Q1 2022 R1 RCM Inc Earnings Call
Good morning, My name is Chris So I'll be your conference operator today.
At this time I'd like to welcome everyone to the Arb, one RCM Q1, 2022 earnings conference call.
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After the Speakers' remarks, there'll be a question and answer session.
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Thank you Archie Frigging head of Investor Relations you may begin.
Good morning, everyone and welcome to the call any statements made during this call maybe considered forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 in particular any statements about our future growth plans and performance, including statements about the scoop.
What was the acquisition of climate, and its expected benefits or strategic and cost saving initiatives or liquidity position or growth opportunities under our future financial performance are forward looking statements. These.
These statements are often identified by the use of words, such as anticipate believe estimate expect intend design May plan project.
And similar expressions or variations.
Sort of 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.
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.
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 acquisition of augment which may not be completed on our anticipated timeline or at all or growth strategy. The impact of the COVID-19 pandemic and factors discussed under the heading risk factors in our most recent.
Annual report on Form 10-K, or quarterly report on Form 10-Q and a.
Proxy statement and prospectus for upcoming annual meeting.
We will also be referencing non-GAAP metrics on this call a reconciliation of the non-GAAP amounts mentioned to the equivalent GAAP amounts. Please refer to our press release.
Information related to cloud and that is based on data available to us and are subject to change.
Now I would like to turn the call over to Joe.
Thanks, Tom Good morning, everyone and thank you for joining us.
I'm pleased to report 2022 is off to a strong start with revenue ahead of expectations and adjusted EBITDA at the high end of expectations for the quarter communicated on our last earnings call. Our team continues to perform well and deliver on our commitments to our customers.
I'd like to extend a big thank you to all our team members for their tremendous dedication that goes into delivering our results every day.
On the call today I'd like to cover three topics first an update on commercial activity.
Road by color on our ongoing operational performance and lastly, ill discuss our pending acquisition of cloud matter.
On the commercial part I'll start with an update on the $10 billion NPR contract. We've discussed over the past few months negotiation for the customer are complete with the economic terms agreed to and we are through their internal governance processes. One open item. We are now focused on is the provisioning of user access.
For our employees with a third party vendor used by the customer.
Our normal contract sequencing. This provisioning process takes place post contract signing.
This customer prefers this person listening to be completed prior to signing let's.
Let's say change relative to what we had previously planned and therefore, the processes admittedly taking longer than expected.
We remain very confident in getting the deal completed and are working as expeditiously as possible towards signing.
This deal aside commercial activity in the quarter was very strong with new entrants coming into our pipeline.
Gretchen up deals in the pipeline and the conversion of activity into signed deals.
We issued a press release this morning announcing their tenure end to end agreement with <unk> on health.
Sign on health as a health system comprised of 61 long term acute care hospitals or <unk>.
We have 18 short term acute care community hospitals.
The agreement encompasses approximately $2 billion in NPR across the 61 L tax side health is our first one in the <unk> segment of the market reinforcing our identity as the revenue cycle partner for providers across all care settings, we expect onboarding activities at <unk> to commence next month with <unk>.
Employee transitions expected to begin in August .
Additionally, we have roughly $500 million of health system NPR in the contracting stage under a full operating partner model.
We're seeing strong demand from physician groups, where our value proposition is resonating well amid staffing challenges and an ability to rapidly scale with growth in the first quarter. In addition to our normal physician flow business, we signed $750 million and end to end operating partner NPR.
Across three large independent physician groups.
<unk> vision, Samsung clinic, and emergency Physicians professional association.
The physician space is strategically important to us we believe we have a disruptive offering targeted at both IGN affiliated physicians as well as large independent physician groups, who are underserved by the current vendor set focused on this segment of the market.
In 2020, we launched a physician specific solutions to the market with a pricing structure aligns our performance and a <unk>.
Robust offering based on our technology architecture shared services infrastructure and analytics tools collectively collectively these factors enable us to price below prevailing market price segment and at the same time achieved 30% plus EBITDA contribution margins at steady state.
This offering has been received very well in the market and ranked number one by class for the last two years.
With over $2 7 billion and operating partner NPR already signed in Q1 and $500 million in the contracting stage. In addition to the expected 10 billion NPR contract. We are reevaluating, our investment deployment capacity, which I'll discuss later.
Activity for our modular offerings also remained strong with 23, new deals signed across 12, new customers in the first quarter, including Hendrick Health Rocky Mountain State anesthesia providers, VP health and Liberty Hospital.
The largest of these new modular deals is to provide accounts receivable management for a major health care provider in California. These.
