Thank you for standing by. My name is Sydney and I will be your conference operator today. At this time, I would like to welcome everyone to the R1 RCM Q3 Earnings Call. [Operator Instructions] Thank you. Evan Smith, you may now begin your conference..
Good morning, everyone. Certain statements made during this call maybe 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 and 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, 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 may differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to, economic downturns and market conditions beyond our control, including inflation and high interest rates the quality of global financial markets, regulatory changes impacting us and our customers and our ability to timely and successfully achieve the anticipated benefits and potential synergies of the acquisition of Cloudmed and factors discussed under the heading Risk Factors in our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q.
We will also be referencing non-GAAP metrics on this call. For a reconciliation of non-GAAP metrics to the most closely comparable GAAP metrics, please refer to our press release. Now let me turn the call over to Lee Rivas, our CEO.
Lee?.
Thank you Evan. Good morning, everyone and thank you for joining us. Our sequential and year-over-year third quarter results demonstrate the strength of R1’s innovative technology-driven operating model and our commitment to delivering value to our customers.
We continue to drive performance through a focus on operational execution, synergy realization with Cloudmed and investments in intelligent automation and our generative AI across our environments and business processes.
Jennifer will cover the financials in more detail, but we are pleased with the performance this quarter and progress on our strategic priorities to drive shareholder value. First, I want to share my perspective on industry dynamics.
We continue to work closely with our provider partners to more effectively address two items that are critical to their success, revenue optimization and workforce management. These are being exacerbated by changes to payer time frames, increased coding complexity, regulatory shifts and macroeconomic pressures.
By leveraging a constant supply of structured and unstructured data from all payer and provider types across U.S. care settings, we deliver highly integrated analytics that uncover new opportunities to drive revenue optimization and cost savings for our customers. This, in turn, drives value for our shareholders.
And most importantly, we save our customers time and money by simplifying the enormous amount of fragmented health care data to eliminate their need to stitch together a complex set of disconnected solutions for multiple vendors. On the payer side, turnaround times remain mostly stable on a sequential basis.
We anticipate continued improvement over the next several years as normal cycles return following COVID. Improvements continue to positively impact our AR trends. Similarly, patient volumes have continued to stabilize, implying a constructive environment for our ability to collect cash on behalf of our customers.
We believe our strategy continues to position us well to leverage and respond to industry dynamics. We combine best-in-class technology and services to deliver superior outcomes at every stage of the revenue cycle workflow.
With more than 500 trusted partners representing over $900 billion of covered NPR, we have a growing structured and unstructured data set based on over 500 million patient encounters annually.
Our operating scale and access to this real-time performance data empowers our intelligent automation and now generative AI initiatives to deliver optimized revenue yield at a lower cost more quickly. This maximizes revenue while alleviating our customers’ operating expense and capital cost burden while improving patient satisfaction.
While large-scale deployments are not without troubleshooting and change management, our operating model is battle tested, it allows us to sign multiyear contracts with significant embedded earnings as contracts mature, and we help our customers with their goals.
We believe this model will drive long-term sustainable growth by expanding our total addressable market and our pipeline through continued advancement of our modular and fully integrated solutions to meet more customers where they are on the revenue cycle management optimization journey.
Our relationships with over 500 clients across the RCM workflow continuum, combined with our global captive resources, deep experience in technology development and deployment and our access to significant data distinctly positions R1 to deliver innovation at scale.
An example of how we have leveraged these vast data resources to the count pre summarization, and AI bought reviews account-specific data inputs and summarizes key account notes and AR events, improving productivity by saving our expert’s time on each open account receivables.
We remain focused on three areas of technology investments that are critical to client success, intelligent automation, patient experience and scaled analytics.
Across all three, we use a variety of technologies, including robotic process automation, or RPA, machine learning and GenAI to build solutions that aim to lower cost, improve yield and enhance the patient experience. Intelligent automation removed steps from highly manual processes to increase efficiency.
Embedded intelligence and broad data visibility have helped and will continue to help us build predictive AI and machine learning models to improve processes, eliminate unnecessary steps and drive efficiency and yield. Our track record of bringing new and innovative technologies to the sector showcases our leadership and revenue management.
For example, as you saw in this morning’s press release, we announced the expansion of our Microsoft relationship. This collaboration will integrate Microsoft’s open AI service into the R1 platform to bring enterprise-level generative AI into health care revenue cycle management.
We have started to deploy generative AI solutions and tools live in production in a few targeted areas, including physician coding quality, payer follow-up and enhancement of revenue integrity rule productivity. We believe we are ideally positioned to leverage and apply GenAI across revenue management, and we intend to lead this evolution.
Our first large language model or LLM application was recently introduced and significantly increases the productivity of physician coding quality assurance, integrating tools for Microsoft’s Azure AI studio.
The application evaluates complex medical records to predict physician evaluation and management codes and improve coding quality across patient charts. Historically, our team manually coded approximately 50,000 physician charts per week and sampled around 5% of those to assess quality.
Now we were able to automatically compare our 50,000 manually coded charts to the automated code. R1 recently finalized the automation of quality assurance for 100% of its coding volume in this area, resulting in improved coding quality and more satisfied physicians. We conceived and delivered the application in under 4 months.
We have developed a product road map with a catalog of generative AI use cases planned for testing and deployment through the remainder of the year and into 2024. Along with our existing platform, data assets and access and technical agility, we expect our investments in GenAI will further extend our competitive advantage.
