Q1 2023 Premier Inc Earnings Call
[music].
Good morning, and welcome to the Premier.
That's 2023 first quarter results conference call.
All participants will be in listen only mode.
Sure.
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Specialist a quick question on strategy.
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After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Andrew Mccabe, Vice President of Investor Relations. Please go ahead.
Thank you welcome to Premier's fiscal 2023 first quarter conference call.
<unk>. This morning are Mike Al-qaeda, Premier's, President and CEO , and Craig Mckesson, our chief administrative and financial officer before we get started I want to remind everyone that our earnings release and the supplemental slides accompanying this conference call are available in the investors section of our website at investors stopped premier.
Inc. Dot com management's remarks today contain certain forward looking statements and actual results could differ materially from those discussed today. These forward looking statements speak as of today and we undertake no obligation to update them.
Factors that might affect future results are discussed in our filings with the SEC, including our most recent Form 10-K, and our Form 10-Q for the quarter, which we expect to file soon.
We encourage you to review these detailed safe harbor and risk factor disclosures.
Also where appropriate we will refer to adjusted or other non-GAAP financial measures such as free cash flow to evaluate our business reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix of the supplemental slides accompanying this presentation.
And in our earnings form 8-K, which we expect to furnish to the SEC soon.
I will now turn the call over to Mike Alkire, Mike.
Thanks, Angie good morning, everyone and thank you for joining us today.
Morning, We reported our first quarter results, which were consistent with our expectations and we are reaffirming our fiscal 2023 guidance, which we introduced at our August earnings call.
Our performance reflects continued execution of our strategy to provide value to our members and other customers through our innovative technology enabled solutions that we expect will result in sustainable long term growth and create value for our stakeholders.
Raw data and insight that can influence virtually every decision to health care, we are demonstrating our value as a trusted partner in helping our members navigate an evolving and challenging environment.
This morning, I'll share some highlights from the quarter.
And the progress we are making towards achieving our long term growth objectives, Craig will review, our financial results and fiscal 2023 outlook in more detail.
And our PKI clinical decision support business, we continue to enhance our prior authorization and analytics solutions.
Long others to improve the patient provider and payer experience, we are expanding our utilization management or U N capabilities beyond the way U M is currently deliver.
We expect to soon began scaling our new full service <unk> offering that enables providers and payors to leverage medical evidence and partner directly to help ensure that patients receive the most appropriate treatment.
The solution well leverage our technology to transform a prior authorization process.
One that guides clinicians to the most appropriate evidence based options for their patients.
This clinical decision support technology is embedded into the electronic medical record workflow of the clinician, thereby making it more efficient and less burdensome to the patient provider and payer.
Our goal is simple to accelerate the time it takes for patients to be connected to appropriate therapies and to improve health outcomes.
We have also made investments to improve some of our core capabilities, including our clinical surveillance technology for infection prevention.
Quality analytics products and enterprise resource planning technology among others.
These solutions are now being introduced to better serve the growing non acute market.
We're also further expanding our partnerships with pharmaceutical medical device and diagnostic companies that leverage AI data and research capabilities for real world evidence to advance the development and commercialization of critical.
Patients on.
Our fiscal 2022 third quarter earnings call. We highlighted the work that pink AI applied sciences is doing to identify patients with idiopathic pulmonary nodules or Ips we.
We are proud that PKI applied sciences, along with our partners Astrazeneca and plenty thing when a recently chosen as biotech week, Boston 2022 be WP awards winner for innovative use of technology enabled health care solutions and the digital.
Medicine category.
We were recognized for working together to identify patients that have Ips as part of our efforts. We review diagnostic scan that were done earlier during the COVID-19 pandemic and the largest health information exchange and the New York market, we identified over 150000 Atms.
7% to 10% could be pre metastatic early stage lung cancer and if not for our efforts could have been overlooked.
