Q4 2022 R1 RCM Holdco Inc Earnings Call
Good morning, My name is Cathy and I will be your conference operator today at this time I would like to welcome everyone to the Q4 2022.
Our one RCM earnings conference call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time simply press. The star followed by the number one on your telephone keypad, if you'd like to withdraw your question. Please press the star one again.
And at this time I would like to turn the call over to our chief of him head of Investor Relations. Please go ahead.
Okay.
Good morning, everyone and welcome to the call certain 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.
Strategic and cost saving initiatives or liquidity position or growth opportunities and future financial performance are forward looking statements. These statements are often identified by the use of words such as anticipate believe estimate expect intend design May plan project would and similar expressions and 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, our actual results and outcomes may differ materially from those included in these forward looking statements as a result of various factors including.
But not limited to geopolitical economic and market conditions, including heightened inflation slow growth or recession changes to fiscal and monetary policy higher interest rates currency fluctuations and other factors discussed under the heading risk factors.
Annual report on Form 10-K for the year ended December 31, 2022, which will be filed with the Securities and Exchange Commission. After this call.
We will also be referencing non-GAAP metrics on this call for a reconciliation of non-GAAP amounts mentioned to their equivalent GAAP amounts.
Please refer to our press release now I'll turn the call over to Lee.
Thank you al good morning, everyone and thank you for joining us.
On today's call, we will discuss four key topics.
First highlights from our fourth quarter results, Jennifer will provide additional detail.
Next our 2023 priorities.
We are focused on operational execution.
Then provide insights on commercial activity.
And lastly, I'd like to update you on our ongoing investment in technology and automation.
I am pleased to report we closed 2022 on a strong note, giving us momentum as we enter 2023.
The contributions from our global team members drove fourth quarter revenue and adjusted EBITDA to the top end of the ranges provided on our last earnings call.
For the quarter was $532 8 million.
And adjusted EBITDA was 125 million.
We saw improvement in payer turnaround times and I am very pleased with our operational performance for our end to end customers and over 500 modular customers are.
Our Q4 performance set the stage for continued operational improvement and it's one of the key factors behind our 2023 guidance announced a few weeks ago.
The completion of the cloud that acquisition in June 2022, created an extraordinary capability for us going forward.
As we believe we are well equipped to address multiple challenges facing providers.
Providers are under incredible financial pressure now more than ever and are evaluating options to reduce costs. So they can focus on what they do back which is care for patients.
We operate in at $115 billion and market, which continues to grow roughly 10% annually and we're over 70% of providers still managed revenue cycle processes in house.
Given the current inflationary environment and labor challenges in the U S providers are often unable to solve that issue alone.
We believe we are distinctly positioned to address these challenges providers face on a daily basis.
Through our operational capabilities, our commercial expertise and our scale technology and automation platform.
It's me most is the combination of these market needs and our purpose built capabilities to solve these complex problems on behalf of our customers.
This morning, I wanted to go through each of these capabilities and more detail.
First let me cover our operation.
Our global operation is a key component of the value proposition, we deliver to our customers.
We are particularly well positioned to accomplish more for our customers for several reasons.
First is our global scale and ability to flex resources.
Next our ability to invest where needed to resolve pain points through the claims process.
A lot is the application of technology and automation to reduce reliance on labor to solve these problems longer term.
What positions us well to service our end market.
It's our ability to navigate the complexities of regulatory changes.
To adapt to changing reimbursement models.
And our ability to proactively respond to recent payer dynamics.
In the near term we are focused on operational execution again, all cash collection metrics to enable our customers to generate more revenue.
And more efficiently than they would do on their own.
In Q4, we saw an improvement in our operational metrics, including modest improvement in our days, which is the primary cash collection metric we focus on.
This gives us increased visibility into our 2023 performance.
One of the areas in which we create significant value for providers.
The increased cycle time for claims, which we discussed on our earnings call in Q3.
We have seen modest improvement in the last few months.
And its claims cycle times have decreased this has translated to an improvement and incentive fee revenues.
This is a win win for our customers and for our one.
We are able to proactively address the deficiencies in a way that providers, who do not leverage a global Tam.
Tech enabled model would be able to accomplish on their own.
We are also applying automation to accelerate claims payment resolution.
Our 2023 outlook assumes we will continue to see modest improvement and incentive fee revenues quarter over quarter across the rest of the year.
Another operational initiatives I'd like to highlight the significant value add for our customers is our continued global expansion.
In light of today's labor shortages and increasing cost of labor.
<unk> are facing major challenges in hiring sufficient administrative staff.
Our offshore operation creates an avenue to mitigate the inflationary environment in the U S by.
By filling administrative labor gaps for our customers.
Of note, we are expanding not only in our scaled India operation, but also in the Philippines, where we now have over 1000 associates.
Lastly, I would like to highlight our class recognition.
We are proud to have been selected as number one in cloud in three categories.
Ambulatory RCM.
Denials management and robotic process automation or RPI.
Each of these offerings addresses some of the most difficult challenges faced by the hospital and physician providers we serve.
Klas recognition is a key win for our one that represents our ability to serve the provider on multiple operational dimensions, whether they want an end to end solution or a modular offering to drive incremental revenue yield.
Next I'd like to discuss our commercial activity.
Our <unk> customer footprint covers 55 billion of net patient revenue and we have over 500 modular customers representing over $850 billion of N. P. R.
Collectively we touch over 900 billion of total NPR across our customer base.
This includes 94 of the top 100 systems in the U S.
Our end to end modular offerings are built to deliver value and challenging settings.
In 2022, our commercial team meaningfully exceeded targets with over $13 billion, and new customer NPR, including Sutter.
And thank you Hal.
We also signed 15 large physician groups and over 600 distinct bookings for modular solutions.
While simultaneously, creating a strong pipeline for continued 2023 growth.
The <unk> cloud med commercial teams are now integrated under Cal hiccup.
In January .
Our <unk> pipeline reflects future relationships within both acute physician and provider groups and we see significant opportunity for long term growth in our <unk> footprint.
The modular pipeline continues to reflect a high demand for our denials and revenue enhancement solutions with market conditions favoring several emerging solution.
<unk> 340, B at entry pay.
We expect cloud by offering alone will grow revenue by 20% in 2023.
Incredibly proud of the achievements our team has made to execute well and deliver meaningful value to our customers.
The last area I would like to discuss is technology and analytics.
While our provider customers have made many investments in their own revenue cycle journey.
The reality is that the process is still labor intensive and requires data collection and validation across multiple systems and individuals.
The complexity of the revenue cycle.
Labor constrained.
And evolving regulatory and payment landscape mean that errors delays and difficulties are bound to happen unless technology is appropriately deployed.
Our our one platform that automation approach provides scale intelligent automation and standardization to solve complex revenue cycle scenarios.
In 2023, we will continue to advance our technology via investments focused on three primary goals.
Now let me cover the first.
Our first goal is to automate tasks that are typically done manually and revenue cycle.
Or one has been on a digital transformation journey and we are accelerating progress here as we leverage the cloud meant capabilities. In addition to those built like a tier one.
We ended 2022 with 150 million cat automated.
Up from $110 million in the first half of 2022.
Second for work that cannot be fully automated.
Our goal to make it work as efficient as possible we call this optimal workflow.
To do this we leverage our deep revenue cycle expertise.
As well as more than 14000 proprietary rules and algorithms.
To allow automated and human centric workflows to operate seamlessly together.
For example, our roles identified problems that happened in the revenue cycle, such as inaccurate coding and automatically route the work to the best fit specialist. So our teams can work transactions on an exception basis versus the men will review of each claim.
That specialists has the information they need at their fingertips to suggest necessary corrections, leading to an accurate reimbursement.
The higher accuracy fewer denials.
Last our turnaround times to payment and ultimately increased revenue for our customers.
Our third and last goal is to leverage data and analytics to its fullest potential.
With the breadth and depth of data we see.
500 million patient encounters annually, covering 900 billion plus of NPR across our total customer base we.
We use data and analytics to identify patterns and trends.
This allows us to continuously improve the customer experience in our performance.
Simply put we believe our technology investment will enable us to find more revenue for our customers.
Accelerate cash collection.
And mitigate inflationary pressures by reducing their reliance on manual labor to a level that health systems cannot achieve by themselves.
In closing I'm very pleased with our team's performance in the fourth quarter and look forward to continued improvement in our operational results over the course of 2023.
In light of our results.
Scaled global operation and intelligent automation, we believe we are well positioned to address the challenges provided are facing.
I'm excited about the long term outlook for our one and the earnings power of this company when current contracts are fully ramped.
We look forward to executing on that opportunity as well as new wins to drive additional growth.
Now I'd like to turn the call over to Jennifer to provide additional detail on our financial performance.
Thank you Lee and good morning, everyone.
We are pleased to report solid fourth quarter results with revenue of $532 8 million.
Almost 34% year over year, and adjusted EBITDA of 125 million.
<unk> 31 per cent.
For the full year revenue grew 22, 5% to $1 8 billion and adjusted EBITDA grew nearly 24% to $425 5 million.
These results include cloud net revenue at $126 5 million in Q4 and $260 million for the full year. After the acquisition closed in June 2010.
Excluding cloud Mad organic revenue growth was approximately 2% year every year in the fourth quarter and 5% for the full year.
Growth was slower than prior years due to lower incentive fee and lower physician revenue.
Adjusted EBITDA margin for the year with 23, 6% at 25 basis points compared to the prior year.
Now for the fourth quarter and a little more detail.
Net operating fees of $344 4 million grew approximately 4% or $12 4 million year over year, and $20 2 million on a sequential basis.
The increase was driven by contributions from new end to end customers.
Incentive fees in Q4 totaled $25 9 million and declined $9 9 million on a year over year basis due to the impact at the payer timeline dynamics, we discussed on the last earnings call.
While down year over year compared to Q3 incentive fees increased $5 1 million.
This is due to our operational efforts in response to the increased payor reimbursement timeline.
Other revenue.
Revenue from our modular solution was $162 5 million.
This revenue grew $131 4 million year over year, primarily due to the cloud in that business.
On a sequential basis modular revenue was up 11, and a half million data cloud and had strong performance in the fourth quarter.
Moving to expenses.
non-GAAP cost of services in Q4, with $364 5 million up $85 4 million year over year, driven by cloud Mad costs related to the onboarding of new customers and operational investments to support new growth.
These increases were partially offset by savings across a few areas.
Leading automation Inc.
Incremental global transition and vendor rationalization.
Compared to Q3 non-GAAP cost of services was up 37.6 million, primarily driven by new customer employee transition that took place in Q4.
Next.
non-GAAP SG&A expenses of $43 3 million or $18 6 million year over year, primarily due to cloud met.
Q3, non-GAAP SG&A was down 1.8 million due to the allowance for credit losses incurred in Q3, and partially offset by health care and other corporate costs.
Adjusted EBITDA for the quarter was $125 million up almost $30 million year over year.
Increase is a result of the cloud med acquisition offset in part by investments to implement significant new customer wins in the year.
Relative to Q3, adjusted EBITDA was up 1 million. This is due to higher incentive fees quarter over quarter and higher revenue from cloud that in Q4. Please.
These increases were offset by cost of Onboarding new customers.
Lastly, in Q4, we incurred $47 4 million and other expenses.
These expenses were primarily related to the cloud and that integration costs and to completing the buildout of our new business services Center in the Philippines.
Now I'd like to comment on a few areas of the balance sheet.
Cash and cash equivalents at the end of December were $110 1 million compared to $131 1 million at the end of September .
Bob had integration cost and higher AR balances due to timing of payments for certain customer strike. The use of cash in Q4. These payments were subsequently received in early January .
Net debt at the end of December was $1 7 billion.
Net debt leverage for credit agreement purposes was three times, and we had liquidity of approximately $609 million at yearend.
This liquidity includes cash and cash equivalents and availability under our revolver, we expect our net debt leverage to decline over the course of this year.
Now looking forward to 2023.
As previously announced we expect to generate revenue of 2.28 to $2 three 3 billion and.
And adjusted EBITDA at $595 million to $630 million.
Embedded in our outlook are the following factors, one and the expectation at 20% year over year growth at cloud Matt.
Two operational and pregnant, which should generate higher incentive fees quarter over quarter.
Three operational cost improvements as our new business matures.
And finally, our realization of cost synergies through the year as we continued the cloud met integration.
I would also like to provide an update on the overall cloud met integration, which is progressing very well we have integrated our organization across each function.
Our corporate systems, including core HR and finance systems are mostly consolidated.
And last the overall organization is working to transform its delivery model to best serve our customers.
We previously provided guidance that we expected to realize $15 million to $30 million of cost synergies in 2023, we now expect those savings to be towards the higher end of the range.
We also remain confident in our ability to realize significant revenue and cost synergies longer term.
In Q1, 'twenty three we expect adjusted EBITDA growth of approximately 5% relative to Q4 as we continue executing against our priority.
Overall, we are very pleased with our Q4 results and our operational performance.
Lee you mentioned 2023 will be a year of execution as we implement new end to end wins from 2020 to continue.
Continued to generate strong modular growth from cloud Mad and largely complete the integration of the cloud that acquisition.
Now I'll turn the call over to the operator for Q&A operator.
Thank you and again everyone to ask a question. Please press the Star then the number one on your telephone keypad.
And first we will go to Charles <unk> of Cowen.
Good morning, Thanks, Lee and Jennifer for all that.
Just wanted to leave just to follow up on your comments that what youre seeing in the market here. It sounds like what Youre, saying is youre seeing improvements in the ER.
In the <unk> days and increased cycle times for claims has declined from last year is that coming from your end.
Putting more resources in or is this are you seeing improvements on the the parent.
First.
Yes. Thanks, Charles So we are seeing moderate improvements on the payer and.
And then.
Our ability to impacted is very positive.
Couple of points here Charles.
We're seeing moderate improvement, we're seeing staffing slowly improving on the payer side around claims processing.
We are deploying resources to your point against our customers on this dimension as well as automation.
We expect the trend to continue in 'twenty, three so really moderate improvement on the payer side and our 23 guidance assumes that the other thing I'd point out is the reason, where we're applying relatively conservative assumptions in 'twenty three as our customers re negotiate with payers in the first half so we.
See potentially positive impact in 'twenty four.
Okay. That's helpful.
And as we think about the <unk> guidance, Jennifer you said.
About 5% up sequentially.
Related to incentive fees, though should we think about that the same because I know I think.
Lee you said, you kind of assume incentive fees themselves improve modestly through year, but from the from <unk>, how should we think about that.
From <unk> to <unk> I wanted to see that incentive fees are fairly flat quarter over quarter, starting out the beginning of the year and then they will and free up modestly quarter over quarter through the year.
Great I'll hop back in.
Thanks.
Okay.
And now we will take a question from Michael Cherny of Bank of America.
Okay.
Good morning, and thanks, so much for taking the question.
I wanted to talk about the pipeline clearly 22 was a record year.
We all know the logos you put up as you think about into 'twenty, three and maybe even building beyond that how do you think about your ability now, especially.
Being in the CEO seat or I guess desire to continue to take on customers and is there any changes, especially given the activities on the payer side that you saw at the end of 'twenty.
2022, they are continuing that give you pause or any changes in terms of the way that you want to work on phasing in new customers as they come to you.
Thanks, Mike Let me touch on the first part just the state of the pipeline and then make sure I get to your the second part of your question around phasing. So the pipeline is very strong.
And specifically I'll talk about the end to end pipeline and then maybe touch on the modular pipeline.
I've personally been engaged along with Kyle in several discussions of last few months and anecdotally with systems that are considering outsourcing we're hearing the same things.
Significant financial pressure.
Lastly.
Of <unk> investment or the ability to invest in tact across their enterprise and then continued labor challenges. So anecdotally, we continue to see demand for end to end solutions. The other thing I'd add that that's unique relative to the integration of cloud met as we has even more avenues to drive the pipeline.
So one is we have 94 of the top 100 systems within climate with at least one solution sold that gives us close visibility with our head of revenue cycle of each of those organizations and we're able to see where there's needs on the and then space. The other piece is.
Is.
This is touching on the modular pipeline, which is also very strong.
Nominally climate, but also some of the our one legacy modular solutions, we are able to cross sell the our one legacy modular solutions into the client base of.
Hundreds of customers. So there is things I'd point out to you.
Second question on phasing.
It's difficult to predict when we have demand and how that paces, but to the extent, we can where our pipeline is pretty balanced between large idms and physician groups. So we feel very good about the capacity, we've added and the ability to hit the 4 billion of new NPR in the back half of this year.
Got it.
And then.
I'll leave it there for now I'll, let other people have it.
Okay. Thanks, Mike.
Yes.
And now we will go to Glenn isn't Yang with Jefferies.
Yes. Thanks for taking my question I also wanted to sort of follow up on the pipeline late last year. The company signed 13 billion, a new sort of end to end business.
And at the time you increased its onboarding capacity I think to 9 billion can you just sort of give us an update on sort of where you are in terms of onboarding capacity, how much of the 13 billion, maybe you've already brought on how much of that would come in two.
2013, and you know how we think how should we think about the set up as it relates to 2024.
Now let me touch on just the operational components of your question and I'll, let Jennifer add in.
So just just stepping back we have on the antenna side 55 billion of NPR in our antenna space of which call. It 19 $20 million is still in some phase of Onboarding, right, which which we've talked about before it's why we're so confident in the earnings power of the business with essentially 100%.
Customer retention and the ability to onboard that over time and drive to our EBITDA numbers.
The thing I'd point out the largest <unk>.
Implementation, obviously the Sutter.
Myself the team, we're all very very close to that it's very much on track.
<unk>, one largely complete with centralized functions integrated phase two is the back half of this year with additional.
Additional tech integration.
So and then I would also add there are several other integrations happening that we're very close to so operationally we feel very good about our about keeping those implementations on track Jennifer do want to mention capacity sure. So we.
Luckily, we had $13 million.
And then in 'twenty two.
Currently onboarding eight Julian of that.
And if you think about the remaining five it will be late 'twenty three going into 'twenty foresee we will really see the impact of that in 'twenty four.
Okay, perfect and Jennifer I, just wanted to follow up on the <unk> guidance again.
Based on sort of your target for call it roughly a $131 million in EBITDA in Q1, that's only about 21% of your full year guide if I use the midpoint, though I know there were a number of things that may be impacting.
That that <unk> number you you call that maybe lower than normal incentive fees.
Maybe there were some incremental onboarding costs.
There's been some integration issues, we've talked about in the past could you maybe just comment on that <unk> number and how we should think about the ramp as the year progresses, just sort of given some of the embedded cost we knew from the past couple of quarters. Thanks.
Sure so embedded in Q1 as I said earlier on the Kpis relatively flat to Q4, we will see some increases in base fees cloud that is growing 20%. So we will have some growth from that.
As we said that's really what's embedded in Q1 as we move through the year to your point that it was 21% as full EBITDA.
There are multiple drivers that are going to continue to increase EBITDA as we move across the year. So number one is new business.
As I said, we're ramping to $8 billion that margin will continue to mature as we get it in and we onboard and ramp those customers and then began cost take outs on that to improve the margin. Two is all incentive fees from Q4 to Q1 will be relatively flat and we do expect modest growth quarter over quarter.
Through the year on incentive fees cloud <unk> growth will continue with the strong bookings that we had in 'twenty. Two are implemented we will see continued growth as we move through the year and then the last piece, we mentioned cost synergies, so $15 million to $30 million of cost synergies, we expect to be on the higher end of that range and.
Those synergies will be realized through the year and will drive incremental EBITDA quarter over quarter.
Okay. Thank you very much.
And now we will go to Stephanie Davis as SVP.
Hey, guys congrats on the quarter and thank you for taking my question.
I was hoping you could give us an update on some of the internal turnaround initiatives on staffing in CAC.
Can you give us a quick highlight what's been done so far since you've taken the range, we what's still running thin and kind of what's on the docket for 2023.
Sure. Let me just kind of Stephanie just step back and just talk through priorities and then this will be address our operational execution, including tax so.
As I step back.
I am privileged to lead a great business that foundation has a large market $115 billion and growing very well with an end market that needs us.
Now more than ever.
The things I'm personally focused on a very execution oriented so number one by a mile is customer engagement.
I've personally been involved along with tile John our President Jennifer has been engaged with our current and prospective customers. So that's very much top of mind for me the number one priority.
Related to that is operational execution that includes tier point staffing up to address any operational customer issues that includes the point Jennifer made about executing on synergies.
The third piece for me is tech enablement.
I believe that there is a huge opportunity.
For us given that we are already deeply embedded in the customer workflow I personally visited several facilities and when you see the impact of once your embedded the ability to apply all of the pieces I talked about whether it's data and analytics AI machine learning and what.
What we call after optimal workflow to prioritize tasks on behalf of our customers, whether that's front end middle or back.
It's huge for us and the fourth thing Stephanie that I've personally been focused on.
It is driving people and culture and creating an inspired organization, which in my mind is very easy to do given our mission, which is to help providers do what they do best. So so those are the big pieces I'm happy to go deeper Stephanie in any area.
This is the weird area to go deeper and but it feels like one of the biggest issues with kind of your your staffing needs that there are still a lot of there's tight labor market.
That in mind would you ever want to utilize the new AI tools like chat G. P. G. As are the call center efficiency, our assistance tool as part of this D. G O strategy.
Okay.
Crazy thing.
No no no. That's a good question. The short answer is yes, so just to step back.
One of the areas, we feel like we're uniquely position us to address a tight labor market and inflationary labor market because of our ability to deploy resources not just in the U S. But also in India and the Philippines.
Now that said, we're constantly looking for efficiencies.
I was asking our operators about this very question because obviously.
This is in the news a lot for sure we're going to be a fast follower on applying those kinds of tools across our business, including in our operation Center. The thing I'd point out on the whole concept.
AI.
Is is we are uniquely positioned because of this underlying foundational piece, which is we already have the underlying data and what I would call model. So we've previously called algorithms.
So through cloud med and the antenna business, we see 500 million patient interactions a year. So therefore, we're able to see across all 50 states all payer types all care settings.
We're able to apply or build models that can then automate processes. So when I talk about automation or what you've heard me talk about intelligent automation that includes the concept of having the underlying data and models to drive repeatable process and then reduce the need for labor to your point.
And perhaps thank you.
Thanks, Stephanie.
And next we have Scott Shannon House of Keybanc.
Okay, highly and Jennifer I wanted to dig more in on the cloud med side of things. So you mentioned now you have 500 modular customers with 850 billion of NPR, a strong pipeline and expect 20% growth this year in cloud Matt.
It was up I think you said 11, 5% sequentially in <unk>, how should we think about the cadence of this growth throughout the year is there is any seasonality or timing of upselling that we should be thinking about.
Scott, Let me start with just the just how things are going our cloud med and then hand off to Jennifer to talk about some of the sequential growth questions. You had here here's what I'd say just stepping back.
This is a business that is essentially a safety net for providers identifying opportunities for incremental revenue yield.
Through coding inaccuracy fees.
Lack of people or technology investment so.
With a frictionless implementation that is easy for customers to consume.
And when you add in we already has the majority of the top 100 U S systems with at least one solution sold a big part of our strategy is cross selling our solutions into that customer base. So a couple of things I'd point out just to directly answer. Your question. One is where we're meeting our financial targets and feel very good about too.
<unk> thousand 23.
<unk> is integration is going very well on the people side with Orient the organization largely integrated the commercial organization integrated I mentioned, the cross sell opportunities there.
The back office integrated and Tac integration going very well. So those are the pieces a little bit of color I'd add here.
The interesting thing what's happening in the market is.
He is with labor shortages, we are seeing significant demand for AAR and denials management solutions. Both on the clinical administrative side. So that's that is a distinct capability, we have of deploying a repeatable process and identifying areas around a arent denials. The other place we continue to see demand is a very.
Tech enabled solution around coding accuracy, so across our solutions, we're seeing a lot of demand that supports the 20% growth assumption into 'twenty three Jennifer do you want to talk about potential there's not really a lot of seasonality in the cloud in that business.
The growth comes from implementation of booking so it's really commercial expansion on new wins and that happens there may be some lumpiness.
Lumpiness in the timing of bookings through the year.
Haven't seen a lot of seasonality in that overall base business, So and think about our implementation timelines are usually around call. It three months.
So from the time, we win a deal until we get it implemented.
Roughly 90 days and then it starts generating revenue.
That's really helpful for all that color. Thank you just my follow up is then what's the current EBITDA contribution of our margin profile on this business currently I remember it.
When you bought when RCM bought cloud Med legacy margins were running at 43%.
If we assume a 20% growth on this business. This would imply some nice contribution this year considering the ongoing consolidation efforts you guys are doing.
Yeah, well you know as we.
We continue to.
Integrate this business, we will not have a full margin profile for it so as I mentioned from a synergy perspective, an integration update we've already integrated a lot of corporate functions. So that as we're getting pulled into that overall, our one functional area.
The way to think about and we haven't disclosed <unk> separately from an EBITDA perspective for a full year, but the way I would think about it is those margins are in line with what we do.
What we're seeing in 'twenty, two and then obviously as we continue to.
Realized synergies in 'twenty three.
Cause margins to inquiry.
Savings were realized.
Yes.
Thank you very much.
And next we have Joel interesting of choice.
Thank you and good morning, everyone. So first a quick clarification on the comment earlier around expectations for incentive fees being flat in Q1 versus Q4 can you help us understand like given your investments in technology and some modest improvement from payer side as well why do you not expect any sequential step up there in Q Q1 end.
Are there any sequential offsets on incentive should be away, though.
Sure.
Some of the incentive fees well.
Build through the year, so there's some seasonality to at the beginning of the year.
May have some of them reset their annual metrics. So they kind of build as you go through the year. So that would be one piece of it we have applied a lot of resources and and labor she.
Stabilize those incentive fees.
It's just given starting at the beginning of the year and we ended Q4 really strong on incentive fees.
We do expect to start the year off flat.
Lee anything to add on technology.
Yeah.
That you'd want to add on just kind of in that.
The only thing I'd remind you glenda ill address it as part of this is labor, but part of this is also especially with regards to some of the payer dynamics in high dollar claims some of the more complicated clinical denials is not just deploying labor, but applying automation more aggressively more targeted.
For our customers in general, but also as applied to some of the Kpis, especially on days.
So on so.
For sure we're also applying technology.
Okay, and then my quick follow up I'm, sorry, if I missed this but any update on the other two clients you called out last earnings call Magnetics Lifeline I believe you previously expected trends to stabilize during the first half is that still the expectations and how do you think about the margin ramp at these two clients in general for this year or next.
So let me let me tackle the first part of the question.
And Jennifer you can talk about margin ramp.
So no change of lenders still very positive on progress on all the key cash conversion metrics on both customers. So I've been personally involved in both and very very close to all the issues there and.
What I would say is similar theme, we're increasing capacity in the short term at both customers were increasing automation capabilities of both customers were also closely engaged on making sure. We are integrated with their respective technologies and still no change I expect both to be at some.
Will of normal if you will by the end of the first half.
Do you want to touch on a point on margin Yeah, I would just say on the labor that we've applied against our operations. We continue to keep the same thing about the same rate through.
Through the first half of the year as we stabilize and make sure that the metrics are moving in the right direction and that we're performing and seeing signs of success. So first half of the year, we would have higher labor against that and then as you know this will be part of our incentive fee improvement.
Through the year quarter. This is part of what's baked into that modest improvement quarter over quarter through the year as we stabilize and then start to see the impact flow through the financials.
Great. Thanks, a lot.
And next we have Sean Dodge as RBC capital markets.
Yes. Thanks, good morning, so maybe.
On the incentive fees for just another moment.
Jennifer you said the expectation is those continue to improve modestly each quarter beginning after Q1.
Just to put a little finer point on that I guess before Q3 last year incentive fees were running in the neighborhood of $30 million per quarter is that the level, we should think about being the target by.
By year end or with the completion of some more client implementations in the interim is there the possibility there for something even higher as you execute towards that and exit the year.
Yeah, that's a good way to think about it.
With a modest improvement being in that $30 million range and by the time, we get to the fourth quarter. The other pieces as we onboard our new customers those incentive fees will start to kick in the back half of the year, we've assumed a modest incentive fees because it usually takes a few quarters after a week.
Can live.
We're we're still base lining all of the metrics and then we start to measure that performance against those baselines.
As incentive fees as well.
Think about that is kicking in slowly Q3 and Q4.
Okay.
Super Helpful. And then in addition to the payer delays you you also mentioned some other market headwinds and I think you've said before.
Patient self pay is becoming a more meaningful portion of our collections and I think the number on the last call. If my memory is that was something like 20% of of the questions. You use is from patients.
Are you seeing any changes in collectability or any any kind of.
The difference in trends.
Outside of these kind of payer dynamics or payer delays.
John No.
No no change.
And we've assumed in our 2023, just no changes continued moderate expectations.
On the self pay dynamic this is actually a small part of our business.
So call it less than 5% of our total business.
It is actually a self pay so.
It's it's.
What we've assumed in 'twenty three is continued same trend across the board.
Okay, great. Thank you on the market.
John I was just going to say on the market dynamics in the market headwinds really deaths.
Implied labor so both the payers, which is driving some of the elongated.
Fine lines as well as our customers.
Okay.
Good clarification. Thank you.
Thanks, Sean.
And now.
Anne Samuel of Jpmorgan.
Thanks for taking the question.
A lot of moving pieces in the gross margin this year with incentive fee volatility cloud integration and synergies.
Was hoping maybe you could help us with just how to think about the underlying trend in the gross margin outside of all of those pieces and just what the expansion opportunity it looks like there.
And what I would say it's the.
Main driver and just touching on both parts of the business.
<unk> is the biggest driver on on this dimension on gross margin. So I'll just use <unk> as an example.
Even though we are already high.
High EBITDA margins, there is still an opportunity to apply more more automation more technology around Ottawa workflow to that and on the on the <unk> side at the same thing so you see over.
Over the last couple of years, we have talked about our automation center of excellence, where continues added if anything doubling down on how we apply automation and AI. So that is that is really the biggest driver of anything and everything that the only thing that I would add is we've had a significant amount of new business onboard this year and as you know that the.
Margin on that business.
Is negative the first year as we make their early investments and that is client and then it will ramp over three years to the target margin. So given the amount of new business that we've had that's plan a little bit of a damper on that gross margins, but we do expect that this will increase and that coming.
Quarters.
Great. Thank you.
Thanks, Dan.
Okay.
And next we have Elizabeth Anderson Evercore ISI.
Hi, This is Samir Patel on for Elizabeth Anderson, Congrats on a quarter I had a quick question just on your guidance are you embedding any additional credit allowances for the year and related to that have you been able to collect on any of that charge that you took in Q3.
Sure I'll take that one.
No additional reserve taken on the allowance for credit losses.
To that customer. Thank you have a payment plan and they are on track, making the payments and according to that plan. So it's something we'll continue to monitor but we are in close contact and <unk>.
<unk>.
And in Texas that customer there are obviously still an active customer and making changes that they need to internally.
But we all signs are positive right now we don't our 'twenty three guidance does not assume that we take any additional reserves.
We continue to monitor.
And.
Jennifer you mentioned quickly cloud that bookings can we expect any additional disclosures going forward on cloud bad more on like a quarterly basis or is that sort of has it.
We will probably continue to provide some as we continue to integrate the business. Obviously, just looking at the cloud piece becomes more difficult.
Integrating <unk>.
Cloud in that business and see the more martinez the broader modular business within our wine.
But if you think about the modular piece.
Which is really that other revenue most of it is cloud Matt. So I don't know that we will continue to disclose.
And call out cloud that specifically, but it's really most of that modular piece anyway.
Got it all right. Thank you so much I appreciate it.
And next we'll go to Craig <unk>.
Of Morgan Stanley .
Yes. Thanks, a question for Lee just around the opportunity, perhaps reaccelerate growth in some of the legacy are one modules and like visit pay and anything to note around under Kyle's leadership things that youre doing from a cross sell perspective.
The module business more broadly.
Yes, Craig good great question, So I would just lead off with having.
Worked with Kyle and seen the commercial model he built over the last five years at legacy excitement.
I'm very confident on this front so.
He built a model of revenue cycle experts that can have very deep discussions with our customers coming from the same.
A degree as Kyle from her.
Early entrants into the end to end and in our case in the climate side. The revenue integrity space. So the first thing I'd say is having seen lots of sales models in my career that he's built an incredible model that is geared towards a balance of cross selling into our customer base as well as driving net new business in some markets.
We haven't been as focused on over the last couple of years.
The other thing I would say is we are excited about the legacy are one modular solutions.
And just as an example, the patient payment business we built.
We are one bought a couple of years ago visit pay we're actually very excited about that and the ability to have deep conversations with our customer base are the 94 of the top 100 that in many cases are one hasnt accessed those.
Been able to have those discussions so very excited about the patient payments piece also very positive on physician advisory solutions. So there's just a lot of opportunity to take those are one legacy module solutions and start to have the discussions and build the pipeline and just anecdotally we've already had at least one.
Key win in the patient payment space selling into the cloud Med base. When we're also seeing the pipeline build.
Across the board.
That's helpful. And then just as a follow up any comments on what you saw just from a utilization perspective and the market in Q4, and how you were thinking about utilization.
As it.
In 2000 and says your guidance for 2023.
Sure.
Low single digit growth and.
In the back half and Q4, specifically and embedded in our guidance is roughly the same utilization rate going forward said think about that as low single digit growth.
Got it thank you.
Okay.
And now we'll take a question from Jack Wallace of Guggenheim.
Hey, good morning, Thanks for taking my questions congrats on the quarter.
Most of my have been asked and answered, but I wanted to touch on the pipeline comments, you made about $4 billion of incremental NPR wins to be had on top of the $5 billion of.
Sutter expected to implement in the back half of the year at $4 billion of MPR, how much of that is a cross sell from legacy.
<unk> customers and how much of that is the de novo.
Customer expectation thank you.
Jack.
What I would say that.
It's hard to tell.
What materializes back half, but I would say anecdotally what im seeing is let me just by definition any.
Large idea and as is.
94 of the top 100 are cloud met customer. So just I'll give you an example.
Jennifer and I and Kyle were on a prospect meeting just the last few days and this customer happens to use our DRG validation in our underpayments.
Solutions so there.
Okay.
They already have a knowledge base of what we can do for them to drive incremental revenue yield so now whether that converts or not there's look there's a lot of steps involved in any of these complex negotiation and that by the way is another example of we heard verbatim the themes around financial pressure inability to hire inability to invest in.
<unk> and part of our pitch. If you will is we are very well positioned to resolve some of those issues, but the moral of the story as they already know cloud met and so the any idea.
The six of the 100 or.
Trying to go get them day 10.
And to be academic medical centers.
Tend to be in the northeast.
So that's that on the other side with the de Novo.
It tends to be a.
Physician group customer, which just by definition. The cloud majority was very much focused on idea and above call. It $2 billion of NPR. We in the last 18 months made a push in the physician group space. So that's where you get a lot of a lot of net new customers. If you will.
Got it. Thank you that's really helpful. And then Jennifer this one's for you just thinking about the incentive fee guidance for the year and just trying to extrapolate this youre going forward.
Historically, some of the incentive fees got to about 12% of <unk>.
Base operating fees something at back in <unk> and 'twenty, one thinking about what is the reasonable expectation for <unk>.
Our high watermark for that percentage once the book of businesses.
At a mature level, and obviously going to be adding new customers every year. So on a blended basis, you won't be fully mature, but on a mature contract what is that.
You kind of a reasonable high watermark.
Yeah, it's hard to give.
Specific percentage for individual contracts only because every deal is different.
And so some customers want to.
Minimize the variability in.
A quarter over quarter that they would incur and so by nature of the contract.
It's going to be lower so yes, it will vary but typically in our contracts we have.
<unk>.
Some sort of incentive fee and all of them now historically the NPI revenue has actually been in.
5% range of total revenue.
So a fairly small percentage of revenue as cloud continues to grow I would expect that that would decrease over time a bet if youre looking at it against total revenue.
Specific to 2023, and if you think about by the time, we get to the end of the year that $30 million.
In the quarter, it's it's what's reasonable.
That's really helpful. Thank you and congrats again.
Thanks, Joe.
Got it.
George Hill of Deutsche Bank.
Yes.
Good morning, guys and thanks for taking the question I'm going to take a shot at a few numbers questions here, which is firstly and Jan have you guys quantified what the pipeline opportunity looks like for 'twenty three.
And then it sounded like you were saying the synergy target might exceed the $85 million target. Prior I just wanted to double check that and then my last question would be kind of can you talk about capex expectations and cash flow outlook for 2003.
Yes, George Thanks for the question. So so we have quantified internally pipeline.
Well, we haven't disclosed that publicly but what I would say having.
<unk> looked at different models around pipeline and how those convert to new deals specifically cloud met about it but I've also been involved in business with businesses with much larger deals.
I would say I feel very comfortable with the model the pipeline model and our ability to convert.
This year, but also in the long term.
The difference I would point out.
As George that the <unk>, obviously are highly complex. These are very sophisticated negotiations or have longer sales cycles, whereas the cloud and the deals tend to be super quick sales cycles, especially if youre talking about a new booking with a current customer so I have to be cognizant of that as I assess the pipeline, but but overall.
We feel very positive about what I see Jennifer sure.
Specific to the synergies.
The 15 to 30 million range that we gave for realizations in 'twenty three we believe will be on the high end of that range, but we're still on track for the overall 85 million of synergies.
And then specific to Capex.
Cash flow on Capex, I think about it is that 5% to 6% range of revenue.
Yeah.
In 'twenty, three and then on cash flow.
We had lower cash flow conversion and 22, primarily driven by transaction costs associated with the cloud net transaction and 23, our cash flow will still be lower than what normal steady state would be because we're spending.
<unk> to integrate the business and part of that is cost to achieve the $85 million of cost synergies that we expect to get longer term. So we will still continue to have a fair amount of integration costs and 23, but as we get into 'twenty four and beyond I would expect that cash conversion to improve.
Significantly.
Okay.
And now we will go to Richard close of Canaccord.
Great. Thanks congratulations.
Jennifer maybe looking at the guidance and to wrap a bow on everything that's been said here. This morning can you just like <unk>.
Give us some thoughts on what gets you to the high end what gets you to the low end what has to happen.
On each of those.
Sure.
What what gets us to the high end up the range, we've talked about Macy's is the largest piece of our business.
So there are a lot of moving pieces here, but we've assumed low single digit growth for utilization.
<unk> increases and so to the extent that utilization is higher than that.
That could be one driver to being at the higher end of the range there.
The other is incentive fees.
Assumed modest improvement with higher labor cost to get those in Tennessee, So to the extent that we see earlier wins on that.
We see payor timelines coming down faster than what we've assumed then that can be another large driver.
We feel really confident on our cloud met with have high visibility into the 20% growth. There obviously bookings come in much higher first half of the year.
You could see some incremental revenue there and then we will have a lot of visibility into that the cost synergies. So I do think that there'll be in that range.
Okay. Thank you.
Okay.
Yes.
And with that that does conclude today's question and answer session I would like to turn things back to Lee for any additional or closing comments.
Thank you first of all I wanted to say thank you everyone for your questions and.
And just to add.
A few closing comments.
First thing is we are entering 'twenty three confident in our ability to deliver on our commitments for the upcoming year.
You heard the theme today, we're very focused on operational delivery and execution. We believe we are well positioned to address some of the end market dynamics. We discussed today, which then creates significant commercial opportunities. Both on the end to end modular side and we are very focused on advancing our.
Your agenda to drive cost efficiencies and value for our customers. Thank you all for joining US today, we look forward to updating you on our progress on future calls.
And this does conclude today's conference call, we'd like to thank you again for your participation you may now disconnect.
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