Finally, I would like to discuss our commercial progress with a few examples of cross-selling and up-selling across our business.
Today, R1 scale which was enhanced significantly by the acquisition of Cloudmed supports a broader range of clients by size and at every stage of the revenue cycle with best-in-class solutions to deliver improved performance.
R1 has the flexibility to meet immediate to long-term client needs with the capabilities and global scale to expand the partners over time. I am pleased with our progress in building a deep pipeline of active opportunities, including a number at the final stages of negotiations.
While we are confident in signing $4 billion or more of NPR in the coming months, our priority is structuring a long-term collaborative partnership with terms that create optimal value for R1 and our partners.
To drive performance and value for both our customers and shareholders, we regularly review our partnerships to ensure alignment on goals and objectives. As such, we have been in active discussions with one of our physician clients to determine a mutually agreed upon path forward.
In the interim, they have sent us a notice of their intent to terminate the contract. This client is not material to our financial performance. On the modular side, we’ve continued to see accelerated bookings because of macroeconomic pressures, positioning us well for continued growth.
Now let me give you an example of how we can meet the customer anywhere on their journey by leveraging our suite of modular solutions. One example of cross-sell of an R1 solution is a long-standing Cloudmed customer who had increased their usage to several Cloudmed solutions over the past 3 years.
The customer is exploring additional patient payment solutions which presented an opportunity to showcase our entry pay solution, a fully integrated and intuitive patient payment experience via a personalized self-service platform.
They selected R1 based on our strong performance over the past several years and the capabilities of the Entri Pay solution. We have also had success adding Cloudmed solutions to the end-to-end customer base to provide advanced reporting and analytics for improved performance.
As our existing and potential customers continue to experience financial and macroeconomic pressures, we believe our modular and end-to-end offerings, leveraging technology and services on a global scale will create new opportunities to drive pipeline growth and increased bookings.
Our diversified portfolio ensures we can solve the most complex problems our customers face, either on an individual or comprehensive basis. In closing, we are confident our innovative solutions will continue to exceed our customers’ increasingly complex needs, driving growth and shareholder value.
Our team remains focused on delivering on our priorities and finishing 2023 with a strong fourth quarter. We are committed to our mission to make health care better for all. Now I’d like to turn the call over to Jennifer to review the financials..
Thank you, Lee and good morning everyone. As Lee mentioned, we delivered another strong quarter with revenue of $572.8 million and adjusted EBITDA of $161.5 million. Adjusted EBITDA in the quarter grew 30% year-over-year and was ahead of our expectations.
Total revenue in the third quarter grew 15.5% year-over-year driven by continued growth across both our end-to-end and modular services. Let me provide a little more color on revenue. Net operating fees of $368 million grew approximately 14% or $43.8 million year-over-year.
Growth was driven by the onboarding of our record new business wins from 2022 in our end-to-end business. It also included low single-digit growth in cash collections from our existing end-to-end customer base, and that was in line with our expectations. Incentive fees were $30.1 million in the third quarter.
Let me point out a couple of onetime drivers of incentive fees in the current quarter. The first is a $4 million payment for a modular client whose contract ended in Q3 instead of Q4. This was offset by a $2 million impact of a customer contract change that reclassified revenue to net operating fees.
The net impact was $2 million of incremental incentive fees in the current quarter. On a normalized basis with these adjustments, incentive fees were in line with our expectations. We are pleased with the continued progress here and with the results we are delivering for our clients.
Our other revenue generated mostly from our modular business, including Cloudmed posted another strong quarter with revenue of $174.7 million. As Lee mentioned, revenue growth year-over-year is primarily driven by cross selling new solutions to our 500-plus customers.
Also, revenue this quarter includes fees earned through our wind-down support of the previously discussed physician customer. We have been paid for these services, so there is no future collection risk. In addition, Cloudmed continues to perform in line with our growth expectations for 2023. Now turning to expenses for the quarter.
Non-GAAP cost of services in Q3 was $364.7 million, up $37.8 million year-over-year and roughly flat to the prior quarter. The year-over-year increase was primarily driven by costs related to onboarding new end-to-end customers, continued growth in our modular business as well as investments in technology.
Non-GAAP SG&A expenses were $46.6 million in the third quarter, up approximately 3.3% from the prior year and down $6.7 million from the second quarter.
The current quarter included an allowance for credit losses of $7.5 million primarily related to aged receivables for two customers, one end-to-end and one modular in light of their specific business outlook and current environment. Our adjusted EBITDA reported for the quarter was $161.5 million.
Revenue growth, combined with continued cost discipline, and execution of our integration priorities drove these results. We continue to perform in line with our expectations for the year. Lastly, we incurred $29.4 million in other expenses primarily related to Cloudmed integration costs and strategic growth initiatives.
The current quarter includes approximately $12 million related to restructuring the organization to better align to our long-term growth strategy. The quarter also includes a charge of $7.2 million for the last large facility exit. As a result, we remain on track to achieve approximately $30 million in realized cost synergies this year.
Now let me provide a couple of comments on the balance sheet. Cash and cash equivalents at the end of September were $164.9 million compared to $123.1 million at the end of June. We generated $109.2 million in cash from operations in the current quarter. We also incurred $32.4 million for capital spend.
Net debt at the end of the quarter was $1.57 billion, down $84.2 million from the end of June. Given the strength of our cash flow year-to-date, we paid down an incremental $40 million of debt above our required repayments for the year, including $30 million this quarter.