This most recent recognition further highlights our technology capabilities and we believe it positions us at the forefront of tech enabled solutions, adding to our unmatched capabilities and using structured and unstructured data to create analytics to help reduce costs and improve quality.
We're also making progress on our strategy to expand into adjacent markets.
October we completed our previously announced transaction to acquire key assets of TRP and direct pay and Devin health work collectively T. R. P M.
These assets include contracts with more than 900000 providers across 4.1 million U S locations as well with licenses to cost containment technology.
We are focused on integrating the assets into our business and are now developing the acquired provider contracts into our new out of network wrap offering.
This new product named contango help configure that.
This is expected to help improve access to health care and reduce the cost to patients as it will provide health play of payers and their health plan members medical claims savings through pre negotiated discounts with network providers.
In addition through the asset acquisition continue go health will expand its customer base to include National Health plans.
<unk> life insurance providers and other network companies work is underway to build other provider network offerings to meet the specialized needs of.
The existing and new customers can Chico health certs.
Configure net is also expected to complement and help grow contango health established health plan administration and centers of excellence lines of business.
I'm also proud of the way in which we have advanced our environmental social and governance or ESG efforts over the last year in a manner that supports our strategies to create value for all of our stakeholders.
We recently published our 2022 sustainability report highlighting our many practices and initiatives that are aimed at improving health care building trust with our stakeholders operating responsibly and positively impacting communities.
All of which are critical to our mission to improve the health of communities.
In addition, we signed the U S Department of Health and Human services office of climate change and health equities climate pledge as part of our ongoing commitment to reduce greenhouse gas emissions across the health care sector and increased climate resilience.
We recognize we have a responsibility to reduce our climate impact and we're also working alongside health care providers and other stakeholders to help support their efforts and reducing their carbon footprint.
Together with our vision mission and values ESG practices are guideposts, we used to ensure that our strategy delivers long term sustainable growth, while also having a positive global impact.
In summary, our business is built on a strong foundation that provides stability and enables growth.
We develop and provide innovative technology enabled solutions to help our members and other customers in the delivery of care.
We generate strong cash flow and we have a flexible balance sheet.
We remain focused on our mission and advancing our multiyear strategy to achieve our longer term goals.
I will now turn the call over to Craig Mckesson for a discussion of our operational and financial performance and fiscal 'twenty 'twenty three financial guidance right.
Thanks, Mike This morning, I will walk through our fiscal 2023 first quarter results and discuss our outlook for the remainder of the fiscal year, which remains unchanged from when we introduced it on our earnings call in August .
Turning to the first quarter of 2023, and as compared with fiscal 2020 twos first quarter results were consistent with our expectations with total net revenue of $313 9 million a decrease of 14% <unk>.
Supply chain services segment revenue of $219 7 million a decrease of 21%.
In performance services segment revenue of $94 2 million an increase of 7%.
And our supply chain services segment net administrative fees revenue was essentially flat compared with the year ago quarter, primarily driven by continued growth in our non acute GPO business as well as further penetration of existing members spend in the acute business, partially offset by the impact of members that did not.
Men or renew their GPO agreements in August 2020, as discussed on previous earnings calls.
Within our G. P O portfolio, the food category experienced strong growth, which was partially offset by price reductions in our pharmacy category as well as the continued normalization across a few categories, including pharmacy and experienced stronger purchasing related to increased demand due to the COVID-19.
Pandemic in the prior year period.
With respect to price inflation and as we have communicated on recent earnings calls we continue to manage price increases for supplies and services on behalf of our health care provider members, although inflationary price increases have had an impact on some contracts across the portfolio. They have not had a significant impact.
On our business to date.
As we expected products revenue declined from the prior year quarter due to the continued normalization of demand and pricing for personal protective equipment or PPE and other supplies as a result of the progression of the COVID-19 pandemic. This.
This was partially offset by ongoing demand for products as we continue to expand our product portfolio to include more clinical products, such as safety catheters and drive increased member adoption.
