strategic initiatives, including the VisitPay acquisition and the capital structure simplification transaction, which we completed in January. Turning to the balance sheet.

Cash and cash equivalents at the end of March were $103.5 million compared to $173.8 million at the end of December. Use of cash in the quarter was largely due to the $105 million payment for the conversion of preferred shares to common as well as CapEx of $9.6 million.

We generated $46 million in cash from operations in Q1, driven by adjusted EBITDA growth in the quarter. We remain focused on generating strong cash flow from operations. And one of our focus areas this year is to carefully manage our AR days, which increased last year primarily due to AR associated with the RevWorks and SCI acquisition.

We also expect our other expense line to moderate, excluding expenses related to M&A activities. Net debt at the end of March, inclusive of restricted cash, was $444.1 million compared to $379.8 million at the end of December. The increase was driven by use of cash for the capital structure transaction.

Available liquidity at the end of Q1 was in excess of $130 million, consistent with commentary on the Q4 earnings call. We believe our liquidity is sufficient to invest in and grow the business while navigating the current environment.

In order to provide additional flexibility and to fund the VisitPay acquisition, we intend to refinance our current credit facilities concurrent with the completion of the acquisition and expect improved liquidity and pricing as a result of the refinancing. Turning to our financial outlook.

We continue to expect revenue of $1.41 billion to $1.46 billion and adjusted EBITDA of $315 million to $330 million for 2021. We continue to assume the patient volumes remain at 90% to 95% of pre-COVID levels, in line with our experience year-to-date across our customer base.

We expect to update our guidance after completion of the VisitPay acquisition. R1 will acquire the business for approximately $300 million in cash in a transaction that provides a tax benefit valued at approximately $40 million, equating to an effective purchase price of approximately $260 million.

To give you a sense of VisitPay's financial profile, the growth is strong with greater than 70% compounded annual revenue growth over the 2019 to 2021 period and comes with a very compelling gross margin profile. Beyond 2021, we expect VisitPay to be accretive to growth and margins.

Consistent with my comments on our last call, we expect Q2 revenue in the range of $335 million to $345 million and adjusted EBITDA of $65 million to $75 million. As previously noted, the anticipated sequential decline in adjusted EBITDA is largely a function of upfront costs associated with onboarding the LifePoint contract.

Before I conclude, I want to briefly touch on our ESG initiatives. We published our inaugural ESG report in March, and we are pleased to have received a lot of positive support and feedback. We seek to enhance the interest of all of our stakeholders through our ESG commitments that are centered on innovations, integrity and inclusion.

Our report can be viewed at r1rcm.com/esg, and as always, we welcome your perspective. In closing, I'm pleased with our continued execution that delivered Q1 results ahead of our expectations. The fundamentals of our business remain strong, and we look forward to maintaining the momentum demonstrated in Q1 as the year progresses.

Now I'll turn the call over to the operator for Q&A.

Operator?.

[Operator Instructions] Your first question comes from the line of Sean Dodge with RBC Capital Markets..

Congratulations on the quarter. On the revenue outlook, Joe, you mentioned a high degree of confidence in your NPR target. Maybe digging into that a little bit more. You've said before, you've been very active on the RFP front, including a handful of several large ones.

Can you give us a sense of how those are progressing? Are all of them still active? Have some been decided now? And then maybe anything else you can kind of share about sales pipeline sales outlook and how we should think about you hitting that $4 billion over the coming quarters?.

Yes. Thanks, Sean. Just a couple of comments to provide additional color on progression of pipeline. The first thing is, I would say, linking to your question, I would say, yes, the RFP activity is active, and we are progressing that nicely through the different phases of the pursuit process, commercial pursuit process.

The second thing I would say is our, in total, active end-to-end pipeline is up 175% since the start of the year. So we're also seeing -- we're seeing active opportunities progress to later stages, which underpins some of our view on the year. And then in totality on an end-to-end basis, we're seeing the total pipeline in aggregate grow nicely.

So we continue to feel really good about the end-to-end offering, the end market receptivity, and we're seeing that across the board in that overall commercial pipeline dimensioning. In addition to that, and I think another indicator of the flexibility we have in our offerings, we booked 24 new modular agreements with new customers in Q1.

And the overall revenue bookings was 74% ahead of our internal target. So we continue to see just broad-based positive activity in the end market. And that's some of the dimension that I'd share with you, Sean..

