Q3 2020 R1 RCM Inc Earnings Call
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I'd now like to turn the call over to your speaker today.
He's got his head of Investor Relations. Please go ahead Sir.
Good morning, everyone and welcome to the call Center.
Certain statements made during this call may be considered forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 in particular any statements about our future growth plans and performance, including statements about or strategic and cost saving initiatives or liquidity position or the growth opportunities that are future financial performance or.
Forward looking statements. These.
These statements are often identified by the use of words, such as anticipate believe estimate expect intense design may plan project would and similar expressions or variations investors are cautioned not to place undue reliance on such forward looking statements. All forward looking statements made on today's call involve risks and uncertainties.
While we may elect to update these forward looking statements at some point in the future. We have no current intention of doing so except to the extent required by applicable law or actual results and outcomes could differ materially from those included in these forward looking statements as a result of various factors, including but not limited to the potential impacts of the COVID-19 pandemic and the factors.
Cost under the heading risk factors.
Annual report and our latest form 10-K, and our latest report on form 10-Q.
We will be referencing non-GAAP metrics on this call for a reconciliation of the non-GAAP amounts mentioned to the equivalent GAAP amounts.
Please refer to our press release now I'd like to turn the call over to Joel. Thank.
Thank you all to good morning, everyone and thank you for joining us I am pleased to report that our team continues to perform extremely well in the current environment.
Our 20000, plus employees have demonstrated incredible commitment and that made a tremendous effort to ensure our success and the success of our customers. During this pandemic in.
In addition to navigating the operational challenges presented by COVID-19, we have exceeded the new business targets. We set at the start of the year and have successfully completed the acquisitions of Sci and rough works as well as the divestiture of Dms business, our customer relationships are stronger as a result of these efforts and the car.
He is on solid footing for continued growth.
I'd like to extend the big Thank you to the team for the outstanding work this year.
Third quarter revenue of $307.2 million and adjusted EBITDA of $50.4 million were ahead of the expectations. We communicated on the second quarter call revenue upside was driven by higher incentive fees as a result of strong execution and they focus on customer performance this along with prudent.
Cost management from the actions we took earlier in the year drove higher adjusted EBITDA.
As we look for the balance of the year, we're updating our revenue guidance to $1.25 billion to $1.26 billion and continue to expect adjusted EBITDA of $230 million to $240 million.
Coburn My team continues to present, a degree of uncertainty patient volumes across our customer base in aggregate have been relatively stable at 90% to 95% of pre koby levels. In recent weeks, we remain prepared for a variety of scenarios and our working assumption at this time is that.
Volumes will remain at current levels until there is a full rebound in economic activity.
Overall, our business is performing well as we have demonstrated over the past few quarters.
More importantly, our commercial pipeline continues to gain momentum and we remain very bullish on our long term prospects.
Last week, we announced an end to end operating partner agreement for Lifepoint health.
One of the nation's largest health systems with over 8 billion in annual net patient revenue per NPR.
The agreement encompasses more than one third of Lifepoints hospitals and covers 2.8 billion in NPR for a 10 year term.
We are honored truck bed selected by Lifepoint. After an extensive evaluation process and are excited to deliver meaningful financial benefits as well as a better patient experience. We expect onboarding to begin in January in three phases and concluded in the summer of 2022.
With economics in line with the operating partner contract Economics, we have provided in the past.
In addition to currently contracted business, we look forward to expanding our relationship with Lifepoint in the future to allow them to achieve greater operating efficiencies freeing up resources to deliver high quality patient care.
Point like many health systems across the country faces increased financial pressure growing revenue cycle complexity and evolving demands from patients and physicians are tech enabled service platform is built for purpose to address these needs. In fact, our technology was a critical driver in Lifepoint selection process led by our.
<unk> platform and automation capabilities.
The successful outcome of this process gives us increased confidence in our competitive positioning.
Taking into account Penn State Health, which we signed earlier this year, we have signed on 5 billion in NPR. This year. Despite the backdrop of the pandemic well ahead of the 3 billion target we set at the start of the or on the heels of this and the 4.1 billion in NPR. We signed in 2019, we have made the conscious decision to increase our NOL.
Total annual deployment capacity to 5 billion, an end to end and PR, our ongoing discussions with prospects indicate support for this level of deployment capacity as we look out over the next three to five years.
Beyond Lifepoint, our pipeline remains active for all three of our go to market models interest in our EPS and offerings continues to grow as ideas are increasingly seeing the value of boss as a strategic partner.