Our liquidity also remained strong with approximately $704 million of liquidity at the end of September, both from cash on our balance sheet and availability on our revolver. Now let me go to our outlook. Given our solid performance in the quarter and year-to-date, we remain in a good position to reiterate our 2023 guidance.
We expect 2023 revenue to be $2.255 billion to $2.275 billion and adjusted EBITDA to be in the range of $600 million to $615 million. We plan to provide our initial 2024 guidance as we normally do in early January. Let me close with a few key points on the overall business.
Number one, performance across the core business remained strong with additional opportunities for growth within our existing customer base. Number two, we continue to have strong bookings in our modular business. We expect these deals will have strong margins and faster time to revenue as deals are implemented.
Our end-to-end pipeline is deep and provides a runway for future growth. Number three, there is a real need for our solutions in the industry. We hear it from hospital executives every day. This need creates incredible opportunity for us to deliver value for both our customers and R1 shareholders.
In closing, I would like to thank our global team for their continuous commitment to delivering value to our customers every day. And with that, I’ll now turn the call over to the operator for Q&A..
[Operator Instructions] Your first question comes from Charles Rhyee..
Yes. Hi, thanks for taking my question guys. I wanted to ask a little bit more about pediatrics here. I know you guys talked about it being immaterial to the results here. Just trying to get a better understanding what might have happened here.
And I know you guys put in a lot of resources, including staffing overseas to support the onboarding earlier this year. Just trying to get a better sense on some of the dynamics here. Thanks..
Hi. Thanks, Charles. This is Lee. A couple of things I’d say here. First of all, we are very appreciative of pediatric mission supporting newborns and mothers. It’s a very important mission. I personally enjoyed working with the team in my here first 10 months.
The thing I’d point out about their mission, Charles, it is very unique and distinct relative to our broader physician customers. Just to give you a sense of the complexity of their model different workflows related to newborns and mothers, billing is different, reimbursement is different, systems are different.
And as you know, the initial onboarding didn’t get off to a great start. And there are clearly things we can improve. And all that said, what we could control on the metrics progress significantly over the last several months this year. And to your point, we did actually invest incremental resources for pediatrics.
And I would highlight that we will absolutely continue to work with them to ensure a smooth transition, which should take the next 12 months. And the last thing I’d point out, Charles, to your point, is this is not material to our financial performance..
Great. And if I could just follow-up. You did mention sort of you closed on new wins.
Maybe give us a little bit more color around what final stages are? And do you think pediatrics, you don’t expect us to have any impact on those discussions?.
Yes, to your last point, absolutely not, Charles. But let me just point out a couple of things, and I should probably just elaborate here.
The first thing is kind of building off what Jennifer said at the end of her comments around our value proposition, particularly in today’s time of need around the financial pressures on providers is our value proposition is absolutely resonating the scale of our model, the technology, just being able to meet providers where they are.
And we are clearly leveraging some of the commercial activity in our Cloudmed business to get access to see if it does some of the CFOs and CEOs. The second thing I’d say more specifically is we’re pleased with the progress and development in our pipeline and have a number of systems in late stages of negotiations.
And so what I’d say is just – and this is a bit of a nuanced part, Charles, while we’re confident in signing $4 billion or more – in the coming months, our priority is structuring long-term partnerships that create optimal value for our customers and for R1.
So while we move closer to signing one or more, what I don’t want to do is apply – put additional constraints on the commercial team. These negotiations are complex and I don’t want to unduly impact final terms. So I’ll leave it at that, but we’re feeling very good about where we are..
Great. And just to clarify, the added resources for pediatrics, I mean, was this contract even profitable? I mean, because it sounds like as this could maybe be a positive from a financial standpoint..
Yes. Yes, we had said that we had added costs and we had done that and we’ve kept them on through the first 9 months of the year. I would say that Lee mentioned it’s immaterial. I would say it’s kind of in the 1% to 2% EBITDA range as a percentage of our EBITDA, so not a lot of profitability..
Okay, thanks. Appreciate that..
Your next question comes from Elizabeth Anderson. The next question comes from Jailendra Singh..
Yes. Good morning, thanks for taking my questions.
Can you guys, hear me?.
Yes, yes..
I wanted to follow-up on this allowance for credit losses of $7.5 million. You guys called out it relates to age receivables for two customers, one end-to-end and one modular. Can you give a little bit more color? And kind of related to that, maybe broadly just there have been some concerns around some of your customers’ financial conditions.
Maybe talk about your customer health and how you feel about the market in general way?.
Sure. From our credit reserve perspective, it’s something that we look at every quarter. As we look at our results, we’re taking an approach of – in our CECL model, which is looking at the ultimate collectability of our AR. So based on the aging of our AR, we always take a reserve.
So there can be movement there just based on the aging across all customers.
The other thing that we do is we look at specific customers where we know that there may be risk based on specific outlook with the particular customer, things going on in their business, discussions that we’re having, things that we know about them in addition to perhaps the outstanding receivables that we have.
So in the current quarter, we did take a small increase related to our overall CECL reserve across all customers. And then we – in addition, we took two specific reserves related to the customer’s mission, one enterprise and one modular.
As far as overall health on customers, Jailendra, customers are under an incredible amount of pressure coming out of COVID, post recovery, volumes, cash collections, inflationary dynamics. It creates a lot of tailwinds for us from a need perspective in the market, but they do have incredible challenges.
