Q2 2020 R1 RCM Inc Earnings Call
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I would now like to hand, the conference over to your speaker today, a T Rahim head of Investor Relations. Thank you. Please go ahead Sir.
Good morning, everyone and welcome to the call certain statements made during this call maybe considered forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of making 95 in particular any statements about future growth plans and performance, including statements about or a strategic and cost saving in.
I should note, our liquidity position or growth opportunities in or future financial performance are forward looking statements.
These statements are often identified by the use of words, such as anticipates believes estimates expects intend design me plant project would and similar expressions are 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.
Well, we may elect to update these forward looking statements at some point of the future. We have no current intention of doing so except to the extent required by applicable.
Actual results and outcomes could differ materially from those included in these forward looking statements as a result to various factors, including but not limited to the potential impacts of the corporate 19th endemic and other factors discussed under the heading risk factors in our annual report on our latest form 10-K and in a quarterly report on form 10-Q.
For the quarter ended June Thirtyth 2020, now, let's turn the call over to Joel.
Thank you all to good morning, everyone and thank you for joining gosh. The second quarter presented continued unprecedented challenges from the cold 19 pandemic. Despite this difficult backdrop. Our team came together in a remarkable manner to support our customers and ensure that patients have access to care had a safe an expeditious manner.
I'm very proud of our over 20000 employees for their dedication positive attitude and customer focus on the current environment.
The commitment and engagement we've seen from a team is a key driver of our success.
We provided uninterrupted service to our customers and help them navigate challenge was brought about by the pandemic.
Which has translated into strong positive feedback and strengthen relationships with our customers.
We had a strong second quarter with revenue of three were $14.7 million driven by continued strong deployment execution inorganic growth at a large and on customers.
Adjusted EBITDA of $65.3 million was up $24.7 million year over year, driven by broad based operational execution with their particular focus on cash conversion for our customers driving operating efficiency.
Overall, the company has performed well during this challenging environment. In addition to these strong results and navigating the Cobra Dr. Rob We completed the acquisition. So that's the I solutions and service Rub works business and announced the divestiture of the how much business. These accomplishments are a testament to the significant effort by the end.
Tire all one team.
Today I want to focus our discussion on three key topics first review trends, we're seeing related to covert 19, and how we're managing through the current environment.
Second provide an update on ongoing commercial activity.
Third highlight how our technology investments, particularly digitization out for our building on and further differentiating our already strong operating model.
Starting with Cobot 19, the health and safety of our workforce remains our top priority.
Early actions, we talk starting in late February including transition to a work from home environment restricting travel securing personal protective equipment and other precautionary measures for frontline employees have helped ensure a safe working environment and enabled us to continue to serve our customers without any disruption.
We also continue to support our customers as their operating partner to help them navigate the challenges they face.
Let me recap some of the actions we have taken to date to support our customers.
First at the onset of the crisis, we raise the performance targets for operations team with respect to the conversion of billings to cash, helping our customers generate cash to pay for supplies and expenses.
In March we launched and deployed a new mobile registration solution, enabling contact was patient Chuck though.
We have helped our customers navigate complex compliance and regulatory changes I trust and provision for the cares arc and various CMS HHS and state specific updates, we've ramped up tele health resources for our customers and finally and potentially most importantly, we're helping cost more customers with their restart processes for.
Got to procedures.
I see us platform is proving to be very effective in enabling our customers to navigate and quickly respond to different scheduling scenarios.
The scheduling functionality proved especially important as we started to see volumes recover in the second quarter relative to March and April lows volume started recovering in late April and how posted successive monthly improvement through July.
Each geography and care setting has recovered on its own pace, but the recovery overall has been faster than we expect to three months ago patient acuity has also been higher.
Considering these trends and the visibility inheriting harvest business model I am pleased to say, we're in a position to reintroduce 2020 guidance.
We now expect revenue of $1.22 billion to $1.25 billion, and adjusted EBITDA of $230 million to $240 million.
Importantly, this updated guidance includes the plan how much divestiture, which represents approximately a 5 million dollar headwind to adjusted EBITDA.
No EBITDA contribution from the sort of level works business is assumed in 2020.
Looking out to 2021 utilization trends continue to remain highly dynamic, which makes it challenging for us to reasonably forecast cash collections beyond the couple of quarters at the same time, we see favorability to our previous 2021, adjusted EBITDA guidance, if patient volumes returned to normal by the fall of this year I'd like.
To note that we have executed on the corporate cost savings initiative, we mentioned on the Q1 call, we remain vigilant and ready to adapt to changes in the operating environment in a way that balances the long term opportunity we see in the market with near term dynamics. We see this long term opportunity accelerated by the current situation, which I'll discuss some.
In more detail on my comments about the commercial activity we're seeing.
It's around all the Cobot 19 discussion, let me update you on our deployment activities.
Starting with our most recent customer Penn State Health, we initiated the Onboarding activities of May and are proceeding on schedule, both Penn State health and all one teams have collaborated extremely well to move forward with Onboarding and the virtual model.
Over the coming months, we will focus on maintaining a strong momentum and expect onboarding to conclude in the first quarter 2021.
Onboarding out rush continues to progress on schedule also wondering virtual model.
Evolving cobot 19 restrictions in Illinois may impact the pace at which some operational initiatives are implemented.
But we are optimistic that we can complete the onboarding of Rosh by the end of 2020.
For the 700 million NPR physician contract, we signed in the third quarter of 2019, we're currently 75% through our deployment plan and we remain on track to complete onboarding in the fourth quarter.
