Q2 2023 R1 RCM Inc Earnings Call
Yeah.
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the art want RCM second quarter 2023 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 this.
Time simply press Star followed by the number one on your telephone keypad, if he would like to withdraw your question again prestige star one. Thank you Archie for him head of Investor Relations you May begin your conference.
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 1095 in particular any statements about our future growth plans and performance, including statements about our strategic and cost saving initiatives our liquidity position.
Growth opportunities and our 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 or variations and 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.
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 economic downturns in market conditions beyond our control.
Including periods of inflation, the quality of global financial markets, our ability to timely and successfully achieved the anticipated benefits and potential synergies with the cloud nine acquisition and factors discussed under the heading risk factors in our most recent annual report on Form 10-K, and quarterly reports on Form 10-Q.
We will also be referencing non-GAAP metrics on this call for a reconciliation of non-GAAP amounts to their equivalent GAAP amounts. Please refer to our press release now I'd like to turn the call over to Lee.
Okay.
Thank you Jeff Good morning, everyone and thank you for joining us.
I'm pleased to report strong second quarter results driven by our technology focus operating model and our team of experts delivering on behalf of our customers.
Revenue totaled $560 7 million and adjusted EBITDA was $142 9 million.
Inclusive of $11 $6 million increase to reserves covering credit losses related to our physician customer.
Adjusted EBITDA would have been well ahead of expectations absent This reserve increase.
We are pleased with our first half performance.
And are refining our guidance to reflect our updated outlook for the remainder of the year.
Jennifer will cover the financials, shortly but first I'd like to discuss progress against our top three priorities.
First operating trends across both the business and industry remained largely in line with our expectations and we continue to help our customers navigate complex macro dynamics across the provider industry.
Second the power of our technology platform, including automation AI and large scale data analytics continues to strengthen our provider partnerships.
And third commercial activity expansion reflected strong sales model, including cross sell opportunities and differentiated capabilities in a market where providers need us now more than ever.
Let me cover operational delivery for our customers.
A combination of people and technology allows us to proactively address evolving industry dynamics for our customers.
Our global infrastructure reduces cost, while continuing to achieve high quality results.
<unk> built technology deployments drive deep insights and accelerated cash conversion, including predictive analytics performance benchmarking and trend management.
Years of revenue cycle experience and access to data across more than 500 customers and 900 billion of NPR try some more predictability for our customers, allowing them to focus on what they do best care for patients.
Industry metrics, such as payer timelines and volumes were in line with our expectations for the second quarter.
Our internal efforts and customer engagement resulted in reductions to both total.
And age they are.
As a reminder, our customer specific fluctuations are expected within these calculations and are dependent upon customer geography care setting types and payer mix.
While payer dynamics in our own operating performance have improved throughout the first half of the year providers continue to face pressures due to sustained financial backlogs and increased cost as well as in an evolving regulatory landscape.
Our customers understand that our technology expertise and unit economics continue to make us the preferred market partner.
Next I would like to talk about our technology strategy. The progress. We've made this year on our platform and data approach and applications of AI.
First let me start by reminding you of the problem, we are solving for our customers and the technology journey, we've been on for 10 plus years.
Revenue cycle is a highly complex process typically solved with manual effort at a high cost.
The complexity is due to a large volume of claims compounded by limited digitization.
Lack of data standardization and siloed data across provider and payer systems.
Our technology investments have been and continue to be aimed at digitizing standardizing and automating this process.
Which improves both the productivity of our team and the quality of our services.
Our customers typically do not have the financial capacity to invest in technology at scale.
It often struggle with the manual process for youth fragmented point solutions.
Our technology journey has been focused largely in three areas intelligent automation pace.
Patient experience and scaled analytics.
Our intelligent automation work, which began in 2018 has focused on automating repeatable processes and reducing the need for labor in areas, such as claims adjustments insurance verifications and payment posting.
Our patient experience solution, which we call entry unifies and Digitizes, the scheduling patient registration and patient payment experience, which.
Which provides a combination of patient self service and behind the scenes automation that makes patients lives easier and improves the efficiency of our team.
Our scaled analytics power solutions across our customer base.
By maximizing revenue opportunity identification.
Using our breadth of data.
Algorithms and expert rules across our over 500 customers.
Across all of these areas, we leverage machine learning for example to extract data from documents.
Personalized patient payment plans and defined data anomalies that are new revenue opportunities.
Now for a few specific examples of technology deployed in our second quarter.
The automation team released several net new use cases, one high value example is our enhanced prior authorization determination.
This solution determines whether a prior off as required by comparing the scheduled service against frequently changing payer policies to determine whether an authorization is required without human intervention.
In another example, we continue to leverage our data by expanding our work prioritization models across our modular offerings.
By analyzing the over 500 million patient encounters we touch annually.
Our models can more accurately predict the likelihood of Collectability and time to collection translating to more revenue for our customers faster. We expanded these models to our under our payments business, which is now automated and simplified the complex trade offs. Our teams use to prioritize their work in summary, we made significant.
Progress across our technology portfolio, including extending our business intelligence solutions to new clients.
<unk> cash posting activities.
<unk> appeal generation time, consolidating legacy applications, and improving stability and scale.
Efforts to date created a strong foundation.
For us to leverage AI across our technology platform.
We believe large languid models have the potential to significantly reduce and in some areas fully automate workloads by summarizing account histories and medical records.
Defying documents, enabling patients to solve more complex problems via self service and more.
Our data science and technology team has made great progress testing the applicability of these models on data from real World use cases, and we expect to have several in production by year end.
We think of AI and large language models as a significant new toolkit that when combined with our data access and revenue cycle expertise.
We will enable us to achieve another level of automation.
<unk> satisfaction and.
And service quality, which will further extend our competitive advantage.
Finally, I'd like to discuss the continued strength of our commercial engine.
And market dynamics remained favorable due to continued financial and capital pressures faced by providers.
Large and aged backlog changing reimbursement and policy developments as well as overall costs continued to drive a need for our solutions.
Despite these challenges over 70% of providers continue to manage revenue cycle processes in house.
We believe these factors present us with sizable runway for long term growth across the business.
In Q2, the pipeline expanded across both end to end and modular opportunities for both hospital and physician customers we.
An increase in cross sell activity as our teams leveraged our new commercial model.
We increased the number of meetings with Cfos and heads of revenue cycle, thanks to internal opportunities from cloud met.
Ross sell of legacy or one module solutions into the client mandates and introduction of antenna solutions to the cloud that base.
On the modular side bookings in the first half were ahead of expectations with.
With a faster sales and deployment cycle relative to our end to end solutions, we've been able to capture market demand faster with momentum expected to continue into the second half of the year.
On the <unk> side, several partnership opportunities continue to progress on our pipeline.
Furthermore, there was an uptick in inbound activity throughout the first half of the year. Thanks to the cross sell efforts made by our commercial teams as a result, we are making good progress towards our goal of signing 4 billion of NPR by year end.
In closing our teams remain dedicated to our 2023 priorities.
We solve an important problem for our customers in a time when they need us the most.
The market for our solutions is large and growing and we have highly differentiated offerings with technology and data to maximize results for our customers.
Now I'd like to turn the call over to Jennifer to review the financials.
Thank you Lee and good morning, everyone. We.
We are pleased to report strong second quarter results with revenue of $567 million and adjusted EBITDA of $142 9 million.
Adjusted EBITDA for the quarter grew 64% year over year and was well ahead of our expectations, excluding the $11 $6 million reserve taken in the quarter for the physician customer that Lee referenced earlier.
I'll provide more detail on that shortly.
First I'd like to provide some color on revenue.
Total revenue in the second quarter grew 43% year over year driven by contributions from the cloud Med acquisition completed in late Q2 of last year and revenue from new end to end customer wins and 2022.
Normalizing for cloud, Matt revenue growth was 13% compared to the second quarter of 2022.
So let's go through some additional details on our revenue breath.
Net operating fees of $357 8 million grew approximately 12%.
$439 5 million year over year from new business wins.
On a sequential basis net operating fees declined $3 2 million due to normal seasonality and cash collections.
We also moderated the pace of employee and vendor contract transitions at some of our newer customers while the timing of these transitions and tax net operating fee revenue it has little or no impact on near term adjusted EBITDA.
This transition is also beneficial from an operational standpoint, as it creates better stability and customer satisfaction during the onboarding process.
And set of fees at $38 million in the second quarter were ahead of our expectations driven by strong operational performance and achievement at cumulative performance targets for some of our customers.
We're very pleased with the progress our operational teams are making here as these incentives are aligned directly to our operational metrics.
And then it's the execution drove the sequential improvement in revenue compared to last quarter.
Our modular and other revenue posted another strong quarter with revenue of $172 1 million.
Revenue from cloud Med solutions was up 20% year over year and remains on track to grow 20% full year.
Turning to expenses for the quarter.
non-GAAP cost of services in Q2 was $364 5 million up $84 million year over year.
The increase was primarily driven by cloud med and costs related to Onboarding, our new customers.
On a sequential basis non-GAAP cost of services remained relatively flat thanks to cost discipline across our teams.
That's from automation and realization of cost synergies.
non-GAAP SG&A expenses were $53 3 million in the second quarter, which includes the reserve previously mentioned <unk>.
Excluding this reserve non-GAAP SG&A expenses would have been essentially flat from the first quarter as we realized cost synergies and real estate and in corporate functions.
Let me provide some additional color on the charge taken this quarter related to one of our physician customers.
And the third quarter of last year, we booked a reserve for this customer for approximately $10 million.
In mid July of this year, the customer announced the decision to cease operations effective July 31.
As a result, we have increased the reserve for this customer by $11 6 million in the quarter and are now fully reserved for all amounts outstanding.
We are also pursuing payment for the outstanding receivables balance our adjusted EBITDA as reported for the quarter was $142 9 million.
Excluding the reserve adjusted EBITDA would have been well ahead of expectations, we communicated on our last earnings call.
Higher incentive fees.
Here modular revenue and lower costs due to continuing operating discipline were the main drivers of this performance.
Lastly, we incurred $28 3 million in other expenses, primarily related to cloud that integration cost and technology transformation initiatives.
We remain on track to achieve approximately $30 million in cost synergies in 2023 from these activities.
Now let me provide a few comments on the balance sheet.
Cash and cash equivalents at the end of June were $123 1 million compared to $104 2 million at the end of March.
We generated $57 4 million in cash from operations in the quarter.
We also incurred 25 million for Capex and used $12 million for debt pay down in the quarter.
Net debt at the end of the quarter was 165 billion down from 168 billion at the end of March driven by the debt pay down I, just mentioned and a higher cash balance.
As I've previously discussed we expect net debt and leverage to continue to decline over the course of the year.
Our liquidity remains strong with approximately 632 million of liquidity at the end of June that is from cash in our balance sheet.
And availability on our revolver.
So what does this mean for our financial outlook.
We are updating our 2023 guidance to reflect our expectations for the remainder of the year.
Let me start by saying that our operational performance has been strong as demonstrated in our core financial results this quarter and year to date, even when considering the impact of the reserve taken for the physician customer.
We are very pleased with our financial results and with the progress we are making against the priorities that Lee reviewed.
Starting with revenue, we now expect 2023 revenue to be in a range of 2.25 to 2.2 dollars 75 billion.
Our updated guidance is driven by three factors.
Number one the wind down at the physician customer will impact revenue in the second half of the year by approximately $15 million.
Number two the timing of new end to end business wins is expected to impact revenue in the second half by approximately $25 million.
Our guidance assumes new business sign from this point forward in the year will not contribute revenue in 2023.
Number three timing of employee and vendor transitions will impact our net operating fees as we paced the ramp up of our recent customer wins.
It is important to note that this will not have a material impact on our adjusted EBITDA for the year as the cost will not transitioned to us until we execute the operational transition.
Our current pace is aligned with our customer expectations at.
It creates stability in our operations and it is the right balance in the near feature as we continue to deploy new business.
One additional note on revenue guidance, our prior guidance anticipated incentive fees would increase modestly across each quarter to achieve approximately 30 million by the fourth quarter.
We achieved those results in the second quarter, which included a benefit from metrics calculated on a cumulative basis.
Therefore, we expect incentive fees in the second half of 2023 to remain in line with comments provided on prior calls.
We now expect 2023, adjusted EBITDA of $600 million to $615 million.
This update includes three drivers in our business.
Number one the $11.6 million reserve for the physician customer we previously discussed.
Number two the second half EBITDA impact for the same customer as they wind down operations and we adjust our cost structure to reflect the change.
And number three better operational execution year to date and changes we are making to our model to ensure long term stabilization through scale.
This has allowed our operations team to realize savings on some key initiatives in the first half of the year that were already embedded in our original guidance for the second half of 2023.
For the third quarter, we expect adjusted EBITDA to be slightly ahead of current consensus estimates.
Overall absent the impact from the physician customer our adjusted EBITDA would have been above the high end of our prior guidance range. Thanks to the efforts of our global teams that work to serve our customers every day.
We are well positioned to deliver value to health care providers, who are unable to do so on their own and.
And we will continue to execute on our priorities to drive shareholder value.
In closing our team is executing well on both the operations and on our customer performance metrics. We are on track to deliver results for the second half in line with our updated guidance and look forward to updating you on our progress on future calls.
Now I will turn the call over to the operator for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Glen Santangelo from Jefferies. Your line is open.
Yes. Good morning, Thanks for taking my question Jennifer.
Jennifer I just.
A lot of people are asking questions, obviously about this customer.
Just trying to do these gymnastics to figure out how much to charge in this customer may be impacting the 23 full year guidance, but it sounds like Jennifer I heard you correctly, you don't anticipate taking any additional charges.
And if we could maybe just look past 'twenty three for a second and look at 24 based on reports and what we've seen about this companies.
Customers NPR is it fair to say that maybe this customer represents a little bit more than 1% of your total NPR and if we think about this customer having let's call. It average margins is it fair to sort of size up this customer a little bit maybe more than 1% of Rev and EBIT.
Because what I'm really trying to figure out is the impact of this customer on 'twenty 'twenty four and beyond really.
Good morning, Thanks, Glenn.
Yes, so the way to think about this customer is at this point with the $11 $6 million charge. We took in the quarter. We are fully reserved for all of the AAR. That's outstanding. So there's there's no more exposure there from an AUR perspective from a just normal operations.
Respective in the second half of the year.
As we noted we expect the revenue impact to be about $15 million, So think customer on an annual basis about $30 million of revenue.
Low 30% margins here and and said that the annual kind of impact in the second half of the year. Its 15 million on revenue. The EBITDA impact is more in the second half because we're not we're not we're assuming we're not going to be generating any revenue, but it will.
Take us some time to right size the cost structure. So there will be a.
A bit of an outsized impact in the second half of the year, well that will be normalized going into 'twenty four.
That's awesome I really appreciate that detail Hey, Lee maybe if I could just ask a quick follow up on the current operating environment. It sounds like you're getting you're starting to see a tailwind from this utilization uptick that we've seen across the industry.
And in your presentation you seem to suggest that your you are comfortable adding that $4 billion of NPR in the back half of the year could you maybe just frame the conversations youre seeing or having with your customers right now and how confident you are in that 4 billion in and just maybe what you're seeing in the market more.
<unk>.
Yes, So Glen let me, let me touch on a few things on the market first and then generally say if you have any color commentary before I get into.
New business.
On the utilization side largely in line with our expectations.
Yeah, we have a mix of customers in different geographies different care settings.
Obviously, a lot of factors that can drive variances to industry average.
We're generally positive we see some more stability and the thing you have to notice you'd have to look at our specific there are three largest for example look at the geographies what their care settings are to kind of do the math and so theres. Some theres always some variability with that within our customer base, but we feel good about it. So we're seeing what you see across the <unk>.
<unk>, which is some level of stabilization in volumes Jennie.
Jennifer anything to add there before I get to new business.
No I think that that's.
That's in line Okay.
On the new business side, a couple of things I'd say first of all the headline matter.
I and the team are are confident and signing at least 4 billion of NPR by year end.
Here's what I'd say, a couple of things as this one deserves a little bit of color commentary that I think it's consistent with.
What I've said the last couple of months.
But I'll add a couple of points of emphasis.
First is the market demand is strong okay. So we have seen.
<unk> increased interest within mid to large systems and it took a couple of factors just very very common themes I personally spent.
Most of my time.
On the road talking to prospective customers and current customers and the conversation is always very similar and.
And it goes something like this one is especially in certain markets on the West West Coast continued labor challenges challenges, particularly in higher administrative staff and the cost structure of their of their workforce.
Second is we could go on this one as well there's still pressure on payer timelines with residual so.
Depending on the market that is always a theme within the boardrooms of these systems is whats happening in our market and coincidentally, we can help them because.
We with the cloud med data have access to 95 of the top 100 systems, we have access to data across every state every payer every care setting.
So we can show them with what we call our net revenue variance analysis exactly what's happening in their markets.
The current customers or prospective customers are just wowed by the analysis, we can do given the datasets, we have but it typically shows there's hotspots if you will.
And the third thing we've heard is that there is.
The technology theme is always tricky.
Cause if you are a hospital system and there's only so much you can invest organically in technology or with vendors you hire and then oftentimes if you do have the capacity to invest and in vendors. It's often fragmented point solutions. So they look to us and say.
The last 10 on quality of pipeline, including the you know my predecessor, who who who I still talk to you know a good bit are are pipeline has a range of deals across different sizes and types for both the modular in 10 business and it is it is very strong.
I don't I'm not.
Don't give metrics on size of pipeline I've I've run fails teams I understand you can always do you know math gymnastics on sides of pipeline, what I would say it is as strong or stronger than we've ever seen.
And the last thing they make us our our our message and value prop is resonating the combination of our revenue integrity cognate business plus.
The legacy or one business is is resonating and so I'll I'll find they're very positive towards towards finding the 4 billion by end up here.
Thanks, very much for all those details much appreciate it.
Thanks <unk>.
Your next question comes from the line of Sean Dodge from RBC capital markets. Your line is open.
Yep. Thanks.
And congratulations on the great progress again this quarter.
Your comments around strong market demand and seen an uptick in inbound interested in where do you all stand now from a nominal deployment capacity.
I think he entered the year with a structure that could support $9 billion.
Also think there were plans to continue stealing that you guys continue to invest their to expand that to meet this demand.
Yep, Jennifer you Wanna take that yeah, I can answer that one hey, Shawn that from market capacity perspective to deploy any business. We are still on that between eight and 9 billion dollar range work, obviously monitoring it with the existing new business wins that we are continuing to deploy as well as.
The pipeline is Lee indicated being strong and just.
Uhm monitoring the timeline of when we think those deals are coming in.
You know something that will continue to monitor we kept it fairly stable sent to me made that investment Ned last year and it started to ramp some of those resources, but it's something that will continue to monitor to see if we need to continue to expand and make an additional investment there or if a comfortable at the level that it is.
Okay, and then just quickly pay a reimbursement timelines I think when you said continues to normalize or are we back to kind of more normal levels. Now are there still some improvements you can drive there and then you know at what point can you start to release the the extra resources you added to the address that for.
For those issues.
I wanted the timelines we are we have seen some improvement what I would say is it's more stable. If you look at the day's claims payable, which again is not perfect, but a proxy some of the public payers are saying that they're up slightly in quarter and some are down but it <unk>.
<unk>, So I would say overall fairly stable, we saw an improvement N. R. A are both a R. N H a R. This quarter modest improvement and I would say that they're still work today, they're still opportunity for it to come down we still aren't back to what I would say is baseline is still elevated.
From a historical levels.
Okay, great. Thanks again.
And your next question comes from a line of Charles <unk> from T. D. Cowan Your line is open.
Yeah. Thanks for taking the questions Jennifer I wanted to follow up on Glenn's question about when we think about 2024 and you you mentioned, obviously this year's EBITDA numbers impacted obviously by the the charge, but also sort of the ongoing contribution from a P. P. There is no longer there in this.
Normalizing the cost structure, you know give us or what you've given given us here it sounds like that a P. P contribution would've been something like you know three to 5 million and EBITDA.
The the cost structure <unk>.
Frame sort of you know what kind of expense will be running through or sort of the delevers you're getting on the contract until you normalize it was that more than the contribution, perhaps and and I guess, what I'm trying to get out as if we were to then add these kind of items back is is that the right baseline number then to think about as we grow 24.
So on an annual basis is about $30 million of revenue with margins in the low 30%. So the EBITDA contribution is is higher than that.
Uhm.
And that's on an annual basis, but in the second half of the year Charles the way to think about the impact is obviously the revenues or have your impact on revenue, but on the call side. It will take us through the third quarter to be able to right size cost. So it'll have an outsize impact because we still have those cough and the business three the third quarter.
<unk> before we are able to to really normalize it so.
It will create a M.
Distorted do in the second half of the year versus just ongoing margin.
Okay.
Okay.
Okay I can think back into that and then you know <unk> you talked a lot about automation and you know I'm pregnant use of a R. T.
Can you envision going forward.
<unk> can you think of vision of the future, where you don't even need people to to look at a claim now I know we have target margins of 35%.
You know that's currently you know I think when when the after the merger happened, but where can that margin opportunity go too because if you think about a lot of the use cases, just talk about I know you already automated a good percentage of the shared services functions, but where where do you see sort of the upper limit I mean is there a possibility down the road when you think about <unk>.
Peter Vision natural language processing, where you know.
Actually needed humans touch to the manager claim.
So Charles I Love. The question I. Appreciate it we are thinking very aggressively about how to get to that vision of what you're talking about what we think about is.
A frictionless revenue cycle, where to your point you don't need a person to evaluate some element of a claim so that that's absolutely part of our our vision, let let me give you a little detail and just how we think about the application of automation data large scale data and analytics, which as you know we have.
Yeah, a significant amount of clinical payment reimbursement data through our climate customer base and then the application of some of these new tools around generally they I a couple of things just the way we think about it in the framework. We use is we have.
Three things we have to think about the data has to be accessible.
Quality and accuracy is imperative.
And privacy has to be at the top of the list. So let me just touch on the first one yeah. We have just you know that's Charles Buck 55 billion of N P R and and plus 900 of N. P. R touched with our <unk> data. So we absolutely have access to data.
But that data yeah can't be siloed across many systems are you you need to think about a way to aggregate it to access it standardize it and that's exactly what we have done over the course of our journey on building a data applied for them building automation tools and so on quality and accuracy is an imperative. This isn't you know like other industries.
Consumer where you can apply technologies and and trying it out you have to be super accurate, especially if you're dealing with something like coding for example.
And then privacy is a poor company competency of ours, which is embedded in our system and culture every day. So the point of all this is we have we believe.
We have a right to win with are.
Given that we are embedded in our customer workflows and have access to data. So the thing I'd say Charles <unk> I could give you. An example on each end right on the automation side. This is applying R. P. A automation too otherwise labor intensive and repeatable processes and.
An example, I would use his prior authorization requires multiple touchpoints accessing pay or portals et cetera. We are absolutely automating all elements of that that area of revenue cycle, which historically as a point of friction into your appointment Charles we'll just need less people accessing the system to do to accomplish that task.
On the analytic side, there's yeah, we we don't talk about this enough, but I use I I've. Many examples but we access an episode of care in any given state for any given pair in any given care setting and we see that thousands or tens of thousands of times across the country and when we see a charge.
<unk> associated with a hip surgery, we know the various up that charge and we could either a have a human auditing okay. Because the charges that are very so let me go check it or we have a model and bought that says hey. This is out of various let me send this. This example to an auditor right that says okay.
It's it's it's a bumper beyond that reimbursement level. So that's an example of just needing less people must hutches and applying machine learning a model to that to that area. The third example, I'd say it's on January <unk>. So this is.
There's lots of examples of <unk> G. B T. As applied to you know S. N is what have you the the the common theme in health care is.
80% of data and health care is unstructured, okay. So think of the clinical notes and a medical record. The example, we use a lot is when when it denial happens from a pair there's a write up and then then from the provider there has to be another right up what if there is an <unk>.
<unk> appeal on that claim that it's auto generated by a large language model that we have tested and verified because we see that claim thousands or tens of thousands of time or that denial and so that's an example of where you would otherwise have a person writing it probably using a template now you have a tool like <unk> that is.
Essentially writing that without any person handling that that work. So all of these are examples of just needing less people and that leads to the customer side way more efficiency faster past election, more insight more predictions of where there might be problems and in the claims process.
And then for US Charles to your point that gives us confidence in our long range margin profile.
And then and do you think we can see you know exceeding that 35 per cent of our time cause. It seems like you know, particularly when you start adding watertight as models and be able to remove more people out of the workforce you start getting closer to maybe not total software margins, but getting further from where we are.
<unk> I am I am aspiration on this but that's a little too far out I I think I secret projection and the next thing you know I I I <unk> I feel confident in the next couple of years.
Okay, Great I appreciate all the comments thanks guys.
Thanks Charles.
Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.
Hi, guys. This is Samantha tell on for Elizabeth Anderson I was wondering could you add a little bit more color on that 25 million dollar timing impact from new wins sort of give us color on what your previous expectations for versus what you're what you're expecting now thanks.
Thanks.
Thanks.
Sure that 25, vanilla <unk> is based on the assumption that 4 billion in the back half of the year. The original guidance assumes one <unk> essentially one quarter of revenue.
That we would sign in the back half of the year, but we would start you know the transitions and actually generating revenue in the fourth quarter based on where we said at the beginning of August now we've made the assumption that any deals that we sign between now and the end of the year based on that you know.
Larry Yeah cautious.
<unk> rap and deployment process that we would not generate any revenue in your for it as Lee indicated our pipeline is still very strong and we're confident about our ability to close business, but at this point and he just where we sit in the year the ability to generate any revenue associated with it we made.
<unk> for that.
Got it Super helpful. And then one last quick question just based on your guidance. It looks like your strategic initiatives cost range is a little bit lower for the year is there anything specific that you're driving that is that lower integration costs or anything you're sort of postponing into 2024 I'm just curious on what is driving that download pet.
It's it's really our integration cost and our outlook on that we've been very.
Very prudent and and to spend there and as efficient as we can to realize the synergies we're still confident in the level of synergies that will realize this year and that 30 million dollar range, but it will cost us less to get there which is you know.
Certainly a good indication that will spend less cash to do sir.
Great Super helpful. Thanks, guys.
And your next question comes from a line of Jill Undressing from true is securities. Your line is open.
Thank you and good morning suddenly I actually wanted to follow up on your comment that bear dynamics heavy improve you. Cynthia know you gave some color how much of the 6 million outperformance coming to in N out apartment Mcwhorter, what do you attribute with that or is it all around your own technology investment a process changes I mean somebody excuse you guys a call out of the pass around.
Labor shortage bear living.
Living higher dollar cost claims just wondering if you are seeing in terms of the improvement any any <unk>.
Thanks, Solyndra uhm on the pay or timelines like when you see the data in the industry. They kind of indicate stable timelines, but R. E. R is improving modestly.
So I I would say that we're doing a little bit better than <unk>.
What would be expected in the overall industry now we've sat on me a prior earnings call that we have added labor too.
Bring those balances down and said, we believe that our efforts on behalf of our customers are paying off to do that that is driving and and and a quarter drove higher incentive fees. So that's part of the EBIT impact is the flow through.
Of those higher incentive fees.
We aren't expecting that there's gonna be some huge improvement in the second half of the year, we still expect there's gonna be slow steady improvement not just even in the second half of this year by the end of 24 as we come back to more of historical norms on on the E R and the pay your overall pay or timelines.
So it was really the incentive fees that drove the performance because we would say are are labor associated with that is slightly elevated but to generate incremental revenues. It certainly paid off.
You still expect so your guidance is 30 million incentive fees are both creek you in for two right just to make sure that.
No we we.
The guidance on incentive fees has remained unchanged from our prior commentary. So we expect because then that order we saw some <unk> impact where for some of the accumulative matrix, we had a great quarter on those matrix and we were able to think about it catch up some of the incentive fee.
Where they are cumulative.
<unk> so for the third quarter I would expect that it will go down slightly but then back to the 30 million by the end of the year Okay.
Okay, and then I have a question on the American innovation partners customer clearly situations seems very isolated but just curious what are your views on <unk> customer held in general and if this development impacts your willingness to work with perdition groups in future. Our understanding is that you guys have another of course does have 150.
<unk> with other producing partner groups any updated it would be helpful.
Yeah, I mean, <unk>, what I'd say is just strategically this as a part of the market we need to continue to work with we have a capability to apply technology people processes global scale to that end of the market. So broadly I'd say this is absolutely what part of the market. We we we are going to address.
And and help customers in that in that case, both on the current base as well as going after net new customers, but you know there's there's always something some learning here, we we have to be thoughtful about what kind of customers. We take on right and do our own diligence on you know the type of work the markets. They serve you know the.
The longterm viability that customer. This is an isolated case, though you know and we are sympathetic.
[noise] sympathetic to to a physician group. It serves this part of the market and want to work with them. So I would say no change to our strategy, but every every instance at some learning.
Alright, thanks, guys.
Thanks to Linda.
And your next question comes from the line of Craig heading back from Morgan Stanley . Your line is open.
Thanks, you know a question on the positive commentary around cross-sell Lee can you just touch on what's resonating and then any changes and go to market ourselves under the leadership of Kyle.
Yeah sure so.
Just to remind <unk> <unk> the group what.
What the commercials strategy is and what we changed so we still have our president and Johns Barbie that and with a lot of the customer interactions. It's it's a team effort, but as you noted.
<unk>, who has you know 25 plus years of experience similar pedigree to all the legacy or one folks and the revenue cycle spaces, leading our commercial group.
The strategy is leverage the cloud med customer base to start <unk> advanced some discussions that would eventually lead to enter and opportunities now that is very purpose low or very targeted because our customer in that space is typically the head of revenue.
[noise] cycle.
Then on the other side it'll come back to this first peace, but on the other side.
There is a set of large are one and then customers that would benefit from cloud med solutions and that is.
Nothing is as easy correct, but that has gone really well advancing those discussions either within or outside of the current and then contract with with our largest customers. So let me go back to the first point.
The discussions are are you know sophisticated in that you know our first priority with those customers is to advance cross-sell opportunities within closet. So yeah. The discussion that is happening a lot is let's say, we're working with a large top 100 system and we've deployed or coding accuracy solution, what we called D. R. G validation.
And we see a major opportunity is.
Optimizing their under payments that they don't use that service for us.
Yeah, we have access to all their data we know the opportunity and add that in this example in the under payment space. It is a a very straightforward discussion to cross sell climate solutions within our customer and that's why you're seeing very strong road and <unk> continued strong growth and climate.
The more sophisticated discussion is how do we elevate a discussion from the head of revenue cycle to the buyer of an antenna opportunity CFO .
And so the way that has worked and I have a couple of examples in my head of of recent discussion is we're already doing a great job with a header revenue cycle on some climate solution. There is a discussion that we are considering expanding our relationship because we're having the same problems.
Earlier, which labor challenges fresher frog Payors, and we're having a hard time figuring out our own technology strategy in that discussion with a head of revenue cycle elevate to the CFO and those are discussions we've had and what you see in our pipeline as traction from that.
That type of cross the opportunity.
Got it. Thank thanks for all of that and then just a follow up for Jennifer you're making really nice progress on the integration savings and are on track. There you are more broadly can you just touch about anything you're doing any organization from an efficiency standpoint, and maybe it's leveraging some technology, but just how you're thinking about kind of margins.
More intermediate term.
Sure in a specific to integration like I said, we're on track on the synergy realization Fry at this point most of our backend G&A functions are integrated and and I said, we're we're realizing cinergy <unk> facility closure.
<unk> and <unk> and our facility footprint are done so we will in the back half of the year be generating synergies from that you saw some of the one time map or other cough and a quarter first time at the facility charges. We took so those are all on track. So we feel very good about the overall <unk>.
<unk> specific to technology and March an improvement I think Lee gave a lot of examples on different extremes of where we're deploying technology to drive efficiencies, whether it's through just R. P. A and automating manual task or whether it's.
Through more generative AI and more you know what we what we term internally as more intelligent automation, we do expect that we'll see margin improvement as we move forward and over the longterm medium to long term from technology deployment.
It's built into our model into our long range models and it's part of that you know margin maturity on new business as we deploy technology. So I would say that it's factored into the near term.
Guidance of medium term guidance of the 30% margins, but as Lee indicated earlier, we're constantly looking at other opportunities to continue to deploy new technologies and drive further synergies inefficiencies in the business.
Got it thank you.
And your next question comes from the line of Michael Cherney from Bank of America. Your line is open.
Hi, Thanks for taking the question. This is Hannah Leon Uhm My Attorney could you talk a bit about the the second half impact for the a P. P physician customer how should think about the full ear headwind to eat it though.
Yes.
The second half, we specifically called out the revenue and Pat have about 15 million in the second half of the year.
On a normalized faces.
Low 30 per cent margin customer, but the second half of the year will be a little bit bigger impact because we won't.
And are not expecting to generate any revenue in the third quarter, but it will take us some time to get the cost out. So I think about <unk> Q3 verses key for impact.
Having a larger EBITDA impact in Q3.
Great. That's helpful. Thank you.
And your next question comes from the line of Scott Schoenhof's from Keybanc. Your line is open.
Hi, Lee and Jennifer Thanks for all that color on the uptick in cross cell activity on the climate base in modular bookings you.
You maintain your 20 per cent growth for cloud made for the year, what's driving the assumptions in the back half and does any of the 4 billion a new N. P are expected to be sign this year, there any opportunity to be here for cross sell or upsell and four Q or both of those opportunities really immersion 2024.
Yeah, So a couple of things Scott.
What's driving the cloud med growth.
Is at the highest level. There is we we solve a very large problem of revenue leakage. If you will with a safety net approach to our customers and we.
And that problem is large 1% to 3% of total M. P. R across hospital systems, and and physician groups is well over 100 billion dollar problem and so it's an easy discussion to have when we're going to them and saying we already work with you with one solution. We have the data we see the opportunity and.
So our cross-sell approaches working we're also going after what have historically been net new markets for us from from the old card my business going to physician customers and we're also innovating with net new products right like several new products that we're introducing the customer so that that at at the highest level is what what is driving.
Continued growth and and <unk>.
On the <unk> side. These are you know the color I would add or these are sophisticated deals and by the way a larger one may or may not be more sophisticated a couple of variables that I think about when I see whether it's Ah yeah. I'll give you. Examples I've you know four to 5 billion R. N P. R. Six.