So we’re doing what we believe is the right thing to do from balance sheet perspective and taking the reserves, and we’re continuing to closely monitor it..
Okay. And then my follow-up, I completely understand that we will have to wait until Q4 for detailed 2024 guidance.
But if you can just spend some time on percentage, any qualitative color, we should keep in mind as we have some moving parts here as we think about 2024 compared to this year?.
Yes. We’ll provide our guidance in early January, normal course as we always do. And Lee mentioned the pipeline and new business. So that certainly will be one factor – we expect continued growth in our modular business that will be strong growth for us.
And we’ll continue security of the margins on the new business over time, continued opportunities with automation. So those will be some of the drivers consistent with this year, quite frankly, but we’ll provide more details when we give guidance in early January..
Okay, thank you..
Your next question comes from Daniel Grosslight..
Hi, thanks for taking the question here. As you know, there’s a report out there questioning some of your accounting techniques among other things.
I know you’re not going to respond line by line to some of that news flow, but I was curious if you could just address if there’s been any change in your accounting assumptions around contract assets or receivables if you remain comfortable with those assumptions given what you just mentioned around the challenges at your customer base and how we should think about the development of bad debt or reserves for the next, call it, 12 months or so?.
Daniel, if you allow me, I’d love to just frame it first and then hand it over to Jennifer to answer your specific question on the report. First and foremost, we don’t believe the information included in the short report is accurate. A couple of points I would highlight. Underlying demand remains high, as we mentioned.
We continue to have success with expanding with our more than 500 customers, including 95 of the top 100 systems. Pipeline modular bookings continue to expand with diverse opportunities which support long-term growth.
Further evidence of the strength of our model is the expansion of our strategic collaboration with Microsoft to leverage our purpose-built technology to drive new innovations and further strengthen our competitive advantage.
And as we said before, our customers face challenges due to things Jennifer mentioned on the call payer time frame, increasing coding complexity, regulatory shifts and macro pressures. So while this provides us with significant opportunities, at times it can create some headwinds as we saw with a couple of our physician-based clients.
And while difficult, we’ve created a diversified scale business to provide flexible solutions to support continued growth even after these events. So with a strong financial profile, we’re on track to deliver on our 2023 guidance.
And last, our third quarter performance demonstrates the strength of our model for continued growth improved cash flow in Q3, which enabled us to pay down an additional $30 million in debt above our acquired repayment.
Jennifer?.
Sure. Specific to the revenue recognition question, there was a shift in our revenue recognition policy or methodology at the time of acquisition. So let me just give you a little bit of context around the reasoning behind it – there are some specific questions related to contract assets and some of that.
So what happened is at the time of the acquisition, we made a change to still recognize revenue under ASC 606, but we’re recognizing revenue at the time that we are performing the performance obligation because we have determined we can estimate the transaction price. So a little bit of context there.
606, which is the guidance for revenue recognition requires that you recognize revenue at the time that you performed the performance obligation to the extent that you can estimate the transaction price, and that’s the important point here because prior to the acquisition, Cloudmed determined that they could not estimate accurately the transaction price.
And therefore, if you can’t do that at the time the performance obligation is met, you have to wait and recognize revenue at the time you can estimate the transaction price. So in particular, this change happened in our underpayments business. So the nature of the underpayment businesses, we inflow potential opportunities back to clients.
They determine if it’s an opportunity they want to pursue with the payer. We send it to the payer. Ultimately, the payer pays some, all or none. And so there was – there’s an estimation of pretty – a lot of judgment in it, but there’s an estimation process.
What we determined and this came from an acquisition that we couldn’t estimate it because we didn’t have the models in place to ultimately be able to determine that liquidation rate.
And so we were taking a more conservative approach and saying, okay, well, when the cash comes in and we know what the liquidation is by the time we build a customer, we’ll recognize the revenue. This was the Triage acquisition acquired by Cloudmed in 2020. So that’s the way they were recognizing revenue. We kept it consistent after acquisition.
But Cloudmed through ‘21 built out a model to be able to estimate that transaction price. And so by the time R1 acquired the business in ‘22, we made the determination that we actually had good data, historical data, that was accurate and we could estimate the transaction price.
So at the time of the acquisition and accordance with diligence and the auditors and everything, we made the decision that we would change the revenue recognition methodology at that time. We did it as part of the purchase price at the opening balance sheet. So we set up the contract asset and we changed the methodology going forward.
The important point there is we thought that was the best thing to do. And the reason why is because if we had done at some point after acquisitions, we would not have had a – we would not have – we would have had incremental revenue that would have distorted our results going forward.
We would have had this kind of bolus of revenue that hit at the time we changed the revenue recognition process, and we didn’t want that to happen because we had the data we did it. Now the accuracy of the model has continued to be on kind of on point, and we’re constantly every quarter updating for the collectibility percentage.
So any change in our collections rate over a period of time will automatically get caught up in the model and the revenue would be adjusted real time. So there’s not expected to be big swings in revenue because we’ve accelerated this methodology. It’s all part of the go-forward model. And it’s been accurate. We’ve done a look back.
We continue to do a look back and the cash that we’re actually collecting as a result of the contract assets that we set up is very close to the estimates that we made. So I know that’s kind of a long-winded answer, but I want to make sure that you understood the context around it because that’s an important point..