Lastly deployment activities, our quorum health are complete and the team on the ground will now focus on optimizing performance.
Turning now to commercial activity the emerging teams from prospective customers. We discussed on the last earnings call have continued to play through.
Which gives us conviction in the view that the pandemic has the potential to accelerate the providers inclination to enter into end to end the agreements. Some of the themes. We continue to hear include there was a higher desire to variablize their cost structure.
They are questioning that need to leverage their own balance sheet for revenue cycle infrastructure and technology investments.
The inefficiencies associated with multiple third party vendors is coming to light and the business continuity and infrastructure resiliency, we've been able to demonstrate through this crisis is viewed favorably.
They are seeking partners who are economically aligned.
And finally, a holistic solution to drive patient engagement and coverage for uninsured patients is increasingly important.
We are encouraged to see discussions intensify along these lines our pipeline for end to end as well as modular deals has grown over the past quarter driven by an increase in RFP activity, which we view as an incremental positive indicator.
We've also seen increasing activity from health systems with $5 billion plus in NPR.
In addition to ongoing activity in the one to 5 billion dollar MPR segment of the market.
Given this activity we have a high degree of visibility to meeting or exceeding our goal of 3 billion of new end to end NPR in 2020.
Yesterday, we completed the acquisition of level works from Cerner.
We're excited to serve the Rev works customer base with our industry, leading services to deliver superior operating performance on their behalf.
We're equally excited about the strategic partnership we created whereby we will offer our revenue cycle capabilities and expertise to service current customers and new prospects. This collaboration augmented by direct seamless purpose built integration between our technology enabled services platform and service.
Software stands to reduce any technical friction for our clients and accelerate our onboarding timeline for new end to end customers and deliver value to them faster.
While we have been limited in our collaboration prior to close this week, we are launching a methodical deal and marketing playbook designed to broadly and thoughtfully communicate the enhanced value proposition that all one and shorter now offer to prospects across the country.
Over the past 12 months under VJ Coattails leadership, our physician solution team has worked to ensure we have a highly differentiated value proposition for physician customers.
As a direct result of this our physician offering is gaining strong traction.
Two notable recent wins include Pinnacle dermatology and integrated care physicians. This segment of the market remains highly attractive for US in addition to faster growth relative to the acute segment. The vendor landscape is highly fragmented competitors in the space generally have limited scale leverage which presents.
Okay, great opportunity for us to deliver meaningful value to large physician groups.
Now I'd like to update you on our technology in particular, our digitization effort six quarters into the formal launch more digital transformation office.
A high degree of conviction that revenue cycle operations can be fundamentally transformed through the use of technology.
Three levers in particular have a high degree of applicability to our business.
The first is digitization of the patient and physician interface within the revenue cycle encompassed in our patient experience platform or PX.
Second automation of manual tasks using robotic process automation RP technology.
And third using machine learning and predictive modeling to improve complex revenue cycle processes, such as business denials.
I'd like to provide additional context on these three levers.
Starting with the Digitization of the patient and physician interface, we're seeing strong market demand for RPX platform with the acquisition of Sci. We now have comprehensive digital patient interface capabilities across the front office inclusive of scheduling contactless patient intake and financial clearance.
Our strong proof point of the increased market demand and our differentiated value proposition is the number of new customer signings. We've had over the past few months. A few notable signings include Boston children's seeing chewed children's new bonds Health, Houston Methodist and another 5 billion dollar.
NPR health system, who we plan to announce after go lives.
The traction we're seeing in the market gives us increased conviction in the strategic importance of digitizing and integrating the scheduling and registration processes and fully enabling these processes via digital front store strategy as such we intend to further invest and advancing our capabilities and increasing market awareness.
Of this offering.
Given our domain expertise and significant experience managing patient intake, we're confident we can deliver meaningful value to healthcare providers via RPX platform.
In addition to the patient interface will also digitizing the contact points across the network of referring and rendering providers. This includes automation and historically burdensome processes like authorization and clinical appropriateness of care by creating these efficient automated interfaces between.
Healthcare demand and supply overtime, we intend to enable a uniquely high performing digital marketplace for care coordination.
Next I'd like to provide some context on the investments we've made in automation.
The original portfolio of routines, we discussed over the course of 29 team is fully deployed into production and is already generating meaningful dividends even in the current cobot 19 environment, we're on track to exceed our expected results.
A summary level, we estimate that over the last 12 months, our employees have executed over 400 million task manually in the current workflows system.
We believe about a quarter of these manual transactions are strong candidates to be fully automated through the use of our PPA and machine learning technologies.
The original 13 routines I just referenced cover approximately 15 million of this 100 million opportunity.
Our teams currently have an additional 10 routines in various stages of development and an ongoing process to ensure that we have a robust pipeline of new use cases scope expansions and tangential expansions.
Lastly, we expect machine learning to present, another significant opportunity to reduce inefficiency and improved productivity.
We have started to leverage our vast repository of structured data to improve operational performance through the use of machine learning technology.
We currently have for proof of concepts, which we have launched and we're very encouraged by the early results are deep operational expertise has proved critical to both iteratively and proven model performance and integrating these models with existing operational processes to realize value.
Similar to automation, we have initially focused on the foundational elements of the program, which are needed to quickly innovate and operate at scale. These initial proof of concepts are validated our hypothesis of the broad applicability of this technology and we are therefore, increasing the intensity of our efforts in this area.