Okay. Great. And then maybe along the lines of what you just announced here with the Ascension and the complete adoption there now of your PX solution.

If we think about the cross-selling opportunity across the other parts of your current base, can you give us an idea of what proportion is currently using all the components of your PX platform? Maybe just kind of how we should be thinking about the size, the potential around cross-selling into the other parts of the kind of the non-Ascension base?.

the order intake; the referral process; scheduling signals; financial clearance, i.e., the registration, operate, et cetera, that process; and then finally, the payment process. So that overall value prop is resonating, and we see strong receptivity to that in our captive end-to-end customers..

Your next question comes from the line of Donald Hooker with KeyBanc..

I understand the acquisition of VisitPay, but I was curious if you all could provide any detail on VisitPay's financials itself.

Like what exactly are you acquiring financially? Is this the company that will -- kind of what kind of revenue should we start building in? And are there other large EBITDA losses? Can you elaborate on some of the financials of the company you're acquiring?.

Yes. What I would say, Don, is I'll just use a full year kind of kind of basis. So if we look to 2022, we would expect this business to do about $41 million, $42 million in revenue, and we would expect it to contribute conservatively $7 million to $8 million in EBITDA.

As Rachel mentioned in her commentary, this business has been growing at 70% compounded over the trailing 3 years. So it's got a very high-growth profile, and it's got a very compelling gross margin rate that comes with that growth. But maybe equally important, there are significant, what I'll call, captive operational synergies.

And what I mean by that is, that's where we're not dependent on the external markets for growth. We're, just to a large degree, in control of fully deploying the VisitPay platform across our contracted book of business.

And those synergies come in the form of digitizing interface with the patients around the payment process, which allows us to lower our cost structure. The second thing is improving the yield, which contributes to our KPIs.

And the third thing is we think, over time, we will be able to materially shift onto the VisitPay platform digitized statements or online bill presentation. And today, we have a significant amount of cost that still exists in print statement operations.

Somewhat tactical, but it's, without a doubt, from our standpoint, a synergy that we have a high degree of confidence in. The collective bulk of that is probably at maturity more than twice VisitPay's 2022 contributed EBITDA.

So when we roll all that in, not even counting for net new growth, we think we can go get -- we think on a synergized basis, with only assuming our operating control synergies, this is a very accretive transaction for us. It would be very strategic technology capability in the eyes of the end market..

Got you. I mean, just to be clear, so there's the synergies, which make a ton of sense, that will probably phase into your P&L over the next few years. And then just on a stand-alone basis, you're saying $41 million, $42 million of revenue next year, obviously, high growth. I mean, just to be clear..

Yes, growing at 70% trailing. That will come in as the business grows. But it's still, in any scenario, going to be, from our standpoint looking out past 2022 off of that basis, a very high-growth business and a very high-margin business..

Sure. And then maybe just as a follow-up. Also, I would love to hear -- I mean, VisitPay has been around for a while. I think I'm just looking at their -- I'm not familiar with them, obviously. But it looks like they have some nice logos on their website of different health systems they work with, some of which are RCM's clients and some which are not.

Can you just talk about kind of any maybe client introductions or kind of overlap or what their client base looks like?.

Yes. No, one of the things that as we looked at the different targets in the patient payment ecosystem, one of the things we really liked about VisitPay's platform is they've actually served some of the most sophisticated health systems. And you can see that in their logos, as you referenced, Don.

And from our vantage point, that's a really important demonstrated capability that we like about their profile. We know how hard it is to serve some of the leading health systems. And those are health systems that are run very, very well.

So when you see a technology that's driving incremental improvement, whether that be in the patient experience or in the financial outcomes, that is a true proof point from our standpoint to the leading position that VisitPay has. That's the first point.

The second point is right after this call, we've got probably 20 calls with prospects, meaning not current customers, where we're really excited to introduce this acquisition and talk with those potential net new customers about the enhanced value prop we're bringing to the market.

And that's an indication, Don, of some of the growth synergies that in my prior comments I didn't even include. But we do think there's potential over time for those to be significant and potentially outweigh the captive operational synergies that we used in our underwriting case..

Your next question comes from the line of Stephanie Davis with SVB Leerink..

I echo my congrats on a very busy quarter. Kind of following on the last question, I was hoping to hear about how you chose VisitPay among the many payment providers in the health tech universe.

And just given some of your prior investments on the patient experience platform, what nudged you closer to buy over build?.

their growth -- their sales team and their channel for growth; the second thing is their marketing and some of the commercialization and productization skills that they have; and then finally and most importantly was the technology development profile. And so talent was a big factor for us.

