Q4 2019 Earnings Call
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time, if anyone should refer operator assistance. Please press Star then Gerald restaurant telephone as a reminder, this conference maybe recorded I would now like to turn the conference over to Jim story of Investor Relations you may begin.
Thank you Sonya and welcome everyone to Premier Inc.'s fiscal 2019 fourth quarter conference call.
Our speakers today are Susan Devor, Chief Executive Officer, Mike Alkire President.
And Craig Mckasson, chief administrative and financial Officer.
Susan Mike and Craig will review the year in quarters performance provide an operations update and discuss our outlook for fiscal 2020.
Before we get started I want to remind everyone that copies of our earnings release and supplemental slides accompanying this conference call are available in the Investor Relations section of our website at investors thought Premier Inc. Dot com.
Management's remarks today contain certain forward looking statements and actual results could differ materially from those discussed today. These forward looking statements speak as of today and we undertake no obligation to update them factors that might affect future results are discussed in our filings with the FCC, including our fiscal 2019 Form 10-K , which we expect to file soon.
We encourage you to review these detailed safe harbor and risk factor disclosures.
Please also note that where appropriate.
We will refer to non-GAAP financial measures to evaluate our business reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the appendix of the supplemental slides accompanying this presentation and in our earnings release form 8-K, which we expect to furnished to the FCC soon.
Now, let me turn the call over to Susan to more.
Thanks, Jim and welcome everyone to our conference call today will recap, our fourth quarter and fiscal 2019 performance provide updates on our strategic objectives and discuss our outlook for fiscal 2020 into tail, leaving sufficient time for Q and a.
So I'll start today with a quick overview of our performance and highlight the opportunities that we see ahead.
Results from our continuing operations for both the quarter and fiscal year were consistent with our previous expectations. As we continue to collaborate with our large national footprint of member health systems, and other providers to reduce cost and improve quality and safety.
A few quick highlights financially, we delivered 3% year over year growth in consolidated net revenue, 4% growth in non-GAAP adjusted EBITDA and achieved a 16% increase in non-GAAP adjusted fully distributed earnings per share.
We generated significant non-GAAP free cash flow in fiscal 2019 of 342.8 million, which equaled 61% non-GAAP adjusted EBITDA, we successfully completed the transaction to exit the specialty pharmacy business and we maintained a strong balance sheet, which provides the ongoing flexibility to support our growth strategy. While also returning capital to our stockholders.
During the fiscal year, we completed our previously announced $250 million stock repurchase plan and announced board authorization for a new $300 million stock repurchase plan for fiscal 2020.
Looking ahead, our financial outlook for fiscal 2020, anticipates, a continued challenging market environment political and regulatory uncertainties, which continue to weigh on member decision, making in some areas will likely intensify with the approaching presidential election in which health care is already taking center stage.
Consistent with this market environment, we are experiencing some challenges in our performance services segment.
Where we also faced uncertainty related to the significant reduction or elimination of the CMS Hospital improvement project that we have participated in for the past three years.
At the same time, our supply chain services segment has continued to deliver steady growth.
In line with these factors our financial guidance for fiscal 2020 projects modest year over year consolidated revenue and profitability growth.
As we begin the new fiscal year, we continue to operate from a position of financial strength characterized by our flexible balance sheet and very strong free cash flow.
And we are confident that premier remains positioned to continue to successfully navigate the current environment.
While positioning the company for the future.
Importantly, we continue to focus on expanding our supply chain business and improving the growth of our enterprise analytics and performance improvement capabilities.
Our longer term vision for these businesses remain consistent.
In supply chain services, our vision is to co manage total supply chain costs by among other things expanding our strong supply chain portfolio and technology, enabling all aspects of the supply chain spend.
In performance services, we are working to expand our market reach as a health care technology and data sciences business with wrap around implementation services, leveraging our capabilities to connect providers to payers employers and life sciences companies to improve clinical outcomes and reduce cost.
We believe premier has the right capabilities and offerings to continue delivering the unique and compelling value for our customers, which will help us deliver long term growth and stockholder value.
Now, let me turn the call over to Mike Alkire, Our President who will walk you through some of the initiatives that were pursuing.
Thank you Susan and thanks, everyone for joining our call. Let me start with a few operational achievements for the year just ended.
We continue to serve more than 4000 hospitals and health systems across the U.S. and expanded the number of other providers and organizations with which we do business with to approximately 175000.
We increased the purchasing volume running through her or TPL contracts to more than $61 billion.
We maintain very high retention rates again, this year with a 97% retention rate for our group purchasing business at a 96% SaaS institutional renewal rate.
At the end of fiscal 2019, our member owner average tenure stood at approximately 20 years.
And our annual number satisfaction survey showed we continued to be viewed by our members as a strategic partner, whereas an extension of their organization.
Looking forward, we remain focused on continued growth and are currently recruiting and hiring additional sales professionals to capitalize upon identified opportunities.
At the same time, we are committed to rightsizing other businesses within our portfolio to align with shifting market demands and are continuing to diligently manage costs.
Now I want to review some of the specific actions, we are taking to augment our core capabilities and drive growth and stability in the current market environment. While at the same time supporting the longer term vision that Susan just discussed.
First we are leveraging our unique combination of data assets analytics and other capabilities to continue developing a high value care network linking employers and payers directly with providers to enable better clinical outcomes and reduce costs.
We have been investing in those longer terms strategic initiative over the past year and are targeting to engage major employers during the current fiscal year.
As part of this initiative, we have teamed up with two major health plans to develop an innovative automated prior authorization solution.
With one of these Magellan health, we're collaborating together to deploy this unique prior authorization solution within the electronic health record and physician workflow at the point of care and are piloting the project with Hawaii Pacific Health, one of the largest health care providers in Hawaii.
The acquisition of stance on health and its clinical decision support technology represents a key part of this developing strategy and it's also an attractive business in its own right.
We acquired Stanton last November and this has generated excitement and new sales opportunities, we continue to build and integrate stances functionality with other premier data assets and capabilities and expect it to be modestly accretive to earnings in fiscal 2020.
