Q3 2023 R1 RCM Inc Earnings Call
Thank you for standing by my name is Sydney and I'll be your conference operator today.
At this time I would like to welcome everyone to the Ireland Archie M Q3 earnings call all.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star and one thank you.
Yes.
Evan Smith you May now begin your conference.
Good morning, everyone.
Certain statements made during this call maybe considered forward looking statements pursuant to the safe Harbor provisions.
Private Securities Litigation Reform Act of 1995 in particular any statements about our future growth plans and performance, including statements about our strategic and cost saving initiatives, our liquidity position and our 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 intend design May plan project would and similar expressions or variations investors are cautioned not to place undue reliance on such forward looking statements. All forward looking statements made on today's call involve risks and uncertainties, while we may elect to update.
These forward looking statements at some point in the future. We have no current intention of doing so except to the extent required by applicable law.
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 economic downturns.
And market conditions beyond our control, including inflation and high interest rates the quality of global financial markets.
Regulatory changes impacting us and our customers and our ability to timely and successfully achieve the anticipated benefits and potential synergies of the acquisition of cloud met and factors discussed under the heading risk factors in our most recent annual report on Form 10-K, and our quarterly reports on Form 10-Q, we will also be referencing.
non-GAAP metrics on this call for a reconciliation of non-GAAP metrics to the most closely comparable GAAP measures. Please refer to our press release now let me turn the call over to Lee <unk>, Our CEO Lee.
Thank you Ivan good morning, everyone and thank you for joining us.
Our sequential and year over year third quarter results demonstrate the strength of our ones innovative technology, driven operating model and our commitment to delivering value to our customers.
We continue to drive performance through our focus on operational execution.
Energy realization with cloud med and investments in intelligent automation and now generative AI across our environment and business processes.
Jennifer will cover the financials in more detail, but we are pleased with the performance this quarter and progress on our strategic priorities to drive shareholder value.
First I want to share my perspective on industry dynamics.
We continue to work closely with our provider partners to more effectively address two items that are critical to their success.
Revenue optimization and workforce management.
These are being exacerbated by changes to payer timeframes increased coding complexity regulatory shifts and macroeconomic pressures.
By leveraging a constant supply of structured and unstructured data from a payer and provider types across U S care settings.
We deliver highly integrated analytics that uncover new opportunities to drive revenue optimization and cost savings for our customers.
This in turn drives value for our shareholders and most importantly, we save our customers time and money by simplifying the enormous amount of fragmented health care data.
To eliminate their need to stitch together, a complex set of disconnected solutions from multiple vendors.
On the payer side turnaround times remain mostly stable on a sequential basis we.
We anticipate continued improvement over the next several years as normal cycles return following COVID-19.
Improvements continue to positively impact our AAR trends.
Similarly patient volumes have continued to stabilize implying a constructive environment for our ability to collect cash on behalf of our customers.
We believe our strategy continues to position us well to leverage and respond to industry dynamics.
We combine best in class technology and services to deliver superior outcomes at every stage of the revenue cycle workflow.
With more than 500 trusted partners, representing over 900 billion of covered.
We have a growing structured and unstructured data sets based on over 500 million patient encounters annually.
Our operating scale and access to this real time performance data empowers, our intelligent automation and now generative AI initiatives to deliver optimized revenue yield at a lower cost more quickly.
This maximizes revenue, while alleviating our customers' operating expense and capital cost burden, while improving patient satisfaction.
While large scale deployments are not without troubleshooting and change management, our operating model is battle tested.
Allows us to sign multi year contracts with significant embedded earnings as contracts mature and we help our customers reach their goals.
We believe this model will drive long term sustainable growth by expanding our total addressable market and our pipeline through continued advancement of our modular and fully integrated solutions to meet our customers where they are on their revenue cycle management optimization journey.
Our relationships with over 500 clients across the RCM workflow continuum.
Combined with our global captive resources deep experience in technology development and deployment and our access to significant data <unk>.
Distinctly positioned <unk> to deliver innovation at scale.
An example of how we have leveraged these vast data resources as account pre summarization.
An AI bot reviews account specific data inputs and summarizes key account notes in our events.
Proving productivity by saving our experts time on each opened account receivable.
We remain focused on three areas of technology investments that are critical to client success.
Intelligent automation and patient experience.
And scaled analytics.
Across all three we use a variety of technologies, including robotic process automation or RPE.
Machine learning and Jen AI to build solutions that aim to lower cost improve yield and enhance the patient experience.
Intelligent automation removes steps from highly manual processes to increase efficiency.
Embedded intelligence and broad data visibility has helped and will continue to help us build predictive AI and machine learning models to improve processes.
Eliminate unnecessary steps and drive efficiency and yield.
Our track record of bringing new and innovative technologies to the sector showcases our leadership in revenue management.
For example, as you saw in this morning's press release, we announced the expansion of our Microsoft relationship.
This collaboration will integrate Microsofts open AI service into the <unk> platform to bring enterprise level generative AI into health care revenue cycle management.
We have started to deploy generative AI solutions and tools live in production and a few targeted areas, including physician coding quality.
A follow up and enhancement of revenue integrity raw productivity.
We believe we are ideally positioned to leverage and apply Gen AI.
Cross revenue management, and we intend to lead this evolution.
Our first large language model or LLM application was recently introduced and significantly increases the productivity of physician coding quality assurance.
Integrating tools for Microsoft Azure AI studio.
