Q3 2019 Earnings Call
Gentlemen, thank you for standing by because it's a much third quarter conference call.
At this time all participants are in listen only mode. After the speaker presentation, there will be a question answer session.
Lastly question during especially when it's press star one on your telephone.
Please be advised that today's conference is being recorded.
Any further assistance. Please proceed.
I'd now like to have the conference over to your speaker today Upper brochure.
Senior Vice President Investor Relations.
Please go ahead Sir.
Thank you Victor and good morning, everyone.
Joining me are ability, our chairman Chief Executive Officer, and Jeff Sherman, Our Chief Financial Officer. This call is being webcast can be accessed via the Investor Relations section of our company's website HMS Dot com.
Today's press release, highlighting our financial results is also post posted on our IR website.
Billing, Jeff will first provide their perspective on our recent financial operating result, and business outlook and then we'll open the line for questions. We ask that you. Please limit yourself to one question and one follow up so we can get through the full Q in a timely fashion.
Like I remind you that the financial results reported today and in this mornings press release, our preliminary they're not final until our Form 10-Q that their reporter and at September Thirtyth 2019 as filed some of the statements. We will make today are forward looking in nature based on our current expectations in a view of our business as they see it today such statements, including those related to our updated.
Full year 2019 financial guidance future financial operating performance and future business plans objectives are subject to risks uncertainties and may cause actual results could differ materially.
As a result, they should be considered in conjunction with the cautionary statements in today's press release and the risk factors described in the company's most recent SEC filings, including our Form 10-K .
Finally, we may refer to certain non-GAAP measures. This morning reconciliations of these measures to comparable GAAP measures are included in our press release posted to our website with that I'll now hand, the call over to Bill.
Thank you Robert and good morning, everyone.
Hmm did post mixed results for the third quarter versus a strong quarter. This time last year with revenue and adjusted EBITDA down year over year, but cash flow is up significantly.
Through the first nine months of 2019, our total revenue increased 4.6%.
With adjusted EBITDA, 16.5%, including the reserve releases in both years and an investment gain this quarter.
We continue the generates strong cash flow with year to date operating cash flow up 60% from a year ago on a comparable basis.
This significant cash generation is enabling us to invest in our IP infrastructure and product capabilities in order to support our future growth.
Overall, we remain confident in the trajectory and strength of our business given our year to date performance recent expansions of client work and very strong contract signings in Q3 across all lines of business.
With respect to each of our service lines. We have mentioned on past calls the potential for quarter to quarter variability, which on a whole impacted us favorably in Q2 and negatively in Q3.
So you'll be revenue did decline 10, the half percent when compared to one of the strongest.
Yeah, we quarters ever in the third quarter a year ago.
This year over year decrease can also be attributed primarily to the timing of recoveries related to certain customers.
And that's and as we have set in the past we have good visibility on an annual basis, our quarterly C. O V revenue can be lumpy as third party carriers do treat our Medicaid see Ob claims differently than original claims from providers.
Their systems at times are just not prepared to handle the volumes of claims or eligibility transactions we generate.
This is not a new phenomenon theyll be but it's important to understand that we cannot control the precise timing of third party payer activity.
The key point is that the revenue opportunity Nclb, it's not lost and we expect this revenue revenue to rebound in the fourth quarter.
We currently anticipate mid single digit revenue growth for see about CRB for the full year as we had originally planned.
We continue to work on enhancing our CRB growth my leveraging machine learning and automation and through product development, such as our real time insurance identification and eligibility verification solution.
Hainan integrity delivered another strong quarter with revenue up 11.1% from Q3 last year.
We are seeing encouraging encouraging trends in new solution adoption within our existing client base for both commercial and government programs.
Of course, our P.I. business opportunity is supported by CMS is heightened industry focus on program integrity as announced in the last two weeks my administrator Burma.
Our population health revenue in the most recent quarter was essentially flat on a year over year basis.
But up 8.8% sequentially from our second quarter.
Our consumer engagement platform Allysa continues to be the primary driver of our PHN revenue, which today is still primarily a volume driven transactional business.
We are working to balance our sales efforts between the signing of longer term recurring revenue agreements and shorter term transaction oriented services and Rob.
And at the beginning of 2019, we integrated P.H.M. sells into our overall commercial sales force.
This approach Unfortunately did not work as we had planned we have not obtained our sales targets. So far this year.
As a result, we are refining our go to market strategy and rebuilding a sales team focused solely on phs.
Which includes hiring both new sales leadership and talent.
To be clear, we continue to gain traction in the market and our sales pipeline for P. H M is solid.
We did sign or second at risk Allied the deal this quarter with a large national payer.
In which we have upside revenue potential based on the achievement of certain key performance indicators, including improvements and heated scores and their ability to close gaps in care through appointment scheduling.
A number of our recently signed contracts are much more complex, but also recurring in nature. So revenue will ramp and then be recognized over a longer period of time.
We also continue to build awareness of our P.H.M. capabilities with their state clients.
In fact, our interactions with certain state leaders have led the specific discussions about how HMS can help with programs designed to increase childhood immunization rates.
Reminders, the Medicaid members to complete their eligibility redetermination.
And very critical initiatives like reaching out to individuals on life sustaining medications impacted by adverse weather events.
Most recently, we signed our first contract, which a customer well pair both our risk stratification and analytic solution Ellie.
With Aricept care management platform.
And we have another similar sell pending.
This win is a great example of why we acquired vitreous health, which is the predictive and prescriptive analytics engine within Alley.
Our algorithms and analytics use historical claims and social determinants of health data to identify high end rising risk members as early as the point of enrollment. So health plans can proactively engage members from day, one to prevent high cost of assets.