Second while the broader provider market continues to experience more modest growth, we are leveraging certain businesses within our existing portfolio to capitalize on opportunities in adjacent markets.
One of these is our applied Sciences research business, which Leverages, our best in class data subject matter expertise and our provider channel to generate real world evidence that supports healthcare transformation.
While still a relatively small contributor to performance services segment revenue. We are pleased with its rapid growth rate and see continuing potential in the coming year.
Additionally, this business is partnering with industry leaders to develop test and scale real world interventions for health care improvement a few examples.
We are collaborating with major diagnostic imaging and pharmaceutical companies to accelerate oncology innovations.
And we are working with major pharmaceutical and device companies collaboration with healthcare systems to evaluate and impact large populations of patients with complex conditions.
As Susan noted earlier strategic acquisitions have always been carefully considered as part of our disciplined capital deployment strategy. While status represents a recent example of an M&A opportunity that we acted on we're exploring other potential acquisition opportunities to to add to augment our capabilities in targeted areas of the business on the supply chain side for instance.
We're looking at ways to further improve our members supply chain processes using technology. We believe this will continue to position Premier has an embedded and centralized partner within our members supply chain operations.
On the performance services side, we are exploring opportunities that would allow us to better support and accelerate the delivery of our high value network strategy.
As well as capabilities that further enable the strategic evolution of our emerging automated prior authorization offering.
Let me conclude by reiterating that we remain disciplined and opportunistic we are focused on pursuing value creating opportunities in our current markets as well as in new markets Premier continues to partner with our members to explore new and innovative ways to better manage costs and improve the quality and safety of care delivery, while creating long term value for our stakeholders.
At the same time of course, we remain committed to maintaining a strong balance sheet, while returning capital to stockholders as part of our balanced capital allocation program.
Thank you for your time today now, let me turn the call over to Craig Mckasson, our chief administrative and financial Officer.
Thanks, Mike.
As Susan highlighted we completed the sale of certain assets related to the specialty pharmacy business and initiated activities to wind down and exit from that business in the fourth quarter, Accordingly, and unless otherwise indicated all results discussed during this call reflect our continuing operations before we walk through the results I do want to remind everyone that beginning in fiscal 2019, we adopted the new revenue recognition standard FC six so six using the modified retrospective approach, which means we did not restate prior year results under the new standard as a result, we are comparing our fiscal 2019 fourth quarter and full year results using the new standard to prior year results under the previous revenue recognition standard which means some of these comparisons may not be meaningful.
Before reviewing the quarter I want to reiterate that our full fiscal year performance, excluding discontinued operations met our expectations with consolidated net revenue of $1.22 billion up 3% year over year non-GAAP adjusted EBITDA of $561 million up 4% and non-GAAP adjusted fully distributed earnings per share of $2.66 up 16%.
Supply chain services revenue rose, 4% year over year, driven by a 3% increase in net administrative fees revenue and a 7% rise in products revenue and our performance services revenue growth was nominal.
Now, let's walk through the fourth quarter's performance in more detail.
As I discussed earlier in the year, we anticipated that fourth quarter year over year comparisons would be challenged largely due to the timing of revenue recognition throughout the year under the new revenue standard which resulted in stronger results in the first half of the year relative to the prior year under the previous standard while setting up more difficult comparisons in the second half of fiscal 2019, particularly in the fourth quarter.
From a GAAP standpoint, consolidated fourth quarter net revenue of $316.2 million compared to 312.6 million a year ago supply chain services segment revenue was $227 million compared to $217.8 million from the same period a year ago.
While net administrative fees revenue of $170.2 million increase from the preceding quarter. It decreased by 1% from the same period a year ago. This is consistent with the assumptions and cadence. We have previously discussed given higher than anticipated recoveries of past due administrative fees and the timing of cash collections, which benefited revenue under the previous standard in the prior year fourth quarter.
Products revenue was $54.7 million compared to $43.8 million, a year ago, primarily driven by growth in certain commodity product categories of our direct sourcing business as well as sales associated with the aggregated purchasing of products.
Turning to the performance services segment fourth quarter revenue was $89.2 million compared to $94.8 million for the same period a year ago.
The decrease was due to lower consulting revenue from cost management and quality and safety engagements, which was partially offset by growth in the clinical surveillance cost management and clinical decision support areas of the technology business.
More specifically, we are experiencing lower demand for large performance based cost management consulting engagements relative to last year as many healthcare providers appear to be taking more of a wait and see approach given the market uncertainty upcoming election, and slower adoption and movement to value based care models.
Performance services revenue did benefit in the second half of fiscal 2019 from two large licensed safety engagements, while the majority of our technology revenue is SaaS based we do also sell licenses for our safety and infection prevention technology.
Under the new revenue standard the majority of revenue associated with license engagements is recognized at contract signing whereas under the previous standard revenue was more ratably spread over the term of the contract.
Looking at profitability GAAP net income was $70.2 million for the quarter compared to $101 million a year ago. After a GAAP required non cash negative adjustment of $297 million to reflect the increase in the redemption value of limited partners class B common unit ownership.
Based on the increase in our stock price during the period, we reported a GAAP net loss of $4.28 per share.
Consolidated non-GAAP adjusted EBITDA was $139.9 million for the quarter compared to $147.7 million for the same period a year ago.
During the year, we invested approximately $7 million and incremental operating expenses for future growth initiatives, including the build out of our high value network. The integration of our clinical decision support technology. The development of our provide Gx program and our recently launched E Commerce initiative.
From a segment perspective supply chain services non-GAAP , adjusted EBITDA was $141.9 million compared to $142.1 million a year ago gross profit growth in the direct sourcing business from increased sales of higher margin products was primarily offset by increased investments in our ecommerce initiative.
In performance services non-GAAP , adjusted EBITDA was $28.2 million compared to $37.6 million for the same period a year ago. The decrease was primarily the result of the lower revenue compared to the prior period as well as the ongoing investments in our clinical decision support technology and the high value network strategy.