We believe the disciplined application of this technology will fundamentally transform the revenue cycle driving improved satisfaction improved revenue yield and significant reduction in the cost of revenue cycle operations.
In addition to our efforts in Digitization, we also continue to advance our capabilities and the value based arena.
Yesterday, we announced the launch of an innovation lab in conjunction with Rush University system for health.
This is one of the leading institutions with advanced capabilities and care quality tools, we intend to combine these tools with all one scale to deliver new innovative solutions to healthcare providers nationally.
We're incredibly pleased to partner with rush and look forward to commercializing our solutions.
In closing I am pleased with how our team has managed to continue to deliver on our commitments through the current environment. This crisis has caused significant disruption, but it has also promoted innovation and better collaboration internally in our one as well as with our customer partners. We remain very bullish on our long term prospects.
And our ability to deliver significant value to healthcare providers and the company's stakeholders.
Underpinning, our bullish perspective, and a very high level or the following key attributes first we operate in a large underpenetrated target market.
Second technology is fragmented and fall from optimized resulting in sub par results for providers and third we have a highly differentiated and aligned value proposition to address the market's needs fueled by our investments in technology and our global scale.
These attributes provide us with a long runway for growth, which we fully intend to capitalize on.
Now I'd like to turn it over to Rachel Wilson, our new Chief Financial Officer, we're thrilled to have heard join our team and she brings a wealth of experience to the role.
It's been a pleasure to work with ratio over the last couple of months and we look forward to her contributions to our one.
Thank you for your time, where it's Joe I'm honored to be here today is partly our one team.
I'm very pleased with my early learnings that the company.
It's a strong metrics driven culture high degree of accountability and passionate team deep industry expertise.
I'd these incredible assets coming in at all.
First off I'd like to thank Rick and the entire finance team for a detailed in apparel onboarding process. Despite the challenges and the current environment.
We've had tremendous market opportunity ahead of.
The need for the healthcare industry to reduce the cost of revenue cycle operation and further enhance the use of technology for automation Vinay ice clear and even more and parent in this environment.
Between market opportunity and team strength I'm excited to be able to join Joe and the entire Arlon team to drive our continued Craig.
Before I discuss second quarter results I'd like to remind everyone that we'll be referring to non-GAAP metric on the call.
A reconciliation of non-GAAP amounts mentioned today, probably get announced please refer to our press release.
Revenue for the second quarter 314.7 million.
Turning point 7 million or 6.7% year over year, driven by new customer wins inorganic growth existing customer. This was slightly ahead of our previously communicated expectation obviously one call.
The majority of Q2 net operating fees were based on customer cash collection in the December 29 team February 2020 timeframe hardcoded.
As you'll note there's some volatility in your incentive fee in the current environment in second quarter incentive fees declined to 1.3 million given by the sharp decline in customer I think trailing 90 day average daily revenue due to cope.
This is a key component the calculations at our performance fees are tied to Conversely, following the recent recovery in volume incentive fee declines are expected to reverse the second half a year.
Non-GAAP cost of services in Q2, 229.8 million down 2.7 million year over year, and 7.8 million sequentially due to actions we tend to reduce our cost structure starting in late February along with lower employee healthcare claims and cares accurately.
Corporate cost structure initiatives helped drive down non-GAAP operating expenses 2.3 million year over year and $1.7 million sequentially to 19.6 million.
Adjusted EBITDA for the second quarter, with 65.3 million compared to 61.6 million last quarter, and 40.6 million a year ago.
Sequential improvement, primarily driven by cost containment initiatives and lower employee expenses, which showed a combined decline from Q line 9.5 million and non cap cost of services and non-GAAP best in expenses.
More than offset the 5.9 decline in revenue from Q1, reflecting company.
Lastly, we incurred 18 million other cost in Q2 compared to 8.7 million last quarter with the increase is primarily driven by expenses related to M&A activities akoti exit charges and covert related costs pertaining to appreciation belief based our frontline employees and pandemic response mobilization effort.
Turning to the balance sheet cash and cash equivalent at the end of June were 123 million.
From 106 million at the end of March driven by positive cash flow from operations at 44.7 million offset by 17.8 million in Capex and debt pay down of 11.4 million. We completed payoff Reconsolidation of 5 million dollar thing acquired as part of the FDI acquisition.
Net debt at the end of June inclusive of restricted cash with 443.4 million upfront 275.8 million at the end of March the increase was driven by incremental debt to finance the Sci acquisition offset in part by positive cash flow from operation.
After the pending CMS divestitures complete we expect to pay down to 70 million outstanding on our revolver to reduce the ongoing interest expense, while maintaining flexibility for future acquisitions.
Our current cash position availability on the revolver and expected proceeds from CMS divestiture, great over 285 million in cash that could be used for debt paydown investing business or for application.
We don't believe we have sufficient liquidity to withstand a wide range scenarios stemming from the coded Craig.
Turning to our financial outlook with recovery patient volumes today. We are pleased to be in addition to reintroduce 2020 guidance again indicated again, we expect revenue of 1.22 billion to 1.25 billion and adjusted EBITDA of 230 million to $240 million.
To provide some color on a quarterly progression, we expect Q3 revenue to be in the 290 300 million range with total non-GAAP expenses up modestly from Q2 level.
We continue to manage the business prudently to ensure that we are positioned to deliver top tier services to our customers at volumes were down and has sufficient capacity to onboard new customer given our commercial momentum.
We started selectively hiring for strategic and critical role and expect our cost structure to ramp up as we exit the year, albeit at a slower paced the expected ramp in revenue.