We're working with you know three hospital system type you know prospective customer you know it has one O system, let's say, one EMR that as a down the middle we do that all day could onboard very quickly, but may have their own set of politics right local community Board.
Different processes are fee or no fee. So there's always nuance that versus a very large system and we have at least a couple of those in our pipeline. We would expect those to take time.
And I would expect to be have a very sophisticated.
A conversation but.
<unk> just like we did with our last large way and say at what right do we want to take on this customer how do we think about it. The the simple framework is always Friday did all that we historically have done a lot in the back and with a R. On reimbursement just the the classic you know building space we've historically.
Now I've done a lot more in the middle Uhm on coating and more recently introduced technology on the front end in scheduling registration coverage discovery and so on and so all of these are are unique discussions I personally.
Had very positive I see plenty in our pipeline personally involved in all of those discussions on the other hand I wanted to be very thoughtful about not pushing these are naturally and getting them to the right place at the right time. So the net of all this is yeah. You you never really know cause you're you're you're looking at a pipeline.
Confidence based on where I am and when I say by but we in the team, but me personally am in many of these discussions.
Very good about closing that businesses here, but it may may turn out to be.
Some point end of year, which is why we're adjusting Rodney.
Jennifer anything you're very helpful.
Good Thanks got.
And your next question comes from the line of George Hail from Deutsche Bank. Your line is open.
Yeah, Hi, it's Maxine <unk>, thanks for taking our questions I want to follow up on your all your commentary on prior authorization Uhm. What are you seeing in the prior authorization process from the largest payers are I'm seals, making it harder for providers will get paid.
You know, it's it's a great question that there there's a lot of nuances here and I don't Wanna take us down a rabbit hole, but yeah. It's still a friction point right. It's it's absolutely a friction point in the industry. There's a few places where you'll see a lot of attempts at innovation prior off as one of them. Yeah. We feel like we have a huge advantage.
Because we see the workflow we're used to working with pairs, but I would say broadly no no major changes, but there there's still an element of you know I said I'd sit with lots of hospital system customers. We have them on our boards. You know there is a discussion that is yeah. Both data back cause we could look.
It does have a or we can look at time lines by pair that is you know what kind of pressure are we seeing from hers and what you know you have to remind folks is these pairs or have you have software tools that used to optimize reimbursement. So it's a constant battle. If you will to make sure that providers are are paid what they deserve so uhm no major.
Changes.
And fire off but it remains a very very.
Significant point of friction in the system and one network.
<unk> address.
Got it that's very helpful color just a quick follow up are you seeing any impact on Medicare and determination in terms of collection of timeline next.
Yeah, No. It's a great question no no major exposure and we anticipate minimal longterm impact just based on the timeline of rollout rollouts as well the states participating.
Just in niches of time I, just make one comment the data were saying is it.
Dividual to remove will either re enroll with updated paperwork or will move into the exchange process.
Yeah, the latter would increase revenue for providers under new commercial policies. We've also seen a minor uptick in the open uninsured population, but we have a full team dedicated to finding coverage for these claims so broadly yeah. We we are watching this very closely but no no major impact to us.
Alright sent to you.
And our final question comes from the line of Jack Wallis from Guggenheim Securities. Your line is open.
Okay. Thanks for your squeeze me in and congrats on the quarter.
Wondering if we could get a quick update on Sutter remind us kind of when we expect the phase one.
To get the full.
The recognition and then as a follow up to that timing expectations for me too. Thank you.
Yeah, George Great question, just a couple of points better for you to have anything to add onboarding of the first phase continues to go well. This is obviously a large flagship customer for us on the West Coast you know as we didn't talk about priorities, but priority number one absolutely for.
And twenty-three with operational execution and that included both stabilizing the current customer base as well as Onboarding new customers. This was top of our list on Onboarding. So I'm I'm proud to say that the team has done a very very good job all metrics have been positive on Onboarding Sutter I would also highlight you know they have a new C E O CFO it's Ah.
Very strong new leadership team I've been out what several times met with them educated them on our partnership to date, an overall they've been very supportive uhm. So we continue to make progress on the on the latter phases of the deal and benfield feel good about it.
The only thing I would say on the future phases as it is really more about 24.
<unk>. So we would start that <unk> expect to start planning on the second phase.
Later part of this year and that will provide more guidance, obviously as we we get update on 24, but we're not expecting any impact in twenty-three for that appointment at the second at the second phase.
On Friday.
That's that's helpful. Thanks, so much and congrats on the another strong execution corner.
Thanks George.
And this ends our question and answer session. Mr. Lee reverse I turn the call back over to you for some final closing remarks.
Thank you Rob and thank you all for joining US today, just just a few closing comments to end the call first as you can tell where we're very focused on strong operational execution into the second half of the year and feel very good about privacy made the first half.
The second point I Hope you you you got from today is our pipeline is very active across both modular and then 10 solutions and.
And then third I'm glad some questions came to me around technology. This is a big focus area for US we are investing heavily in the progress we've made alrighty and automation AI machine learning and deploying Jonah large language models into our workflows. So we look forward to update you on future calls and thank you again for your interest in our one.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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