These wins are reflective of our strong modular offering and competitive positioning in the market.
Which we expect to be enhanced by the pending cloud med acquisition.
Our purpose built platform encompassing comprehensive technology global delivery infrastructure and a best in class operating system to drive performance, where common factors across all customer decisions in the quarter the.
The investments we've made in these areas over the last several years have significantly enhanced our value proposition and our competitively differentiated as we said today. We believe we have the highest quality lowest cost platform to manage provider revenue across all care settings.
We continue to build on this strong foundation with additional investments in automation and patient experience and most recently revenue intelligence with the pending acquisition of cloud man.
Providers are increasingly recognizing the strength of our value proposition and this has resulted in a doubling of our entire pipeline over the past two years, even effort converting more than $13 billion of NPR across life.
Penn State Rush pediatrics.
From an American physician partners ongoing discussions with prospective customers and market dynamics point to a continued acceleration in demand over the next three to five years.
In order to successfully onboard this accelerated activity, we plan to increase our deployment capacity to a range of $9 billion to $10 billion NPR annually exiting 2022. This is a meaningful increase from the $5 billion. As we entered 2022 and is supported by the progression of deals in our pipeline.
We first launched a dedicated deployment office in 2016, and it has proven to be a prudent investment and ensuring that new customers are on boarded as smoothly as possible.
We are in the process of finalizing the level of investment needed to increase our deployment capacity and anticipate being in a position to provide specifics when we update our guidance. After completion of the cloud Med acquisition. Our early expectation however is to see meaningful scale and cost efficiencies realm.
<unk> to the $7 million to $8 million and incremental costs. We saw when we increased capacity from 3 billion to $5 billion in 2021.
In addition to a dedicated deployment function. We also bear upfront costs with Onboarding, a new customer some of these costs until duplicative labor cost to hire and train new employees in advance of a transition to our shared service centers.
Integration costs and run out of third party vendor contracts. These costs have typically averaged approximately $4 million per 1 billion of NPR.
In the <unk> setting onboarding costs and contract economics are different compared to illustrative models. We have provided for IBM historically in the <unk> setting there are lower needs for certain revenue cycle functions. As an example, nearly all patients are transfer directly from an acute care facility eliminated.
The need for traditional patient access registration at entry points, such as an emergency department or diagnostic imaging centers as it relates to the <unk> setting we expect a revenue collection rate of approximately two 5% with EBIT contribution margin rates in line with contract economics.
FERC operating partner customers as a result of the lower personnel needs upfront costs are lower we expect upfront cost in the <unk> setting to be approximately $2 million per 1 billion of NPR.
Next I'd like to provide an update on our operational performance. Our team is performing well under the current backdrop navigating a very complex operating environment and delivering sustained financial improvements and a better patient experience across our customer base.
Two dynamics, we are closely watching our patient volumes in the labor environment patient.
Patient volumes to date have trended in line with the expectations embedded in our 2022 guidance, which assumes volumes and cash collections at close to pre pandemic levels gross charges, which are a leading indicator of cash collections are trending slightly above pre pandemic levels with stronger performance in the <unk>.
<unk> setting in outpatient surgery emergency visits and office based visits are closer to flat versus pre pandemic levels from an operating capacity standpoint, we are adequately staffed to process current volumes and maintain a close watch on leading indicators such as scheduling data.
Turning to the labor environment current tight conditions presents us with the same challenges many other companies are facing.
Our 2022 guidance incorporates wage increases in select markets and we feel comfortable with our current wage levels technology, driven productivity improvements presents a significant opportunity to reduce labor costs, which is why we continue to invest heavily in automation and digitization and.
In the first quarter, we automated more than 12 million additional tasks on an annualized basis and are on track to exceed 100 million manual tasks annually as we exit 2022. This.
This automation capability is turning challenging labor market conditions into an opportunity for us as providers recognize that for that's a superiority turned it to their internal efforts.
Turning next to cloud that we.
We're on track to complete the acquisition by the end of June subject to the completion of debt financing and satisfaction of the remaining closing conditions, including shareholder approval for the issuance of stock related to the transaction.
We have announced the post close senior leadership structure to both teams, bringing together the best commercial and operational acumen from both sides to accelerate growth across end to end modular relationships.
We cannot yet approached the market as a combined entity feedback from customers on both sides has been positive along the lines of breath of payer coverage and geographic coverage significant strengthening of our middle operations and the ability to meet providers, where they are in their revenue cycle Jordan.
Our integration team is fully mobilized and resources with the help of external advisors to launch our plants immediately post close with.