In our performance services segment revenue increased 7% compared with last year's first quarter. This was primarily due to continued growth in our adjacent markets and consulting businesses.
And partially offset by the timing of revenue associated with enterprise analytics license agreements in the current year compared to the prior year in.
In addition, our adjacent market businesses grew 40% over the prior year quarter, driven primarily by growth in Pink AI applied Sciences, and T O health and <unk>.
We remain on track to achieve our fiscal 2023 target of <unk>.
30% to 40% year over year growth in our adjacent markets businesses, which delivered over $80 million of revenue last fiscal year.
With respect to profitability GAAP net income was $43 million for the quarter.
Adjusted EBITDA of $109 4 million in the first quarter decreased 10% as we expected from the same quarter a year ago, primarily due to two factors.
First supply chain services, adjusted EBITDA of $121 2 million decreased quarter over quarter. This was mainly due to our direct sourcing business, which experienced a decline in profitability as we expected given a decrease in products revenue driven by lower demand and pricing for <unk>.
E as well as higher logistics costs impacted margins.
Second performance services segment, adjusted EBITDA of $19 4 million decrease from the prior year quarter, primarily due to the timing of revenue related to enterprise license agreements as well as higher selling general and administrative expense mainly related to additional headcount to support anticipated.
In our adjacent market businesses, particularly <unk> and <unk>.
Compared with the year ago quarter, adjusted net income decreased 21% to $62 5 million and adjusted earnings per share decreased 19% to 52 cents.
Adjusted net income and adjusted earnings per share reflect income tax expense at an effective rate of 26% and 21% for the first quarters of fiscal 2023 and 2022, respectively.
The lower effective tax rate in the first quarter of fiscal 2022 was primarily the results of the estimated impact of a valuation allowance release due to a subsidiary reorganization that was expected to and ultimately did occur in the second quarter of fiscal 2022.
We continue to expect our effective tax rate to be at a more normalized level of 26% to 27% for fiscal 2023.
From a liquidity and balance sheet perspective cash flow from operations for the three months ended September 32022 was $74 8 million compared with $55 2 million for the prior year.
The increase was mainly due to increased cash flows from the continued growth in our performance services business as well as higher cash receipts from a dividend associated with one of our minority investments.
And that was partially offset by a decrease in cash received as a result of lower revenue in our direct sourcing business as demand for pandemic related supplies continues to normalize.
Free cash flow for the first quarter of fiscal 2023 was $31 5 million compared with $10 3 million for the same period a year ago.
The increase was primarily due to the same factors that affected cash flow from operations as well as a decrease in purchases of property and equipment.
As a reminder, free cash flow is typically lowest in the first quarter since our fiscal year ends in June and payment of certain expenses, including annual employee incentive compensation occurs in the first quarter.
For fiscal 2023, we continue to expect free cash flow of approximately 45% to 55% of adjusted EBITDA.
Cash and cash equivalents totaled $176 6 million as of September 32022, compared with $86 1 million as of June 32022.
We ended the quarter with an outstanding balance of $250 million on our five year $1 billion revolving credit facility and subsequently utilized an additional $125 million to fund our acquisition of <unk> assets, bringing our outstanding balance to $375 million.
As of the end of October .
With respect to capital deployment in a rising interest rate environment, we will remain disciplined and focused on taking a balanced approach through investments in organic growth and targeting acquisitions to strengthen enhance or complement our existing capabilities and differentiate our.
Offerings in the marketplace as well as the return of capital to stockholders through our quarterly dividend.
We continue to look at opportunities that we believe will generate long term stockholder value and are also focused on successfully integrating previously announced acquisitions.
As Mike discussed earlier, we closed our acquisition of key assets in TRP N to advance can Chico health growth strategy and paid for the assets through a combination of cash on hand, and utilizing our credit facility.