The application evaluate complex medical records to predict physician evaluation and management codes and improve coding quality across patient charts.
Shortly our team manually coded approximately 50000 physician charts per week and sample at around 5% of those to assess quality.
Now we were able to automatically compare off 50000 manually coded chart to the automated code.
Our one recently finalized the automation of quality assurance for 100% of its coating volume in this area, resulting in improved coding quality and more satisfied physicians.
We can see it and deliver the application in under four months.
We have developed a product roadmap with a catalog of generative AI use cases planned for testing and deployment through the remainder of the year and into 2024.
Along with our existing platform.
Data assets and access and technical agility, we expect our investments in <unk> will further extend our competitive advantage.
Finally, I would like to discuss our commercial progress with a few examples of cross selling and upselling across our business.
Today, our one scale, which was enhanced significantly by the acquisition of cloud Med <unk>.
Supports a broader range of clients by size and at every stage of the revenue cycle with best in class solutions to deliver improved performance.
<unk> has the flexibility to meet the immediate and long term client needs with the capabilities and global scale to expand the partnership over time.
I am pleased with our progress in building a deep pipeline of active opportunities.
Including a number at the final stages of negotiations.
While we are confident in signing $4 billion or more of NPR in the coming months. Our priority is structuring a long term collaborative partnership with terms that create optimal value for our one and our partners.
To drive performance and value for both our customers and shareholders. We regularly review our partnerships to ensure alignment on goals and objectives as such we have been in active discussions with one of our physician clients to determine a mutually agreed upon path forward.
In the interim data sent us a notice of their intent to terminate the contract. This client is not material to our financial performance.
On the modular side, we've continued to see accelerated bookings because of macroeconomic pressures positioning us well for continued growth.
Now let me give you. An example of how we can meet the customer anywhere on their journey by leveraging our suite of modular solutions.
One example of cross sell of an <unk> solution is a long standing cloud met customer who would increase their usage to several climate solutions over the past three years.
The customer is exploring additional patient payment solutions.
Which presented an opportunity to showcase our entry pay solution.
Fully integrated and intuitive patient payment experience.
A personalized self service platform.
They selected <unk> based on our strong performance over the past several years and the capabilities of the entry pay solution.
We have also had success, adding <unk> solutions to the end to end customer base to provide advanced reporting and analytics for improved performance.
As our existing and potential customers continue to experience financial and macroeconomic pressures, we believe our modular and end to end offerings, leveraging technology and services on a global scale, we will create new opportunities to drive pipeline growth and increased bookings our diversified portfolio ensures we can solve the most comps.
Plex problems our customers face.
On an individual or a comprehensive basis.
In closing we are confident our innovative solutions will continue to exceed our customers increasingly complex needs.
Driving growth and shareholder value.
Our team remains focused on delivering on our priorities and finishing 2023 with a strong fourth quarter. We are committed to our mission to make healthcare better for all.
Now I'd like to turn the call over to Jennifer to review the financials.
Thank you Lee and good morning, everyone.
As Lee mentioned, we delivered another strong quarter with revenue of $578 million and adjusted EBITDA of $161 5 million.
Adjusted EBITDA in the quarter grew 30% year over year and was ahead of our expectations.
Total revenue in the third quarter grew 15, 5% year over year, driven by continued growth across both our end to end and modular services.
Let me provide a little more color on revenue.
Net operating fees at $368 million grew approximately 14% or $43 $8 million year over year.
Growth was driven by the Onboarding of our record new business wins from 2022, and our end to end business.
It also included low single digit growth in cash collections from our existing end to end customer base and that was in line with our expectations.
Incentive fees were $30 1 million in the third quarter, Let me point out a couple of one time drivers of incentive fees in the current quarter.
The first is a $4 million payment for a modular client whose contract ended in Q3 instead of Q4.
This was offset by a $2 million impact of a customer contract change that reclassified revenue to net operating fees.
The net impact was $2 million of incremental incentive fees in the current quarter.
On a normalized basis with these adjustment incentive fees were in line with our expectations.
We are pleased with the continued progress here and with the results we are delivering for our clients.
Our other revenue generated mostly from our modular business, including cloud Mad posted another strong quarter with revenue of $174 7 million.
As Lee mentioned revenue growth year over year is primarily driven by cross selling new solutions to our 500 plus customers.
Also revenue this quarter includes fees earned through our wind down support at the previously discussed physician customer.
We have been paid for these services. So there is no feature collection risk.
Their specific business outlook and current environment.
Alright, adjusted EBITDA reported for the quarter was 161.5 million.
Revenue growth combined with continued cough discipline and execution of our integration priorities drove these results.
We continued to perform in line with our expectations for the year.
Lastly, we incurred 29.4 million and other expenses, primarily related to cloud met integration cough and strategic growth initiatives.
The current quarter includes approximately 12 million related to restructuring the organization to better align to our long term growth strategy.
The quarter also includes a charge of 7.2 million for the last large facility exit.
As a result, we remain on track to achieve approximately 30 million and realized cost synergies this year.
Now, let me provide a couple of comments on the balance sheet.
Cash and cash equivalents at the end of September were 164.9 million compared to 123.1 million at the end of June we.
We generated 109.2 million in cash from operations in the current quarter.
We also incurred at 32.4 million for capital spent.
Net debt at the end of the quarter was 1.57 billion down 84.2 million from the end of June.