We've conducted extensive deep dive sessions across cloud <unk> product and technology operations commercial capabilities and human capital.
Coming out of this we have established a roadmap for a cohesive market presence across all solutions, a unified technology platform and integrated delivery capability. We've also completed capability mapping for customer solutions and technology applications to establish a detailed plan.
For technology rationalization investment and timeline leveraging the best capabilities for both companies.
Our planning process to date has confirmed several of our deal thesis assumptions.
Our base case assumptions for revenue and cost synergies are achievable, given the operating models and efficiency opportunities.
<unk> <unk> technology architecture, and assets are extendable to establish <unk> as the technology and data platform leader in the industry.
Three both companies cultures are highly aligned and cloud <unk> talent base is very complementary to our one space.
And finally cloud based modular commercial engine in particular, the combination of our ones comprehensive automation catalog with cloud much superior go to market capability has emerged as a significant opportunity for us.
We believe the capabilities cloud math adds to our portfolio will enhance our once existing functionality and drive significant growth in the years ahead, we look forward to completing the transaction and launching our integration plans with the long term goal of positioning <unk> as the Premier brand to serve health care providers.
Revenue management needs.
For those of you who may still be looking to come up to speed with cloud met in its offerings. We hosted a teach in for investors on April 12, and a replay is available on the Investor Relations section of our website.
We are encouraged by cloud <unk> performance to date with our understanding that topline results for Q1 were ahead of their plan driven by a healthy mix of cross sales into the existing base as well as new customers.
<unk> is also making progress in launching new products to drive organic growth and saw strong demand for its 340, <unk> solution, which enables lower income consumers to access affordable prescription drugs. Overall, we believe cosmetic solidly on track to meet or exceed the $446 million in revenue.
And $191 million and adjusted EBITDA targets, we expected when we announced the transaction in January with.
We plan to update 2022 guidance to reflect the contribution from cloud.
And expansion of deployment capacity following the completion of the acquisition.
In closing I am pleased with our performance in the quarter and we are well positioned to deliver on our 2022 goals. We remain focused on pursuing the commercial opportunities ahead of us and planning for a successful integration of cloud met while maintaining our commitment to strong operational execution now.
Now I'd like to turn the call over to Rachel.
Thank you Joe and good morning, everyone. We're pleased to report solid first quarter results with revenue up.
6% year over year to $385 7 million.
And EBITDA up 11, 1% to $89 3 million.
Net operating fees of $322 8 million grew $36 $7 million year over year, primarily driven by the onboarding of new customers that you might point in pediatric.
Hoffman.
Welcome to inpatient volume across your customer base.
On a quarterly sequential basis net operating fees decreased $9 2 million due to historic cash collection period for a large end to end customers.
Incentive fees at $30 2 million.
$19 million over the prior year driven by strong operational execution.
Part by any incentive fee net operating fee for one of our customer contracts as previously discussed.
On a quarterly sequential basis and can compete declined by $5 6 million due to typical seasonality.
<unk> obligations in the first quarter.
Underwriting mainly consists largely of modular services with $32 7 million.
2 million over the prior year.
$6 million over the prior quarter, driven primarily by contribution and commitment.
The non-GAAP cost of services in Q1 with $273 6 million.
$70 8 million year over year, which is in line with revenue credit Inc.
Incremental costs to serve new customers. Any addition, dissipate operating costs were offset in part by our automation ADT to Jason Eric.
non-GAAP SG&A expenses between $18 8 million were up $3 4 million year over year, driven by debt to pay related call sales and marketing spend to support business growth and increased travel expenses.
Let's move to the fourth quarter of 2021, non-GAAP SG&A expenses declined $1 9 million due to lower marketing expenses.
Adjusted EBITDA for the quarter with $89 3 million up $8 9 million year over year.
The increase was driven by strong operational execution contribution from new customers and dissipate as well as lower costs as a result of our automation and digitization initiatives.
On a quarterly sequential basis, adjusted EBITDA declined by $5 8 million, primarily due to contracting cost associated with the $10 billion pending country.
Lastly, we incurred $17 1 million and other costs.
From $13 million in Q1 of 2021, and $11 9 million in Q4, primarily due to costs associated with the cloud may take action.
Turning to the balance sheet cash and cash equivalents at the end of March were $123 9 million compared to $130 1 million at the end of December .
Generated $39 million in cash from operations in the quarter and a sequential decline in cash was driven by tax payments of $21 5 million related to Q1 vesting of employee equity Mark.
$10 million for capital expenditures and for <unk>.
<unk> 4 million for debt repayment.