Yes. That’s helpful. And I guess to the last part of my question, as we think about this provision for credit losses, and you kind of addressed it with Jailendra’s question, but I’m curious, as we look forward, do you think it’s obviously high this year relative to past years.
Do you think kind of this year is abnormally high? And as we think about ‘24, that should moderate? Or do you think we’ll continue to be in this area where we’re seeing increased credit losses just because of the difficult situations some of your customers are in?.
Yes. I mean a significant amount of our credit loss reserves this year were related to one specific physician customer. And I would say that’s an unusual situation. That’s not something that happens in the ordinary course.
It’s very specific to the nature of that business and that customer very unfortunate for the industry and for the customer and the patients associated with it, but that was an unusual situation. So I wouldn’t expect that they would stay at the same level that we’ve had this year, but it’s one of those things that we’re going to continue to monitor.
The challenges that these customers are under actually create opportunities for us, both in our end-to-end business and our modular business, where there are there’s more pushback from the payers and denials and underpayments and some of the other services that we provide.
So it creates opportunities for our business and helping them respond to the challenges, but also at times it can create issues where the systems have financial challenges resulting in ultimately bad debt. So it’s something we’re going to continue to monitor. But I would I expect to see some improvement as we move forward next year..
Makes sense. Thanks for the color..
Your next question comes from Glen Santangelo..
Hi, yes. Thanks for taking my questions. I just want to follow-up on a couple of things. First, as it relates to pediatric, Jennifer, I think I heard you say that it represents in today, I guess, 1% to 2% of EBITDA. But I also heard you say that you made a fair amount of investments in this business.
Will you have the ability to strip out some of those costs post the termination of the contract that might offset some of the loss to EBITDA.
I just want to think about that a little bit more as it might relate to ‘24?.
As it relates to ‘24, I mean the contract termination is an effective data December of this year, so the end of the year, but there’s going to be likely a lengthy transition period, we’re having active conversations with them. We’re going to continue to support them through the transition.
We expect it will be a very complex transition to move away, so there’s still some things to work out with them on what that transition looks like and the time that it will take them to move away. But I would expect that we’ll continue to see revenue through some portion of ‘24 as they transition away.
Well, obviously, we’re going to do the right thing for the business and we’ll take down costs as the as they begin to transition away. But some of that is still to be determined, and we’ll give more color when we give our guidance in early January..
Okay. Perfect. Lee, if I can just sort of follow-up. You talked about the uniqueness of this contract. But earlier in the year, you talked about integration issues, not just at pediatrics, but also LifePoint was another sort of high-profile situation.
Can you give us an update there? And as you think about the rest of your book of business, do you feel comfortable with all the other contracts? Or do you feel like – or do you feel like pediatrics was sort of this just isolated incident? And I don’t know if there’s any contract renewals coming up in ‘24, ‘25 that you want to flag for everybody.
Thanks..
Yes, sure. So let me just kind of start with a broader point. And there’s a bit of nuance to that kind of complexity point. I feel – we feel very good about the broader base of customers.
And there’s this item we’ve talked about, which is the pressure they’re under, right? So the pressure they are under with higher labor costs, with point solutions on the technology side, pressure that comes from payers, and that makes our jobs even more important, our role even more important.
That said, it puts pressure on us to perform, right? And it puts pressure on all metrics, and we’re not perfect.
And we – but we broadly, as you can see from our incentive fees, are helping our customers to progress, okay? So – and I would add now just getting to the complexity point, all onboardings are complex, right? We are installing our technology. We’re applying our best practice processes. We’re shifting people.
And as you can see from some of our recent large onboardings, they have gone very well and we have a track record of success with all of our large customers.
Now there is a level of complexity that is unique when it comes to certain customers and the variables I would point out, and this is not specific to pediatrics, just generally things now that I’ve – being over 10 months I look for, it’s when a customer has multiple host systems.
And I don’t just mean the top two, the largest two, I mean, more than several, so lots of host systems. When they are fragmented geographically lots of small hospitals, when there are not standard processes and when there are either no technology or fragmented technologies.
My learning here as the leader of this business is we have to be really diligent about the customers that we are partnering with and also more realistic about onboarding time lines and the complexity of onboarding.
So my answer to your question is, I actually feel really good about the broad base of our customers, especially the large systems that have a lot less complexity. And I would say to your last point, this is – the pediatric is a unique situation.
Again, we’re going to support them, but there’s a lot of complexities and that is even distinct relative to the broader base of physician customers we have, which we are a leader in that market just based on lots of metrics. So I would say we feel very good about what we’re doing..
Okay, thanks..
Your next question comes from Elizabeth Anderson..
Hi.
Can you hear me?.
Yes..
Hi.
Can you hear me?.
Yes..
Hi. I wanted to ask about your cash balance. It looks like there’s a bit of a buildup of cash. Is this related to the fact that you may have to purchase an asset from Sutter.
Otherwise, presumably it would be better to keep voluntarily paying down the 7%, 7.5% debt rather than get 5% of the cash, right?.
Yes. So we have paid down $40 million of incremental repayments above the required repayments year-to-date. And that’s something that we’re going to continue to look at and pursue opportunities to pay it down based on the obligations that we know we have and investments that we’re making in the business.
So we will continue to do that, and that’s one of the priorities that we have from a capital allocation perspective is to continue to pay down debt. As far as the Sutter asset, there was a put option that was included in the Sutter agreement. Those are still conversations that we’re having with Sutter.