It's also why we believe Ali as distinct from other risk stratification tools.
Our ability to connect hi in rising risk with care management and consumer engagement places HMS in a very strong competitive position to help our customers actively manage their members care.
Our allies the analytics then.
Inform us how the engagement has executed from the wording of the message to the mode used to communicate to the timing of the outreach and at scale.
Additionally in early October we invested in med advisor, a leading digital medication management company and Australia.
This aligns with our strategy to continue to evolve HMS is population management capabilities in the U.S., but also advance our international growth initiatives.
It's really in the United Kingdom, and nurture continued innovation to improve clinical outcomes.
We intend to pair met advisors medication management software software platform with our P.H.M. solution as part of this strategic relationship.
In summary for the quarter, we believe our recent sales momentum and strategic investments combined with very positive market trends offer numerous opportunities for growth.
And support our outlook for the remainder of 2019 and into 2020.
We will remain focused on delivering on our clients expectations to continue to help bend, the cost curve and improved clinical outcomes and quality.
Jeff will now provide additional detail on our third quarter performance Jeff.
Thank you Bell good morning.
While our financial performance in Q3 was not up to our expectations. We did deliver solid quarter in terms of cash flow and we currently anticipate sequential revenue and earnings growth in Q4.
As Bill mentioned, our business model has the potential for some quarter to quarter revenue variability, which is why we provide annual guidance and remind you not to extrapolate any one quarter's performance as a trend.
Persio be specifically, we currently expect revenue to rebound in the fourth quarter.
Year to date on the service line basis.
Revenue was up 2.5 per cent compared to the same period a year ago.
<unk> increased 9.1%, excluding the reserve releases and P.H.M. revenues up 5.8% during the same period.
This implies that overall, we are trending below our initial guidance for revenue growth communicated back in February .
Year to date, our adjusted EBITDA margin expanded 110 basis points. When you exclude this quarter's investment gain and the reserve releases in both years. This is inline with our long term expectations based on the inherent operating leverage of our business model.
Third quarter 2019, adjusted EPS was 30 cents per diluted share versus 31 cents per diluted share in Q3, a year ago.
This quarter included in adjusted EBITDA benefit of 7.7 million edit adjusted EPS benefit of six cents per share from an investment gain we recognized in Q3 related to foreign investment instead med following that company sale back in July .
Adjusted EPS. This quarter also included about $1.7 million of deal related costs or a penny a share in adjusted EPS.
Our cash flow in the quarter remains strong with operating cash flow up 9.3% to 34.8 million compared to the third quarter of 2018.
Year to date operating cash flow of 112.9 million increased 60% from a year ago, a normalized basis adjusting for a settlement payment last year and is higher than any full year of operating cash flow in the company's history.
With cash and cash equivalents of $281 million in total debt of churn 40 million at September Thirtyth 2019, we continue to have a very strong balance sheet and liquidity profile. This is after a 36.6 million dollar acquisition of Vitriol is health in September funded with cash on hand.
As Bill noted in early October we made a seven and a half million dollar investment and met adviser, leading digital medication management company in Australia.
And approximately 13% ownership stake and this publicly traded companies.
This investment launched a strategic relationship and aligns with our strategy to evolve our ph and capabilities and advance our growth initiatives.
We remain focused on executing on our business plan at a high level and our capital allocation strategy continues to be geared towards investing in our IP infrastructure and enhancing our product and sales capabilities.
We are continuing to focus on potential acquisition opportunities and will move forward with the transaction if it meets our strategic and financial criteria.
In addition, our board of directors has authorized to repurchase of up to $50 million. If the company's common stock on the discretionary basis for a period of up to two years, we planned to be opportunistic in our approach to share repurchases.
We updated full year 2019 financial guidance today, it take into account, our recent performance and outlook for the remainder of the year.
We now expect 2019 total company revenue of 630 $640 million.
This would be year over year growth of 5.4% to 7%. When you include the reserve releases from both years.
This implies Q4 revenue of $167 million to $177 million and we currently expect steel B T. I M. P. A gym to show growth both sequentially and on a year over year basis.
We're now projecting full year, adjusted EBITDA of $182 million to $187 million, which represents growth of 12.3, 15.4% over 2018.
Similar to revenue, we are including investment gain this quarter and the reserve releases in both years.
And we're now projecting full year 2019, net income to being a range of $89 million to $94 million, which should be year over year growth of 61.8% to 70.9%.
[noise] [noise] additional details our revised outlook for the year were provided in this mornings press release now posted on our IR website, which will help address more detailed modeling questions.
As we close the year, we will continue to focus on delivering positive results for our clients and for our shareholders. Bill now offers some concluding remarks, and then we'll be ready for questions Bill.
Thank you Jeff.
We do believe the overall industry environment should continue to be a tailwind for HMS.
CMS continues the heightened focus on program integrity, and we will leverage our significant payment accuracy experience to expand so you'll be npis services to both commercial and Medicare advantage plans.
Recent data from Kaiser family Foundation highlighted that the uninsured rate has been rising since 2017 and now approximately 15 million uninsured individuals are eligible for either Medicaid or other subsidized marketplace insurance coverage.
HMS is very well positioned to provide services the government and managed care organizations as efforts continue to get the uninsured population covered including the 20 states that plan some type of Medicaid eligibility expansion in fiscal year 2020.
Additionally, the Kaiser reports show many states have a plan focused on pharmacy cost containment Medicaid, Brian opioid misuse prevention and other payment accuracy and quality initiatives that are aligned with our offerings.
These are solid indicators of the current and future business opportunity for HMS as we continue to help move the healthcare industry forward.