Net debt at the end of March with $647 4 million relatively flat compared to year end 2021, which implies a net debt to adjusted EBITDA leverage ratio was too many times versus one nine times at the end of 2021.
We did not conduct any meaningful share repurchase activity in the first quarter.
Our liquidity position remains very strong overall with more than $590 million of availability.
And cash on hand at the end of March.
Turning to our financial outlook, we remain on track to generate revenue of one 6 billion to $1 7 billion and adjusted EBITDA of 385 million to $405 million in 2020 Q.
We plan to update our guidance after we close the <unk> acquisition to account for the partial year contribution from cloud net investments related to expansion of our declining capacity and upfront cost to onboard NTR beyond the 10% to 12% growth.
Five to $4 8 billion as originally budgeted for in 2018.
As Jim mentioned, we continue to expect cabinet to generate at least $191 million any GAAP to EBITDA for the full year. We currently expect.
Approximately a prorated contribution depending on the timing of the net.
Net of the startup cost synergy, we expected investment harmonized compliant hybrid security infrastructure.
Turning to the financing for the transaction, we are funding requirement exiting at net debt interest and accumulated expenses.
These activities are in market and are nearly complete.
In February we received commitments from our bank group for $500 million in incremental term loan financing.
$50 million increase to our revolving credit facility.
In the April we receive rating from Moody's S&P and Fitch and we are waiting final commitments from lenders this week for $540 million internal Mb financing.
We expect to have approximately $1 8 billion in gross debt and $600 million revolver capacity.
Interest expense is expected to be in the 3% to 4% range based on current character right.
For the second quarter. The current range of potential adjusted EBITDA is wider than normal as it depends on the exact timing of cognex, clearly and investments related to strong commercial activity.
Forward to providing Q2 guidance post close of the cloud nine acquisition we.
We continue to expect.
Adjusted EBITDA to ramp in the second half of what the case pre Kevin.
In closing I am proud of our team's continued strong operational execution and the results delivered in the first quarter, we remain focused on disciplined execution and balancing near term investments to support long term growth.
From a two year, we are well positioned to deliver on our commitments.
Sorry to updating you again on our progress in conjunction with the cabinet transaction now I'll turn the call over to the operator for Q&A.
Operator.
As a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question today comes from Stephanie Davis with SBB Securities. Your line is open.
Hey, guys. Thank you for taking my question and congratulations on the new <unk> Wang.
I was against.
Against that a little bit more color on the one just in terms of sizing and how to think about it.
The model given your existing capacity.
Yes, so we're excited.
To serve scion and excited to serve the <unk> care studying as I commented in my.
Formal remarks.
It's a pretty straightforward outside of the care setting being different.
And the traditional short term acute care settings and some variety.
And the associated <unk>.
Scope, our cost to collect that I referenced in our remarks I would say it's.
Relatively straightforward from.
From a deployment sequencing timelines order of operations so to speak.
And so we would expect to see.
Similar profile as it relates to <unk>.
Contract economics, as well as it relates to major deployment activities over the course of this year.
And then into the following years.
And then in terms of contributing net patient revenue should we assume that it's going to be balanced.
With the existing capacity what is available R&D quoted the $10 billion room, which is why you did during the day.
The way I would think about it in the short term the answer is yes, Stephanie so because we are starting this deployment as we speak.
And we're also in pre deployment activities for the large contract that we mentioned.
Really when we think about our deployment capacity.
I would comment on raising deployment capacity.
That's really a view towards the medium term the next two to three years out.
Couple of things along those lines first the demand environment is very robust and just based on progression of contracts signed this year.
And what we expect to sign as well as looking at our leading indicators in the pipeline activity. Yes. We just think it's prudent for us to start to raise our deployment capacity on that target is to exit the year at $9 billion to $10 billion of Onboarding that we could support on a given year.
We're on a repetitive basis.
So what we're working through right now is how does the phasing of that investment the real goal for us is to have that in place.
During 2023 in the short term, we're going to stretch our resources that we've got good plans around this to <unk>.
Serve that demand.
We've contracted in the first quarter.
Which is above what we had expected to contract in the first quarter outside of.
The large the large contract that we have not yet signed but we commented on where exactly were add on that.
Got it so I don't think of that as something that will cause any delays given floor.
No I don't think thats going to cause us delays in the short term.
You'll remember Stephanie from prior comments, we can flex our existing capacity to do more than we would nominally flat around.
But we cannot do that for multiple years in a row. So really what we're investing in this for the 23 demand environment in 2000 and for demand environments.
And it takes us some time to bring that capacity on board.
That's really how we think about that longer term planning signal in the short term.
We're going to leverage our existing resources.