There’s been no determination that’s been made at this point related specifically to that asset. They have roughly until the end of the year. I think it’s the very beginning of 2024, early January to make the final decision.
But we’re leaving ourselves some opportunity and flexibility with the cash balance, but certainly paying down debt is one of our priorities..
Got it. And then – thanks for that. Just a quick clarification. You guys mentioned that the wins could be coming in the coming months.
Does that imply that could possibly creep into 2024? Or is this definitely still a 2023 sort of win pipeline?.
Yes. The thing – I want to be careful just putting pressure on the teams. So – and look, my experience, which is relatively short, but I also have tracked the history of this business on what’s happened with the contract negotiations is that it is literally impossible to predict exact timing.
What I would say is that we have a couple of deals that are late stage enough for me to have confidence to say, a couple of months, whether that’s September 31 or January 30 or February, I – it’s just hard for me to predict. So it’s hard for me to give you specificity on the exact timing..
Got it. Appreciate that..
Your next question comes from Sean Dodge..
Thanks. Jennifer, you mentioned beginning to unwind some of the actual resources you added a few quarters back to address some of the payer time line issues and the client implementation issues beyond just the pediatric one.
Did any of that unwinding happen or contribute in Q3 or is expected to be more of a Q4 event? And then – can you give us some sense of the magnitude of the savings you expect as you begin to roll some of those extra resources back?.
The way I would think about it, Sean, is we’re monitoring our metrics, our operational metrics, and we’re going to do the right thing by our clients and what we need to do to make sure that we are making incremental progress on the metrics that are important to them, and it’s something that we’re continuing to monitor.
As you’ve seen in the first 9 months of the year, we’ve continued to make progress on those fronts operationally. So, we are pleased with our performance, the incremental resources that we added are making the difference, and we believe contributing to our overall results.
With that said, I wouldn’t expect that you are going to see some huge increase in – or relief on expenses related to pulling back on resources. It’s going to be a slow, steady monitoring of kind of returning back to – now that we have gotten some of these metrics stabilize kind of returning to what we expect to be kind of normal course.
The other thing that could impact that is when some of these resources is bringing new business. So, as this new business comes on, likely resources could transition to new wins and new business to support that revenue.
So, there is a lot of dynamics there as far as the specific resources, but generally, we are continuing to watch the metrics, and we are going to make sure that performance is in line.
But overall, as you have seen in our incentive fees and the progress that we have made quarter-over-quarter there, we are seeing positive results related to these resources that we have added..
Okay, great.
And then some of the other cost levers you all have with the off-shoring in the Philippines center specifically, is there any update you can give us on how many employees you have in the Philippines now, maybe how many you expect to add over the next 12 months? And then how much of the extension base of work that you take the transition there has been transitioned thus far?.
Let me start Sean and then just kind of conceptually give you an idea of progress there. Look, we are very pleased with the progress there in Philippines. Jennifer can validate. I think we have 1,500 employees that are now significant growth projected over time as our customs – as we evolve with our customers.
But this is by all accounts a very successful initiative for the company, one that has benefited our customers, but we feel very good about the progress. We have got great leadership there on the ground and very connected to our U.S. team. So, we are feeling very good.
Jennifer, anything to add?.
Yes, 1,500 is about the right number. And remember that the expansion to the Philippines was announced associated with the Ascension renewal of that contract.
So, this was an opportunity for us to continue the partnership with the Ascension and expand in some of the front-end operations with patient contacts and scheduling to expand to the Philippines. And those were built into the economics of that renewal.
So, it’s an opportunity to share some of the savings with our customers, and it was a great way to be able to convey value to extension into partnerships, but we have seen very good success operationally as we have begun to move some of those operations over to the Philippines, and we expect that we will continue to expand that over time and also with other customers as well in the future..
Okay. Great. Thanks again..
Your next question comes from Jack Wallace..
Thanks for taking my questions.
I wanted to get a reminder on where we are with the deployment capacity and just any timing elements there with regards to some of these recent deployments as well as the Sutter Phase 2, particularly in light of accounts like maybe a more phased deployment strategy for new deals and thinking about whether that has any impact on when you would want to sign some of the new NPR.
And then a follow-up to that is what the pediatrics resources becoming available sometime next year, if you think about that as incremental deployment capacity or more along the lines of your cost saves. Thank you..
Thanks Jack. Let me start at the highest level on deployment capacity in general and then talk a bit about Sutter and then Jennifer, if you have anything to add on some of the numbers. One of my insights in my first 10 months is one of the reasons we are successful in most all of our onboarding is we can adverse capacity at the very beginning.
So, think about our model. We are – one of the ways we leverage and can deliver really good unit economics to a customer is as their employees at TRID, which as we know with administrative or clinical staff in the U.S. is pretty significant.
We can replace those individuals with trained individuals in our global captives that are already trained on the host system, whatever it is, and able to do that work, but we are also to ensure a smooth transition and no degradation in metrics are deploying capacity we have already added at some point.
So, we will continue this concept of having capacity to take on new customers or in some cases, as we saw a year ago, using that capacity as needed to deal with some of the delays we discussed in my first call. So, that’s one I would say. The second Sutter Phase 1 has gone well by any measure. I have been personally involved.
Jennifer has been personally involved. Our team is very engaged. I have been very impressed with our leadership team, the new leadership team there and making very good progress. Phase 2 is still on plan. We are working with them to determine exact timing, but that will also be part of once we get back to you in January on our guidance.