HMS has a large footprint across both the government and commercial marketplace.
This clearly sets us apart from our competitors as we are uniquely positioned to deliver increased value and innovative solutions across a large set of diverse clients and partners.
In closing, we remain committed to both organic and inorganic growth and I'm confident the entire HMS organization is up to the task of delivering enhanced value for our customers.
I'd like to thank our employees, our board and our shareholders for their continued support.
Operator, we're now ready for the first question.
Thank you as a reminder, asked a question you need to press star one on your telephone.
To withdraw your question pressed apparently.
Please standby will become part of it came in a roster.
And our first question will come from line Oh, Ryan Daniels from William Blair You may begin.
Hi, Good morning, guys. Thanks for taking the question Bill.
Provide a little bit more detail on the population health management business.
Can you talk a little bit more about the salesforce restructuring kind of what the initial thought was in integrating that with the existing sales team and then what didn't occur to drive sales and how the new reorganization there will in your view help going forward based on the pipeline.
Yes, Thank you right so.
We do have a strong pipeline by the way I should I should reiterate that an had strong sales closings in Q3, but.
But I think I think what we decided early on was that we will consolidate it primarily under our commercial sales team.
And that we would attempt to train the entire team and account management team on the what are pretty unique complex needs of the PHN business.
While we do sometimes cells are the same buyers I think what we found was that the we needed that different type of individual to sell the PHN product line, we need to people who were immersed in understanding the quality measures that health plans focus on.
The unique programs that we can deliver and of course, a fair amount of this is also a technology sale.
Which is not always the case with our CEO BNP I services. So.
When we realized that we were not getting the traction we had.
Dissipated, we decided to regroup.
Build a new sales force focused solely on T.H.M. sales and particularly knowledgeable about the integration of the three products that we are now delivering.
And you could imagine Ali is a very complex sale because of its predictive and prescriptive analytics system importation of social determinants of how you really do need a different type of salesperson for that.
So we chose to do that and recruit a leader over ph EM sales.
And has that report directly into our division President.
Who leads the population health management business. So we're starting to see the early fruits of that change, but that we should expect this be more volume from that.
And more craft cross sell activity in the balance of the year in 2020.
Okay. So is that team build out fully completed at this point and are we seeing that.
Sales and marketing spend reflected or there's still a number of hires leadership for direct sales some kind of what's the size of the team how far along in the process on establishing that number.
Yes, I don't know the exact sides of the team, but we are still building out the team. So we are still interviewing and hiring.
And.
It's not to say that where we are not leveraging our existing customer base.
We have sold to existing HMS clients that previously had not use either allies set or alley. So we have done that but.
And we will continue to drive those leads from our account management team, but we're not done completing the build out of the sales team.
With that said, we did have as I said, a strong Q3 sales closing.
Contract closing corridor and as as we've said before for most of our PHN products, but particularly alive.
Pretty fast.
It's pretty fast path from closing in contrast to revenue generation. It may build up overtime, but as a pretty fast path for implementation, yes, I would just add in our PHN products continued to be well received.
By our clients and prospects in the market. So we are optimistic about the growth potential for the service line given the breadth of opportunities and what we consider to be a multibillion dollar market.
Our our care management product is that we are up 30% year over year.
Through the first nine months to the year. So we are seeing traction there. It's obviously smaller numbers, but I think the three products combined.
We believe is very good opportunity Ali as we came into the at risk stratification product. We expect it was going to be a slower ramp as bill noted we are getting some traction in the state market, which we knew was going to be a much longer sales process, but getting some more traction with allianz. Some wins, we think we're well build momentum as we head into Htwo.
Turning 20.
Okay. Thanks, a lot guys.
Thank you and our next question will come from the line of Matthew Gilmore from Baird you may begin.
Hey, Thanks for the question I wanted to ask about the CRB performance I. Appreciate you had a difficult comp this quarter I think Bill also mentioned there were some payers that had some system issues processing the volume of CRB claims, but I was hoping you could provide some more details about what causes delays and it was that specific too.
A subset of payers or or was it more of a broad based trend.
Thanks, Matt no there.
This this happens relatively consistently in our business, but sometimes it piles on as it had in Q3 2017, So we had.
No I am I going to name payers, but we had.
PBM, whose system was in was not part of it was not capable of managing the volume of eligibility verification that we push through now that's very important to us because our clients, while we get data on a daily weekly or monthly data basis, our clients really wants to bear.
Our fight very detailed information about a policy, whether it's a pharmacy benefit or or medical benefit and it could get down to group number in pharmacy I'm going to use some weird words, but PCN and Ben if that specific so to be able to load that into our client system, we'd verify.
And if they can't handle our verification transactions that volume and you'd consider with 40, plus states and a couple of hundred Medicaid plans. We are processing a lot of volume because people's coverage changes frequently so that happened we had another PBM that wasn't was not capable do the system limitations.
A processing all of our claims so you know doling out on an all 1000 claims a week or something that's very low volume for us and then a couple payors.
Typically they are large regional payers.
That have problems or their systems for Medicaid claims shuts down and then it picks back up and we we process again. This is where we don't lose the revenue we process the backlog when their system is ready. So we unfortunately had more of that in this quarter.
We typically do and what happens after they.
Turned the funnel back on our turned the top back on is basically we catch up.
Sometimes in a rapid fashion, sometimes not so rapid and that bleeds out over a couple of quarters because they're processing systems are still you know they can only handle X number of claims per week, so that happened a little more.