Okay.
The next question is from Sean Dodge with RBC capital markets. Your line is open.
Yes, thanks, good morning.
On the guidance I just want to start there so a lot of moving parts, but Joe or Rachel just to clarify the guidance you're reaffirming now does that include the incremental cost to take the nominal deployment capacity to $910 billion.
Along with the Si Unhealth implementation and then maybe just kind of help us think.
Through how the $10 billion I know theres a lot of costs upfront that you've already.
Spanned two.
Ahead of that contract how does how does the $10 billion now kind of the guidance too.
Yes.
I would say it started at a headline level. So we do have a lot of moving parts in the guidance between contracting activities in that M&A so to speak.
So when you break those things down.
We will have.
We will have some or we will incur.
Some cost this year that we had not originally contemplated.
To raise our nominal deployment capacity to nine to 10.
So that's something that we're working through like I said.
Our real target is to enter 'twenty three with that so that's going to be a phased in timeline and something.
We will incorporate when we close the cloud med transaction and update guidance I don't think I don't expect it to be material.
And then the other thing is just as we said before you can thank Rachel referenced in her remarks.
Tactical number on a 10% to 12%.
Our gross and 22 call it nominally the mid fours.
I've commented along the lines just for simplicity 5 billion of NPR being on boarded in our core.
Guidance at the start of the year when we look at.
The euro right now.
With the $2 7 billion contracted another 500 in contracting and what we would expect is $5 billion of deployment starts in the year associated with a large contract.
Put us somewhere.
In the <unk>.
777% to $8 billion range of new contracts that were starting and so we will incorporate some of the economic the year, one economics, what those contracts and again, we're just working through the phasing of that and we're working through the phasing of that more.
<unk> range planning investment to support again the growth environment in 'twenty, three 'twenty, four which we see at those elevated levels, which we are very excited about and very encouraged around.
And then of course, incorporating the cloud met guidance. So our thought process was to close the cloud <unk> transaction have an accurate.
Set of numbers that incorporates what we will include in our guidance from that as well as some of the other moving parts.
And.
In due course, when we closed that cloud met transaction.
Okay, Alright, that's very helpful and then on the tech investments.
Joe I think you said, you've automated an annualized 12 million tasks. During Q1 Youre on track to deliver something in the neighborhood of $100 million by the end of the year can you just put that in context.
Where do you stand now you think in terms of how much cumulative incremental EBIT that you've been able to.
Generate from those I guess, where are you now and how much more do you think you can you can generate by year end.
Yes, I think well, let's start with just the activity level. We currently have eight.
82 million.
Tasks automated in production on an annualized basis.
Thats inclusive of the $12 million in the quarter. When we started the year, we had targeted to the exit the year.
Nominally around $100 million, we will be above 100 million tasks exiting the year.
And since inception, just to book on the numbers since inception, we had targeted roughly 45 million of incremental EBIT contribution since we launched this program exiting 'twenty two.
And we've seen a pretty good correlation between our progression on activity and progression on EBITDA. So.
So I would expect us to.
You'll be well on our way.
To that EBIT target and also I would expect us to.
To have some favorability which is.
Against that original target, which which again is being reinvested and it's also helping us to make sure we can navigate any.
Dynamics relative to wages and whatnot that we tend to see.
More more geographically concentrated.
Rod based.
From our perspective, right now or skill set concentrated.
Okay, great. Thank you Dan Thanks.
Thanks, Sean.
Our next question is from Vikram.
<unk> with Baird. Your line is open.
Hi, Thanks for taking the question.
First I just wanted to clarify your comments around the $10 billion NPR customer I know you said that the negotiations are complete I guess at this point is there still any risks around this contract not being signed at all or is it really just a matter of timing from here and what's your current expectation around when you can finish the remaining open items associated with that contract and what the cadence.
Onboarding is going to look like given a deal of this magnitude and everything else that you have going on.
Yes, I mean, theres always risk until were signed.
But as I said in my comments we.
We are very very far advanced in were down too.
One main activity, which is around third party access to some post Iot.
Systems, So so thats and Thats something that as I said in my comments, we typically do post contract signing in this case, we're going to do a pre contract signing so yes.
We would typically think about it as a deployment activity.
And the fact that we're doing it ahead saves us some time and capacity around the deployment starts.
As it relates to timing.
Yes.
It's near term.
It's hard for me to say discretely exactly.
A day or a week or whatnot, but I would characterize it as near term in nature based on typical typically how this process is run and we do it on every one of our operating part of our contracts.
As it relates to capacity.
We have provisioned all of the capacity for this deployment and dedicated and allocated it to this independence of our other contracting activities.