Given the strength of our cash flow year to date, we pay down an incremental $40 million of debt above are required repayments for the year, including 30 million this quarter.
Our liquidity also remains strong with approximately 704 million of liquidity at the end of September both from cash on our balance sheet and availability on a revolver.
Now, let me move to our outlook.
Given our solid performance in the quarter and year to date, we remain in a good position to reiterate our 2000 twenty-three guidance. We expect 20 twenty-three revenue to be 2.255 to 2.275 billion.
And adjusted EBITDA to be in the range of 600 to 615 million.
We plan to provide our initial 2024 guidance as we normally do in early January.
Let me close with a few key points on the overall business.
Number one.
Formats across the poor business remains strong with additional opportunities for growth within our existing customer base.
Number two.
We continue to have strong bookings in our modular business.
We expect these steals will have strong margins and faster time to revenue as deals are implemented.
R and and pipeline is deep and provides a runway for future growth.
Number three there is a real need for our solutions in the industry, we hear it from hospital executives every day.
This need creates incredible opportunities for us to deliver value for both our customers and our one shareholders.
In closing I would like to thank our global team for their continuous commitment to delivering value to our customers everyday and.
And with that I'll now turn the call over to the operator for Q&A.
At this time I'd like to remind everyone in order to ask a question press star and the number one on your telephone keypad.
He's follow a limit of one question and one follow up question.
Your first question comes from Charles <unk>.
Hey, Thanks for taking my question guys wanted to ask a little bit more about pediatrics here I I know you guys talked about it being in material. The results here just trying to get a better understanding.
What might have happened here.
And I know you guys put in a lot of resources, including stuffing overseas to support the the Onboarding earlier. This year, just just trying to get a better sense on some of the dynamics here. Thanks.
Hey, Thanks, Charles this week.
A couple of things I'd say your <unk> first of all we are very appreciative of Pediatrics mission supporting newborns are mothers. That's a very important mission I personally enjoyed working with a team in my you know first 10 months.
Find out about their mission Charles it is.
Very unique and distinct relative to our broader.
Physician customers just to give you a sense of the complexity of their model.
Workflows related to Newport is the mother's feelings different reimbursements different systems are different and as you know the initial onboarding didn't get off to a great start.
And there are clearly the things, we can improve and and all of that said, what we could control on the metrics progressed significantly over the last several months this year and.
To your point, we did actually invest incremental resources four four pediatrics and I would highlight that we will absolutely continue to work with them to ensure a smooth transition which would take the the next 12 months and the last thing I'd point out Charles to your point is this this is not material to our financial performance.
Great and if I could just follow up are you you did mentioned sort of your close on new wins, maybe give a little bit more color around what final stages are and and do you think pediatrics. It cause you don't expect us to have any impact on those discussions.
To your last point, absolutely not Charles but let me just point out a couple of things and I should probably just elaborate your the first thing is.
<unk>.
Building off what Jennifer said at the end of her comments around our value proposition, particularly in today's time of need around the financial pressures on on providers is our our value proposition is absolutely resonating.
The scale of our model the technology, just being able to meet providers, where they are and were clearly leveraging some of the the commercial activity in our climate business to get access to <unk> does some of the <unk> the.
The second thing I'd say more specifically is we're pleased with the progress and development in our pipeline and have a number of systems in late stages of negotiations.
So what I would say, it's just a.
A bit of a nuanced part Charles while we're confident inciting 4 billion or more in the coming months. Our priority is structuring longterm partnerships that create optimal value for for our customers and for our one.
So while we moved closer to signing one or more what I don't want to do is applied put additional constraints on the commercial team.
<unk> negotiations are complex and I don't want to unduly impact final term so I'll leave it at that but we're feeling very good about where we are.
Alright, and just to clarify.
He added resources for <unk> I mean was this contract even profitable I mean cause it sounds like you know <unk> <unk> <unk>.
Maybe be a positive.
From a financial standpoint <unk>.
Yeah. We had said that you know we had added cost and we had done that and we've kept them on through the first nine months of the year.
Uhm.
Yeah, I would say that Lee mentioned, it's immaterial I would say, it's you know kind of.
And the 1% to 2% EBITDA range as a percentage of our EBITDA, so not a lot of profitability.
Okay. Thanks, I appreciate that.
Your next question comes from Elizabeth Anderson.
[noise].
Your next question.
Challenge as saying.
Yeah. Good morning, Thanks for taking my questions can you just hear me.
Yes.
I wanted to follow up on this allowance for credit losses of 7.5 million you guys called out.
2842 customers, one and two and in one modular.
More color and kind of related to that maybe broadly.
There have been some concerns around some of your customers.
Shall conditions, maybe talk about your customer Hello, how you feel about democracy in general do.
Sure.
So.
From our credit reserve perspective, it's something that we look at every quarter you know as we look at our results were taking it and approaches.
See so model, which is looking at the ultimate Collectability of R. A R. So based on the aging of R. A R. We always take a reserve. So there can be movement. There just based on the aging.
Ross all customers.
The thing that we do is we look at specific customers, where we know that there may be risk based on specific outlook with the particular customer things going on in their business discussions that we're having things that we know about them. In addition to perhaps.
A outstanding receivables that we have so in the current quarter, we did take a small increase related to our overall Cecil reserve across all customers and in addition, we took two specific reserves related to the the customer's mentioned one enterprise.
And one modular.
As far as overall health on customers Solyndra.
You know.
Credible amount of pressure coming out of Covid posts recovery.
Volume's cash.
Cash collections.
<unk> dynamics it creates a lot of tailwinds for us from a need perspective in the market but.
Do you have incredible challenges. So we're doing what we believe is the right thing to do from a balance sheet.
And taking the reserves and we're continuing to closely monitor it.
Okay, and then my follow up I completely understand that we will have to wait till Q for it.
<unk> 2024 guidance, but if you can just spend some time on any qualitative collar, we should keep in mind.
Some moving parts here as we think about 2024 compared to this year.
Yeah, we will provide our guidance in early January normal courses you know we always do.
And.
Lee mentioned, the pipeline and new business. So that certainly will be one factor you know we expect continued growth in our modular business uhm that will be strong growth for us and will continue in a majority of the margins on the new business hyper time continued up opportunities with.
Automation, so there'll be some of the drivers consistent with this year quite frankly, but will provide more details when we give guidance in in early January.
Okay. Thank you.
Your next question comes from Daniel Gratified.
Hi, Thanks for taking the the question here and you know you know there's a there's a report out there questioning some of your accounting techniques in a.
A month.
Things I know, you're not going to respond line by line to to some of that news flow, but I was curious if you could just address.
There's been any change in your accounting assumptions around contract assets are receivables.
If you remain comfortable with those assumptions given what you just mentioned around the challenges that your customer base and you know how we should think about the development of a bad debtor our reserves for the next call at 12 months or so.
Daniel.
If you allow me I'd love to frame. It first and then enter a Jennifer to in your answer your specific question on the report.
First and foremost we don't believe the information, including the short report as accurate a couple points I would highlight.
Lying demand remains high as we mentioned we continue to have success with expanding with our more than 500 customers, including 95 of the top 100 systems.
Flying modular bookings continue to expand with diverse opportunities, which support longterm growth.
Further evidence of the strength of our model is the is the expansion of our strategic collaboration Microsoft to leverage our purpose built technology.
Drive new.
Innovations and further strengthen our competitive advantage.
As we said before our customers face challenges due to think Jennifer mentioned on the call pair timeframe increasing coding complexity.
[noise] literary shifts and macro pressures. So while this provides us with significant opportunities at times. It can create some headwinds as we saw with a couple of our physician based clients and while difficult we've created a diversified scale business too.
To provide flexible solutions to support continued growth even after these events so with a strong financial profile, we're on track to deliver on our 2000 twenty-three guidance.
<unk> third quarter performance demonstrates the strength of our model for continued growth.
Grooved cash flow in Q3, which enabled us to pay down the initial 30 million in debt above a required repayments.
Sir.
Sure specific shade of revenue recognition question, there was a shift in our revenue.
Recognition policy or methodology at the time of acquisition. So let me just give you a little bit of contacts around the reasoning behind it.
There are some specific questions related to contract assets and some of that so what happened is at the time of the the acquisition we made a change to still recognize revenue under AFC 606.
We're recognizing revenue at the time that we're <unk> we're performing.
The performance obligation because we have determined we can estimate the transaction price so a little bit of contacts there 606, which is the guidance for revenue recognition requires that you recognize revenue at the time that you perform the performance application to the extent that you.
Can estimate the transaction price and that's the important point here.
Prior to the acquisition cloud Mad determined that they could not estimate accurately the transaction price and therefore, you can't do that at the time to perform its obligations, Matt you have to wrecking wait and recognize revenue at the time you can estimate the transaction price so.
Particularly in particular this change happen in our underpayments business. So the nature of the entertainment business is we inflow potential opportunities back to clients. They determine if it's an opportunity they want to pursue with the pay our we send it to the payer ultimately the payor pace.
<unk> <unk>.
All or none.
So.
There was there was an estimation pretty you know a lot of judgement in it but there's an estimation process. What we determined and this came from an acquisition that we couldn't estimate it because we didn't have the models in place to ultimately be able determined that liquidation right and so we were taking a more conservative approach and saying, okay. When would the cash come.
And and we know what the liquidation is at the time, we build the customer will recognize the revenue.
This was the triage acquisition acquired by cloud met in 2020. So that's the way they were recognizing revenue we kept it consistent after acquisition, but cloud Mad 321, built out a model to be able to estimate that transaction price and so by the time, our one acquire the business and 22, we made that.
Determination that we actually had good data historical data that was accurate and we could estimate the transaction price. So at the time of the acquisition in accordance with diligent in the auditor's and everything we made the decision that we would change the revenue recognition methodology at that time, we did it as part of the perks.
Price you know at the opening balance sheets, and we set up the contract asset and we we change them.
Methodology going forward that important point there is we thought that was the best thing to do and the reason why is because if we had done at some point after acquisition, we would not have had a.
We would not have we would've had incremental revenue that would've distorted our results going forward, we would've had.
Kinda bolus of revenue that hit at the time, we changed the revenue recognition process and we didn't want that to happen because we had the data we did it now the accuracy of the model has continued to be you.
You know on kind of on point and work.
Instantly every quarter updating for the Collectability percentage, so any change in our collections right over a period of time.
Will automatically get caught up in the model and the revenue would be adjusted real time, so there's not expected to be big swings in revenue because we've accelerated this methodology. It's all part of the go Ford model.
And it's been accurate we've done a look back we continue to do a look back and the cash that we're actually collecting as a result of the contract assets that we set up is very close to the estimates that we made so I know that's kind of a long winded answer about I wanted to make sure that that you understood the contact.
[noise] surround it because that's important an important point.
Yeah, that's all for it and I guess to the last part of my question as we think about this provision for credit losses, and you Kinda address do with lenders question, but I'm curious as we look forward.
You think it's obviously high this year relative to passengers do you think this year is abnormally high and as we think about 24 that should moderate or do you think will continue to be in this era, where we're seeing increased credit losses, just because of the difficult situations. Some of your your customers are in.
You know I mean, a significant amount of our credit loss reserves this year.
Light into one specific physician customer and I I would say that's an unusual situation that's not something that happens in the ordinary course, that's very specific to the nature of that business and that customer very unfortunate for the industry and for the customer and and the patient's associated with it.
But that was an unusual situation. So I wouldn't expect that they would stay at the same level that we've had this year, but it's one of those things that we're going to continue to monitor.
The challenges that these customers are under actually creates opportunities for us both on our end to end business and our modular business, where there are there's more pushback from the payers and denials and underpayments and some of the other services that we provide so it creates opportunities for our business and helped.
Ing them respond to the challenges, but also at times it can create issues where the.
The systems have financial challenges, resulting in and ultimately Baghdad. So it's something we're going to continue to monitor but I would expect to see some improvement as we move forward next year.
Makes sense thanks for the color.
Your next question comes from Cohen Saint Angela.
Oh, yeah, thanks for taking my questions.
Follow up on a couple of things you know first as it relates to pediatrics.
<unk> I think I heard you say that it represents in today I guess, one to two per cent of EBITDA, but I also heard you say that you've made Lee a fair amount of investments in this business. You will you have the ability to strip out some of those costs posed the termination of the contract that might offer some of the lost EBITDA. We just want to think about that.
A little bit more as it might relate to 24.
As it relates to 24, I mean, the contract termination, it's an effective date of.
December of this year. So the end of the year, but there's gonna be likely a lengthy transition period, we're having active conversations with them. We're gonna continue to support them through the transition we expect it will be a very complex transition to move away. So there's there's still some things to work out.
With them what that transition looks like in the time that it will take them to move away, but I would expect that will continue to see revenue through some portion of 24 as they transition away at well, obviously, we're going to do the right thing for the business and will take downcast as the as I.
Began to transition away, but some of that is still to be determined and will give more color. When we give her guidance in early January.
Okay perfectly if I could just sort of follow up you know you talk about the uniqueness of this contract but earlier in the year you talked about integration issues not just a pediatrics, but you know also litecoin was another sort of high profile situation could you give us an update there and if you think about the rest of your book of business do you feel comfortable.
With all the other contract or or do you feel like you or do you feel like pediatrics was sort of this just isolated incident and I don't know if there's any any contract renewals coming up in 24 25, you know that you want a flag for everybody. Thanks.
Yeah sure. So let me just start with a broader point and then there's there's a bit of nuance to this kind of.
<unk> point.
I feel are we feel very good about their broader base of customers and there's this there's this you know item we've talked about which is the pressure they're under alright. So the pressure they are under with.
Fire labor cost with you know point solutions on the technology side.
Pressure that comes from hers and that makes our jobs, even more important role even more important that said you know it's.
It puts pressure on us to perform right and and you know it puts pressure on all metrics and we're not perfect and we we but we broadly as you can see from our incentive fees.
Are helping our customers to progress so so and I would add now just getting to the complexity point.
All on boardings are complex right. We are installing our technologies, we're applying our best practice processes.
We're shifting people and as you can see from some of our recent large onboarding. They have gone very well and we have a track record of success with all of our large customers now there is a level of complexity that is unique when it comes to certain customers and the variables I would point out and this is not specific to pediatrics.
Generally things now that I've been here for 10 months I look for it's when a customer has multiple host systems and and I don't just mean, you know the top to the largest too I mean more than you know several so lots of whole systems. When they are fragmented geographically lots of small hospitals.
When there are not standard processes.
And and when there are either no technology or fragmented technologies My learning here as you know the the leader of this business is we have to be really diligent about the customers that we are partnering with and also a more realistic about onboarding timelines and the complexity.
[noise] of Onboarding. So then my answer your question is I actually feel really good about the broad base of our customers law, especially the large systems that have a lot less complexity and I would say to your last point. This is you know the pediatrics is a unique situation again, we're gonna support them, but there's a lot of complexities and.
And that is even distinct relative to the broader base a physician customers, we have which we are a leader in that market just based on lots of metrics. So I would say we feel very good about what we're doing.
Okay. Thanks.
Your next question comes Sham Elizabeth Anderson.
Hi can you hear me.
Yes, hi.
Hi can you hear me.
Yeah, yes.
Hi, I wanted to ask about your cash balance it looks like there's a bit of a build up of cash is this related to the fact that you may have to purchase an asset from center, otherwise, presumably it'd be better to keep voluntarily paying down you know the seven 7.5% that rather than get five per cent out of a cash right.
Yes, we have paid down $40 million of incremental repayments above the required repayments year to date and that's something that we're going to continue to look at and pursue opportunities to pay it down based on.
On your obligations that we we know we haven't investments that we're making in the business. So we will continue to do that and that's one of the priorities that we have from a capital allocation perspective is to continue to pay down debt as far as the stutter asset you know there there was a a put option that.
Included in the Stutter agreement those are still conversations that we're having with Sutter. There's been no determination. That's been made at this point related specifically to that asset they have roughly until the end of the year I think it's very beginning of 2024 G. Early January.