In Q3, and obviously a lot less in Q2 based on our Q2 over performance Yeah, and I was just that recall that this this did occur in 2018, we had a very strong Q3 c Ob and we were up 8% year to date through three quarters and we finished the year up about 3.8%. It also.
Happen in 2017, when we had a weak Q3 and finished the year with a strong Q4. So I think as Bill said, it's not a new phenomenal.
There are quarters, where we have more of is go against US Q3 was certainly that way a lot more than we expected, but we do expect it to rebound in Q4 and still expect seem to be overall to be up mid single digits inline with our original expectations.
Thanks for that and then.
I was hoping just a if you could have have you seen any of those.
Yep trends accelerate as or early here in the fourth quarter or just.
Bigger picture looking at the business and normally you see when you have a sort of a slower period, one quarter tends to bounce back I just wanted to see if he had sort of visibility into some of those claims processing accelerate care in the fourth quarter.
We have a lot of war going on at a client by client basis, Matt We look at it client by client we tracked it that way we are actually looking at some some new ways of doing some of our work that can help.
Some of the backlogs that have occurred made introducing more automation or our technology into it. So I would say at this point knowing knowing what we know we expect to see a rebound in Q4 Oh.
We have it very detailed on a basis point on a carry client specific basis.
I think were we remain.
Yeah, I'm confident that we'll see that rebound in Q4 at this point.
Okay. Thanks very much.
Yes.
Thank you and our next question will come from line now gel and a sense from credit Suisse. You may begin.
Yes. Thanks, Thanks for taking my questions, So and a follow up on the previous question. I mean, you have talked about the shortfall in third quarter.
To get kind of but they did two quarter to quarter when im looking to your business, but the same time you guys actually reduce your full year revenue outlook by essentially the same amount as the miss in the quarter. So how do you actually reflecting any other large some recovery of the third quarter revenue shortfall in fourth quarter or is it more just being considered.
I think that.
Let's assume that just what about 19 20 billion shortfall in third quarter does not really fighting fourth quarter held for Threeq inside those comments around on the business.
Well the so there's two components see a b was was the principal driver of the revenue.
Revenue shortfall for us.
Ph Hammer population health management business. It was the remainder of so I'd say roughly about two thirds of the shortfall is related to see it will be.
And the remainder for the most part majority of it was was on the ph inside from from our own expectations. We've already addressed the P.H.M. side of it. So the PHN side, we expect to see growth in there but to the extent we were short there in the quarter, we won't expect that to catch up and for the year and then I'm the CEO . Besides.
As Bill said, what we'll see some of that come back in Q4, and then we'll see some of that bleed over probably into next year because at times or else. There are still so many volume of claims that the carriers come process and then finally I would say you know we are we are expecting you know at our implied guidance revenue of 100.
$67 million to $177 million.
Each would be each of those ranges would be almost the single largest revenue quarter. We've had so we do expect.
Pretty strong rebound in revenue in Q4.
And from the CEO beside what we'll get some of that back with some of it could bleed into the following year.
Okay, and then my follow up that had been some concerns in the marketplace marketplace around Medicaid eligibility verification is having impact on Medicaid enrollment and utilization thing have you seen bad having any impact on your business, especially in the C. you will be segment any talks that would be helpful.
No we've really not seeing you know Medicaid enrollment has not.
Grown as fast, but we have not seen an impact negative impact on the volumes that we saw so our key indicator leading indicator is claims spend dollars of claims and number of claims coming through our systems and number of lives right, we've not seen a big.
Delta in that.
As we process month to month now some of it is because.
We continue to get increased scope clients expand what we're able to do we may get additional lives. So you know that.
Client turns on their chip population.
They may in the past have restrict us from pursuing the dual eligibles and now we get those those in our day to see but we also have states that are expanding some Medicaid eligibility. Some is more broad I attended the legislature in Kansas and Utah has a.
A waiver in front of CMS. The it was on the ballot actually.
This year and and pass to expand much more broadly than initially proposed so we continue to see expansion in some states more broadly in other states on specific populations.
So I don't think I think we continue to outgrow we will continue to outgrow our revenue will likely outgrow the pace of Medicaid enrollment.
And I think it's primarily because you have to remember there is always churn people move on and off Medicaid They move.
Between health plans and May move on and off commercial insurance or employer insurance all of that churn.
Creates revenue activity from us.
And I would just add.
The most recent data shows Medicaid enrollment actually down 2% or year over year, we're expecting she'll be revenue to grow in the mid single digit so our yield activities are continuing to drive revenue there.
You are right our she'll be revenues broken into cost of Oregons, where we find other coverage and then Rick when we find other coverage other half is recoveries, we continue to see good opportunities to recover more dollars.
For where we find a policy it could go back three years and so there's there's opportunity there the technology investments, we're making are continuing to help drive higher returns in yields there and that remains a focus as we go into Q4 in 2020, continuing to invest in those yield activities.
Okay. Thanks, a lot.
Thank you.
Our next question will come from line, Jamie Stockton from Wells Fargo.
Yes.
Yes. Thanks.
Maybe just to follow up on its other questions on theyll be it sounds like you guys are saying that.
There is really any shortage.
Demand.
The issues from a shortfall standpoint arent on client side at all that correct.
Yeah, I mean, we you know look we have scope changes that happened almost quarterly but net net every quarter every year. The scope changes net out to be positive for us right because whether your state or your Medicaid plan, which is on razor thin margins you really want to bring those dollars.
That where you want to make sure you're being as innovative as possible and and rejecting those claims.
Early on and getting the provider to Bill way.
The commercial payer indoor and typically.
A payer that pays that provide or more so it's a win win for the health care system.
But you know we you know we've been we've been in we've been doing CLP for 40 years.