So I feel like we are well positioned.
To support this and obviously.
We've got a lot of time to plan just given some of the.
Delays that we've seen in there so that in a way has helped the combination of that planning time as well as pulling some activities.
Pre contract that would be typically post contract.
The way I think about the deployment is.
We will.
About half of it.
This year.
The remainder will will run over the course of 'twenty, three and maybe a little bit of deployment in 'twenty four based on current plans with.
With the customer.
And we think that we think that that works well.
That gives us a lot of visibility going into 'twenty three.
As well around aggregate EBITDA, our aggregate MPR to planned capacity around.
Okay, Great and then I appreciate all the other updates you gave around NPR I guess based on what Youre seeing right now in the late stage pipeline how much additional NPR do you expect to sign during fiscal 'twenty, two and then from a higher level. When you think about everything that hospitals are going through right now, whether it's labor and pandemic and inflation and everything.
Do you anticipate any changes around your sales cycles or just your ability to close deals as you think about the balance of this year. Thanks.
I don't see.
I don't see a huge.
Change in sales cycles on the larger operating partner construct theyre very variable, sometimes they can move faster sometimes they take much longer it really depends on the DNA of the culture.
The alignment of the.
The counterparty or the provider of that were working with.
As we think about.
How much new contracting activity can we support I mean, we're going to be very.
Very disciplined along those lines I think we've got good players too as I commented on that.
Cover the contracting or the contracts, we signed in Q1, and we expect to sign in the near term.
And we will watch our capacity closely over the course of the year.
And as we bring.
Some of that.
Deployment capacity on board will marry that up with late stage opportunities I do expect us.
To see heavier modular activity as we.
Head into a cloud met close and as we as we start to work on capturing what we think are some very exciting growth synergies I know, we havent commented discreetly on growth synergy numbers, but at a headline level I would say that from.
From the planning work the teams have done I'm very encouraged.
With that value creation lever and I would expect that to be a big focus.
For us in the second half of the year as well.
Okay. Thank you.
The next question is from Glenn Santana, Hello, with Jefferies. Your line is open.
Yeah. Thanks, Joe I, just want to clarify something you talked about with respect to the Onboarding capacity I think.
The way you described it as youre comfortable with kind of 7% to $8 billion of NPR starts. This year and then as we think about next year and I know you're not going to guide on next year, obviously, but it sounds like you plan to have the capacity up to 9% to 10 billion by the end of this year. So is it reasonable.
All things sort of being considered is it reasonable for us to assume that that you can have $10 billion worth of contract starts in 2023.
Yes, I think so glad and that's essentially what we're planning for and breaking down that.
That nominally 10 billion of contract starts in 'twenty three you've got five.
<unk> five that will come from the call. It the second wave of deployments on this large contract we've commented on.
And then an incremental.
Five.
From that and Thats.
<unk>.
The four corners of our planning horizon.
But we generally.
We generally see.
Activity that would support that investment.
Okay, and any sort of high level commentary you can make around profitability on all this new business I mean, just given maybe some shifts in the competitive landscape. For example, one of your competitors choosing the state private another one of your competitors choosing to stay part of the Big Hospital chain I mean, how should we think about profitability on all this new business kind of coming on at.
A very high level maybe.
Yes, I mean, we think about the contract economics.
To be in line with.
What we've previously shared how those contracts progressed through the three stages of margin expansion.
If we do sign.
Different care settings, as the case with <unk>, we will make sure to highlight where there may be variances to those economics, but as it relates to.
The IBM environment or a health system environment, so to speak.
We see contract economics Gen.
Generally in line and the thing that's really really important for us and I think very very important for the providers is our commitment to automation.
Because that that technology lever enables us to drive significant value.
That the providers really need significant economic value to them to be.
<unk>.
Very very competitive on our value prop vis vis peers and have a.
Our return threshold that's in line with what we've communicated so that is really.
Tom.
A huge priority it has been a huge priority and it will continue to be a huge priority and as I've said before our use cases should expand with the cloud mad.
Technology architecture, and data footprint combined with our significant.
Scale and capability and automation on a standalone basis.
Okay. Thank you.
Thanks Glenn.
The next question is from Charles <unk> with Cowen Your line is open.
Yeah, Hey, guys. Thanks for taking the question.
Just wanted to go back to sign health a little bit.
Can you just give us a sense on maybe what the competitive process for that was.
In winning that deal and maybe give us a sense for what does the market opportunity in the <unk> space look like maybe size the Tam there for us.
The competitive environment I would say Charles was similar to other other competitive processes, we highlight we've highlighted historically.