Allowing them to focus their core efforts on patient care. We've also seen an uptick in demand from physician groups. Following the launch of our physician solution earlier. This year in the third quarter, we signed 11 deals with physician organizations across the diverse range of specialties.
Modular activity also remained strong with 10 deals in the quarter across from a revenue cycle and patient experience solutions. Our partnership with her is also off to a good start both of our teams are working closely to coordinate and communicate our value prop to service customer base and the interest we have received to date is very encouraging it.
Addition to activity on the commercial front there are three areas I'd like to discuss on todays call first technology and how we are extending our competitive lead.
Second an update on customer deployments and integration of our recent acquisitions.
Our COVID-19, and how we are adapting to the current environment starting.
Starting with technology as I mentioned earlier technology was a critical driver and Lifepoint selection process and is increasingly becoming the deciding factor in many of our pipeline discussions I'd.
Ideas are recognizing that our comprehensive and and solution is better positioned to achieve scale benefits from technology investments than the patchwork of in house resources and point solutions predominantly in use today.
We see a significant opportunity for technology to fundamentally transform the revenue cycle and drive improved yield lower costs and a substantially better experience for patients and providers. Our business model is uniquely suited to drive this transformation operational control over revenue cycle processes allows us to.
The benefit from a quick feedback loop and prioritize investments accordingly, driving rapid innovation.
Investments we have made in recent years are clearly starting to pay dividends for US let me highlight the areas. We're currently priced prioritizing our efforts on.
The first area is our patient experience for PX platform, which is a digital interface between patients and providers PX enables providers to develop a digital front door strategy and benefit via higher order conversion rates, along with digitize scheduling intake referral and authorizations net promoter scores for P. acceptance.
System, we held above 75, and our customer locations with PX installed our knowledge, keeping a 60% patient self service rate with the acquisition of Sci earlier. This year, we now have substantive IP to drive forward further innovation in this area and have developed an extensive roadmap to further advance and differentiate our capabilities.
During the third quarter, we launched our new analytics platform focused on scheduling related performance metrics, such as orders management time to schedule digital self service adoption and capacity utilization. This platform has been designed with best in class Visualizations role align dashboards and in process measures correlated to high.
Value outcomes, our partnership with service also helping advance our PX journey certain of our PX platform assets are now Cerners preferred solutions and server is actively marketing these assets to its installed base. In addition to providing a valuable distribution channel, we expect our collaborative approach to deliver improved value.
[music] to customers and enhance the overall patient experience.
Our second focus areas robotic process automation or Rps as discussed on our last call. The original portfolio of routines. We started developing in 2019 is generating results ahead of our expectations. We continue to see significant promise in this area and are devoting further investment to our our P.A. efforts, we have a team of.
Over 100 employees fully dedicated to advancing our automation and machine learning goals.
The third quarter, we develop seven net new routines to a targeted group of customers one of the most impactful of these recently developed routines is the automated posting of adjustments to more than 10 different patient accounting systems in use across our customer base, we plan to roll out these new routines across other customers in the coming.
In months.
The current portfolio routines and production are expected to automate approximately 30 million manual tasks out of an opportunity set of approximately 100 million manual tasks.
Our backlog of opportunities also continues to be robust with nine additional routines in various stages of development third.
Third we are just scratching the surface with machine learning, which we believe presents a significant opportunity to improve productivity and reduce financial leakage.
In the third quarter, we deployed our first machine learning model into production. This model uses historical claim patterns to predict if they denied claim is likely on recoverable based on our standard processes and would therefore resulted in a write off. This is a great example of a situation where our deep expertise and control the process.
Allows us to iteratively refine our technology before deploying it at scale across our customer network. Another area. We are devoting resources to as technology integration in order to accelerate and streamline our on boarding process. Historically, one of our biggest hurdles to speed to value has been the complexity latency and cost of integrating.
With customers the HR systems through our partnership with Cerner or we expect to reduce our normal eight to 10 weeks technology integration window by up to 60%. In addition to reducing the integration timeline. This will also reduce the lift required by our customers by facilitating direct standard integration.
Next I'd like to update you on our deployment activities, we initiated onboarding activities at Penn State Health in May and are on track to conclude in the first quarter of 2021, both the Penn State Health and our one teams have been focused on maintaining strong momentum and have collaborated extremely well in a virtual deployment model early results are positive and the teams.
We are focused on maintaining the strong momentum established in the first few months of the relationship at all.
Bush health all major work streams have been substantially completed and we are on track to complete any remaining onboarding activities by the end of the year.
The partnership and collaboration with Roche remains very strong and a comprehensive program of operational performance improvement initiatives is underway. The Russian our one teams continue to operate effectively in a virtual model to drive execution of these initiatives and work streams for.