And then the third or final thing is really just the advanced analytics and algorithms they have around serving the patient with very tailored financing options. And we think that's a key differentiator above and beyond just a bill presentation platform, which obviously is very, very important.

But at the end of the day, those deep insights and the analytics that they've built over the past 10 years, we think, are compelling and differentiated to their peers..

Understood. So kind of as your PX development capabilities going forward as well..

Yes. I don't think -- I think we're in really good shape from depth of capability in every one of the workflow steps.

Where our, call it, organic investments have been and are going to continue to be are around the deep integration across the process flows, so across that workflow continuum, and deep development work to ensure we seamlessly integrate across care settings. So I mentioned ambulatory and acute.

That was a big strategic driver in our discussions with Ascension. And then I would say, looking forward, we anticipate making significant investments organically via our technology teams around extending that workflow continuum into the post-acute setting of care, which we think there's a significant opportunity.

And then the final thing is, from our standpoint, off of the PX platform, we think there's a very logical extension of some of these services to better serve the clinician or the provider. So those are some areas on our internal development road map looking forward that we're very focused on..

Just one last follow-up from me.

Just given this acquisition and the extended Ascension contract, how does it change your relationship with Phreesia, if at all? And do you know if Ascension is still interested in expanding the hardware component given kind of the changing views on that with COVID?.

Yes. I really don't want to get into -- it wouldn't be within my perspective to get into Ascension strategies from an IT standpoint on hardware.

But what I would say is we're very focused on solving a very complicated problem, which is -- and I'll keep referencing this, the integration, the seamless integration in the eyes of the patient across care settings and across workflow.

And for us to solve that problem, we have to go very deep on the integration of technology, and that underpins kind of all of our bias and our actions.

Now there will be different personas of customers, and there will be customers that don't necessarily want to embark or they're not prepared at this point in time to embark on that journey, and they just need a very compartmentalized solutions set. So I think our focus -- and what I would draw your attention to is our focus is along those lines.

And we feel and we're hearing from our current customers as well as target customers who, by our own admission, are the larger kind of integrated health systems that they really would like us to bring that value prop to the market. And so that's where our internal efforts lie, which is maybe not the same end market as some of the intake companies..

There are no further questions at this time. I would now like to turn the conference back to Joe Flanagan -- we do have a question, I'm sorry..

Go ahead, Gene..

Congrats on this quarter.

Did you talk about the client overlap with VisitPay, in particular, the maybe quantifying the market opportunity of cross-selling into your base and vice versa, maybe RCM into their base? And up to this point, do you have any of your own patients' functionality that maybe is going to be replaced, either self-developed with your script library? Or are your customers generally using third-party applications for this function now?.

Yes. So let me first cover -- just give a little bit more color on client overlap. VisitPay serves Intermountain. So we work with them in that setting. And as I mentioned before, they're partially deployed at Ascension. We will fully deploy the platform at Ascension.

And then in our captive book of business outside of those 2 anchor clients, there's significant white space for us to deploy. Now as part of that deployment, we will be displacing third-party patient payment platforms that exist in that third-party spend that with our contractual frameworks and transition to our control.

And that's very much in line with comments that I've had in the past, where we have an internal technology platform. And we have very broad coverage of the process with our captive technology. We displace and in-source, integrate and simplify for our customers their technology ecosystem. And that will occur with VisitPay.

If you look at VisitPay's outside of primarily Intermountain, and you can see some of the logos on their website, whether that be Inova, Carilion Clinic, Geisinger, Henry Ford, you start to get a sense that from our standpoint, they've done the hard work of trying to penetrate the leading integrated delivery systems.

And that's squarely in our strategic focus from a growth standpoint. It's early innings. We're just starting the process.

But I'm generally optimistic that those discussions will proceed well, and we'll have a lot of focus from our commercial teams to curate those relationships and look to convey the value on a broader basis that we can deliver via a partnership.

So that's how I would characterize, Gene, kind of the spectrum of, call it, installed base and client potential synergy. Angie, if we don't have any more questions, just thank you for your help today moderating the call, and thanks, everybody, for joining us today.

We are very excited about the developments that we're announcing, and look forward to updating you on progress on an ongoing basis in future calls. Thanks again for all your participation..

Thank you for participating in today's conference call. You may now disconnect your line at this time..