And in that 40 years, while we've grown the business significantly for 40 year old service technology based service business to continue to grow at mid single digits, while the enrollments not rolling we are going to see lumpy quarters.
But we've seen lumpy quarters in the past in this business.
And it will continue I don't expect that this will always be a smoothes line and again, it's because we don't control the behavior of third parties.
And this is this continues to be at very high ROI, our product for both our commercial and government customers. Jamie. So I think on the demand side, you know given the ROI we deliver.
We haven't seen a slowdown in demand. This is more in that the claims execution side, where again, we don't we don't always control the data feeds coming in when we get data from from carriers, and we and we can't control the processing timing per se on a quarter to quarter basis.
But again at the end of the day, it's federal law that they process. These claims so we still see opportunities continue to continue to get better and recover more dollars and you know I think weve, but we have bucketed, yes.
Or I guess in general we've talked about this being Medicaid Seo be living reality, Seo B to C Ob opportunity well and Medicaid continues to grow is strong in both the commercial and Medicare markets and so this year, we've had some good successes.
In helping our clients in there and they're part D.
See Ob, which we will be expanding that in our sales activity. The other part D plans.
As well as Medicare advantage and then.
Eventually a product offering that will serve the commercial the commercial CLP market, so she'll be as a.
I hate to call at this but a gift that keeps giving because we are the experts and we plan to expand that into other markets market areas.
Okay, that's great and then the the buyback.
This is just kind of a technical the old program what's expiring.
And from our capital allocation standpoint, you guys are still going to be disproportionately focused on M&A.
Yeah, I mean, Jim we still continue to review view or share repurchase program as an important component of just a prudent capital allocation strategy and consistent with our overall our commitment to building shareholder value I mean, our cash flow gives us the ability to continue to invest in our business continue to do strategic acquisition.
Yes.
And and we'll be opportunistic share buyback side, you know in the last four plus years, we've bought back over $90 million stock over 7 million shares at an average price of below $30 a share. So I think we have been a good deployer of share buybacks.
An opportunistic and I would expect overtime, we'll be opportunistic as well with this buyback program.
Okay. Thank you.
Thank you and our next question will come from China, Richard close from Canaccord Genuity, maybe can.
Great. Thanks appreciate the questions.
Jeff just curious your I appreciate the breakdown one third two thirds on the revenue shortfall.
Is that how you think about the EBITDA.
As well in terms of shortfall there in terms of one third piece.
Population health and the remaining philby.
No. We don't generally break it down you know bought by a product level.
Basis, Richard We said you know basically that P.H.M., particularly our allies had margins similar to the company's overall blended margins.
And so you'll be is the high margin part for us as well so clearly with the majority to revenue shortfall in CLP that I have impact on earnings.
In the quarter.
Our revised guidance.
If you look at our revised guidance the our previous range was 25 to 190, we're now at 180 to 87.
With the revenue shortfall. So we are continuing to see good margin performance and and good leverage on the revenue generating Q4 last year was our highest margin quarter for the year, but they said my prepared remarks, we're still up a 110 basis point.
Thanks.
Margin three first three quarters of year normalizing for the reserve release and again, we had in the quarter. So we are continuing to get leverage you know on our on our revenue and we expect that that trade will continue into 2020, the things that we're doing to drive yield investments.
In technology that are allowing us to become more efficient on the processing side not in generate incremental yield on revenue.
Both Oh will allow us to continue to drive margins, we believe in the fourth quarter as well as into 2020 and.
Beyond.
Okay.
And then with respect to the.
Population health and the sales force.
Restructuring or building a independent.
Our specific sales force there.
Do you think this change is the timelines associated with you know move trying to move the business from.
A volume or transactional perspective to subscription and just any thoughts on how we should think about that revenue model.
Trending over time.
Yes, so I would say with with the alliance and piece, which is the biggest piece of the PHN revenue today, we are still seeing.
The subscription model sales, we are expecting those to grow I would say for further you said care management and Elie risk stratification products. Those are principally if not entirely subscription model sales now a set was.
Hey.
A software model.
As we bought it when we bought it and now we're moving that more and sell more into subscription model. So I think our view is still to sell them as a combined package over time in a subscription model is where we're headed.
But the subscription sale, we expect on their lives aside is going to come from existing customers. We don't expect we're going to sell that into a new customer without the ability to prove what are what our capabilities can do.
Okay. Thank you.
Thank you and our next question will come from line of screens Hopper.
Surface Carol you may begin.
Hi, Good morning, So you talked a lot about strong sales closings and pipeline.
I know its little bit early but can you give us some.
Thoughts about growth and 2020, specifically and just terms.
You know.
Generally sort of guideline.
Yeah, what we'll give guidance Steve it in February .
We certainly think we're positioned for continued growth as we head into 2020 as I look at where we're at we had a similar quarter.
Two years ago in the third quarter 2017, I think the company is much better position today to pivot into the following our fiscal year given just the overall, what we view as strength in market position and see Ob, our emerging growth and payment integrity.
And I think just the product offerings at market receptive acceptance, we're getting for ph him as I said earlier, we expect to be able to continue to expand margins as well. So I think we're we're optimistic heading into 2020 that we'll be able to continue to grow the business and see margin expansion.
What will give more specifics you know as we give guidance.
Sorry.
That's fair and one one other question on on P.H.M. and rebuilding a standalone.
Sales for us, where they're individuals who moved into the larger sales organization and who will now move out or do you have to is it isn't really a full rebuild.
Going out and rehiring for hiring new people.
Well, we don't I mean look we did we do have a staff of salespeople, it's just not as large as we we'd like and.