For the 700 million NPR physician contract, we signed in the third quarter of 2019. We are currently 90% through our deployment plan and expect to complete on boarding in the first quarter of 2021, both the customer and our one teams have moved to a virtual model to continue collaboration and execution of the on boarding work streams.
Turning to an update on recent M&A activities. The integration of Sci is on target and we are delighted to report that customer and employee retention are both meaningfully ahead of our original forecast. This gives us increasing conviction in the differentiated value proposition for clients.
Excitement about the substantive IP, we not alone.
As well as confidence in the financial operational and cultural synergies of these businesses.
As discussed earlier, we have an ambitious roadmap in place to be the most comprehensive platform for digital engagement with patients and providers and we are generally at or ahead of targets for delivering this roadmap.
The integration of rubber works is also progressing well we are tracking ahead of plan and consolidating work performed by third party vendors to our shared services locations. This bodes well for us since rationalized and third party spend is an important element in achieving steady state adjusted EBITDA margins of 25% to 30% for this business.
Lastly, let me provide some thoughts related to COVID-19.
The health and safety of our workforce remains our top priority.
The vast majority of our employees continue to work from home and we do not expect to revert to an office environment for the foreseeable future productivity engagement and retention continued to remain at satisfactory levels.
At a macro level the operating environment remains very dynamic given the recent rise in cases in many geographies and resulting regional restrictions relative to the February timeframe, we and our customers are generally much better prepared to navigate and mitigate the challenges presented by COVID-19 pace.
Patient volumes across our customer base have stabilized at 90% to 95% of pre coated levels in recent weeks with some variation as we look across care settings, and some physician and inpatient environments volumes are back to normal, but IAR by volumes continued to lag at around 80% of pre cole good levels are working.
The assumption is that volumes remain at these levels until economic activity reverts to normal we remain vigilant and ready to adapt to changes in operating environment in a way that balances the long term opportunity we see in the market with near term conditions in closing I'd like to once again acknowledge the remarkable effort by everyone at our one we remain.
Focused on serving our customers as they fight this pandemic then.
The need for our services continues to grow and we are very bullish on our long term prospects. We continue to invest in advancing our technology to find better ways to serve our customers, which we're confident will deepen relationships with our existing customers and drive new business over time now I'd like to turn the call over to Ray.
Thank.
Thank you Joe and good morning, everyone I'm pleased to report another strong quarter. Despite challenges presented by the pandemic demonstrating the strength of our business model and outstanding contribution from our team.
Revenue for the third quarter, with 307.2 million up $6 million or 2% year over year, driven by new customers Onboarded. This past year and contribution from the Sci and networks acquisition offset by closing related volume decline.
Revenue was ahead of expectations provided on the Q2 call due to higher incentive fee.
Breaking down the components of revenue.
Net operating fees at 253.7 million declined 12.9 million year over year, and 34.1 million sequentially, primarily due to cogent related volume declines and somewhat offset by contribution from new customers and Rep. Mark as a reminder, the vast majority of our net operating fees lag cash correct.
By approximately pharma hit Q3 represents the peak impact and the national locked down in the March through April timeframe incentive fees of 25.1 million improved 12.8 million over the prior year and $23.8 million over last quarter due to strong execution and a recovery in 90 day average down.
The revenue, which is a key component of the calculations that our incentive fees are tied to other revenue, which consists largely modular services were 28.4 million.
6.1 million over the prior year and up 2.8 million sequentially driven by the contribution from Sci the non-GAAP cost of services in Q3, with 236.2 million up 8.5 million year over year, and 6.4 million sequentially due to costs associated with new customers and West Africa.
Jason offset by actions, we took to reduce our cost structure starting in late February corporate cost structure initiatives helped drive down non-GAAP EPS in expenses 4 million year over year to 20.6 million.
Relative to Q2 as you know expenses increased slightly and we expect these to continue at approximate 6.5% margin through the fourth quarter.
Adjusted EBITDA for the quarter was 60.4 million up slightly year over year and down $14.9 million from 65.3 million reported last quarter.
The sequential decline was primarily driven by the lagging effect of revenue relative to our cost structure. Lastly, we incurred 15.7 million other costs in Q3 with almost half of these costs related to leased facility exit costs corporate restructuring and coding related expenses, turning to the balance sheet cash and cash equivalents at the end of September.
MBR $106.3 million compared to 123.1 million at the end of June driven by working capital changes M&A related spend capex and debt Paydown net debt at the end of September inclusive of restricted cash were $453.7 million compared to $443.4 million at the end of June.