Fourth quarter non-GAAP adjusted fully distributed net income was $86.3 million compared to $94.7 million for the same period, a year ago, representing non-GAAP adjusted fully distributed earnings per share of 68 cents compared with 70 cents a year ago.
From a liquidity and balance sheet perspective cash flow from operations for fiscal 2019 was $511.9 million compared with $505.3 million last year.
non-GAAP free cash flow for the fourth quarter was $124.7 million, representing 89% of non-GAAP , adjusted EBITDA and totaled $342.8 million or approximately 61% of non-GAAP adjusted EBITDA for the full fiscal year.
Our cash and cash equivalents totaled $141.1 million at June 32019, compared with 152.4 million at June 32018.
We ended the year with an outstanding balance of $25 million on our five year $1 billion revolving credit facility, which we subsequently paid down on July 15th.
And as previously reported we completed our $250 million share repurchase program during fiscal 2019 repurchasing a total of approximately 6.7 million shares which added approximately six cents to non-GAAP adjusted fully distributed per share results for the full year.
Now, let's turn to our financial guidance for fiscal 2020.
We are introducing fiscal 2020 full year guidance based on our historical performance and current expectations for the fiscal year.
This guidance incorporates certain key assumptions related to our business and an uncertain political and regulatory environment.
Consistent with prior years, it does not incorporate the impact of any future significant acquisitions that we may undertake.
In developing our guidance, we factored in the expected realization of approximately $1.1 billion in estimated revenue that is available under contract for fiscal 2020. This represents approximately 88% to 93% of our consolidated net revenue guidance range consistent with prior years and assumes the continuation of historical GPO retention and SaaS institutional renewal rates.
So with these key assumptions in mind, our specific fiscal 2020 full year guidance ranges are as follows supply chain services segment revenue of 872 to 907 million representing growth of 2% to 6%.
Performance services segment revenue of $359 million to $373 million representing growth of negative one to positive 3%.
Together. These produced consolidated net revenue of 1.231 to 1.28 billion representing growth of 1% to 5% over the prior year.
We expect non-GAAP adjusted EBITDA to be in a range of $566 million to $589 million, reflecting a 1% to 5% increase for the year and non-GAAP adjusted fully distributed earnings per share is estimated at $2.76 to $2.89, representing an increase of 4% to 9% over prior year results.
Our per share guidance does not reflect the impact of our previously authorized fiscal 2020 $300 million stock repurchase plan, the timing and amount of any share repurchases will be determined by management based on market conditions share price and other factors given we had completed our $250 million share repurchase program. In March 2019, we did not repurchase any shares in the fiscal fourth quarter and we'll provide updates regarding our share repurchase activities, if any on a quarterly basis.
Our fiscal 2020 guidance is also based on additional assumptions and expectations as follows.
Overall, we expect non-GAAP free cash flow will approximate 55% to 65% of non-GAAP adjusted EBITDA for the full fiscal year.
In supply chain services, our revenue guidance anticipates, 1% to 5% net administrative fees revenue growth.
Mid range revenue growth assumes continuation of the generally flat patient utilization environment.
Growth is expected to be achieved by further penetration of existing members spend addition of new contracts and growth from new member conversions and ramp up consistent with historical trends.
Our supply chain services revenue guidance also anticipates, 5% to 9% year over year growth in our products business mid range for products revenue assumes continued steady member use of our product portfolio.
Stable product pricing that is not significantly impacted by potential tariffs and the continuation of our periodic aggregated purchasing programs.
In the performance services segment mid range guidance assumes continuation of our historically high SaaS institutional renewal rates and does incorporate the continuing challenge of hesitant demand in some areas.
Lastly performance services revenue guidance also factors in uncertainty associated with the extension of our hospital improvement innovation network contract with CMS, which generated $14.4 million in fiscal 2019 revenue our three year contract expired on June 27th and month to month funding has continued in July and August at a reduced level. However, the further continuation of this program is uncertain at this time.
Accordingly, our fiscal 2020 guidance range anticipates, a partial year contribution from the potential continuation of this program through March 2020, approximating 45% of the revenue contribution we experienced in fiscal 2019.
Impacting fiscal 2020 performance services revenue growth by over 2%.
Looking at the cadence of revenue flow for the year. We currently expect to generate approximately 48% of consolidated revenue in the first half of the year.
From a segment perspective, we expect supply chain services to generate approximately 49% and performance services to generate approximately 45% of their segment revenue in the first half of the year respectively.
Looking at profitability approximately 48% of consolidated non-GAAP adjusted EBITDA is expected to be generated in the first half of the fiscal year, while supply chain services. Adjusted EBITDA is relatively consistent across the first and second half of the fiscal year performance services EBITDA is more heavily weighted in the second half of the year as planned the revenue growth occurs from the investments in clinical decision support the high value network and incremental technology and consulting sales from the recruitment of additional sales professionals.
As a result, we anticipate performance services segment revenue to reflect negative year over year growth in the first and second quarters with consolidated non-GAAP adjusted EBITDA showing negative year over year growth in the first quarter due to the factors previously discussed.
Our guidance contemplates capital expenditures, primarily capitalized internally developed software and other purchase capital of approximately $95 million to $100 million for the year, representing 78% of projected consolidated net revenue. It also anticipates a consolidated non-GAAP adjusted EBITDA margin in the range of 43% to 47% of consolidated net revenue.
And our non-GAAP adjusted fully distributed net income calculation will reflect an effective tax rate of 26%.
Finally, I would like to provide a brief update on our ongoing quarterly exchange process on July 30, Onest approximately 1.3 million class B units were exchanged on a one for one basis for shares of class a common stock.
As a result holders of our class a common stock now holds more than 50% of the voting power for the election of directors, which means premier no longer qualifies for the controlled company exemption as defined by NASDAQ.
Our company has been anticipating this change and we expect to comply with all related NASDAQ guidelines in a timely manner, including having a majority of independent directors on our nominating and governance and compensation committees by the end of October and a majority of independent directors on our board within one year, our audit and compliance Committee has always been fully independent.