But so far, so good, everything is progressing as we planned.
Jennifer, anything to add on...?.
Yes, related to the deployment, we have said historically, and we are still maintaining in the $8 billion to $9 billion range. And so what will be important as we move into ‘24 is the timing of new business and the number and size of wins that become onboarded in early ‘24 and what that means.
We have the opportunity to scale up, scale down the deployment as we need to, based on the timing of new business. These deals obviously are very large and somewhat lumpy in nature when we sign them and onboard them. So, we can flex that capacity up and down as needed.
Specific to the PDX resources, we will continue to look at that as I have previously said on the transition planning, as they transition in ‘24, again we expect that to be a complex transition, and we are going to make sure that we are giving them the right support they need through that process.
But we will be measuring the timing of when the PDX operations transition and new business to determine what the resource shifts look like. The great opportunity for us is as we bring on new business, we will have some excess capacity with PDX that we can redeploy in the right places. And so we will continue to monitor that.
And we will have more information for you as we roll out specific guidance in early ‘24..
I appreciate that and just a quick follow-up. So, we have got about roughly $5 billion or so of NPR for Sutter Phase 2. The four more that’s expected to be signed sometime in the next few months, it gets us to the high end of that deployment capacity while we are not looking for a specific guidance for next year.
Just thinking about the time that the plant capacity would be tied up, would that prevent the company outside of any extra resources from pediatrics from signing additional NPR until the end of next year or is the right deals were coming through? Do you have the opportunity to add another $4 billion to $5 billion of capacity should you need it?.
Yes. We don’t expect deployment capacity to be a limiter on our new business..
Excellent. Thank you..
Your next question comes from George Hill..
Yes. Good morning guys and thanks for taking the questions. Lee, you have spent a little bit of time talking about like it seems like nuance discussions between you guys and the $4 billion NPR that you guys are hoping to sign in the up and coming months.
I guess is there any – can you give us any color for what the flavors of the conversation will look like and maybe kind of what the hang-up points are? And what I am most concerned about is, are there any implications for future deals as it relates to the negotiation of this deal?.
Thanks George. Let me try to – and the time left to give you a kind of short answer. The discussions are all very similar. They all start with, we are struggling with our revenue cycle. We are – we don’t necessarily have the talent to manage it. It’s – we admit, it’s very complex. We have our own labor issues, either cost or availability can you help.
And that discussion is happening. And I would add that there are often happening off the back of the Cloudmed business we already have with them on the revenue integrity side, so driving revenue yield, which migrates from the head of revenue cycle to the CFO or CEO. So, those – that’s what’s allowed us to build our pipeline. So, I would say no hang-up.
It’s the nature of the business when you are a system and need, but you want to do your own diligence to make sure that we can handle all their needs. And so what we articulate in our value proposition is a track record, go look at the very large systems we have onboarded and very successfully worked with. We show them the investment in technology.
So, we literally just show them the demos of our technologies, the AI we have applied within the processes of revenue cycle, whether they be coding, account reviews, etcetera. We showed them our team that is successfully onboarded other clients, we have them talk to our customers. Literally, we are all going to be reference checks.
And then it comes down to the nuances of deals, right. Who are the stakeholders of these systems. What are the – what level of IT constraints that they have. And so I would say, just given the deals that we have late stage, I personally don’t see any major constraints other than kind of natural course of terms and conditions.
So, that’s about all the detail I can give you, but I hope that was helpful..
Yes. That’s helpful.
Maybe then just my quick follow-up is I know it’s very early, but kind of have you had any conversations with attention about the proposed merger with Henry Ford and kind of how do we think about this same opportunity there longer term?.
That’s a great point. What I would say more broadly – well, first of all, it’s early with that. So, we know Henry Ford, Cloudmed is another example of having a customer that we have touch points with. There is a – this is something we don’t talk about enough. But within our installed base, there is significant opportunity.
So, I mean you guys could do the math. I don’t need to name the names, you can do the research, but my math is $10 billion plus of NPR within our customer base when you include Henry Ford, right, when you do the NPR map. Now, these take time. This is not something we are going to force.
This is some of these are discussions we will have with customers that will happen over time. But it’s a great question to just tee up the point that there is a lot of opportunity within our base..
Thank you..
Your next question comes from Craig Hettenbach..
Yes. Thank you. A question on Cloudmed, how you are thinking about the 20% growth that you talked about for this year.
And then, Lee, beyond this year, kind of the growth trajectory of Cloudmed, how you are thinking about importance of up-sell and just kind of momentum behind that business?.
Yes. So, a couple of things, we are – Cloudmed is now part of the broader R1 modular business. And a couple of things I would say just qualitatively, very, very strong bookings for the business that is both Cloudmed plus the old VisitPay business you would know and other R1 modular solutions.
So, just our primary metric is kind of what are we booking that drives revenue in the next couple of months into the year. Demand is very high.
I think of this as meeting providers where they are means if you are a provider and you are struggling with revenue yields, we have the absolute best solution you can get in the market that is enabled by the data we are collecting from claims, visibility across all 50 states, all payer types, all care settings.
One note in particular, if you were struggling with your AR we are the leader in AR and denial management because we are seeing data. We are able to even predict where there are denials. Jennifer mentioned underpayments, we are the market leader there and we are also the market leader in coding solutions.
And so very strong growth, very good leveraging, we have actually had a lot of success leveraging that commercial engine to sell some other R1 solutions, in particular, some recent wins we have had with our Entri Pay, the old VisitPay business. So, broadly very good and feel very confident in growth next year..