We repaid 6.5 million of our term loan at the end of Q3 and the increase in net debt was driven by lower cash balance due to the factors just discussed.
But dms divestiture now complete we are in a strong liquidity position specifically, our current cash position availability on the revolver proceeds for the N.S. divestiture equate to approximately 270 million in available cash. We don't believe we continue to have sufficient flexibility can withstand a wide range of scenarios.
For the credit crisis, but also for continued investment.
Turning to our financial outlook with Q3 results behind US we are updating our 2020 revenue guidance. We now expect revenue of 1.25 billion to 1.26 billion, which represents an approximately $20 million increase from our previous range. We continue to expect adjusted EBITDA of 230 million to 240 million.
As we continue to invest and prepare to onboard lifepoint.
Given the over attainment in new end to end NPR signings. This year, we will be incurring higher onboarding costs than originally anticipated entering the year. These costs are factored into our refresh 230 to 240 million EBITDA outlook looking out to 2021, we are closely monitoring patient volume and are preparing for a variety of scenarios.
We remain confident in our core execution and our commercial prospects in closing I'm proud of how the teams continued to help our customers and how we stay committed to our goals. Despite the challenging environment. The fundamentals of the business are very strong and we look forward to our continued growth driven by new business. We have signed this year our continued to fall.
Since discipline and the strength of our team.
Now I'll turn the call over to the operator for QNX operator.
Thank you at this time, we'd like to ask a question press star one on your telephone to withdraw your question tries to Fenqi. Please hold while we compile the question.
And your first question comes from the line of Matthew Gillmor with Baird. Please go ahead.
Hey, Thanks for the question I guess that the the first question I wanted to follow up on on the 2021 comments and then also some of the comments, Joe and Rachel made around.
Yes kind of the dynamics I think last call you said you'd see favorability that 2021, if volumes in the fall returned to normal it seems like we're in a situation where volumes are sure to 90% to 95% pre Kevin as you said, but maybe revenues have rebounded above that with with higher acuity and then.
Yes and to be the acuity with with Cobot cases.
Was just kind of I know you are not in a position to be specific about 2021, but just sort of how the current revenue standpoint for hospitals sort of compares to what you were thinking.
Last call answering what that implies for 2021.
Yes, Thanks, Matt.
Just let me.
Let me first start with what we're seeing in the current aggregate revenue trends across our customer base.
And then and then we can I'll provide some commentary on how how were thinking about 2021 directionally.
So what I would say at a headline level across our acute and.
And physician revenues.
We're running anywhere and this this varies week to week, but call it 90% to 95% of pre co bid levels. Then when you break that down if I start with acute the one thing I would highlight is we're still seeing EDI volumes down 15% to 20%.
Inpatient volumes in aggregate and this is a combination of acuity and admissions but in totality.
Inpatient volumes are essentially at pre covert levels.
Same day surgery trends are oscillating from ads to down 5% and.
And the rest of outpatient.
It's really kind of in that 90% of targets. So when you roll all that up across our acute clients, that's what makes up that 90% to 95%.
Aggregate revenue trends, we're seeing.
Our physician business kind of follows that we've got certain hospital based physician specialties that follow those acute trends and that our office space physician business is essentially a out pretty cold at levels.
So as we think that's what we're seeing right now and that's the underlying assumption.
You know that we're incorporating into our current internal.
Planning efforts on 2021, we're not through our full planning for 2021.
But I would say what I would say directionally.
Inputs that I would characterize one yeah, we don't see that volume environment are we think it's prudent for us to not assume that volume environment is necessarily going to change until we see some strong indications.
From a.
From a macro.
Covert dynamics setting.
The second thing I would say is core execution is very strong.
That is made up of a conversion of cash as we commented on the call. We're very encouraged with CPI performance.
In in above our targets and.
Then we did a fair amount of structure.
Structural restructuring real estate corporate spend.
That will carry over into 2021 and then the final variable. We're working around is just not investment as we characterized we intend to.
Take our nominal deployment of cash capacity from 3 billion to 5 billion.
That increase will be about a seven to 8 million dollar investment for us.
Phased over the next six months or so.
So we're just.
In the process.
And Rachel's leading this across the company.
To finalize the planning.
Around those inputs, but.
The the environment notwithstanding we're if you think about the other two components of that execution is very strong.
On the things that we can control.
And investment.
A posture is indicative of our confidence in the growth.
Visibility that that we have.
Okay great.
And then you made some comments about technology being.
Deciding factor in.
In some of these decisions and.
You're often times in positions, where sometimes you're competing against other vendors sometimes.
It's it's just a conversation between you and a and a prospect I guess I was.