In this case.
I would highlight our value prop.
In addition to.
Technology and some other things.
As factors.
Don't have an exact <unk> market sizing only to say that.
S as care shifts out of.
Yes.
Traditional short term acute care setting.
Feel really good about how diverse.
<unk>.
Our book of business is and if you look at in the physician care setting the breath of specialties.
Have demonstrated scale coverage and combined with some of the alternatives alternative care settings in and around the acute care hospitals.
Think our profile.
We are well positioned to serve the market where its going.
And thats been a consistent priority for us as opposed to being overly concentrated.
Short term acute care facilities, so we'll follow up on.
More descriptive market share sizing of those care settings and in line with your question, but.
Yes, strategically and Directionally.
That's what's encouraging for me I would say.
No. That's helpful. I appreciate that you mentioned earlier that you kind of expect heavier modular sales around cloud, making can you expand on that like is that a function of how cloud that is sold and maybe some of the synergistic modular products that you have to go into.
Along with our cloud mid sale or is that.
Let's focus on integrating cloud med and in the short term may be we'll just keep selling more modules.
Maybe less emphasis on end to end sales as we pull on cloud.
Yes, I want to make sure.
Unclear adult create any confusion.
We are maintaining and we will continue to increase our focus on end to end sales, we see that market robust we have a strong value prop we love the visibility and the stickiness in those customer relationships and so as you think about.
Yes.
That is in place and it's going to stay in place going into the second half of the year.
The only thing I would say or what I wanted to highlight is.
One of the one of the exciting value creation levers with cloud met is they have a world class commercial engine to serve the modular channel. That's something we don't have we've always known there are health systems.
Have demand for some of our capabilities on a modular basis and historically our commercial teams have just been fully.
Committed from a capacity standpoint, focusing on end to end coverage and so as we look at the close of the cloud met transaction I am very excited to put some of our capabilities into that commercial channel.
And as.
As we've as we've worked with cloud met on integration planning and just continue to be very very impressed and excited to partner with that team.
They have great relationships across all the major providers they understand our core products very well. So I think that's just.
Something we want to.
I have a short term focus on immediately following close to unlock value.
So just to be clear right, we see this as an incremental.
The year on top of sort of the $446 million sort of an annual revenue that you would expect from cloud.
Their ability to sell through your modular products, that's exactly right. We feel we feel as I commented on and Rachel commented on Standalone cloud med.
Based on what we know we're very encouraged on how they're doing and where they are.
Where their standalone performance will be or should be for.
For 2022, what I'm, commenting on is traditional revenue growth synergies.
Above and beyond that.
And just one last clarification the $5 billion on this new contract that you expect to start in the back half of the year does that does that come in stages or should we be thinking of.
Step up to that $5 billion range, starting in the third quarter.
Yes.
Yes.
Typically typically typically will see employee transitions of four to five months post the contract signing Charles and so thats when youll start to see that.
That's a big component of the base fee if you will.
And our order of operations. So that's the that's the.
<unk>.
That's the timeline if you will.
So plan around her to think around from from a modeling basis.
I appreciate it thanks guys.
Thanks Charles.
The next question is from Jack Wallace with Guggenheim Partners. Your line is open.
Hey, good morning, guys great quarter, Thanks for taking my questions.
Just wanted to touch on the nine to 10.
Atlanta capacity is being planned to be added by the end of the year.
Yes, I get the you're going to have $5 5 billion rolling on next year, especially with the large deal.
Our top $4 million to $5 million of new business that can be expect to generate in any given year.
At the size of that team.
The combined companies.
You saw some cloud man.
Wanted to get your thoughts on how much of the incremental demand in the market. You are seeing is from market conditions, and a tighter labor markets and creates value prop versus the combined capabilities of both yourself and cloud meant as being a more persistent.
Driving incremental demand on top of market conditions generally would indicate thank you.
Yes, no. Thanks Chuck.
I think.
In the short term I think what we're seeing is us.
Demand from.
Macro market conditions.
Yes.
When I say demand that the acceleration, if you will and the activity above and beyond what we would maybe typically expect I do think that.
Related to.
Some of the macro conditions labor environment Volte.
Volume patient volume volatility and the need for flex.
Flexible operating systems are flexible partnerships, if you will.
And then I would also emphasize we still see our we are continuing to see an emphasis.
Providers needing comprehensive solutions to transform the patient experience. So that is a very key component.
Of of what we're hearing from customers. So I would say that's a short term horizon when we look to.
'twenty three and 'twenty four.
I fully expect.
Following the close of the cloud met transaction that we should see it.
Incremental demand.
Coming from the joint commercial teams and the combined value prop as I've said before not every customer well.
Want to pursue Ananda and partnerships.
Our our focus is to be able to meet the providers, where they are and what engagement model works for them and I think we're really positioned well on a combined basis with cloud that however, given the size of cloud meds installed base.
And the relationships they have.
There will be some that.
That no doubt, we expect the teams to <unk>.
Locke and converge.
That will.
We'll add to what we see as.
A strong pipeline, but will add to the 'twenty three 'twenty four views and we highlighted that Jack you'll remember when we announced the deal we raised our end to end NPR guidance on a standalone basis, we had that model that 10% to 12% and we took that up to 12% to 14% as a direct result of that cloud met transaction.
And that has not that has not yet.
In our pipeline activity.
And so it should be forthcoming.
Yes, that's helpful and so just to put a bow on this the incremental capacity and contemplating adding at the end of this year.
Say equally related too.
The new deal pipeline <unk> had this year plus two.
Rolling of the large contracts into next year as well as say conversations you've had with.
Sure.
Dive into the.
Client portfolio cloud med into.
Basically thinking okay.
As more potential revenue synergies here, so, let's let staff up to go get it that accurate yes.
Yes, I think Thats fair.
No.
As you would think.
When we think about adding capacity there are scenarios that we can get to.
Yes.
Have have higher than frankly $9 billion to $10 billion of demand environment.
Especially when we look at 2023.
But we know we can flex capacity as well so it's.
You'll hear me use the term nominal that means that's just it's a medium range planning signal, we can flex that up or down.
But.
There's a number of levers in the.
Yes.
And the.
<unk> to our views on end to end demand going forward.
Got it that's helpful. Thank you.
Thanks Chuck.
Again, Please press star one if you'd like to ask a question. Our next question is from George Hill with Deutsche Bank. Your line is open.
Good morning, Julien Rachel and I. Appreciate you guys, taking the question I have no they're kind of derivative question on the <unk>, which is are you seeing any other providers sub segments kind of open up to the outsourcing model. The way you saw this <unk> opportunity to open up and then I have a follow up please.
I would say.
<unk>, we're starting to see.
That market.
Activity in that market and different.
Different inquiries and different perspectives on how.
For those providers or health systems that are looking to scale that segment, how do they want to scale their infrastructure. So that's.
That's one that I would.
Highlight George.
As an example.
Okay and then my follow up is quickly on the $10 billion in deployment capacity I just wanted to be clear how much of that are we thinking that is focusing on the core business pre cloud mid versus focusing on the combined business post cloud then I get the question I'm trying to get to is like are you expanding the capacity and.
The patient basically are you investing in cloud that ahead of cloud or do you think of all the capacity expansion is focused on the core lift out outsourcing business.
Think about it this way George and this is somewhat titrated with Jack's question, but if you look at 'twenty three.
Would still say that $10 billion Mark on 'twenty, three because you've still got $5 billion.
Of starts from this new contract that.
That we expect to be.
Consuming capacity in 'twenty three.
The overarching tan.
Nominally in 'twenty three.
Sure.
It's primarily related to us.
I don't I don't see a lot of cloud met impact.
On that and Thats may be a conservative planning signal I would expect our teams to move quicker than that maybe were necessarily underwriting so to speak.
But when we look to 'twenty, four where you've got a clean 10 billion.
<unk> got a little bit of filling in that.
Large contract that's already been.
<unk> been deployed are substantively deployed that's where we would expect to see meaningful contribution.
From cloud Matt.
Joint commercial activities in their installed base et cetera. So that's really what gives us confidence to say hey, listen let's go ahead and start the process to bring this capacity on board because we do see.
Our pathway.
And a set of drivers for 'twenty, three as well as 'twenty, four and Thats kind of the window, we typically try to plan around.
That's super helpful and maybe if I could sneak one more in I know a lot of your provider organization partners are going to have multiyear arrangements with payers.
Given the labor environment are you starting to see the front end yet of those provider organizations try to push through increased labor crossed an increase increased labor costs and increased operating costs.
With the pay organizations to deal with.
Yes.
Yes.
We see a fair amount of activity with managed care contracting and the like.
Okay. That's helpful. Thank you.
Thank you George.
We have no further questions at this time I'll turn it over to Mr. Flanagan for any closing remarks.
Well first Chris I'd like to say thanks for your help moderating the call today and thanks, everybody for joining US we remain very very excited about the opportunities ahead and look forward to updating you.
On the outlook and our associated progress. Thanks, again for everybody's participation today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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