Got it. And then just as a follow-up, Nice to see the partnership with Microsoft announced this morning. Can you just touch on where things stand today? I know you have talked a lot about just development across AI and the opportunity.
Just from a tangible perspective, how do you see this impacting the business next year and longer term?.
Yes. I think this is a huge enabler for a business. And the reason is I believe we have a right to win in the application of this innovative technology because of the coverage we have across $900 billion of NPR across the legacy Cloudmed and R1 business.
That gives us visibility into the workflow, host systems of our customers and allows us to do things like – just one quick example, I was with an operator last week, and she showed me, hey, look, we used to have pages and pages of summary in our AR accounts. This is to get a customer paid.
And what we were able to do in a very short period of time with our large language model is summarize the account information, which massively streamlines the speed at which that operator can process that reimbursement. And think about that apply tens of thousands of times across our business.
Over time, it will reduce the need of – it will reduce the need to have people doing that same task. Reduce the numbers of people. So, the Microsoft partnership is an example of, first of all, a great partnership.
They are a partner for our cloud services, but also a symbol of the attention and the focus we are going to put on gen AI is applied to our business..
Thanks..
Your next question comes from Jeff Garro..
Good morning. Thanks for taking the question. With the reiteration of the FY ‘23 guidance and I am thinking about the implied Q4 range, I want to ask, what are the key points of variance that could drive results to the high or low end of that range in Q4? And any specific comments on incentive fees and cash flow in Q4 would be helpful, too. Thanks..
Sure. We feel good about the volume, cash collections going into Q4 results and our expectations for the quarter. We feel good about our synergy realization.
Some of the factors just based on the way that our revenue works is incentive fees could always be a guide up or down, although we are comfortable with the expectations that we have for incentive fees for the quarter.
And then we are going to continue to think about resources as far as new business onboarding and what’s to come and the timing of those as well as some of our modular business and the timing of some of those transactions and work that customers are asking us to do on their behalf.
So, those are kind of some of the factors that could drive it towards the higher end of the range, although we are very confident in the – reiterating the guidance for the full year of EBITDA that we gave to be in that – still be in that $600 million to $615 million range..
Great. That helps. And then a follow-up around the gross margin line, some nice outperformance there relative to our model in the quarter, likely some of that coming from incentive fees, but the expense levels also looked relatively favorable versus our expectations.
So, any further color on the impact of expense synergies or the deployment of technology that you have mentioned kind of already moving live and whether that’s having an impact already. Thanks..
Yes. It’s both. I mean we are continuing – this is one area we are continuing to monitor very closely, and we are continuing to drive hard. I mean first – our first priority is making sure that we are delivering for our clients and the performance metrics and generating the cash collections for them.
But we are always looking for opportunities, especially with the deployment of technology and opportunities there to streamline and make our operations more efficient, whether that’s utilizing global resources, utilizing automation opportunities and also continuing to drive high-margin modular business..
Great. Thanks for taking the questions..
Your final question comes from Richard Close..
Great. Thanks for squeezing me in. Jennifer, I was wondering if you could go over the third quarter incentive fees and the puts and takes there. You said something about a reclassification of $4 million. And so would that $4 million of hit modular rather than incentive fees. If you could just go into that, that would be helpful..
Sure. So, incentive fees did come in higher than what we expected for the quarter, but there were a couple of one-offs. As I have mentioned in the prepared remarks, the first one was some incentive fees that we would have expected to realize in Q4 that we had said realized in Q3 based on the timing of the customer contract.
So, think about that as recognizing it one quarter earlier, it would have hit in Q4. The second was a contract change and based on the nature of how revenue gets classified across the different revenue line items. The contract change was to change the nature of how we calculate the fees.
And because it’s more of a – not necessarily fixed fee in nature, but because it’s not tied to specific metrics and performance for those, for this particular customer because they wanted more predictable outcomes and their revenue and their expense going into the second half of the year, we made a change that will take it from the net operating fees into base fees.
So, instead of hitting incentive fees, it will hit net operating fees and therefore, it would bring incentive fees down based on the previous guide that we gave. So, I thought it was important that we gave that color commentary because we will continue to see that.
Obviously, the revenue that got pulled forward into Q3 would have been in Q4 as well as we will no longer see roughly that $2 million of revenue a quarter in Q4. And incentive fees, it’s going to be up in the other line item..
Okay. Thank you..
There are no further questions. I will now turn it over to Lee for closing remarks..
Thanks Sydney. A couple of closing points. Well, first of all, we appreciate your interest and support of R1. And as we have discussed today, the first point is customers need us now more than ever as they face challenging macro dynamics, and we are distinctly positioned to serve any of the revenue cycle needs.
Second point is we believe we have a right to win with a unique combination of services and technology and access to the structured and unstructured data of $900 billion worth of NPR to drive insights for customers, drive costs down and drive revenue yield.
The next point I would make is we have a growing pipeline with diverse opportunities when deed by size, type and solution interest. The next point I make is we have a large set of modular customers and capabilities, 500 customers in total.
This is a high-growth, high-margin business, an increasingly significant part of our business that allows us to meet customers where they are on the revenue cycle journey. And last, we have a strong financial profile and have delivered on our 2023 guidance remaining on track for continued growth and performance. Thank you..
This concludes today’s conference call. You may now disconnect..