And we Didnt have we didn't necessarily have people, who moved around meaning they move into PHN from other areas. We just consolidated under single leadership and it didn't get the focus is needed again, because the sale is.
Pretty complex I mean.
The the thing that I like about as is and we did say that's when we bought alliance it will take a while for our state clients to see that value.
Some of of RPH on product line, but I've been to probably a half a dozen states. This year I've got about five lined up in November alone who had interest in.
Talking about how we can help them move the needle on the CMS scorecards, what you're basically he to scores.
And they're often around things that.
Our very important.
As matter of kids getting flu shots very important thing to happen. This timing here raising childhood immunization rates, making sure people have been more electronic way to be reminded that they have to go through their Medicaid eligibility redetermination instead of sending them stuff in the mail that gets.
The 10% response rate so the state market is just starting to.
Become a market where and of course, the sales cycle there is longer because of.
A more structured procurement process.
And we have hired a state.
Market subject matter expert in this space that we will be deploying.
To help and pre sale and sell support activity. So I think we feel very strong about the product line and its fit.
But we just didnt, we did not take the right moves in terms of consolidating the sales team and now we're fixing and then on the state side, you know about about a quarter of the lights are in traditional fee for service Medicaid, but the states are still managing all half the cost. So the states are still managing the really sick patients.
And are not using much if any technology to do that so I think our ability to to help them manage population that scale with our population health management solutions is going to be very attractive.
Right and when do you think that you.
The majority of that rebuild will be done.
I would say yeah, we're we're looking to be dealt with the rebuild in Q4.
And expect that.
As those people come onboard and become part of the sales process, you know that what we'll see.
Growth from that in 2020.
Great. Thank you.
Thank you and our next question is personal line, though Don Hooker from Keybanc, Sir you may begin.
Great just wanted to get maybe some thinking around the vitreous health acquisition in the collaboration with met advisor.
In my mind should should should I think about that being.
A tailwind to revenue growth and is near as 2020 or is this going to be kind of a longer term.
Revenue synergy story.
Yes, so we've been working with victory OWS over the past year plus.
And they have been really the predictive analytics component of of our restaurant.
Gratification product Ellie.
And so as we view that comprehensive sales approach now with alley and fully fully integrate victory goes.
It's certainly going to be part of our of our growth story for alley in.
In 2020 as Bill said, we are just continuing.
The early ramp up of the risk stratification product I think most importantly for us as we have talked with some of the large national payers as well as some of the space. The beloved Bill has been meeting with.
There really is not a products similar to this in the marketplace and when you combine that with our ability to once we have risk stratified actually helping engage patients.
Actually change their behavior to improve clinical outcomes, that's where we think we're we're well positioned a uniquely position from from both our client base and our product offering did see traction here. Yeah. I was just add particularly when it comes to.
Got it when it comes to the investment had met advisor.
That was for numerous reasons one there is a significant it's that that's an international problem.
People are medication adherence and.
There's clearly a lot of stakeholders interested in that first of all the quality and outcomes for the patients, but also pharmas very interested in making sure, particularly in nations, where they don't get paid as much as the U.S. very interested in making sure people are taking their drugs and refilling their prescriptions. So medication adherence is it but.
Global issue.
We think with with our investment admitted advisor, we can address that better in the U.S. and also help address that internationally, but also plugging in our lives and alley risk analytics since at the solution. So it is a multiyear plan. We're in this for the long game. This is.
Not this is not I mean, I know, we get measured quarter by quarter, but readiness for the long game and we believe we have the trifecta in population health management and it's just kind of takes some time for these very complex sales the come to fruition, both in the U.S. and Australia, and the UK, which.
For the other markets, we'll be focusing on yes away. When you. When you we think about the made advisor investment.
In the US I mean interestingly based upon what they've done you know in Australia. There's there's really three there's three potential customer segments. There's big pharma that's interested in seeing medication adherence improve there's there's the large national chains.
And equally important to got more important for us as the health plans, making sure patients are taking their medication. So that's just opens up the very complimentary product to our allies outreach.
Offered really opens up an interesting opportunity for us in the U.S. and it also gives us a channel to expand our population health management offerings.
Internationally.
Super and maybe my follow up would be on that on the.
Payment integrity area, which seems like you had some nice numbers there in the quarter.
It's good to see that maybe love to hear kind of high level view the competitive environment. There maybe in the context of some United and other players or any anything to talk about their competitively.
Well I mean.
The United Slash Optum acquisition of Equion.
Really doesn't impact us much because we do very little would you consider traditional payment integrity with United.
They are a coordination of benefits customer, but I agree on doesn't do Medicaid coordination of benefits.
So that really hasn't impacted us.
And the our traditional competitors and the payment integrity space have continued to be the same competitors, we've talked about in the past and we just it's an area, where we just continue to invest and technology.
Thus than the account management framework around that business.
And get better delivery and I think that's Argo I'm, sorry, and I think as we look at the total addressable market for payment integrity, we still think is $5 billion to $6 billion plus.
There's a lot of white space opportunity to capitalize on there both with our historical client base and the Medicaid managed Medicaid side Medicare advantage, we still see a lot of opportunities. There. The rack continues to perform well for us we have been getting more audits approved in the auto rack or.
Others were continuing to see new audit scenarios approved there and are expecting they continue to see growth on the rock sites are really at all three of our market segments.
Federal with CMS, RAC medic managed Medicaid and the stateside.
In Medicare advantage, what we're seeing opportunities for prepayment integrity and are optimistic we'll continue to see growth there as well.
Super. Thank you. Thank you so much.
Thank you.
Our next question will come online.
Wondering from Jefferies. Sir you may begin.