We are focused on integrating the acquisitions into our business in fiscal 2023 and positioning in the marketplace.
As we communicated when we announced the transaction we expect it to generate one to two cents of accretion in fiscal 2023.
We also anticipate that the transaction will result in $40 million to $60 million in incremental annual net revenue.
And we will contribute 40% to 50% and adjusted EBITA margin. Once it is fully scaled in the next three to five years.
During the first quarter of fiscal 2023, and we paid quarterly cash dividends to stockholders totaling $25 2 million.
Recently, our board of directors declared a dividend of 21 cents per share payable on December 15, 2020 to stockholders of record.
As of December one.
Based on our first quarter performance and our outlook for the remainder of this year. We are reaffirming our initial guidance that we introduced on our fiscal 2022 fourth quarter earnings call in August .
Specifically, we continue to expect total.
Net revenue to be in the range of $1 38 to $1 45 billion adjust.
Adjusted EBITDA to be in the range of 510 to 530 million <unk>.
And adjusted EPS to be in the range of $2 63.
So $2.75.
From a cadence perspective, and as a reminder of the expectations, we provided last quarter.
In our GPO business. We are now generally beyond the previously mentioned impact of the members that did not amend or renew their GPO agreements in August 2020.
And we expect this business to begin growing on a sequential basis in the second quarter of this fiscal year.
And our direct sourcing products business, we are beyond the impact that the COVID-19 pandemic had on this business and expect it to grow on a sequential basis beginning next quarter.
However, we still expect revenue to be lower in the second quarter of this fiscal year compared with the prior year period, which benefited from the impact of increased demand and pricing related to the pandemic.
Okay.
In our performance services business, we expect revenue to increase sequentially from the first quarter throughout the remainder of the year.
Although due to the timing and magnitude of enterprise license agreements and certain consulting arrangements there may be periodic variability and the recognition of the revenue and profitability associated with these engagements between quarters during any given fiscal year.
From a profitability perspective, we expect earnings in the first half of fiscal 2023 to be affected by three factors.
First the first half of fiscal 2022.
Fitted from higher demand and pricing associated with pandemic driven purchases on PPE and other supplies and our direct sourcing business.
Second the aforementioned impact on our G. P O business in the first quarter of fiscal 2023 related to the members that did not amend or renew GPO agreements.
<unk> 2020.
And third we are making incremental investments across the business to drive our anticipated growth.
Typically in our adjacent market businesses and to recruit and retain talent in what continues to be a challenging labor market.
These factors are expected to result in an approximate mid single digit year over year decline in adjusted EBITDA in the first half of fiscal 2023.
Importantly, we expect this trend to reverse in the second half of this fiscal year as we continue to grow the business.
In summary, we continue to execute and deliver value to our members and other customers in a challenging market environment. We remain focused on executing our strategy and we believe we are on track to deliver on our fiscal 2023 and commitments.
And to achieve our long term growth objectives. Thank you for your time. This morning, we will now open the call up for questions.
I will now begin the question and answer.
Sure.
To ask a question.
Oh, sorry.
One on your telephone keypad.
If you are using speaker phone please pick up.
Before.
Yes.
Roger a question Press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Stephanie Davis SVP Security. Please go ahead.
Hey, guys. Thank you for taking my question here I am I wanted to start a little bit on the guidance in light of the PL acquisition cloud can.
Can you walk us through how much of this was already baked.
Outlook, how should we think of the acquisition contributions I still got it.
And making sure we get the area of that range.
Sure. Thanks, Stephanie so when we originally.
Only established guidance back in August we had not factored in the TRP in assets, although it's not going to be a complete full year as we talked about when we announced the transaction it will be accretive.
One to two <unk> in fiscal 2023, it's early in the year. So we are not adjusting our full year guidance as a result of that incremental contribution, but obviously it is a benefit to the overall guidance range.
Understood so as opposed to the normal D, which with the beat in the first quarter at the time, we gotta spend the acquisition close.