Our next quarterly exchange occurs on October 30, Onest. Thank you for your time today now let me turn the call back over to Susan.
Thanks, Craig.
I want to conclude our prepared remarks by reiterating that we believe premier continues to be well positioned for long term success, we remain a leader in our markets generating growth across multiple revenue drivers operating with a flexible no debt balance sheet and generating strong free cash flow as we pursue our growth strategies. We will continue to rigorously manage expenses and we remain confident in our ability to further improve financial performance and drive growth and value creation.
Operator could you please open the call for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish maybe yourself from the queue. Please press the pound key prevent any background noise I guess, what's your question has been stated.
Our first question comes from Steven Valiquette of Barclays. Your line is now open.
Okay, great. Thanks, and good morning, everybody.
So just in the performance services, you mentioned the lower demand for some of those larger consulting engagements and just to drill in a little bit deeper on that I guess I'm curious are you seeing any cancellation of contracts or is it more the challenges related to getting customers to pull the trigger on new contracts and also I'm. Just curious if there's any color on just just rough ballpark what percent of your overall PS segment is comprised of these types of contracts. Thanks.
So I'll start and then Craig you can answer the second half of the question.
From our perspective, what we are seeing is not any discontinuation of those consulting contracts.
We have had a number of very large consulting engagements associated with several of the GPL pursuits that we've had over the last year or two.
We are in a more normal environment now around GPL recruiting and so we just have slower growth in some of those large scale.
Consulting engagements Craig maybe you can answer the second half shura at a broad level I would indicate that the cost management consulting arm of our performance services segment is typically in the range of.
Approximately probably 8% to 10% of our total performance services revenue.
Okay, all right Thats helpful. Appreciate the color. Thanks.
Thanks, Steve.
Thank you and our next question comes from Ryan Daniels of William Blair. Your line is now open.
Yes, thanks for taking the questions maybe a follow up on that it was somewhat surprising to hear that in performance services, the cost management and quality and safety would be areas of focus or uncertainty. It seems like those would be kind of future proof regardless of who's in the office and if you're moving to value based care the need to improve margins and cut cost in particular seems prescient, so curious what might be driving that weakness.
You know Ryan I spend a lot of time, and Mike and Craig due to out with our provider member customers in what I would say is.
All this back and forth of regulatory programs and at the same time fee for service getting a 3% increase in the market basket payment rate.
Has made sort of staying in fee for service.
A little bit easier in the short term because a lot of the programs, even though the providers know that long term theyre going to need to assume more risk.
They're going to have to manage costs.
Even more intensely it's just lengthening the decision, making and slowing the urgency and momentum around it. So we continue to invest strategically for the long term.
We continue to pivot some of our assets to additional markets.
But it's just an urgency in momentum and decision making thing.
In the provider segment right now.
Okay. That's helpful color and then I don't know if this will ever come to fruition, but I'm curious what your thoughts are on the prescription drug pricing reduction act and the potential impact of section one on top of one nine.
And how they define bonafide service fees and what impact that could have in the GPR if anything.
Yes, so two different questions, we've seen a lot of regulatory proposals and programs, including that international pricing index kind of get rolled out pulled back rolled out again in a different form and so we think that one is is really hard to accomplish politically.
We do think the pressure on pharma pricing, which we have always supported pressure on pharma pricing because our goal is to lower the cost of pharmaceuticals for healthcare systems.
But we think that particular proposal is going to be very challenging to get.
Forward politically.
On the Bonafide fee question I think we have a very active advocacy group in Washington, We're very active in differentiating differentiating the GP low from Pvms and other things that.
That they are trying to work on and so for us.
Well, we're working very hard to make sure everybody understands the difference between the GP and the Pvms and others and we are not anticipating.
The effective that bona Fide service fee impact on Premier.
Okay, great. Thanks for the color. Thanks.
Thank you and our next question comes from Lisa Gill of Jpmorgan. Your line is now open.
Great. Thanks, very much and good morning.
First I just wanted to start with Mike's comment around hiring additional sales people on some incremental sales opportunities.
Are you talking around the GPO side of the business or were you talking on performance services or both of them and then secondly, as we think about the TPL business are you seeing anything that's changing either competitively or structurally in the business today.
So Lisa this is Mike just very quickly so in general we're hiring more commercial assets across the entire business. So.
We are hiring additional folks actually.
Recruit new Gtlds members, but.
From a sales perspective, I think a majority of the investments we want to make are in these new areas of.
Going after life Sciences, as well as in the high value network, So thats, where were making the big investments, that's where we're seeing obviously the bigger growth. So we're going to continue to make the investments in the commercial space for those two parts of the organization. The second part of your question was.
From a GPO perspective, we don't see structural changes in the way. The Gpos are operating we have had.
Great success over the last two years and significant recruitment of academic.
Health systems, we feel like the market is a more normalized market now for GP pursuits, we did launch our high compliance portfolio, which generate.
Double digit savings to healthcare systems started that over over a year ago, we will continue that.
Launching several new contracts in that portfolio. This year and so our health is if we continue with with a pilot for our end to end supply chain management, and I guess I would just describe it as our health systems really looking for.
Deeper and end to end supply chain support it's a competitive market. It continues to be a competitive market.
But we are taking sort of that total supply chain value proposition to to the customer base.
And since then would you say that that's really where you're differentiated I mean clearly your ownership structure is something that differentiates you from some of the other players in the marketplace, but outside of that.
Would you say, that's really like your competitive advantages today in the market.
I think there are two big competitive advantages one is.
That member retention renewal attachment long term relationship that Mike talked about surrounding the end to end capabilities in supply chain and performance services I think thats. One I think the second one really is all of those data assets in performance services when you've got data on 45% of the patients and you can connect that back to supply chain connect that back to total cost improvement and use that to get ready for value based care. Those are the distinct advantages we are having to deal with this CMS innovation project.
Revenue stream that that's being reduced or or even uncertain in total.
