Yahoo Finance R1 RCM Inc. (NASDAQ:RCM) Q4 2023 Earnings Call Transcript
R1 RCM Inc. (NASDAQ:RCM) Q4 2023 Earnings Call Transcript February 27, 2024
R1 RCM Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the R1 RCM Incorporated Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Evan Smith, you may now begin the conference.
Evan Smith: Thank you, operator, and good morning. Certain statements made during this call may be considered forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth plans and performance, including statements about our strategic and cost savings initiatives, our liquidity position, 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 results and our outcomes may differ materially from those included in these forward-looking statements and as a result of various factors, including, but not limited to, economic downturns and market conditions beyond our control, including high inflations, the quality of global financial markets, or the ability to timely and successfully achieve the anticipated benefits of potential synergies of the acquisitions of Cloudmed and Acclara, our ability to retain existing customers or acquire new customers, the development of markets for our revenue cycle management offering, variability in lead time of prospective customers, competition within the market and factors discussed under the heading Risk Factors in our most recent annual report on Form 10-K.
Certain results that will be referenced on this call may be rounded to the nearest whole number. We will also be referencing non-GAAP metrics on this call. For reconciliation of non-GAAP metrics to the most closely comparable GAAP metrics, please refer to our press release. Lee?
Lee Rivas: Thank you, Evan, and good morning, everyone. As I reflect on the last year, I want to share some of my learnings and why I believe we are in the strongest position in the company's history. I spent a great deal of time with current and prospective customers learning about their strategies, their needs and evolving provider market dynamics. The increasing challenges faced by providers has heightened their need for partners that can be flexible in how they deliver value over time. The conversations are centered around needing a partner who has a wide breadth of capabilities with the scale and technology to ensure they realize value quickly while also being confident in future cost, quality, and revenue yield improvements over time.
Customers want a partner who has the ability to apply AI and automation to an otherwise labor-intensive process, along with domain expertise to help them anticipate regulatory, labor, and technology challenges over time. They want a partner that can evolve with them and their patients' needs to improve the overall patient experience. We believe R1 fits this role with our ability to leverage structured and unstructured data from almost half of the acute and physician market, global scale, and a technology platform that is accelerating the application of GenAI and leveraging our datasets to build large language models and automation into the revenue cycle. I also spent time with our global operations team to support the continued execution and deployment of our end-to-end and modular solutions, including the recent onboarding of our largest new end-to-end customer.
Whether a customer wants an end-to-end solution with comprehensive support, a functional partnership across a targeted revenue cycle area, or modular solutions to accelerate, optimize and navigate revenue recovery, R1 has cross functional teams that are highly focused on performance management and capable of expanding with customers over time. We have the flexibility to enter into more managed services deals with functional and modular capabilities that address near-term pain points for a broader set of customers. This also brings the potential for higher blended margins while establishing embedded opportunities to expand into an end-to-end partnership in the future. I would also point out that our modular solutions, which drive higher margins and are a significant portion of our adjusted EBITDA, are already deployed successfully with more than 500 customers.
We believe this is a great anchor for cross-sell and expansion opportunities. As a team, we have also spent time focused on our core operations, stabilizing key metrics for several customers, aligning our global resources to deliver functional solutions at scale, and continuing to advance our technology leadership and initiatives. We believe these efforts will create new opportunities to deliver increased value to our customers, further reduce our operating costs and enhance our growth. It has been a productive year and one where I believe we have made significant progress and have built a solid foundation for sustainable growth and strong financial performance over the coming years. Our full 2023 results demonstrate our commitment to delivering value for our customers.
We delivered $2.25 billion in revenue, strong adjusted EBITDA of approximately $614 million, with adjusted EBITDA margins of 27%. We delivered double-digit growth driven by the full ramp of new end-to-end customers and continued strong performance in our modular solutions. This growth highlights the market demand for our solutions and our ability to effectively leverage our global operating scale. As we consider 2024, we expect revenue of $2.625 billion to $2.675 billion, and adjusted EBITDA in the range of $650 million to $670 million, including contributions from both the Acclara acquisition and Providence commercial contract. As we outlined in our earnings release, our 2024 outlook reflects continued underlying growth across R1's business, including low single-digit growth in our existing end-to-end customer base, offset by customer facility divestitures and previously disclosed customer attrition, as well as continued double-digit growth in our modular revenue.
We entered the year with more than 90% of our modular and other revenue target already booked or recurring from 2023. And last, we expect that the Acclara acquisition and Providence contract will provide incremental growth in 2024 and more than $625 million in revenue and $185 million in adjusted EBITDA by year five. Jennifer will cover the fourth quarter and full year 2023 financial results and our 2024 financial outlook in more detail. But first, I would like to give a quick business update on our 2023 achievements and 2024 focus areas. First, demand for R1 solutions remain strong as the industry continues to face financial pressure, regulatory complexity and labor challenges. Continued strength in our modular bookings, combined with the acquisition of Acclara and the Providence end-to-end deal demonstrates our continued ability to drive growth as well as increased diversification within our business.
The acquisition of Acclara and resulting 10-year partnership with Providence represents a significant growth opportunity and marks the first cross-sell of an operating partner relationship into the Cloudmed base. This was a key investment thesis of the Cloudmed acquisition. While all the opportunities may not be at this scale, the Providence relationship demonstrates the significant potential within the current customer base. In addition, R1 has already seen initial traction for a go-to-market activity leveraging our flexible model, which we believe will add new opportunities in the near term with solid embedded growth potential over time. As an example, late in the fourth quarter, we signed a smaller NPR customer who is initially interested in our end-to-end solution.
Working closely with their leadership, the R1 team assessed their financial needs as well as their operational setup and determined the best path forward for both parties was to enter into a managed services and modular offering partnership. The deal includes full outsourcing of their back office, and we anticipate adding at least four additional modular solutions by the end of the year. Second, R1 continues to apply technology to the revenue cycle to help our customers drive down costs and increase revenue yield. We expect to continue to invest, develop and deploy new technology solutions, enhance processes and leverage our global scale to address critical issues for the customer base. With more than 500 customers now representing over $1 trillion of covered NPR, we have a growing structured and unstructured dataset based on over 500 million patient encounters annually.
We believe our global footprint, including approximately 30,000 employees across the U.S., India, and Philippines, along with access to this real-time performance data, will enable our GenAI and automation initiatives to deliver optimized revenue yield at a lower cost more quickly. We believe GenAI and, more specifically, large language models will power incremental automation throughout many parts of our business and the provider revenue cycle. Our initial focus areas are in denials automation, next action prediction for our AR management teams, coding automation, and revenue intelligence rules improvement, which represent some of our largest areas of operational spend. In the most recent quarter, we rolled out several new models, one of which is available to thousands of our AR follow-up staff members.
When one of our operators opens an account to work, oftentimes that account has been worked before, perhaps multiple times, and frequently the operator begins by reading the account history to understand those details. With this new feature, the operator is immediately presented with a summary of the relevant details and current state of that account. This is a foundation for predicting what the appropriate next action should be and then automating that action when possible. Third, as I mentioned, legacy Cloudmed solutions have been and will continue to be a key driver for the company's growth and profitability, accelerating our technology roadmap and enhancing our opportunity with a larger potential customer base. In addition, the synergy realization from the Cloudmed integration is progressing very well.
We delivered approximately $30 million in synergies in 2023 and anticipate an additional $20 million from Cloudmed synergies in 2024. We believe this success provides additional confidence in our ability to meet or exceed our synergy targets for the Acclara deal. Finally, we have executed several initiatives to strengthen our operations and customer service. We believe these initiatives will create a strong foundation for embedded and sustainable growth in revenue, adjusted EBITDA and free cash flow. In summary, as I said at the beginning of last year, 2023 was a year of execution, and we delivered on several priorities. We stabilized our customer metrics, realized synergies ahead of our targets, strengthened and diversified our customer base, including signing Providence, which positions the company to create a solid growth outlook for at least the next several years.
We accomplished all of this while addressing several challenges in the base business, which are reflected in our 2024 outlook. We are leveraging the full scale of our global capabilities and deploying both functional models and managed services, which will better leverage our platform and provide greater flexibility to address each customer-specific needs. We believe this better aligns resources, objectives, and responsibilities. In 2024, our team will continue to expand upon these focus areas by: one, ensuring our go-to-market strategy aligns with our customers' needs in order to meet them wherever they are in the revenue cycle journey; two, continuing to deliver excellent results to our customers who have recently onboarded or who have long-standing relationships with R1; three, executing against our technology roadmap to drive measurable results; and four, focusing on operational excellence to drive improved financial performance, which in turn will deliver improved shareholder value.
Now, let me turn it over to Jennifer to discuss financials.
Jennifer Williams: Thank you, Lee, and good morning, everyone. We are very pleased with our financial results for both the fourth quarter and for the full year of 2023, as well as the forward progress we are making as a business. In 2023, we were focused on three key financial objectives: one, continued revenue growth; two, operational execution and cost discipline to drive margin expansion; and three, improved cash generation and pay down of outstanding debt. We made significant progress across all three objectives despite some headwinds to the overall business. These results would not be possible without the contributions across our team. I would like to thank all 30,000-plus of our global associates for their continued efforts to deliver results for our customers and our shareholders.
This morning, I would like to walk you through our fourth quarter 2023 financial results, our full year results, and then spend some time on our 2024 outlook. We delivered solid results in the fourth quarter with revenue of $575.1 million and adjusted EBITDA of $167.7 million, demonstrating continued strength across our business and the ability to manage cost effectively to drive operating leverage. Revenue in the quarter grew almost 8% year-over-year. Let me provide a little more detail on the revenue drivers. Our net operating fees of $369 million increased 7% year-over-year. Growth was driven by the onboarding of new business that annualized in the fourth quarter as well as continued low single-digit growth in cash collections from our existing end-to-end customer base.
Our incentive fees were $24 million and in line with our expectations. Our modular and other revenue posted another strong quarter with revenue of $182 million. Double-digit revenue growth year-over-year was primarily driven by cross-selling solutions to our existing customers. Turning to expenses for the quarter. Non-GAAP cost of services in Q4 was approximately $358 million, down $6.8 million year-over-year and down nearly $7 million from the prior quarter. The year-over-year decrease was primarily driven by margin maturity across customers onboarded in 2022 combined with synergy realization from the Cloudmed acquisition. Non-GAAP SG&A expenses were nearly $50 million, up 15% from the prior year. The fourth quarter included a provision for credit losses of $10.5 million related to our receivables.
In particular, two customers account for the majority of the charge due to specific factors in their business and the current macroeconomic environment. Excluding the impact of the provision, SG&A expenses were down 7% year-over-year, driven by synergy realization, offset by investments we are making in technology. Our adjusted EBITDA in the fourth quarter was $167.7 million with growth of 33.5% year-over-year and margins of 29%. Revenue growth combined with continued cost discipline and execution of our integration priorities drove these results. Lastly, in Q4, we incurred almost $29 million in other expenses related to Cloudmed technology and integration efforts as well as facility-related charges. Other expenses also includes roughly $5 million of transaction costs for the Acclara acquisition we announced in early December.
Other expenses decreased by almost $19 million or 39% year-over-year as our teams progressed through the integration. And as Lee mentioned earlier, we realized more than $30 million of cost synergies from the Cloudmed acquisition in-year. Our fourth quarter results bring our full year revenue to $2.25 billion and adjusted EBITDA to approximately $614 million. Our full year margin was 27%, up nearly 380 basis points, driven by our revenue growth, mix of revenue across our solutions, continued operating discipline and synergy realization. Now, let me provide a couple of comments on cash flow and the balance sheet. As I previously mentioned, cash generation has been a focus over the last year and we've seen a significant improvement in cash flow in 2023.
Cash and cash equivalents at the end of December were $173.6 million compared to $164.9 million at the end of September. For the full year, we generated $340 million in cash from operations, and we are very pleased with our execution in this area. We also fully paid down our outstanding balance of the revolver, totaling $60 million in the fourth quarter and $100 million across the full year. As a result, net debt at the end of December was $1.48 billion with a net leverage ratio of 2.25 times. Our liquidity also remained strong with approximately $772 million at the end of December, both from cash on our balance sheet and availability on our revolver. As we announced last month, we completed the acquisition of Acclara in January for $675 million of cash and a warrant to acquire up to 12.2 million shares of common stock.
The company funded the cash consideration and related fees and expenses with cash on hand, additional borrowings of $575 million in term B loans and an $80 million draw on the senior revolving credit facility. Now, let me move to our 2024 outlook. For 2024, we expect revenue of $2.625 billion to $2.675 billion, growing 16% to 19% year-over-year, GAAP operating income of $105 million to $135 million, and adjusted EBITDA of $650 million to $670 million with growth of 6% to 9% year-over-year. These expectations reflect the 2024 impact of both the contribution of Acclara and the new contract with Providence. Our guidance also assumes low-single-digit year-over-year growth for our base net operating fees, driven by improved cash collections. In the fourth quarter, our base customers were generally at their go-forward run rate of $369 million.
Adjustments to this run rate include normal seasonality and the impact of attrition and facility divestitures we expect to occur in 2024. Customer attrition is related to APP and pediatrics as well as the impact of facility divestitures we expect for two customers, including several AMITA Health hospitals which were part of the Ascension and AdventHealth JV dissolution as announced in 2022. In addition, we expect Providence to contribute net operating fees of approximately $45 million to $50 million for the year beginning in the second half of 2024. While we continue to have constructive conversations with Sutter leadership on scope and timing, we have excluded any contribution from Sutter Phase 2 in our 2024 outlook. We expect modular and other revenue, excluding the impact of Acclara, to grow low double-digits.
This includes the following assumptions: mid-teens growth for legacy Cloudmed solutions, and low single-digit growth in the legacy R1 modular business. And finally, we expect Acclara to contribute approximately $290 million to $295 million in revenue. We are in the process of determining the classification of Acclara revenue between net operating fees and modular and other revenues, and we'll provide more detail when we report our first quarter results. We expect adjusted EBITDA to be in the range of $650 million to $670 million. Within this outlook, we expect Acclara to contribute approximately $25 million to adjusted EBITDA. And based on the upfront investment for the ramp of the Providence new business, we expect the Providence contract to have a negative impact on adjusted EBITDA of approximately $45 million in 2024.
Excluding the impact of Acclara and Providence, core adjusted EBITDA margins are expected to increase approximately 200 basis points. We also expect significant improvement in 2025 adjusted EBITDA margins through synergy realization and the maturation of the Providence contract in 2025. This outlook also assumes capital expenditures of approximately 5% of revenue; other expenses of $105 million to $125 million, including Acclara transaction and integrated-related expenses; interest expense in the range of $160 million to $165 million, which includes the impact of the incremental $575 million in term B loans and the $80 million draw on the revolver related to the acquisition of Acclara; depreciation and amortization expense of $330 million to $350 million.
We will update depreciation and amortization guidance in future quarters once the Acclara acquisition purchase price allocation has been completed. As Lee stated, we believe we have established a solid foundation for future growth and performance. We remain focused on the opportunities ahead of us in four key areas: number one, delivering value for our existing customers; two, expanding our market position with new customers, including Providence and other new modular wins; three, operating discipline and execution; and four, automation through technology. We are optimistic that our focus in these areas will allow us to deliver sustainable revenue growth, operating profit and free cash flow in 2024 and beyond. Operator, I will now turn it back over to you.
Operator: [Operator Instructions] Our first question comes from Craig Hettenbach from Morgan Stanley. Your line is now open.
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