We also expect our one healthcare benefit cost increases our employee base begins to access healthcare again.
These factors along with just completed acquisitions network and the pending divestiture any ines business, representing a filing drag to 2020 EBITDA are all included in our guidance.
Given the piece of our investments in recovery inpatient volumes today, we're comfortable with currency three consensus EBITDA estimates and low to mid $40 million range in closing I am proud of how the teams continued to perform through a challenging environment.
We've taken balanced actions to reduce corporate costs, increasing client facing investment positioning us for continued growth, while delivering sustained value for customers and our shareholders.
Im proud to be joining a veteran team in a time when revenue cycle management optimization is more needed than ever.
Now I'll turn the call over to the operator for QNX operator.
Thank you as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound or hash King. Please standby when we compile the Q and a roster.
And your first question here comes from the line of Karen Greene with Cowen. Please go ahead. Your line is now open.
Yes, thanks, everyone and thanks for taking the questions and comments on the quarter.
Maybe first Joe can you talk about the trends in a PR, you're saying in your customer base, you're seeing the conservation July how is that relative to pre covered levels.
And have you seen you sort of downward trends in in business and hotspot areas, such as like Texas, Arizona, Florida.
And then maybe how much exposure does our ones have two to these geographies.
Thanks, Charles just a little bit Oh.
Ill.
Color on.
On kind of the different markets and how they work through recovery is progressing.
As we noted in the comments at a summary level.
The recovery is progressing.
Faster than our original base case.
Projections forecasted.
As we look at geographically.
We've seen the fastest recovery.
Florida, Alabama, Texas markets, No, Texas markets given the recent.
Resurgence or or or flare up if you will.
Our non are not degrading, but they are stable and not improving so so we're holding water so to speak in some of those markets. Obviously you can appreciate this is fluid weeks two weeks.
Based on the.
Not only regional dynamics, but almost on the ground.
Our county dynamics, if you will in the various markets we serve.
On the other side of the equation slower recovery markets, Illinois, Wisconsin, Michigan.
They are lagging a bit but when you roll all that up what I would say as we're generally encouraged against what we had forecasted with the recovery.
Along those lines.
So that's some.
That said in that sense, what we're seeing than the other thing I would see.
The other thing I would say as well that's the leading indicator on on revenue, which is a leading indicator for future cash collections.
We do continue to be encouraged with the execution of broadly on conversion of revenue to cash across the system. So I think there's there's really and that's something that we've commented on in prior calls and that continues to be.
The.
The situation that we see with within our operating teams.
Thanks, and just a follow up on that does that when you're talking about your ability to improve the conversion.
Into cash.
How much of that would you say is contributing right now to the topline.
Maybe compared to last year is at 5% more 10% more than you normally would have and then lastly, sorry.
Yes, no to see some favorability to kind of getting back to the previous 2021 guidance in volumes return can you give us a sense on what sort of puts and takes our for us to actually get their stop there. Thank you.
No problem, it's hard for me to say Charles I'm, just I'm just trying to think through its hard for me to pin an exact number just because the environments change so much on a year over year basis.
But what I would say, even if we normalize for coal.
Quarter over quarter, we are generally encouraged.
With what we would characterize our as our balance sheet performance.
The ability of our teams.
To convert our into cash work through the payer adjudication processes, and then post payer adjudication work through the patient.
Collection processes so.
Yes, the absolute.
Year over year variance of that again as a little bit hard for me because the environments change so much.
But in summary, we are seeing we're seeing strong progression there.
And that is contributing.
To our quote unquote base fee revenue and we're seeing that flow through in our in our results.
The.
Charles can you give me the second question I just.
Yes, just so do you had noted earlier.
You see there's a potential here kind of getting back to.
Good morning, everyone Gardens, just yeah, just trying to get a sense of what the puts and takes to get there.
Yes no.
And our commentary assuming we will we see a return to normal as we exit this year, we would see.
From our standpoint favorability to the prior guidance, what's underpinning that one is core execution as I mentioned to you.
The teams are are executing well. The second is we're seeing good flow through on automation I commented along those lines on the call.
We don't see a shortage of future use cases.
From the original.
12 use cases that we deployed so should we expect to continue to see that flow through.
As I highlighted on our on our Q1 call.
I commented here, we have executed our corporate savings program. So.
Those actions are done and that'll contribute on a full year basis going into next year and then the final thing I would say Charles is a number of the.
The responses we had.
So the co bid.
Volume backdrop.
A number of those will stack.
So.
A new normal on how we think about the need for travel.
Lastly, as.
As you can imagine.
Theres footprint rationalization opportunities.
So so a number of those things are sticky in nature and won't have to be necessarily fully reverse.
As we as we hopefully.
I'll work back to a non coal bid environment. So I would say those are kind of a handful of factors that contribute to.
Our view along those lines on 2021.
Great. Thanks for the comments, Chris Congrats guys. Thanks.
Your next question comes from the line of Matthew Gilmore with Baird. Please go ahead. Your line is now open.
Hey, good morning, Thanks for the question.
I wanted to ask about some of that the pipeline commentary I think you said there is an increased RFP volumes in that also an increased level from.
Thats kind of that the sweet spot of one to 5 billion, but also 5 billion dollar.
Plus when you say, that's an increase you're saying is attributable to just the reactions from coded and the need to get more efficient or is this also reflects some of the capabilities that are unique to that to the company.
I think.
Let me, let me bifurcate that as we've talked about some match in prior calls the one to 5 billion dollar market is where we've generally seen most activity in the highest bias or the highest conviction.
To to change the way they run their revenue cycle process internally.
And I would I would say we continue.
To see that playing through the activity is still strong there and we continue to like that segment of the market.
I do think.
I do think the nature of our value prop.
Absolutely contributes to.
The activity, but also the.
The success, we've had in some of those pursuits uptil now.
More recently, we started to see.
Stronger activity in the 5 billion blog plus segment of the market.
Obviously, the number of those pursuits is lower just given the number of providers that sit in that size range is much lower than in the other segment of the market.
I do think Doug.
The the catalyst of activity is.
Definitely.
Related to cold I think the cobot event.
My sense is clearly has capitalized internal discussion and that the willingness and that segments will start to explore.
You operating partnerships such as I've said that I think the fact that we're seeing those opportunities a testament to our value prop. So I don't want to attribute it all to our value prop.
I think it's kind of a combination of factors.
The strength of our value prop that demonstrate experience of our teams sure more complicated health systems and and in our in our current contracted customer base, we have some of the most sophisticated.
And diverse footprint so customers in the industry at so I think I think those factors accrue to our benefit and that's viewed favorably.
But but I think equally important I think cobot is catalyzing an internal discussion.
Independent necessarily of us on a standalone basis, and so we're just encouraged.
And we think it creates a nice nice.
Opportunity for us or window, if you will.
To compete and so.
And then if I could follow up on.
Asking about deployment capacity I think an attack you talked about having $6 billion of capacity.
That you could deploy with clients are are you feeling about that sort of capacity levels here as you're looking at the current pipeline and our unique position or you may need it and thats into that and increasing.
Yes. So we we nominally think of our deployment capacity that we run at right around $3 billion to $4 billion nominally now.
We've demonstrated an ability to flex that up into the five to 6 billion dollar range.
Well when we beat it too we did that it needs.
2018 time period as an example, most recently when we had a number of ascension deployments and we also launched the inner mountain deployment that year was a good example of our ability to flex our capacity.
What I would say in the current environment that is.
And this was this was as we said some of the balancing act that we wanted to work our way through as we as we thought it was prudent to pull guidance last quarter and we're now in a position to reinstate guidance part of that was just making sure.
We had the appropriate actions to respond to the volume short term volume backdrop, but equally important make sure.
We were adding capacity based on where we see growth so.
Going into the second half a year, we're we're recruiting capacity.
Thats in our plans.
And so we would.
Looking to nominally increase that three to 4 billion.
As we progress through Q3 in Q4 and head into Q1, just based on your current forecasts.
Okay, great. Thank you.
Your next question comes from the line of dials to kind of Keybanc. Please go ahead. Your line is now open.
Great.
Hey, good morning. Thank you for that question. So I guess I just wanted to kind of review your your guidance here.
I guess just from my perspective, I had I thought you might see a little bit more of a depth in Q3 with respect to revenues.
And a little bit more of an increase in Q4, it looks like a somewhat flat.
I know you have some deployments in Q4 it sounds like you have some traction and new product areas. I would have can you maybe walk through kind of the timing of quarterly revenues between Q3 in Q4 whats assumed what's not in maybe embedded in that is Q4, where are we in Q4 with respect to sort of a baseline revenue for you guys.
Yeah, Let me let me.
Let me take the first part of this question Don.
All of I'll refer to Rachel if we've got any additional commentary but.
If you think about the shape of Q3 in Q4 in the progression of that.
I think it's correct as regional comments.
Q3.
Will essentially.
I'll be in arm in the majority of our end to end operating partner contracts will be working off our four month lag so that'll be the cash collection saw.
Off kind of that.
Talk as part of the Kogan environment. So we would expect too.
Kind of see a progression along those lines.
And.
The recovery that we reference.
Starting in mid April that's progressed and the reference of that recovery being favorable to our prior base case testaments.
That's what we're collecting cash on kind of as we speak and that'll that'll really.
Dr. are.
Directionally drive our Q4 dynamics I think Youre I think your commentary on a on a shape basis is generally accurate.
And then and then there's a portion of our business that is more real time, you know, our our pam's business, our physician business and then some of our modular businesses and so those are.
A smaller portion of revenue, but those are more real time index to current volumes. So.
You'll see you'll see a more normal phasing it in those areas.
Joe.
He takes the words right out of my mouth haircut that is actually going to add the point that we've got a high degree of visibility in the net operating fees from our largest customers actually through November right. So that is the piece, where we have that visibility, but we also see we think physician and modular.
Hence incentive fees or some of that really depends on Q3 customer performance, so because of that mix.
And our.
Indication that costs are expected to ramp up slightly volumes recover we've embedded all that into our guidance into that does help explain that shape.
Our detail.
Okay.
Okay.
And maybe I guess I thought I heard maybe Joe was it was if you commenting that you did not include any revenue from Cerner.
In your guidance I think that's about 20 million a run rate per quarter.
But you're not including that white why are you not including that as are the reason.
The comment was more on the on EBITDA guidance.
Again on the guidance up to 30 to 40.
We've been we've assumed that the Cerner revenue comes and it doesn't contribute on that revenue coming in and that is included in our revenue guidance, but doesn't contribute EBIT up in in 2020.
That's the assumption that we've got in that guidance range.
And then the other comment was related to the mess divestiture, we've assumed we incur a $5 million headwind associated with our projections on.
Thats divestiture and that's included in the.
230 to 40 guidance range.
Okay. That's helpful. And then real last quick one for me and I'll, let others jump in in terms of your relationship to Cerner. So interesting to I think everyone.
When you look at your pipeline, what's the mix between Cerner and epic and maybe just a dynamic there between those two client bases, how does that sort of is there anything for us to think about there.
With regards cerner versus at the competition.
Yeah, what I would say it's interesting the first thing I would say at a high level. We are we are.
100% committed to the agnostic nature of our technology and what I mean by that is we have demonstrated capability in our contracted book of business.
To integrate our technology into cerner into out there, but also into a whole host of other gms systems that currently exist in the provider end markets and I I would say.
Yeah, we receive high ratings and our ability to navigate that complexity as part of our deployment process. If I think about our current pipeline our current active pipeline.
The majority of that is.
It's not answered or I am I'm, just mentally running through that but but some.
Directionally the majority of that is not shown or.
That changes with with the opportunity set any given point in time, so I don't want to conveyed that that's a predictable trend it's really.
100% dependent on.
The provider organizations that were pursuing any given point in time and what is their whole system Orient from and as I commented on the call. We're excited with the close that deal to start a more structured process.
Commercially with sooner.
So really identify that the net new potential schirmer customers.
Got together, we can kind of provide a very compelling value prop and we're excited to.
To serve cerner and their customers and to be a great skills partner for them and in our area of expertise, which is revenue cycle management.
Thank you very much.
Your next question comes from the line of David Larsen with Barrington Research. Please go ahead. Your line is now open.
David Larsen asserting research. Your line is now welcome. Please go ahead.
Sorry about that was on mute congrats on a good quarter can you talk a bit about Penn state rush and quorum, how those deployments are progressing and in particular, how do you expect those margins to progress.
For 2020 and 2021 thanks.
Yes. Thanks.
Thanks, Dave So those deployments are progressing well.
The large physician customer and core where at the tail end. So we're coming to the the tail end of those deployment activities.
And as you look at Russian Penn State more recent contract signings.
We're we're in the heart of of deployment it's interesting.
Yeah, I would applaud the teams on our site, but equally important the provider.
Teams.
In the ability to embrace that the virtual.
Tools and to continue to progress so its deployment. So as an example, one of the things I was concerned wed at the started a pandemic was what we really haven't ability to.
Do a detailed assessment of of the current environment and really lay out a surgical plan.
So it drives performance as part of that operating partnership that's a key component.
Of our deployment activity, we have a very robust methodology and we have a dedicated team.
That does those assessments.
For us and for the.
For the clients and so I'm happy to report.
They've completely flipped out 12 virtual environments, the able to do.
Interview process is that they normally do with the client they are able to audits.
Operating routines virtually and that the raible to.
Look at technology configurations, and so by and large we've continued to maintain.
The the progression of that now.
It's not the same as being face to face don't get me wrong I don't want to come across as it's not without its own set account complexities, but I think.
I think given.
The environment and it's a true Testament I think too.
The structured process and the value prop.
That.
This is this this is still being made a priority.
In the in the backdrop of of the of current pandemic. So.
Yes, again, Russian French state.
There's no red flags on those deployments in terms of delays and whatnot.
And then.
On the large physician groups and core those are progressing towards finishing deployment and that just fully running optimizations looking forward.
We would expect those.
And with our prior comments, we would expect those.
Customer contracts to be a right in line with the models we provided.
For.
The co managed in operating partnership and agreements and so we don't see any.
Any changes to that perspectives.
Great. Thanks, that's very helpful. And then just one more how's your relationship with essentially I mean, I'm, assuming it's excellent but can you just remind me how long that contract goes through and are there any is there any gross potential there within ascension.
She is such an important customer just any sort of details. So you can provide to be very helpful.
Yeah.
Sorry about that.
Hey, Doug the relationship with Ascension is.
It's a.
Very very strong I mean, obviously.
We have a huge responsibility.
To serve them just giving given.
The amount.
Have a of of the revenue cycle of their revenue cycle that we run on their behalf as a partner. So I would say, it's very strong we collaborate with them across all levels of the organization.
Both within the finance team, but as well within the.
Operating teams.
So so that some thats some color along that relationship that contracts generally runs to February of 2026.
So there's still a fair amount of time on that contract.
And then relative to growth potential inside of a sanction.
I mean, we do we have a majority.
Share just with the progression of how that.
Contracts has evolved since we made the initial launch in 2016 would that added.
The physician revenue cycle MME management.
There are some areas that we're working with them on a.
Different functionalities.
No that's an always ongoing dynamic and discussion.
But but were.
We're delighted with the the relationship we're proud to be a partner of theirs.
Great. Thanks, Congrats on a good quarter.
Thank you.
Your next question comes from a line of Stephanie Davis with STB Leerink. Please go ahead your line open.
Thank you congratulations on the quarter, guys and Rachel and welcome to the key.
Thank you.
Joe you've talked about significant digitization efforts over the past two years, it's been a big differentiator I want RCM versus some of your bad cycle peers.
With that in mind, how are you thinking of leveraging these investments now that you do that works.
And with a follow up for that what level of efficiencies are speaking again, how should we think about that flex margins and where could it kind of go overtime to take advantage of these investments you've made.
Oh, yes, no that soon thanks, Stephanie so so without a doubt without a doubt we intend to.
Deploy our core technology suite and also the automation routines that we've got in production right now systematically across the rub works book of business. So when you think about.
The levers that we want want to.
So to pull if you will.
As it relates to that operational integration.
A big component is definitely the application of our technology to to their transactional processes. We think we think one we can we can drive real efficiency, but equally important we think we can give the rough works teens or some other tools that will allow them to get scale.
Efficiency and also see the process systematically via our work flow platforms, and then and then our automation routines.
That are in production today, but also those that.
We have used cases that are being developed and ultimately will be deployed into production, we see applicability there as well.
The other dynamic is just the operating methods that we used to run our central operations onshore and offshore so thats another level that lever that we'll be working with the reader leadership team. That's recently joined our team from well wrap works.
Drive that standardization et cetera, and so all in all we would expect.
The margins, we've generated on that business to be right in line with our target margins in the 20% to 25% contributed EBITDA range and so we do see a meaningful opportunity.
Again, using technology and that using.
Kind of scale and standardization of operations.
Two.
To unlock.
The earnings potential off that book of business and then the team is very focused on.
Kind of.
Leveraging your servicing those customers.
Exceedingly well and off of that performance earn the right.
Talk about broader relationships.
And what sort of timeline Jimmy thanks for extracting these efficiencies just given and yeah shrink and limit my time.
Yeah, No I mean, the one thing the one thing I'd say that.
We think about this is kind of inline with our typical deployments. So we think about and that's really.
And those typical deployments were looking to get our technology deployed.
Within the first six months, we have a full of future state footprint identified.
As it relates to kind of the optimal location and the optimal standard for which work work is performed against and so.
As much as we we can I've started those plans.
Based on based on the our one seems understanding from diligence, we we've gotten a head start on that and so I would hope that we started to see some contribution.
As we progress through 2021, yeah, we won't have a full year and 2021.
But you know given we closed right on time based on our internal projections.
That gives us a nice runway in Q3 in Q4, this year or so really gift those major integration activities daunted and our goal of you did.
To give as much in place.
Over the course of this year and into early 2021, so we can maximize benefit accordingly.
Thank you that's super helpful and one quick follow up a certain is still there. So now since I've read cycle wins. So how much controls you have over the terms for the deals there currently in their pipeline banner.
Oh, I'm, sorry separately I missed I missed your questions.
I just have the given star so announcing revenue cycle wins, how much control do you have over the terms for those deals just given there there are longer terms right at contracts. So it's probably more pipeline for awhile.
Oh I don't think we don't have a significant amount of control nor did we ever assume we would on on the wins cerner as announcing we're primarily focused on serving cerner and whatever capacity they need us to serve them as it relates to.
Being a very strong skills partner for that.
Now as it relates to you opportunities that we jointly look at that fit into.
The criteria that lend themselves to a more comprehensive a partnership including the all one offering that's what we'll be working kind of that net new if you will.
Opportunity set that's what upon the close we're now mobilizing our teams against.
Understood. Thank you.
Thank you Stephanie.
Your next question comes from the line of Sean Dodge with RBC Capital markets. Please go ahead. Your line is now open.
Thanks, Good morning.
Maybe on the.
Your comments around the faster conversion a feeling to cast for carriers.
How much we're able to comprise those those timelines as it days or weeks and then can you give us just a quick education and how you do that is that such as the simple is throwing more people add it and what I'm trying to understand is how sustainable is this can you keep these timelines compressor short or should we expect they returned to more of a normal.
Agencies as volumes in environments that normalized.
Yeah, It's hard for me, it's hard to me Sean to kind of again, it's hard for me to.
Compress the.
To kind of characterize the percent compression you on this call just just given the sensitivity of Oh, yes, some of the dynamics related to.
Our customers and yeah, we yeah, we'd like to respect that the levers that we use.
Ultimately.
The levers we use is ultimately the fact of our global scale and the fact that we have significant flexibility to flex up and down in redistribute resources.
Globally.
And then and then that that capacity if you will combined with the fact that we're able to systematically.
Change in that sense to follow up.
Timing for lack of better words in our core work flow applications and by by changing the timing with which the system is driving work to be done that combination the combination of oh of changing the system expectations, which drives.
The work that's really.
Dynamic that we're working to in that where we have a number of ways. We deconstruct the conversion of revenue to cash and basically going through all of those.
What's built in India adjudication process, what's just charged and not final build this cycle times of each of those queues.
We're able to systematically.
Update the targets that our teams have for those and then our performance management teams as well as you know like I said the capacity models all get updated accordingly, so thats kind of the.
The operating mechanisms that underpin that headline comments that were.
Pushing as hard as we can so.
To convert the available buildings to cash sooner.
Okay. Thank you and then right.
Maybe going back to your comments around the commercial activity among the larger health systems, those with over 5 billion NPR.
What you're seeing there are there is more along the lines and competitive displacements are these largely health systems that are looking at outsourcing for the first time or at least I I outsourcing at scale or or in math.
Yeah, there are largely largely.
Looking ahead.
Outsourcing at scale for the first time.
So you know there they're really not competitive.
Displacements when you think about.
The RFP scopes that we're responding to.
You know there generally.
You know were generally looking at a compared or to the in house operations, a different way that health system runs their revenue cycle very similar to the process we went through with.
With Ascension and inner mountain.
In 2016 in 2018.
In core a more recently on on the on the sub process level, you know theres always displacements at the sub process level, but it's not really an apples to apples.
Displacement, it's a new model being looked at in comparison to the way the historical revenue cycle as Ron.
Okay, great, Thanks, and congratulations on the quarter.
Thank you.
Your next question comes from the line of Steven Halper with Cantor Fitzgerald. Please go ahead. Your line is now open yeah, Hi, good morning on PX customer when you talked about a 5 billion MPR health system is that a current are one customer or is that outside of the basin.
Can you talk about the cross sell efforts.
Yes, yes.
Outside of the base, Steve So not a current or one customer and you know that particular customer.
I have be.
One interesting dynamic a heavy driver it was a competitive process.
Heavy driver.
For us.
Getting the award was the Sci capability the core recognition.
Thats the end of the date to to enable the most comprehensive.
Digital self service scheduling.
All the care settings, we've talked about this before but scheduling not only in a primary care initial visit setting but also in the follow on.
More complex care settings, the ability to schedule across that base digitally was say.
It was a significant contributor to to us some of us a winning that pursuit and I would I would say as we said you know the cross sell opportunity into Sci customers.
Is is starting and we've got a number of.
Pursuits.
That we're working on to broaden.
That relationship based on that the are one a comprehensive capabilities and we've had very good feedback from the Sci customers on our acquisition and the way we've approached that so were generally overtime encouraged that you know that installed base can can be.
A mechanism or channels for growth for us.
You know.
As you think about the PX platform more broadly.
All the customers I referenced our our net new customers. So we're really excited about.
The competitiveness of the solution and the opportunity for us too.
To compete on audit on an area that is a critical critical capability providers are seeking right now the ability to digitize.
Their patient and physician interfaces.
Yeah, and just one follow up and the retention on Sci so far.
Higher than we planned in our you know on our kind of.
Diligence analysis.
Great. Thank you.
Thanks to Steve.
Your last question comes from the line of Gene Mannheimer with Colliers Securities. Please go ahead, you if I Miss Allison.
Thanks, Good morning, Hi, Joe Welcome Rachel.
Two part question with the with the acquisition now of Red works and Sci and then that the divestiture of Vms what does the profile of your revenue today relative to.
Variability.
Other words that.
Now that's variable based on healthcare utilization.
And then the second part would be just with the rush collaboration some of the tools are seeking to commercialize there what would the business model look like would those be subscription based or license or how would you sell those thanks.
Oh, so so as we think about the.
Rough works coming as.
The M.S. business going out generally, it's probably net that and.
And in.
Yep.
It's generally going to be flat, you've got you've got some both both of those businesses have some degree of of variability to provider.
Revenue CMS business, obviously is a completely different type of provider I would say in the Cerner business. It's got a a broader mix of contracts. So it's not 100% like our like our core operating partnership contracts, where where those are very.
Very clear the base fees variable yeah, but.
Incentive kelk mechanism in the in the broad basket of customer contracts that sit in the rubber works business. You've got some of those that are fixed price contracts you've got in some of those that are hundred percent variable you've got some of those that are hybrid. So when you think about of the along those lines that.
Business coming in probably has.
Or less variability to our core operating partnerships, but but it's not going to it that the.
I know at when you roll all that up I would say theres no real change to kind of the profile of our revenue push the post the.
Those two transactions.
And then related to rush one thing I'll note as I commented BJ Coty.
Who joined us nobody a little bit less than a year ago, but almost a year ago and he joined US most recently as the chief value Officer, Davita Medical group and the reason I mentioned that.
And one of the things that's really important VJ his background complementing our current leadership team, it's just a deep deep expertise to understand.
How quality and value based payments infrastructure revenue cycle infrastructure needs to evolve.
To ensure.
We're competitively supporting those revenue streams as they.
As they increase as a percent of the overall revenue mix overtime.
So BJ spent working hand in hand of with the leadership team that rush.
And we.
You know as we noted Russia is one of the nationally recognized leading institutions as it relates to quality of care and as part of.
Their mission to be best in class as it relates to quality of care. They have built a number of advanced algorithms that they've used inside their system to improve.
That rating and improve.
Their care delivery mechanisms and so what VJ has been working on is the role we can play.
And our ability to understand how to product size those algorithms how to scale those algorithms and how to commercialize them as part of our overall engagement process and.
I think that offering well, we'll we'll take different flavors, but I would I would refer French our progression on T. Alex.
As a very.
Similar.
Way to think about that what I mean by that is.
It's an additional capability just strengthens our value prop in our end to end agreements and as part of our overall suites.
But equally important it stands on its own it and we would expect overtime not overnight, but over time with what the investments will make there that that will be a commercially viable standalone kind of kinda, Sweden and the final thing I'll I'll say is.
You know one of our strategic priorities is on the heels of.
All the hard work B-j's Dawn should prepare our physician business too aggressively compete the next phase that will start to think about is how do we methodically and at a very disciplined way.
Build the infrastructure within the revenue cycle management domain.
Manage that alternative payment model, we view it as just a different mix of revenue that we're managing and I'm Super excited BJ spend.
Doing a lot of work on that and sub excited too.
You will be in a position to start to shift our energy there.
And I think it'll it'll be received very well by by our customers in the provider market.
Thank you.
Okay, great grass seeds.
I think without we'll close the call just given that given the time and you know as we close first I think you Casey for all your help on the call.
Everybody for.
Joining the call today.
Of course, I also like to thank our team.
For their continued focus on delivering strong performance.
We look forward to operating and executing on the opportunity ahead and updating you accordingly.
Future calls so many thanks again for joining an operator, thank you and we can close the call.
Thank you and maybe some gentlemen. This concludes today's conference call. Thank you for participating may now disconnect.
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