But I think that the overall relationship with members and all of the capabilities that we can bring long term. We think will continue to be a differentiator Susan if I could add just a couple of things on the technology. So Lisa to answer your question I think what differentiates us as we've been making a lot of investment in technology really to sort of control. The point of order. So that is very very unique to premier we've been making investments also to get all of this spend under management. So think of all the purchase services and spend that we traditionally don't really work on today.
We're making big investments, that's very very unique to us in terms of our capabilities. So we want to continue to differentiate along the lines of technology and then secondly, I would also say our contract manufacturing or direct sourcing capability is very unique to us as well, where we're actually contract manufacturing products.
Across the across the globe really to bring the best value back to our healthcare systems in the U.S.
Okay, great. Thank you.
Thanks Lisa.
Thank you and our next question comes from Michael Cherny of Bank of America Merrill Lynch. Your line is now open.
Good morning, Thanks for taking.
All the questions so far.
Thinking about a performance services again, you talked about some the government programs have run out is there any way to parse out what that revenue impact is.
In the outlook for next year versus what the underlying growth rate for performance services should be in and could become over time.
Yes, I think Michael specifically as I articulated in my comments that the government contract revenue was $14.4 million in fiscal 2019, Theres been nominal revenue through July and August we have factored in an assumption that the continuation of that program will continue through March and that we will have approximately six and a half million or so which is about 45% of that $14.4 million in fiscal 2020. So that is a 2% headwind to the growth rate in performance services overall, the government services program was about 4% of our overall performance services.
Revenue stream.
Thanks for the reiteration of that and then just turning back to cash flow.
Very strong finish to the year as you go forward I know you don't have any buyback built into the assumptions I know you talked about some M&A.
Is there anything more sizable that you think would make sense as part of the organization, whether it was helping to accelerate the value proposition to performance services are there any big Gpos that would make sense to drive scale for scale sake or at this point 60 plus billion of spend is more than enough to get you what you need.
No I think we're always looking for growth opportunities. So because we have such a wonderful balance sheet. We are continuing to look for anywhere that we can find revenue growth and synergies that make sense long term strategically.
We're going to be disciplined about that activity I think that we continue with the current and additional salespeople to be focused on GPS sales performance services technology sales and we continue to look at potential acquisitions, the whole supply chain and performance services.
Perfect. Thanks, Thank you.
Thank you and our next question comes from Jamie Stockton of Wells Fargo. Your line is now open.
Hi, Thanks for taking my questions.
I guess.
It sounds like there is there some headwind on the consulting business.
And you talked about the CMS contract, that's creating a little bit of headwind.
As well.
As far as.
You know.
I guess big regulatory issues that clients are focused on right now.
For.
Things that are overhangs kind of other than the election that people are really focused on that you're helping them work through.
Are there one or two big issues. It seems like your clients are focused on.
And I guess, maybe how are you helping them work through those issues. If you could just talk about that that'd be great.
Yes, so I think Jamie long term they are focused on eventually this movement to value based care. What's interesting is that a lot of the private payors follow what Medicare and Medicaid are doing so if if Medicare is slower in implementing some of those programs. The private payers are also slower in implementing some of those programs we fully expect.
When the pressure on Medicare and Medicaid continues from a from an overall cost perspective that that movement to accelerate long term and so are our health systems actually are continuing to participate and we're growing our bundled payment collaborative they're continuing to participate in our COO collaborative we've spoken before about MIP.
And the new payment models for physicians being less aggressive than they have been in the past and so we are seeing some softness.
In that space, which which we have seen for the last.
Year or two actually.
So I think it's really what I said before which is the question of urgency and momentum not a belief that long term. They are not going to have to reduce cost improve quality take risk and have the infrastructure to support all that which is what they will look for us look to us for.
Okay, that's great.
And then.
From an investment standpoint.
I mean, maybe you gave a number and I just missed it but as we think about the employer.
Focus and some of the stuff that you guys are still doing on the prior authorization front for the Salesforce investments that Mike mentioned.
Is there a number that we should think about.
As kind of what you're spending on incremental investments in 2020.
Versus 2019 sure Jamie This is Craig so as I indicated in my remarks, we invested about $7 million in 2019 and for those initiatives, primarily the high value network. The employer initiative and the continued integration of our clinical decision support.
Activities.
We anticipate we'll incur about $12 million of operating expense and Thats factored into the guidance ranges that we provided.
Okay. Thank you.
Thanks, Jamie.
Thank you and our next question comes from Mohan Naidu of Oppenheimer. Your line is now open.
Thanks for taking my question.
Couple of questions on the performance segment again.
I guess on the higher value care network.
Can you elaborate on what you expect.
Next couple of years, and if you compare our high value care network with CBS and applied Science research, which one will be segment should we anticipate to see more traction in the near term versus long term.
Yes. So this is Mike so in the near term, we expect to see much more traction in life Sciences, obviously weve been in that market for a number of years and it's really the evolution of what we're offering into that market. So in the past we've been offering retrospective quick kind of data slices and those kinds of things.
And then in the future it's going to be it's much more about real world evidence it's much more.
About predictive.
Capabilities and the ability to support.
Really the life sciences organizations as they are thinking about launching new therapies.
I think what's different today that we can offer versus in the past is really what we got through the acquisition with stance on health, which is.
Our ability to sort of take protocols and actually embed them into the workflow, which is very very unique for us and so we do think that that's a pretty substantial differentiation. It also.
We will support the whole focus on drug trials. So we think that leveraging that technology again is very differential that that for us that.
Life Sciences might see some value from a high value network standpoint, obviously, we're relatively new to this whole market.
I think the initial opportunities really are going to be getting our healthcare systems prepared from a data analytics and an advisory services standpoint, So thats, where we think we're going to see some initial revenue growth maybe longer terms, we see some opportunities from a PMPM PMPM standpoint.
Really supporting the benefit management of our large employers so thats the focus both short and long term.
Thanks, a lot for the color Mike.