Hi, Thanks for taking my questions good morning.
If I'm interpreting your comments correctly your salesforce build out here in PHN.
Add as opposed to that kind of re assignments and existing could you quantify how much additional cost fewer or investment you're planning to make in the salesforce. What you think that would be.
Yes.
On the did that have against any material. Some of it is just bringing on.
Different talent, Dave So I think there could be a little bit the incremental costs. It would not be material to the overall pinedale activity for us. So I think we're we're certain that bring out those costs are going to drive the revenue more than pay for themselves.
Got it.
Speaking with PHN has a pattern formed at all in terms of which at the three products.
Captures the attention in the imagination of a new client potential client or is that something that perhaps with the with meeting the sales force kind of forms that pattern. After this rather than.
Already.
That's a good question Dave. So so why is the is something like member engagement as something that really all clients really I would say anybody who is either managing risk or needs to communicate effectively with patients are members.
At scale, so think about even a large health care system could benefit from analyzer.
But even public health could benefit from realize it's one of the areas, we're starting to have conversations.
That the the key behind the lies is not only we do it scale about a million and a half outreaches today, but we also have the behavioral science back to behind that so that that has always when you really uncover the when you dig into that a detailed level.
With purchasers they understand why they cannot do that and they can't do with just a robo call company in fact that that's been the brightest bowl.
In Australia in our dialogue there.
I have to tell you when people actually see Ellie Mae get an understanding of the predictive and prescriptive side of it and they understand that we incorporate social determinant to help to better prescribers, who are those patients that they should focus on now to avoid cost and or.
For outcomes people are very excited about the challenges when you don't have a sales force use the selling a clinical analytics product, it's a little difficult and so you can only take so many subject matter experts out on the sales call.
So that's the that's the critical component we believe that.
And of course, as Jeff said OSAT is up 30% year over year. So we're having good success with that product line. We believe the integration of the three across a number of what I'd say small to midsize health plans and Msos in IP AIDS is going to be very very attractive.
But ellie once it's in front of a customer most of them have said their existing analytics programs can't compare now the challenges getting enough.
Those types of analytics salespeople out in the market both at the state and commercial level. It's one of the reasons, we announced a couple of months ago that we brought in a new chief analytics officer to lead that product line, because we've seen the value of it and he's been very very intimately involved.
And sales and go to market strategy on that front.
Got it retiree health government people sell in the queue. So we're going to try and get get everybody in but if you can ask that question and one follow up please thanks.
Okay.
Thank you.
Thank you and our next question comes online.
Charlie Strauzer firms Pjs you may begin.
Hi, Good morning, just a couple of quick ones for.
Are you expecting any onetime benefits in Q4, that's included in your guidance.
No we're not the guys doesn't anticipate any any.
Onetime benefits in Q4.
Got it and then also direct project costs as a percent of revenue seem to kind of nevertheless, like in the quarter. Despite the decline in revenue year over year, any further thoughts or color behind that.
Yes, it's mainly driven by some additional temporary work we brought on to help on some specific projects and and when we have some of these technical challenges. Sometimes we are we do try to bring in some additional staff at for not being able to process things automatically will bring in some temporary helped to do that.
That was the main driver.
And that on that cost line.
Great. Thank you very much.
Thank you enter next question will come online Daniel Crosswhite from SVB I think you may begin.
Hi, guys. Thanks for taking the question just want to pick up on a comment that you made.
At the midpoint of guidance it implies that you're going to have one of.
Your best quarters on a gross basis.
Ever so it sounds like you are.
Pretty confident and she'll be rebound to mid single digits.
Thats still leaves about a call it 15% growth hole.
To reach Richard your guidance here.
And from from your commentary it sounds like most of that is going to have to come from payment integrity. So just curious how confident you are.
That payment integrity is going to.
Really have a strong for Q and how much visibility you have into that line specifically.
Yes, I'd say one of the things we've seen and payment integrity is where we are seeing.
Our our inventory of claims to be reviewed continues to increase so we've got a strong inventory, where we actually have the medical record in house to actually work.
And I have seen good success in getting new edits approved.
Hi, it's always an area, where we have added that weve submitted to customers, including our commercial and CMS, where we know there's findings we have to go through an approval process. Some of those approval processes are more complex than bureaucratic.
And then we would like at times.
But at what we are seeing good good traction there and getting more audits and added a proof and that certainly contemplated in our on our Pi revenue pie revenue growth that we're expecting in Q4.
Got it and then just one quick one on the P.H.M. side as I understand the budgetary cycle in most states and a large planned it seems like they make most of their.
<unk> vendor decisions and in Threeq, So if you're building the the Peach AMN team.
This quarter, probably won't start till the first quarter of 20 does that mean that PJM is really 2021 revenue opportunity.
Yes, I think as on the P.H.M. side in particular.
We always see the back half of the year generally add more opportunities as payers look to close gaps in care. So there's not a beginning of the year sales cycle per se.
For.
For closing gaps in care on our engagement side of our of our business.
I think we we continue to have sales really in all product lines.
In each of the quarters. This year I do think to our earlier comment and bills note on the government side, you know the procurement process for state.
Can be a 12 to 18 month processing, so having getting in front of the state with some capabilities you have made lead to an opportunity. The next time, maybe procure so I'd say that's more of a state driven phenomenon than it is a commercial driven phenomenon. It only thing I would add as remember star ratings just cannot right.
So we impact star ratings as well so plans that didn't do as well in star ratings.
Some of that related to.
What are the self reported.
Customer satisfaction scores Haas and test scores theres other areas, where we impact star rating, so well typically a gap and care closure sales cycle happens Q3 in Q4.
We impacts star rating, so we're still selling into those Medicare advantage plans in Q1 Q2, so that we can impact their future star rating. So.
That.
Said it that at the year long sales cycle and of course.
All of the other things that we've introduced this year, our crisis management program, our incentive management program.
All of those things are starting to get traction.
And just health plans, but also attention in the state market.
Got it thank you.
Thank you and our next question will come online definitely denko from city you may begin.
Hi, guys. Thank you for taking my question.
With the ideas. There is nothing you can do you change the internal systems that your payer client.
Are there any investment you can make on your AD in the CLP business to help make your claims commissions more digestible for some of these payers.
Actually.
Our claim submissions are more digestible for these payers and probably anyone who attempts to compete with us because 90 plus percent 95% of the claims we send to a third party is electronic.
That doesn't mean a process than the electronically we do know that some carriers take our electronic filing in print them to paper because their system can't adjudicate Medicaid reclamation claim.
So there's not a lot we can do I mean, we do work very very closely and arm in arm with the large pvms and the large payers to.
To make sure that whatever we send them is as easy for them to process as possible.
Unfortunately, they still have processing issues and as Jeff said, one of the areas that we spent temporary labor on this quarter was the fact that a large PBM, but not handle our verification transaction. So we needed to have people manually do that work.
So.
But we're very very accommodating worked with payers.
All the time to see what we can do to help them in that process.
And then there are some payers that just at the end of the day.
Cannot and will not process. These claims but legally are required to and we end up doing negotiated settlements.
And those take awhile.
They can move from quarter to quarter, but at any given time, we have two or three payer settlements that we're working on.
I understood is that caused them to lumpiness and in the business.
Could you repeat that question for the just a quick follow up on that one when I talk about payer settlements is that why we will see some lumpiness in the business outside of Texas claims volume.
It's part it's part of it yes, I mean, we could anticipate.
You could anticipate in any given quarter, we're closing two or three settlements and they don't close because up at various reasons. The actuarial department doesn't like the claims sample we sent them we send them a new claims sample, we're negotiating back and forth and we're doing it on behalf of our client right. So we get the.
We get this the state involved in the negotiation, we get the potentially the health Medicaid health plan involved.
I just kind of want to reiterate for everybody. This is not a new phenomenon. I mean this is something again, having done. This work course on a much larger scale now but for 40 years, we've seen this and harken back to third quarter 2017.
Same set of challenges that we talked about and we rebound in Q4, so I.
I think its a.
Look you can't compare RC Ob business with anybody else. So I know, it's difficult to say Gee, we can be extrapolated trend from the you really can't.
We are the experts in this space and we've seen this before and we know how to overcome it. So it's just a process that that you know as part of the business.
All right I understand and then on the P.H.M. side of things.
This is primarily a subscription business model with a wide basis. So was there some compression on the PMPM any attrition to call out that what's driving that being down year over year, well with its just a assumption the non subscription sales falling through no. It was it was more than non heightened.
Transaction scale sales not coming through because we didn't have the qualified sales force to.
Actually make those sales and a combination of the fact that we not while we didn't expect to have a surge in Ali sales in a higher sales Q with Elie now than we ever have.
And it's unleashing more knowledgeable sales people on that product, yes. The revenue is actually up Stephanie year over year through three quarters I am for realize that which is the biggest component of the revenue still the majority of ally's or revenue is transactional in nature now we generally characterize it as recurring transactional because we do the same.
More typically year over year in terms of closing gaps gaps and the sale overall the business is up it's just not up as much as we expected to be up.
Got it.
Thank you for the clarification guys appreciate it.
Thank you and our final question will come from <unk>.
I'm concerned about Butler from Guggenheim you may begin.
Yes, thanks for taking the question just a quick one on PHN. It sounds like you'll be mostly done hiring at the end of Q4, but is there anything to offer in terms of the timeline. It takes for those new hires to get fully ramped up and at what point in 2020 do you think you'll be at full productivity in terms of the broader sales effort in that business and then just as a quick follow up on the capital appointed side, you've given that.
Mission you made in the strategic partnership any update around what the areas of focus our for M&A in terms of building out the platform. Thank you.
So let me start with the sales team so look.
I will tell you that we are always opportunistic to bring in strong talent.
Building, our bench across all of our product lines is always important.
Well, we finished building the team to the degree we wanted to buy the ended the quarter. We hope so but in reality you know you have people waiting for yearend bonuses that other companies and so it could bleed into Q1.
But we're not look we're looking for people who have experience either selling this type of product or experience selling clinical analytics into health plans and Atlas providers.
So we expect that they're learning curve will not be as Steve.
Or bovie, it will be pretty pretty quick.
And we're also bringing in additional subject matter experts to augment the sales team. So I think that we'll see next in 2020, a rebound from the sales activity in the P.H.M. space, because we'll be well prepared for it.
And then on the acquisition side, we're very focused on acquisitions in really any of our product areas, whether its seo be payment accuracy payment integrity or PHN.
And we're active in all of those areas looking at both products that we can plug in or markets that we can expand to with product product acquisitions and like venture iOS, we'll be opportunistic where we see a technology that we believe moves the needle for our pro.
Declines and we continue to have a very active pipeline as bill noted. So we're continuing to manage that look at that alone and continue to expect that we'll be making strategic acquisitions over time, just hard to predict the timing.
Okay, great. Thank you.
Thank you.
Internationally any for the questions at this time.
Turn the call back over to Mr. to cheer for any closing remarks.
Well I want to thank everybody for attending the call. We are looking forward to speaking to you again on our fourth quarter call have a great weekend.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.