On one follow up on that when I think about the license sales in the first quarter that surprised me you're already on a lower base, but license out with them. Once you apply here so.
So can we can we take a step back so we think about that as a benefit the timing in Q2 revenues or is there a way to give us broader color on kind of the demand environment right that first half license sales and 23 versus 22.
Yeah relative to enterprise licenses.
As we've talked about it's hard to predict exactly when they will close I'll, let Mike provide some more perspective on the macro environment and demand, but what I can say is that we had a we did have enterprise license agreements that did occur in the first quarter, but there was another one that we expect it to happen before the end of the quarter that did not close I can say we have had one.
Clothes since quarter end at this point, but that is the timing implication that we regularly discuss can Ken krause across quarters, depending on when they hit and then in terms of just the broader market.
And the demand on the enterprise licenses.
It's Stephanie so these health systems are under a lot of pressure and so we're trying to configure. These enterprise licenses in a way that actually drives not only obviously long term value, but also helps them from a short term and so it's really just getting that message out there that you know there is the ability.
82 potentially.
Potentially.
Reduce costs, but longer term have you know.
Longer term agreements and be able to expand our capabilities into these accounts. So the demand is still there and it's just.
A matter of us, making sure that we're in the market with the appropriate messages.
I don't think that's very helpful guys. Thank you. Thank you.
The next question comes from Eric Percher of Nephron Research. Please go ahead.
Thank you I wanted to follow up on the comments around capital deployment and I'm interested to hear if you're seeing that there's more activity in the market and maybe some entities that are looking for are reaching the end of funding have you seen much acceleration and it feels like if you're in.
Hit a lot of different metrics in terms of being both accretive and extending the business I'm, helping current customers are those just very hard to find or do you think we can see an uptick in M&A this year.
Yeah. So you know more broadly obviously, Eric we are looking at in the market. This year for assets that might be you know priced more reasonably than they have been in the past we are going to continue to look at and you know areas that extend our current.
<unk>, which truly are tech, enabling the supply chain, helping our health systems.
Really focus on.
Appropriate buying and and really channeling them into a capability that that helps them leverage our committed programs and in the end the way is truly to reduce costs. So in our supply chain area. We've got to continue to look for those those opportunities in the performance services area.
It's all of those adjacent businesses that Craig talked about you know our focus has been and just like with TRP and how do we create or buy you know look at these platforms that can help us not only support our health care systems today, but also build a.
Longer term platform that can help them as they are sort of navigating a really really difficult environment and what T. R. P. M. It's going to allow them to do is for many of our health systems that either have partnerships with health plans is going to allow them to extend services under their market. So we will continue to look.
For a more reasonable.
Reasonable reasonably priced.
But with an eye towards assets that really are a platform yeah and the only thing I would add to that Eric is we will continue to have a balanced approach. Obviously, we are in a rising interest rate environment. So we've got to be thoughtful when we are going through our capital plan analysis in terms of strategic fit financial fit and.
Execution slash cultural alignment of the assets that they're going to strategically differentiate us, but we're going to deliver the financial returns we expect.
So you know.
We continue to have an active pipeline, we continue to look but we'll be balanced in terms of how we think about accomplishing that.
And Craig that higher interest rate, obviously impacts your consideration of return when it comes to share repurchase, but looking at how you finance burst in the cash balance do you still look at share repurchase as a possibility over the course of the year.
Something we will continue to assess in terms of best use of capital yes.
Thank you.
Thank you.
Our next question comes from Kevin Caliendo of UBS. Please go ahead.
Hi, Thanks for taking my call.
A question I have is.
Trying to understand if there's any change in purchasing patterns happening at the hospital.
And some of the checks we've done we've heard companies arent or maybe not buying or replenishing inventories as much as they had in.
In the past on supplies and other things I'm, just wondering if you're seeing that in any way shape or form or are there any categories, if it's PPE or anything else.
And how pricing in the in the supply chain might be impacting behavior in any way shape or form yes, no certainly so couple of different things.
That's on that Kevin first you know in supply chain.
It is an environment right now that is continuing to evolve. So if you remember our health care system, a number of them made pretty significant investments in stockpiles.
And you know wanted to ensure that as the virus progressed. They had enough products. So I do think that a number of those health systems are utilizing those stockpiles, which does.
It does obviously put a pressure on the demand for some of that P. P. E. I will also tell you that from a utilization standpoint.
In just terms of of our consumers.
Consumers.
Utilizing the health care system.
The you know through our June quarter, the acute peaks.
Decreased.
Utilization decreased by two 7%. That's obviously also putting pressure on all suppliers, obviously that would have been utilized and.
And those procedures, that's a supply chain standpoint on the performance services side I will tell you you know.
We have to continue to drive the message that we can not only.
Capability that creates long term return and value for these health systems, but also short term and we've got some really really unique solutions that we can offer our health care system customers.
That can help them you know in the short term meet some of their issue to sort of meet some of their needs in terms of bringing down their overall cost not only from an operating standpoint, but also from a corporate standpoint, the corporate overlay.
Many of our health systems, who are trying to figure out how to be more efficient with.
And the only thing I would add to that Kevin is the our expectations, particularly in our direct sourcing business did contemplate that our members had procured PPE kind of buildups that they were gonna be bleeding down which is why we're continuing to see that normalization that we do think the first quarter is the low watermark. So we will start to see sequential.
Both in the direct sourcing business moving forward, although as I said in my remarks, there will still be a to a decline in the second quarter because of the level of purchasing it was still occurring.
Last year at this time.
But that was factored into our expectations in terms of some of that slowdown did what they had built up overtime.
That's helpful. If I can ask a quick follow up is are you also seeing people or customers going more full on formulary and that's kind of what you're saying, but it would feel like yeah.
In a way to save money, that's actually a positive incremental for you as well right without a doubt so and that is obviously, our one of our primary objectives is to get people onto these committed programs a K a formulary so but yes, we are seeing a lot more interest in those committed models as you know health care systems are feeling this pressure.
In some cases of utilization not picking quite back up at the pace they expected.
Great. Thank you so much.
Yes.
The next question comes from Eric Coldwell of Baird. Please go ahead.
Thank you very much I'm going to throw a lot of numbers at you, but I'm following up on Stephanie's original question around performance services and the acquisition.
Oh, So you did $401 million in fiscal 'twenty to performance services revenue TRP N is doing 40 to 60.
And the segment guidance the shares for 30 to $4 50. So it does look on face like organic performance services revenue is implied to be down about $10 million year over year. If we hold this guidance as you know up to date are accurate.
And if T. R. P. N wasn't included in that original guidance and adjacent markets are organically growing 30% to 40% doesn't that imply that the non adjacent markets that made up about 80% of the segment's revenue last year, we're actually down about 40 million Bucks.
I'm, just I'm a bit confused about this.
This performance services revenue guidance for the year Yeah. Thanks, Eric I. Appreciate the question again, it's early in the year and given that we're only going to have partial year contribution from TRP N. At this point, we elected not to change the overall guidance given it will have a nominal contribution.
I will say to your point that we are seeing and have communicated on previous calls the rapid growth that we're seeing in those adjacent markets part of our performance services business, which are offsetting slower growth I wouldn't say, it's negative growth, but I can understand based on the range of guidance why that's how the numbers would appear we will continue.
To assess our performance as the year goes on and revisit our revenue guidance.
On a go forward basis and Bill you know we are obviously, we just closed on that transaction. So we've got to go through a process of integrating this asset over the next few weeks. So it will be in a lot better place to do exactly what Craig suggested if if I could just get one quick follow up are there any.
Revenue is there a revenue discounting going on with that to European guidance or is there anything to consider in terms of the mechanics of how that revenue comes in that.
It might not be immediately you know.
Visible to us on the street, Yeah. It's a great question, Eric I would say I wouldn't.
Really call it discounting, but what I will say is that in contango health original business plan. There was an expectation they would be building out some network capabilities and there was revenue and contribution that was contemplated in the original model, which was in our guidance. We subsequently closed TRP N, which is going to give us contra.
<unk> four network capabilities. So we had to basically net out the benefits we were expecting to get from a different approach than having the TRP in asset and our.
Business mix for fiscal 2023, Okay. That's very helpful. Thanks, guys. Thank you.
The next question comes from Richard close of Canaccord Genuity. Please go ahead.
Yeah. Thanks for the questions and just to follow up on that last question and discussion.
It wasn't clear to me is the 40 to 60 million for the acquired business is that the run rate now or when you expect it to be scaled and integrated yeah. Thank you Richard No. If you go back and read the release announcing the acquisition of 40 to 60 is when that has been.
<unk> built out over the next three to five years not current run rate at all.
Okay.
That's helpful. I just wanted to go back to the utilization management, Mike can you talk about that offering and like the go to market and the revenue model associated with that you know who are their customers just more details there would be.
Well certainly so obviously we're in early stages.
But you've heard us talk about in the past this whole focus on technology, enabling prior authorization. So this is just another step in and building up that category.
That that offering and as you know prior authorization has been a very very cumbersome and manual process and so our focus really is to technology enabled that and we are in a very unique spot.
To use natural language processing and machine learning to automate that capability now we've been working with a couple of different organizations over the last year 18 months to build out that capability. So.
So we feel really comfortable where we are.
Our goal really you know obviously as the Leverages to help our health systems improve quality and reduce costs. So obviously one of the areas of focus is obviously working with our health systems and providers and then the other area. Obviously is working directly with pay.
Here. So we we do have some very specific capabilities.
You know, especially around high cost imaging and end in those areas, where we can help our payors are actually become a more efficient.
As many of them are using manual labor and other capabilities to read charts and to look at lab values and all of those kinds of things and we have a technology enabled that you know using the the the various protocols to automate that entire function. So we're really excited about it but to answer your question.
Two areas.
Areas that you know two markets, we're focused on both the payer and the provider market and Richard just a little additional color. So on the provider side that would be a typically a SaaS subscription to our clinical decision support capabilities. So that would be the revenue model on the provider side on the payer side. It is a contractual relationship with <unk>.
Payer to provide that back office.
Automation and AI enabled capability to eliminate their manual labor.
Okay. Thank you.
Thank you.
Our next question comes from Jessica.
Piper Sandler. Please go ahead.
Hi, Thank you so much for taking the questions. Kim I'm, hoping you can maybe talk a little bit about who the addressable market is for this out of network wrap product from TRP on direct day I'm. Just interested to know are you guys selling that to be sort of a supplement to whatever the employers a S. L plan might be.
Or just how.
How is that spelled who is the end customer and then how large is the marketing and sort of how how quickly do you estimate that scaling.
So let me just hit the highest level the strategy stuff first so we.
We found this asset where I'm incredibly excited about this asset and then suggest as you think about our health care systems. There they need to continue to look at ways to provide more services for their patience. Obviously many of them have our what we've characterized as <unk>.
<unk> sponsored health plans.
And those health plans for the most part are providing services to.
To those communities as well as their own staff right. So many of them are self insured. So what this wrapper does is if if you're a patient or if youre an employee.
Or if you're a customer of that health plan.
And you have to have services outside of that provider footprint typically you have to go.
These are health plans have to contract with somebody else to provide.
That kind of capability and what we have done with this asset is.
B you know provides us now capability of AR.
<unk>, so that when those either customers or those employees go outside that providers footprint, we can actually service them through the contracts that you know we have.
We have bought this acquisition. So we think it's incredibly exciting. We also think obviously that that not only can we provide.
Provide this wrapper capability, but now as health systems are looking to sort of expand into the payer side of the market.
We have that tpa capability that you're well aware of.
That really supports our centers of excellence program and now with this wrapper, we have the ability to provide health plan capabilities virtual health plant capabilities. So that if a provider wants to stay in that kind of capability. We have those assets. So we're really excited about both of those.
Our activities in both of those options and then this is Craig we do think there's a potential third business case, which could be to house.
Employers or providers carve out they are out of network wrap so as opposed to having it bundled into their over offering configure net which we've said is going to be the brand name up this capability in the future could be carved out and actually be a separate capability that can be provided as well.
Got it that's helpful and I just have one quick follow up I think you mentioned that there were some pricing headwinds related to Covid and one killed last year and I just wanted to clarify it that those are not related to the direct sourcing business those were outside of it and then if that's the case can you.
Just kind of clarify what exactly those are.
Headwinds that you locked in <unk>, how big and and do they persist.
It keeps you are at the back half thanks.
Yeah, I think I mean again going back to last year there.
Year over year impact, there's really two headwinds that were affecting us from a pricing standpoint, so indirect sourcing, yes, we had higher pricing of commodity products a year ago prices have continued to come down. So that is a headwind in terms of the margins that we're seeing in our direct sourcing business. We also have the freight expense implications from a couple of months.
That are impacting margins in that business. So those are the headwinds to the direct sourcing business and then I also talked about in my commentary the G. P O headwinds because we had the last quarter a year ago of the folks that had not amended and restated their GPO agreements. So they have lower pricing in their GPO participate.
Agreements a year ago, those have now stepped up which created a year over year headwind in the GPO business.
Thank you Jeff.
Our next question comes from Jack Wallace of Guggenheim. Please go ahead.
Thanks for taking my questions.
Just wanted to talk about the GPO business.
Looks like there's a fairly steep ramp.
You just given the guidance in the first year number can you help us just think.
Through the.
The sequential layering on.
Admin fees expected throughout the year and just the impact of that.
The macro with the volumes.
Yeah.
Yes, I mean as I just mentioned, we do expect from a GPO perspective, Q1 was the low watermark for the reasons I've talked about Jack and then we would expect sequential increases.
Throughout the remainder of the fiscal year, so stepping up in Q2, a slight step up in Q3, and then a step up again in Q4 to get us within the range of performance that we've talked about for the year that is and will continue to be stronger performance in the non acute GPO side of the business, which is about 40% of the business.
Now and lower growth in the acute care business as we are continuing to not contemplate and expect significant ramp ups in the utilization within the acute.
Four walls of the hospital.
Got you that's helpful. And then I just want to go back to the comments made on the last call about the front half of the year, having a kind.
At a mid single digit.
Decline.
Year over year.
We're a little bit higher than that this quarter.
Just wondering how much of that was the impact of the <unk>.
<unk> sales.
That slipped into the second quarter and if there were any other puts or takes them. There yeah. The more significant impact affecting first quarter was the the GPO headwinds that I've discussed in terms of the impact that had and then the direct sourcing margin impact from the normalization of purchasing I think if you.
Look at the gross margins in the direct sourcing business youre going to see a pretty significant step down because of the decreased level of revenue and the freight expense implications that we've talked about that are affecting us in the first half of this fiscal year. We do think that's we're seeing ocean freight come down and things of that nature, which we think will benefit us from a margin standpoint.
In the back half of the year, but those two headwinds are really impacting us within performance services, yes, the lower EBITDA margin contribution we had in the quarter what did get affected by the timing of the enterprise license agreements gotcha. Thank thank you. That's that's it from me.
Thank you.
This concludes our question and answer session.
France has now also concluded.
You for attending today's presentation and you may now disconnect.
Yeah.
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