Yes, one more quick follow up Craig on the changes in the control company exemption I guess the changes expected predominantly at the board composition level or do you need to make any operational changes because hope. This no. Yes. Thanks Mohan. This is Craig its board governance. So we will just have been planning for the recruitment of a couple of additional independent directors overtime.
And in order to get to a majority independent board within the one year timeframe.
Great. Thanks, a lot for taking my questions.
Thank you.
And our next question comes from Sandy Draper of Suntrust. Your line is now open.
Thanks, very much a lot of my questions have been asked and answered so maybe just.
More broadly when I think about how sick on performance services you guys did a somewhat of a portfolio evaluation on supply chain decided to get out of.
The segment there.
Have you got some of the same thing on performance services are there any areas that you see are underperforming and at some point, you're like what down the road. This it just doesn't really set for us.
And we may need to exit or you are you willing to look at that and then I guess the other question is.
Sounds like most of this is not competitive but I'm just wondering are there any.
Times, where you say or you see in the sales cycle that because you're not one of the big DHR vendors that.
You may have good product that people want to get everything from somebody like there I'm just trying to understand is that a factor here or is it really just the consulting business. The choppy market, but is how much is competition a factor in the growth. Thanks.
Two questions. There on the first question, we are always open to and evaluating the performance of all of our businesses and we spoke about Rightsizing you know as because were a diversified business as the market changes and some things are hotter some years than others.
We flex the business and we'll always look at how they're performing and we did make the decision to exit specialty pharmacy. So.
I think you'll continue to see us be disciplined about what we acquire end disciplined about how we manage the business going forward with an openness to any decisions that we need to make on the second question around each ours than the competitive market.
It's interesting I think each ours have been primarily work flow companies for health systems, and our stuff sits on top of all the HR Dizzy HR agnostic and really gives them the business intelligence they need.
And the.
Learning and opportunities for improvement that they need and what we've been doing with the acquisition of stance and is embedding those analytics into the work flow and I think when you're able to do that and you have not only the data from the health system from a workflow perspective, but you have all of this data on health systems across the country and you can embed that in the work flow and help providers make decisions.
That's where we think our differentiation is so.
We do we do see HR vendors, making investments and it is a competitive market for H.C.I.T. and for services.
But we think we are differentiated in the depth and breadth of our analytics that sit on top of all those DHR, it's as if I got one thing.
I think we've got a long history of actually working with our healthcare system to implement those changes so the wraparound capabilities that we offer on top of those analytics are very very unique to us as well and to differentiate us from the HRS.
Okay. Thanks, very much for the answers yes. Thank you.
Thank you and our next question comes from Saul for Burton from its research. Your line is now open.
Hi, Thanks for taking my question you mentioned, some near term regulatory uncertainty however over the long term with the changes to the risk sharing arrangements and the CMS Ceos are you.
Hearing any early signs from your customers as to whether or not they will continue any.
A two sided risk arrangement in.
So how that would.
Impact your engagements with these customers.
Thank you and I have one follow up yep. Thanks all.
Obviously, our providers, taking two sided risk requires more infrastructure and it's harder we have seen a maintenance and growth in our collaborative which which includes folks who are moving down that path.
And so what I would say is that it's.
We're retaining the customers we have there we are growing its own.
It's not growing at the rate that it was growing two or three years ago, because I think it's a bigger level of risk and because there is more uncertainty in the political environment, but we see we continue to see value based care double sided risk.
Both public and private payers as being the ultimate model for the future and we continue to make lots of operating and strategic investments in that infrastructure, because we believe that the long term future.
Okay great.
And just a quick housekeeping.
Yes did you go over the cadence of investment throughout the year.
And is there any way to qualitatively or range kind of the segment EBITDA margins that we should be expecting so for fiscal 2000.
Yes. This is Craig so relative to the 12 million dollar an incremental operating investments that we have factored into our guidance that that's relatively consistent throughout the year. So I wouldn't say, there's a tremendous ramp up or ramp down of that throughout the year, although probably a little bit more heavily weighted in the front half of the year, because we'll begin to get some of the revenue contributions that I highlighted in the back half of the year on which will offset some of the the ongoing investment there relative to EBITDA EBITDA segment EBITDA I did talk about the proportion of the EBITDA throughout the year, if you're asking about from an EBITDA margins perspective.
I would expect fairly consistent supply chain services.
EBITDA margins in fiscal 20, although with the slightly higher growth in our growth rate in our direct sourcing business, we're always going to have a little bit of a downward trajectory as time goes on relative to that so you know if you think overall in the in the mid Sixtys.
Low to mid Sixtys EBITDA margin for supply chain, it will probably tick down a point as the year progresses from performance services standpoint, I think the expectation would be we would continue to have EBITDA margins in the mid Thirtys, where we've been operating likely a little bit lower in the front half of the year given some of the lower revenue.
That we talked about and then you'll see some of that improvement in the back half of the fiscal year.
Great. Thank you.
Thank you and our next question comes from Stephanie Genco of Citi. Your line is now open.
Hi, guys. This is George Bang on for Stephanie Thanks for taking my question.
Could you provide some color on the early traction you're seeing for science and health and if there are any trends in the pipeline to call out.
Yes, I think the early traction really is as as Susan and I have both been mentioning it's really all about picking those analytics and embedded in the workflows. So we've been working with a number of our healthcare systems.
That have actually been leveraging our enterprise analytic service.
And then working with them and for the most part of service led by service line, but really taking those analytics and the insights that our analytics for driving and then writing it that information into the workflow and so that that's really sort of the recipe in terms of how we are driving that the market and I think this is Craig financially. The only thing I would add is that in fiscal 19. It was we were making an investment in that business. We had a couple of million dollars of revenue post acquisition, we are expecting significant growth in revenues in fiscal 20, and as indicated do expect it to be modestly accretive financially in fiscal 2021. Other area that we're focused on and that is the whole regulation around Panama, so putting all those requirements into the workflow that is another area of focus for us.
Got it that's helpful and you mentioned in your opening remarks, but can you just provide more color on the Magellan health collaborations.
So Magellan health, we're working with them on.