To make the final decision.
<unk>, you know, we're leaving ourselves some opportunity and flexibility with the cash balance but certainly.
Came down that is one of our priorities.
Got it and then thanks for that just a quick clarification.
You guys mentioned that you know the ones could be coming you know coming months does that imply that could possibly creep into 2024. It. It's it's definitely still at 20 twenty-three sort of wind pipeline.
Yeah, you know the the thing I want to be careful just putting pressure on the teams so and indeed look my my my <unk>.
Experience, which is relatively short, but I also I've track the history of this business on what's happened with the contract negotiations.
Is that is it is literally impossible predict exact timing what I would say is that we have a couple of deals that are late stage enough for me to have confidence to say a couple of months now whether that's December 31st or January 30th or February I bet, just hard for me to predict so it's hard for me to do.
Give you specificity on the exact timing.
Okay I appreciate that.
Your next question comes from Sean Dodge.
Yep. Thanks, Jennifer you mentioned beginning to unwind some of the extra resources you ended a few quarters back to address some of the pay your timeline issues in the client.
Mutation issues beyond just just the pediatric homes.
Any event unwinding hafner or contribute in Q3 is expected to be more of a Q4 event and then can you give us some sense of the magnitude of the savings you expect as you begin to roll some of those extra resources back.
The way I would think about it <unk>, yeah, we're monitoring our metrics or operational metrics and we're gonna do the right thing by our clients and what we need to do to make sure that we are making incremental progress on the metrics that are important to them and it's something that we're continuing to me.
Monitor as you've seen in the first nine months of the year. We've continued to make progress on those fronts operationally. So we're pleased with that performance the incremental resources that we added are making a difference and we believe contributing to our overall results with that said I wouldn't expect.
That you're gonna see some huge.
Increase in or relief on expenses related to pulling back on resources, it's gonna be a slow steady monitoring of kind of returning back to now that we've gotten some of these metrics stabilize kind of returning to what what you expect to be kind of normal course.
The other thing that could impact that is with some of these resources.
Business.
So as new business comes on likely resources can transition to new wins and new business to support that revenue. So there's a lot of dynamics there as far as the specific resources, but generally we're continuing to watch the matrix and we're gonna make sure that performances in line, but overall.
As you've seen in our incentive fees and the progress that we've made quarter over quarter. There. We are seeing positive results related to these resources that we've added.
Okay, Great and then.
<unk> crossed lovers, you won't have with with offshore in the Philippines Centre specifically.
Is there any update you can give us on how many employees you have in the Philippines now maybe how many to expect to add over the next 12 months and then you know how much of the ascension.
Or use of work that you tried to transition there has been transitioned this one <unk>.
Let me start Sean and then just kinda conceptually give you an idea of progress there. We're very pleased with the progress there in Philippines General forget about it I think we have 1500 employees. There now significant growth projected over time as our customers we evolved with our customers. But this is you know by all of.
Counts a very successful initiative for the company one that has benefited our customers, but we feel very good about the progress we've got great leadership, there on the ground and you know a very connected to a U S teams were feeling very good Jennifer anything that yeah 1500 is about the the right number and remember that.
Expansion to the Philippines was announced associated with the essentials renewal of that contract to this was an opportunity for us to.
<unk>.
Continue the partnership with an S extension and expand and some of the front end operations with patient contact and scheduling to expand to the Philippines and those were built into the economics of that renewal. So it's an opportunity to share and some of the savings with our customers.
And it was a great way to.
Be able to convey value to an extension in the partnerships, but we've seen very good success operationally as waves began to move some of those operations over to the Philippines, and we expect that will continue to expand that over time and also with other customers as well in the future.
Okay.
Great. Thanks again.
Your next question comes from Jack Wallace.
Hey, Thanks for taking my questions.
Wanted to get a reminder, on where we are with the deployment capacity.
And just any timing elements there with regard to some of the recent.
Recent deployment center.
Phase two.
Particularly in light of it sounds like maybe I'm more requirement strategy for new deals.
And thinking about whether that has any impact on when you'd wanna find some of the the new M. P. R. And then a follow up to that is with the pediatrics resources I'm available sometime next year should.
Should we think about that is incremental.
Deployment capacity.
Or more along the lines of <unk>. Thank you.
Thanks, Jack let me start at the highest level on on deployment capacity in general and then talk a bit about Sutter then Jennifer if you have anything to add on on some of the numbers.
One of my Insides, My first 10 months as it is.
One of the reasons were successful in most all of our Onboarding is we can add burst capacity at the very beginning so so think about our model. We are one of the ways, we leverage and can deliver you to really good unit economics to a customer.
Is as their employees to tread, which as we know with administrative or clinical staff in the U. S is is is pretty significant.
We can replace those individuals with trained.
Individuals in in our global captive that are already trained on the host system whatever it is unable to do that work.
But we're also to ensure smooth smooth transition and no degradation and metrics are are deploying capacity. We've already added at some point. So we will continue this concept of having capacity to take on new customers or in some cases as we saw a year ago using that capacity is needed to deal with some.
Some of the delays we discussed in my first first call. So that so that's one way I would say the second Sutter phase one has gone well by by any measure I've been personally involved Jennifer has been personally of all our team is very engage I've been very impressed with that leadership team the new leadership team there.
And you know probably making very good progress phase two still on plan, we are working with them to determine exact timing, but that that will also be part of you know once we get back to you in January about on our guidance, but so far so good everything is progressing as as we plan.
Jennifer anything that on <unk> to deployment, we said.
Historically, and we're still maintaining and the eight to 9 billion dollar range.
And so what will be important as we move into 24 is the timing of new business and the number and size of wins that baton.
Boarded and.
Early 24, and what that means we have the opportunity to scale upscale down.
The deployment as we need to based on the timing of new business. These deals obviously are very large and somewhat.
Somewhat lumpy in nature, when when we signed them and onboard them. So we can flex that capacity up and down as needed specific to the pdx resources you know.
We'll continue to look at that as we try as I previously said on the transition planning.
As they transition in 24 again, we expect that to be a complex transition and we're gonna make sure that we're giving them the right support they need through that process.
But we will be measuring the timing of when the P. D X.
Operations transition and new business to determine what the resource shifts look like the the great opportunity forces. It's we bring on new business. We will have some excess capacity with P. D X that we can redeploy in the right places and so we'll continue to monitor that.
We'll have one or more <unk> more information for you as we rolled out specific guidance and early 24.
Okay I appreciate that and just a quick follow up.
What about roughly 5 billion or so M. P. R for center fees to the four more that's expected to be sign you sometime in the next few months that gets us to the high end of that the planet capacity you know, while we're not looking for a specific answer next year, just thinking about the time that that the planet capacity would be.
Tied up with that prevent the company outside of any extra resources from pediatrics I'm signing additional N. P. R until the end of next year or.
The right deals, where we're coming through do you have the opportunity to.
Add another four to 5 billion of capacity should you need it.
Yeah, we don't expect deployment capacity to be a limiter on our new business.
Excellent. Thank you.
Your next question comes from George Hell.
Yeah. Good morning, guys and thanks for taking my question, where do you spend a little time talking about like what seemed like nuance discussions between you guys and the $4 billion venture that you guys are open to signing up and coming months. I guess is there any can you give us any color for with the flavors of the conversation look like and maybe kind of with the hang up points are most concerned about.
Are there any implications for future deals as it relates to the negotiation of this deal.
Thanks, George you know, let me try to in the in the time left give you a kind of a.
Short answer.
The discussions are all very similar they all start with.
We are struggling with our revenue cycle. We are we don't necessarily have the talent to manage it. It's we admit it's very complex.
We have our own labor issues, either cost or availability.
Can you help in that discussion is happening and I would add that they're often happening off the backs of the cloud med business, we already have with them on the revenue integrity sides of driving revenue yield which migrate from the head of revenue cycle to the CFO or C E O.
So so those that's what's allowed us to build our pipelines. So I would say no no hang ups. It's the nature of the business. When you are system and need but you want to do your your own diligence to make sure that we can handle all their needs and so what what we articulate in our value prop.
Physician has a track record go look at the very large systems, we've onboard it and very successfully worked with we show them the investment in technology. So we literally just show them the demos of of our our technologies. The AI, we've applied within the processes of revenue cycle, whether they be coding account reviews et cetera, we show them our team.
It is successfully onboarded other other clients, we have them talk to our customers literally they're all gonna do reference checks and then it comes down to the nuances of deals right where are what what where who are the stakeholders that these systems. Yeah. What are the the the what level of I T constraints do they have.
And so I would say just given the deals that we have late stage you know I personally don't see any major constraints other than kind of natural course of terms and conditions. So that that's about all the <unk> can give you, but I hope that was helpful.
Nope. That's helpful. Maybe then just my quick follow up is B I know, it's very early that kind of have you had any conversations with ascension about the proposed merger with Henry Ford and kind of help you think about risks and opportunities their longer term.
Yeah, that's that's a great point, what I would say more broadly it well first of all it's early with that so so we know Henry Ford from Cloud Med is another example of of having a customer that we have touch points with.
There is a this is something we don't talk about enough, but within our installed base. There is significant opportunity. So you guys, who do the math I don't need to name. The names you can go do the research, but yeah. My math is 10 billion plus a N P. R. Within our customer base. When you include Henry Ford right. When you do the N. P. R map now these take time this is not some.
We were and of course this is some fees or discussions we will have with customers that will happen over time, but it's it's a great question of just T up the point that there's there's a lot of opportunity within our base.
Thank you.
Uhm.
Your next question comes from Craig hadn't back.
Yes. Thank you ask a question on cloud, how you're thinking about 20 per cent grill that you've talked about for this year and then leave it beyond the sheer kind of grilled trajectory of cloud man now, how you're thinking about <unk> and just kind of momentum behind that business.
Yeah. So a couple of things, where we're gonna you know climate is now part of the broader are one modular business in a couple of things I'd say, just qualitatively very very strong bookings for the business that is both <unk> plus the old visit a business you had no in other R. One modular solutions, so which is our primary metric is.
Kind of you know what are we booking that drives revenue in in the next couple of months into the year.
Demand is very high think of this as well.
Meeting providers, where they are means if your provider and you're struggling with revenue yield we have the absolute best solution you can get in the market that has enabled by the data. We are collecting from claims visibility across all 50 states all pair types all care settings, one note and.
Particular, if you are struggling with your E. R. We are the leader in a R. N denials management, because we're seeing data, we're able to even predict where there are denials, Jennifer mentioned underpayments, where the market leader there and we're also the market leader in coding solutions and so very strong growth very good leverage.
We've actually had a lot of success leveraging that commercial engine to sell some other are one solutions in particular, some recent wins, we've had with our entry pay the old visit pay business. So broadly very good and feel very confident in growth next year.
Got it and then just as a follow up uhm nice to see the partnership with Microsoft announced this morning.
Touch on Lee, where things stand today now you've talked a lot about just developments across AI and the opportunity to just you know from a tangible perspective, how you see this impacting the business next year and longer term.
Yeah I I think this is a huge enabler for a business and the reason is I.
I believe we have a right to win in the application of this innovative technology because of the coverage we have across 900 billion of N. P. R across the legacy Clod met in our one business that gives this visibility into the workflow host systems of our customers and allows us to.
Do things like you know just one quick example, I was with an operator last week and she showed me Hey look we used to have pages and pages of summaries and are a our accounts. This is to get a customer paid.
And what we were able to do in a very short period of time with our law large language model is summarize the account information, which massively streamlines the speed at which that operator can process that reimbursement and think about that apply tens of thousands of times across our business over time, it will reduce the need.
It will reduce the need to have people doing that same task reduce the numbers of people. So the Microsoft partnership as an example of first of all Great partnership there are partner for our cloud services, but also a symbol of the attention and the focus we're gonna put on Jenny is applied to our business.
Thanks.
Your next question comes from <unk>.
Yeah, good morning, and thanks for taking the question.
With the reiteration of the FY twenty-three guidance and done thinking about the implied Q4 arrange wanted to ask what are the key points of variance that could drive results to the high or low end of that range in queue for in any specific comments on incentive fees in cash flow in queue for would be helpful too. Thanks.
Sure you know we feel good about the volumes cash collections going into Archie for results and our expectations for the quarter, we feel good about our cinergy realization.
Some of the factors just based on the way that our revenue works as incentive fees could always be a guide them up or down although we're comfortable with the expectations that we have for incentive fees.
For the quarter.
And then we're going to continue to think about resources as far as new business Onboarding, it and what's to calm and the timing of those as well as some of our modular business and the timing of some of those transactions and work better customers are asking us to do on their behalf.
So those are kind of some of the factors that could drive it towards the.
Higher end of the range, although we're very confident and you know reiterating the guidance for the full year of EBITDA that we gave to be in that still be in that 600 to 615 range.
Great. So that helps them then.
Follow up around the gross margin line. Some some nice outperformance their relative to our motto in the quarter. You know like we saw that came from and sign up fees, but at the expense levels also looked relatively favorable versus our expectations. So.
Any further color on the impact of expand synergies or the deployment of technology that you've you've mentioned have already moving live and whether that's having a an impact alrighty. Thanks, yeah. Yeah. It's both I mean, we are continuing this is one area where continuing to monitor very closely.
And we're continuing to drive hard I mean first our first priority is making sure that we're delivering for our clients on the.
Performance metrics and generating the cash collections for them, but we're always looking for opportunities, especially with the deployment of technology and opportunities there to streamline and make our operations more efficient whether that's utilizing global resources utilizing.
<unk> nation opportunities and also continuing to drive high margin modular business.
Great. Thanks for taking the questions.
Your final question comes from Richard.
Great. Thanks for squeezing me and Jennifer I was wondering if you could go over the third quarter incentive fees and the puts and Peg fair you said something about a reclassification of 4 million and so with that 4 million of modular rather than in front of me.
If you could just go into that that'd be helpful.
Sure So in Santa Fe did come in higher than what we expected for the quarter, but there were a couple of one offs as I mentioned in the prepared remarks. The first one was submit incentive fees that we would have expected to realize in queue for that we instead realized in Q3 based on the timing.
The customer contract to think about that is you know.
Nizing at one quarter earlier, it would have hit in queue for the second was a contract change and based on the nature of how revenue gets classified across the different revenue line items the contract change was to.
Change the nature of how we calculate the fees and because it's more of a not necessarily fixed fee in nature, but because it's not tied to specific metrics and performance for those for this particular customer because they wanted more uhm predictable outcomes and they're rare.
GNU in their expense going into the second half of the year, we made a change that will take it from the net operating fees into space space. So instead of hitting incentive fees that'll hitting that operating fees and therefore, it would bring incentive fees down based on the previous sky that we gave so.
I thought it was important that we gave that color commentary because we'll continue to see that obviously that the revenue that got pulled forward into Q3 would've been in queue for as well as will no longer see roughly that 2 million of revenue a quarter and Q4 an incentive fees, it's going to be up in the other line item.
Okay. Thank you.
There are no further questions I now turn it over to Lee for closing remarks.
Thanks, Sydney, a couple of closing points well first of all we appreciate your interest and support of our one.
And as we have discussed today. The first point is customers need us now more than ever as they face challenging macro dynamics and we are distinctly position to serve any of their revenue cycle needs.
Second point is we believe you we have a right to win with a unique combination of services and technology and access to the structured and unstructured data of $900 billion worth of N. P. R to drive insights for customers drive costs down and drive revenue yield.
The next point I'd make is we have a growing pipeline with diverse opportunities when viewed by size type in solution interest.
The next point I make is we have a large set of modular customers and capabilities 500 customers. In total this is high growth high margin business, an increasingly significant part of our business that allows us to meet customers, where they are on the revenue cycle journey.
And last we have a strong financial profile and have delivered on our 2023 guidance remaining on track for continued growth and performance. Thank you.
This concludes today's conference call you may now disconnect.
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