Kind of curious if you are the are these decisions are they largely on.
On the technology side at the differentiation.
At the very front end and the intake process or is it more about the efficiency that you all create and and as.
Additionally, as is this more about being competitively better or just.
In a in a bake off for more about these are the technologies. We can bring that you don't have access to on a standalone basis.
Yeah, I think it's both so so if you if you.
If you take our patient experience solution and our automation suite those two capabilities I would characterize those as.
Things that we can bring to the table that the peer group.
That were seeing competitively.
Is not as strong of a push position or does not have an offering along those lines. So so so.
That's how I would characterize those those two capabilities.
And then on the core technology again.
We carry a fair amount in fact, our point of view is that we have the broadest coverage of the revenue cycle process with our proprietary technology suite.
We compare very favorably on functionality.
And then we are unique in the sense that our technology is fully integrated so what I mean by that is we're in a good integrated at the database level and were integrated at the code base level across the the process. So the revenue cycle process, you will hear at sometimes broken down into front middle and back middle.
Incorporating the H. I am coding.
Interfaces to the the clinical operations and obviously the back out in the building and follow up into payers and also.
The efforts, we have working with patients on their responsibility we have a comprehensive coverage of of that process and we are integrated and when we compete with other companies or we compete with the internal operations more often than not.
That coverage of that technology coverage.
Is born out of.
Point solutions that by definition.
I don't have a common code base and don't have a common database and so we are able to provide visibility with our technology, that's very unique and differentiated so it's both of those things and you know in some of our recent wins we've competed.
With more technology oriented companies.
And on the dimension of technology, we fare very well, which is encouraging for us.
Great. Thank you.
And your next question comes from the line of Charles Rhyee with Cowen. Please go ahead.
Hey, it's James on for Charles So adjusted EBITDA in the quarter came in ahead of the Threeq Guide, but you guys maintained that the 2020 EBITDA guide.
Are there any other factors aside from the onboarding costs associated with Lifepoint that drove that imply downward revision in Fourq. You is there perhaps any level of conservatism baked in there.
No we I think we have.
Appropriate assumptions.
And and.
And the majority of that is attributed to investment for growth primarily lifepoint.
Okay and is.
Is there any update that you could give us regarding simplifying the cap structure.
Obviously in light of the recent filing.
Have discussions between the board and tower book Ascension begun if so like any progress towards eliminating the convertible preferred.
Yeah. So.
Relative to cap structure. The first thing I would characterize from my perspective and rituals perspective is some.
We're very pleased.
To see engagement in discussions occurring so yes in fact James discussions.
Our ongoing the second thing I would state is they're they're structured and there are some the right organization. If you will around those discussions organization.
Of our board and engagement with the Investor group as well as organization of prospective advisors.
And so those two data points from my perspective are very very encouraging.
And we just have to let those discussions have run their course.
But.
But it's.
Yes, I think it's in.
In line with feedback we've received discussions we've had with investors and so from management's perspective.
Again were were generally encouraged.
With the mode of operation right now in the <unk>.
And the alignment if you will.
In.
In investing energy and time on this topic.
All right great. Thank you.
And your next question comes from the line EPS Donald Hooker with Keybanc. Please go ahead.
Great. Good morning, you're probably not going to want to answer this question, but I guess somebody probably should ask it anyhow.
Obviously, there was news out that Intermountain health is looking to potentially acquire merge with Sanford.
Health.
Can you maybe.
Help us think about.
What kind of opportunities that might provide for you or maybe in another way maybe can you talk about.
When you have health systems, like Ascension, and others make acquisitions or mergers I mean, how typically does that play out for you in terms of extending your revenue opportunity.
Great Don know I'll happily answer.
As best as I can the question I may broaden a bit as well because I think it's relevant.
The first thing I would say is one of the one of the growth vectors that increasingly based on progression of events over the past.
Corridor.
We feel is a key area for us to focus on is expansion within our current customers that could be expansion or evolution of of co managed partnerships into operating partnerships or it could be expansion, whether that be a lifepoint or.
Our core customers that are are consolidating and growing via M&A activity or partnership activity.
Growing along those lines. So what we can control in that equation is being a great partner, serving those customers incredibly well.
Thats, a big component of our investment bias that we've commented on the call our intentions are to absolutely.
Exceed expectations and as a result of that earn the right to growth now more specifically to inner mountain I'm not going to comment.
As as you prefaced specifically on Sanford.
Theres a lot of things that have to get done and occur, but what I would say is that our partnership with Intermountain is very strong.
And.
We we've been a partner of theirs for a long time now.
And intend to continue to serve them.
Incredibly well.
And as it relates to a patterns on acquisitions.
What I would say is.
The pattern has been up.
For those acquisitions to be incorporated into our engagement now I want to qualify that.
The acquisitions that.
We've been absorbing inside of current contracted customers.
Have generally been.
Smaller in nature and more regional type acquisitions. So.
But.
But that is the that is the general progression that we've seen and it's not uncommon for us to price.
Provide support to providers as they assess.
Potential diligence items, so again.
We think increasingly on the heels of our growth Rush Penn State.
Lifepoint et cetera, we think increasingly on the heels of our growth our installed base represents a significant growth opportunity.
And the other thing I would highlight.
No we havent talked much about it but we intend to make it a priority as we go into two.
2021, and it's a natural progression of our integration efforts on our M&A activities.
Theres, a very nice installed base that Sci.
Historically has has served as well as the recent acquisition of Rep work. So when you roll all that up we have and 10 customers.
That have growth opportunity we have M&A.
Activities.
That represent installed basis.
Yet there is a pre existing relationship in a certain amount of establish credibility that we can work from to expand on a and then we also have our modular channel so were generally.
Activity, we've had over the past two years as we look going forward we.
We generally.
Our very encouraged by the that difference.
The different channels, if you will to the provider base to grow from.
Okay. Thank you and let me I'm going to press My luck luck and ask another one that you might not be able to answer my not one answer but in the past you gave sort of an outlook into 2021.
And I think in a recent call you you all commented that you're.
Traction with some of the automation and AI investments kind of might put you towards the high end of that prior range I don't know if you still bless that range going forward, but now we have some new variables. We have you know.
Obviously, some onboarding of new clients and but like how do we help is there a way to kind of maybe frame 2021 with some of the incremental expenses with the new capacity.
Capabilities that you're adding any.
Any comment directionally around there would be helpful. Thank you.
Yes, what I would say is.
As we said before the if we were if we were at pre cobot levels in totality. So in aggregate if our revenue was that pre cobot levels.
Yeah, we would still.
Primarily driven by strong core execution and the restructuring we did in 2020 we.
We would still have line of sight to to favorability.
Within that range now you have to remember that we have M&A activity that we're absorbing in that the divestiture of Vms.
And we're still not even a year into.
The integration of the Rev works business. So there are some dynamics there that we're absorbing in.
And that headline commentary now as I said, we're not we're not going to update guidance for 2021 on this call. We're in the middle of our planning cycle, but what I will tell you is we think it's prudent to have a planning assumption on a.
Revenue environment, that's in line with what we're seeing right now, meaning we're not assuming a magical uptick in the revenue backdrop.
Driven by the covert pandemic.
And again, you know the investment that we're looking at some of it will occur in the fourth quarter. Some of it will incur in 2021.
Is seven to 8 million on that nominal capacity increase so.
Those are the those are the factors that were.
Triangulating, if you will and in line with our normal course planning processes.
Okay. Thank you.
And your next question comes from the line of Stephanie Davis with Leerink. Please go ahead.
Thank you for taking my question congrats on solid quarter.
Could you give us a refresh on your relationship with free given their recent investments.
The market and then the follow up to that did your relationship extend to solely your wins.
Our total hospital wins on their side as well.
So did the new freeze a hostile client give you better inroads into when you are yes.
No I would say so so a new a new freeze a hospital client that's on there.
On their stand alone.
Solution I I don't think we necessarily would I don't think.
That that Doesnt correlate.
Necessarily too.
To an expansion of business for us.
So overtime.
Overtime, maybe maybe there so maybe there was a cross sell opportunity there I would say Stephanie we haven't really focused on that that channel just because to my earlier comments, we feel like we've got.
A lot of Optionality on channels to market right now from M&A activities current customers and then modular business that's been growing over the past three years that represents increasingly represents an opportunity.
We have a very good relationship with Frazier right.
Relative to RPX solution.
We.
Yeah with the acquisition of Sci.
And some of the capabilities that came with that acquisition, we feel like we're in a good position and as I said on the call our intentions are to comprehensively digitize.
The.
The interface to patients on the revenue cycle across all care settings, and I would say Sci was a very critical and very strategic acquisition for us.
To be able to bring that technology solution to life and our strong point of view is.
The complexity in the value to unlock really lies in the complicated services whether that be the order referral service order management service the scheduling service across all care settings, the authorization process, you'll presenting an accurate residual balance eligibility verification.
Station demographic verification all of those complex revenue cycle services.
Which.
Which we're very encouraged that we control the IP and the technology on those complicated services and in line with our end to end agreements.
Implicit in that relationship is we control the process change so when we re badge.
Employees.
And when we transition control of third party vendors, we're actually in a position on behalf of the providers to fully implement the solution and to deliver to the providers to maximum value the technology can bring so.
So that's really where our focus is on.
Fully automating and extending all of those services in all care settings to the patient because when we do that what we see is utilization rates go up.
When the patients can complete as many tasks.
As they need to or the majority of tests they need to have their willingness to engage digitally.
Goes up and that's a that's a a strong driver for us to to deliver financial benefit and and our underlying financial performance.
So that leaves you really particularly to my follow up question.
As you invest in your technology suite and the value acquisition is there any part of the PX experience that you would consciously not in house, just create a consistent PX environment with some the ambulatory or other locations.
Yes, what we've worked really hard on the.
The interface layer.
To the patients into different care settings.
Our view is is that digital front door that layer of technology, that's the actual interface that patients.
Engage in.
Thats a layer of technology that we would like to be flexible on.
Our view is to the extent we can.
Focus on those complicated services and digitize those services with our technology.
And have a very modern architectural design, so that we integrate our technology quickly and.
And flexibly with whatever.
Interface a provider may have we think that's a line of demarcation.
You know that I would that I would kind of Stephanie characterize your question around.
And you know the the.
That's that's why we're so focused on Sci because we felt the scheduling process and the order referral process.
One they're very strategic to the providers.
And to those are processes that historically have not been fully transformed by technology and as a result.
They tend to have manual off ramps that have to occur into a call center or into a.
Complicated administrative process and.
Sci we feel strongly has the ability to extend those services and those process areas.
Super helpful. Thank you for taking my question.
Thank you Stephanie.
And your next question comes on line of Sean Dodge with RBC capital markets. Please go ahead.
Yes, thanks, good morning.
On I.
I guess on the cost side I, just wanted to make sure I understood.
Your comment there it looks like.
You have to incremental drag on EBITDA heading into next year. So you get the implementation of a lifepoint deal and it's kind of the historical rules of thumb hold there that should be like a 12 ish million dollar headwind and then you've got the investment to increase the deployment capacity I think you said something like an incremental or seven or eight there.
Should we should we be thinking about those are treating those two separate or is there some amount of overlap.
Of the expanded deployment capacity that would be kind of captured in the initial drag youd otherwise expect from.
A big new client like like Lifepoint.
There's.
Sean Thanks for that question there is overlap in that.
It's always.
It's always a little bit hard for us from a planning cycle. When you think about our original assumptions around three and and and kind of contracting five this year, but the five is coming at the in launching in in the fourth.
We're at we're in investment phase right now to prepare for the Lifepoint deployment.
And then rolling that into next year. So there is overlap in that.
And what I would what I would really Directionally emphasize is the following we think it's prudent to run with a 90 to 95, we'll figure out what that exact number is on aggregate revenue.
We're going to be ahead of our core operating targets on execution, primarily in NK pie performance Theres been a lot of progress on the working capital already so there may be a bit for us to get but we fully expect to outperform on Cape YY performance, Oh, we're going to absorb the M&A activity.
And then the other variable is just what is the exact.
Overlap to use your terms or what is the exact net investment it will not be the additive of seven to eight and 12 it'll be something you I I would probably point it closer to the.
To the seven to eight number I'm, just because that's truly the NOL.
Nominal increase in capacity.
That we're planning for against a backdrop of.
Historically, a planning assumption of around 3 billion of net new a year, but but.
But I would say.
Yeah, if we were at.
If we were at.
Pre.
Pre covance revenue levels.
Yeah, we would feel.
Very encouraged with the trajectory against the original guidance from.
From pre coal that we put that guidance out in January of 2020.
And.
We.
Yes, we would.
We would just be thinking about really what's the net impact of investment and.
In the Grand scheme of things that would be relatively to menus.
Okay.
That's very helpful. Thank you and then.
Maybe on the partnership with certain are you said that was off to a good start can you give us a sense of.
The type of arrangements, we should expect to come out of that channel are these mostly going to be co managed deals or are these going to look more like operating partnerships and then.
It is or how is it selling process. They are different today to generate leads and it's up to you to chase it down or it sounds like maybe there's a little bit of a tighter closer alignment there.
Yeah no good there's two channels.
There's two channels that we that we're working on with Cerner.
So number one is.
RPX solution.
And as I commented in my.
My opening comments.
We are very encouraged by prop.
Progress in that channel that's.
That's a that's a var relationship that's a component of technology, we have.
It's an option.
That that gets extended to their clients much more importantly, and much more strategic is our efforts to work with them on.
And work with that work with Cerner as a very strong skills partner too.
To extend the value prop into their installed base and so we've we've had a significant amount of planning effort between our commercial team Jerry Gary long, our chief commercial officer, and the equivalent within Cerner against their installed base. There is roughly 500 plus client.
It's that the teams have segmented weve tiered those into three cohorts.
And we're in the process, we've been through the training phase and we're in the process of Alpha.
Outbound engagement in line with the criteria that Weve established and those cohorts are in priority rankings.
And so.
That's what underpins the encouragement tier to your question on.
Co managed or operating partner agreements, it's really hard to determine that is something that's really a local dynamic it's very hard in our experience to segment them.
Market and Archeo type who's going to go operating partner Who's going to go co managed with the exception of my.
My prior comments in the academic medical centers, we would generally see that channel always being a co managed starts.
Just given.
Some of their.
Their decision making processes and.
They're they're propensities.
But a rough planning would be a 50 50 and when you think about.
Our confidence increasing the nominal capacity from 3 billion to 5 billion.
When you break that down we really think it's underpinned.
With a lot of support so so I just commented on the search channel again, we have existing customers that represent significant growth opportunities.
We have.
Acquisitions, we've done that have their own installed bases that we.
Transparently haven't really focused on on a unlocking opportunities installed bases and we've been.
We launched our modular business three years ago, and as we sit today.
We have a modular relationships that are starting to show signs of expansion. So we think all those things combined ill give us a high degree of confidence that we really it's important for us to.
To invest into into that growth opportunity. The other thing I would highlight with Cerner again, we recently per.
Participated in their virtual health care conference.
And then we also were very active participant in their recent revenue management conference income.
Including giving a presentation all the attendees jointly with ascension on the PX solution in the impacts it's had on ascension. So again a lot of mobilization activities.
But that's a pretty big installed base and we feel like were up very strong skills partner and we intend to serve cerner and their customers really well on our core value proposition.
Okay, great. Thank you again.
Thank you.
Okay.
And your last question comes from the line of Gene Mannheimer call. Your Securities. Please go ahead.
Thanks, Good morning, Congrats on the good numbers Mike.
Question revolves around the Q4 revenue guidance and I'm just curious if that includes any one time bounce back or catch up due to providers and utilization opening back up again following the locked down. So for example, we're hearing that there was kind of a bolus of office.
Office visit volume in the July August timeframe once things started to open up again.
Any comment there would be great.
There's probably a little bit just off of that.
There's a little bit of.
Just the progression of how provider volumes have progressed over the year.
Via coated, but what I would really well.
And what I would really comment on gene as.
We're encouraged with underlying execution on CPI performance.
And that's very important for us because that's.
When you think about the economics of the of the Cape YY performance.
There is an order of magnitude more value that's going back to the provider than we're retaining in that equation and so.
That's awesome.
That's something that.
Has been a priority for us it's encouraging to see it play through this quarter and also as we go into the fourth quarter, but but theres a little bit of I'm, just a normal progression you're seeing from a.
From a covert recovery.
Standpoint, and I would say.
For our for our mix of business not as much office visit there.
There are obvious that we're seeing the same trends, you're probably hearing from other providers.
In that segment of the market no doubt, but for our book of business and mix of care settings same day surgery as probably the thing I would highlight that we've seen an uptick in that.
Ill kind of through the through the summer coming out of.
March April may timeframe, but.
But there is there are some in that revenue line core executions contributing this fall.
Make sense, Thanks, Joe and my follow up would be if you if you could remind us if the lifepoint deal if that when included Sci or not and what competitor or competitors or are being replaced there. Thanks.
On the Lifepoint deal. It did include Sci. It does include Sci being deployed.
And then competitively as we mentioned it was a competitive process. We competed with two incumbents. So two incumbents that were existing.
Partners into Lifepoint.
We did not have a pre existing relationship at the start of that RFP process.
And one of those incumbents was.
With a technology oriented companies so.
So the.
As as is always with our engagements there will be some displacement of of third party technology spend and replacement with our core technology.
Very good thank you.
Thanks team.
And there are no further questions at this time I will turn the call back over to Joe for closing remarks.
Gregg will first the Julie Thanks for all your help on the call moderating.
Et cetera, and thank you everybody for joining us today I'd like to close just thanking our team for their continued focus and.
Delivering.
Very strong performance in a complicated operating environment and we look forward to.
Executing on the growth opportunity ahead, and updating all of you accordingly on our future calls so thank you very much again.
For the for the participation.
This concludes today's conference call you may now disconnect.
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