Building out capabilities around prior authorizations. So they have a lot of interest obviously, taking all the insights and the data and the capabilities.
That we've been building out and and using it.
Within their prior off keeper of capability.
And it's it's primarily focus towards utilization management. So there they are thinking about.
Obviously, what's the most efficient way to actually provide care to a patient and they really love our ability to sort of help them work through the appropriate utilization of procedures.
Within the clinical setting.
And Stephanie this is our this is our way in Q.
Payers and employers and connecting providers to payers and employers to when we talk about pivoting our assets to new market.
Stance and it definitely.
One of the ways that we're going to do that.
Got it that's helpful. Thank you.
Thank you.
Thank you and our next question comes from Richard close of Canaccord Genuity. Your line is now open.
Great. Thanks for the question. So just a follow up on the Magellan and Mike I think you said this earlier in terms of the.
Some of the newer opportunities maybe a per member per month on Magellan is that a pilot or will you just be will you be getting any revenue from that I'm just thoughts in and around.
That and then Susan maybe on some of the.
High value networks and the opportunities there what do you what are you thinking in terms of the total addressable market.
Opportunity on that side.
So so just just really quickly the Magellan just to answer your question is a pilot. So we're just we're trying to help them with sort of utilization protocols early early stages. So we're sort of working through the issues from a utilization standpoint, we are working with another large payer as well and in prior authorization.
Doing some very very similar stuff, but again. These are all just in the pilot phase.
Yeah, and as it relates to the high value network, we are on a new entrant into that market.
We're really trying to car our piece, which is what Mike said earlier and Thats how to help providers make sure. They can be included in these centers of excellence.
And they can have the right cost profile and the write up clinical outcomes and so for US. We think you know this is a three or 4 billion dollar addressable market. It for for that piece of it that we we think we can garner some revenue flow and so we're starting with prior authorization, we're starting with centers of excellence concepts, we're starting with how do we mobilize our footprint of providers to do some work directly with employers. It will also likely take the form of pilots in the short term with employers and then it will grow from there.
Okay. Thank you very much.
Thank you and our next question comes from Kevin Kellyanne W.P.S. Your line is now open.
Hi, Thanks, Thanks for taking my call.
Always appreciate the amount of detail around the guidance, but.
I'd like to dig a little bit on that and ask you.
To talk about which is if you were to break down the segments.
And understanding sort of where how you get to the midpoint of your guidance, but where do you think there is the most delta in any of the any of the four business lines that you kind of provide an outlook for upside downside what might drive that and which one has the highest delta which one do you think has the least amount of variability in it.
Sure. Kevin This is Craig. Thanks for the question you know what I would say, it's just Oh I'll answer the delta kind of magnitude and second if he if you think about the lower and upper ends what I would say as I talked about in the mid point the upper end of guidance clearly patient utilization trends impact our GPO. So to the extent that we were to see.
Improved utilization over the slightly flat to declining inpatient and outpatient that we've kind of consistently been seeing and the improvement in non acute that we've been seeing that would help us be on the upper end or if utilization were to significantly decline, which we don't anticipate that could push us to the lower end in the direct sourcing part of our business it's really.
Kind of the steady demand we have so if we see increased uptake from members for some of our commodity products that could push us to the higher end.
And the only variable I would say is the demand and the timing of some of those aggregated purchasing programs that we do can influence direct sourcing on the on the performance services side I wanted that probably the biggest volatility thing is the hint extension because to the extent that that does not get provided that is a 2% headwind within that guidance range that we would need to make up so that could push us to the lower end and then obviously.
The ongoing uncertain market and demand will dictate other opportunities and the expansion into life Sciences, and the employer network and our ability to bring on a couple of employers in fiscal 2000, so with all of that background I would say I would answer and I don't think it would surprise you that I think the the higher risk in terms of Delta is on the performance services side of the business versus the supply chain services side of our business.
That's very helpful.
We talk a little bit about the commodity products are you seeing increased competition, there from the wholesalers and distributors, who all seem to be pushing.
To get more higher percentage of their volume to be sort of white label or private label products. It's an interesting question. So we've been we've obviously had pressure from the distributors since the inception of the program in our focus is to continuing to scale. Our program figuring out who are the right partners to continue to vertically integrate with them and continue to drive down the costs. So in some cases.
We will partner with with them when that where it makes sense and in some cases, we'll continue our strategy to contract manufacturer for products.
Great guys. Thanks, so much.
Thank you.
Thank you and our next question comes from John Ransom of Raymond James Your line is now open.
Hi, John Man deepen the good morning, deepen the Qs, it's really hard to be clever, but.
Let me.
Well I think well, it's hard for me anyway, but let me just.
Step back.
I'm just trying to reconcile.
Mixed messages, we hear kind of through the channel so increasingly when you talk to providers.
They had soured on at least the ones we talk to and this is overwhelmingly for profit. So you have a different slice of the world, but the two reasons I think they've soured on.
Risk taking number one these these government programs or take forever to get let let's look at the dialysis industry Thats go and Fresenius had a bad experience with that the pioneer asias.
One thing is these government programs take takes forever to get the data and it's hard to sustain a growing profit stream when the expectations on saves get ratcheted up every year and like I said the data. The data is murky. The government programs haven't really worked out I don't think.
And then not to mention what you talked about with the pause in some of the orthopedic risk sharing and whatnot and then.
With the commercial side I've heard this expression the capitation trap you know can't say the dollar this year next year I'm going to say $1.20 next you're going to say $1.40 and eventually I guess, it's a heck of a lot easier to sustain.
Some type of growth on a simple fee for service model volume up one revenue up too.
Then it is to try to squeeze out more savings yet to ever ratcheting demands of payers and regulators. So is that it could get is it possible three to five years from now you are saying gosh, we made the wrong bet on risk sharing that it just really wasnt a good setup for the providers in the world Didnt move like we thought it would are we missing something there.
You know I think I think it's about time horizons right and I think that if you think about 10 11000 people joining Medicare everyday in the Medicaid Rolls expanded and you think about the challenges of the overall cost of care with all of the new treatments new drug is going to continue to be a global when I mean global us global budget problems for Medicare and Medicaid.
And so I think that one of two things, it's going to happen either there are going to be fee for service cuts to death.
Or there are going to be shift to risk based models, where people truly figure out how to more efficiently deliver the care and get to better outcomes.
What we are positioning the company for is the infrastructure to deal with a cost pressured environment in the short term.
And some kind of payment model in the long term.
That actually leads to.
More efficient delivery of care and the problem with fee for service is it doesn't deliver more efficient.
And quality of care and so so we're not we're not saying that all eggs are in a basket of risk based agreements.
What we're saying is it's going to be cost focused outcomes focused efficiency focused.
And some form of various payment models to try to get there and we think that when the economy is good and fee for service payments are going up it's easier to not not do anything or to enjoy that time, but we strategically as a company continue to prepare for what we think the future it.
But none of us have a crystal ball over exactly how long it's going to take in the tiny part of the reason that we're focused on employers as we think employers are increasingly frustrated with.
The inability to control that cost and they are seeking new ways to try to control that cost.
And so my.
Thank you for that.
Do you think in the let's let's take a foreseeable time horizon do you think the model evolves vertically or horizontally and what I mean by that is.
Global Capitation type agreements, where hospital system serve as many insurance companies and just all you can eat care for $600 a member a month or do you think it's going to be more vertical let's bundle. This total joint for $22000.57 is and you carve out specific procedures.
And it goes that way.
I think you're going to see bolt I actually think that you're going to end up seeing these broad based risked overlay population health models and within those models, you're going to see bundled payment models or DRG specific model or you know dialysis specific models oncology specific models and so I mean the challenge. We all have is that we're going to let it live in a messy world of multiple payment models and multiple ways of trying to solve the problem I think at the end of the day, we keep saying the ultimate problem to be solved is overall total cost is too much variation in care delivery is clinical outcomes that are not as expected and its access to care for the whole population and so you know it's going to take so many different forms, particularly when you have political administrations moving in and out and so you've got to we just have to stay focused on what the core problem.
It is.
That we're trying to solve for the health care industry at large.
Thanks, so much thank you.
Thank you and our next question comes from Charles Rhyee of Cowen. Your line is now open.
Yes, Thanks for squeezing me in here, Susan maybe a follow up to that you mentioned earlier on some of the expectations around.
You know some uncertainty.
Let's move to sort of election season here.
But when you look at you know programs like diabetes, the government's efforts within diabetes care, that's tended to move forward, regardless of the administration in the White House.
And it sounds like from your expectation that that spread regardless will well continue to move forward. When you talk to the the Healthland client health system clients.
What is it really more just uncertainty around rhetoric noise there little you don't want to.
The pause button, a little bit or is it.
Some view that there could be substantial changes that they don't want to get in front of.
Well I think it timing I think that they they know the overall concept is coming but when the programs are specific and they're very different.
Even even with different administrations the actual programs are different.
They almost in a way I think want to wait till they know what the program is to implement the infrastructure as opposed to what we're trying to do in terms of working with them to say, let's figure out how to build this infrastructure for cost management quality outcomes and assuming risk and then whatever form. These models take this infrastructure will work for.
But I think it's just a question of momentum and timing and the urgency with which they think they need to do it versus the.
If I talk to all of them all the time and I think they all think that that some form of a global model for payment is going to comment have to because we have to get to a more predictable a line item budget for Medicare Medicaid and healthcare cost for employers.
Oh, it's just really a question a question of urgency and momentum.
Okay. That's helpful and then just to drill down sorry.
Thanks, Dan real quick.
When you talk about the efforts you're doing with your health system clients to bed.
Or the decision support into the workflow is it right now just.
Traditional sort of clinical decision rules that are being built into the workload DHR or is this where we're trying to move costing information because you kind of talked about line. You know service line is that and if that's the case, which groups of doctors are we our health systems targeting first is it like the orthopedic practices or is it sort of primary care any kind of sense in which the rest of them will first be helpful. Thanks, Yes. So what I would say is think about it this way I think about it first being clinical content.
Meaning clinical protocols and guidelines and how to make the right decision for.
All your physicians I'm in the care that they're being deliberate so Stanton has lee over 400 for a clinical protocol.
Clinical decision support abuse cases, then from there think about new regulatory programs like this past month thing, which is clinical guidelines for imaging advanced imaging.
And a regulatory requirement that you go through those clinical protocol. So we're embedding that then think about what Mike talked about which is prior authorization with Magellan, meaning get to what are the guidelines that payers have for what they're going to approve or not approve and let's get that in the workflow. So all of that is in process right now with with Premier longer term think about all of our cost benchmarking and all of our supply chain formulary and think about our ability to take those analytics that sit in separate apps today and embed those in the work flow. So a doctor can see that he.
Using three cents when the average is 1.2 or he can see that he's getting ready to use up a product that's not on formulary. So we have we have big plans for where we want it takes dance and but the stuff. You described is already there today.
Okay, and that's helpful and then Craig maybe one just follow up when you talk about the performance services.
Back half.
Was it sounds like 55% of revenues more in the back half we're going to benefit from the investments. We made this year in the first half of this year.
How much of that ramp would you say is more from overall investments bearing fruit versus some of what we talked about the contract you know more meaningful contribution from Stansted and thanks.
Yeah, it's really a balance across really the three components I talked about so we'll be we do believe we'll begin to see contributions from the high value network. We will see some incremental growth we will see growth in the front half from stance in as well, but we'll see incremental growth in the back half the year from Stanton and then with the recruitment of sales professionals that weve been doing and will continue to do as they deliver sales those will convert to revenue in the back half of the fiscal year.
Okay, alright, thanks, a lot.
Thank you.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Susan de Vore for closing remarks.
Thanks, everyone for your time today I'm sure, we'll meet and we'll talk with many of you in the weeks and months ahead. Our next quarterly update is currently scheduled for November 5th. Thanks, So much and have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect.