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Executives

Robert P. Borchert - Senior Vice President of Investor & Corporate Communications

John A. Bardis - Founder, Chairman, Chief Executive Officer and President

Keith Lee Thurgood - President of Spend and Clinical Resource Management (Scm) Segment

Michael Patrick Nolte - Chief Operating Officer and Executive Vice President

Charles O. Garner - Chief Financial Officer and Executive Vice President

Analysts

Michael Cherny - ISI Group Inc., Research Division

David Larsen - Leerink Swann LLC, Research Division

Ryan Daniels - William Blair & Company L.L.C., Research Division

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Frank Sparacino - First Analysis Securities Corporation, Research Division

George Hill - Citigroup Inc, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

MedAssets (MDAS) Q4 2012 Earnings Call February 20, 2013 5:00 PM ET

Operator

Ladies and gentlemen, hello and welcome to today's MedAssets Fourth Quarter 2012 Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Robert Borchert, so that we may begin. Please go ahead.

Robert P. Borchert

Thank you, Naisha, and good afternoon. With me today are John Bardis, our Chairman, President and CEO; Mike Nolte, our Chief Operating Officer; Chuck Garner, our Chief Financial Officer, and Rand Ballard, our Chief Customer Officer. Also on the line with us is Keith Thurgood, who joined MedAssets in late January as President of our Spend and Clinical Resource Management segment. We're including a slide presentation in conjunction with today's conference call and webcast. A copy of the slides is posted in the Investor Relations section of medassets.com under Events and Presentations.

As usual, we'll be making some forward-looking statements on today's conference call regarding MedAssets' expected financial and operating performance, which may be affected by risk factors that are described in detail in our periodic filings with the Securities and Exchange Commission. There are also risk factors not presently known to us or which we consider to be immaterial that may adversely impact our performance. Therefore, actual results may differ materially from our forward-looking statements discussed today or in the future. MedAssets assumes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Today, we will discuss certain non-GAAP financial measures. For more information, please refer to reconciliation schedules and footnotes in today's earnings press release, which are posted in the Investor Relations section of medassets.com and included in today's presentation materials. [Operator Instructions] Thank you. And now I would like to turn the call over to John Bardis

John A. Bardis

Thank you, Robert, and good afternoon, everyone. This afternoon, I will provide a brief recap of our 2012 financial and operating performance, as well as some perspective on the healthcare industry trends we are experiencing, as well as MedAssets' long-term growth targets. Mike will review additional highlights of our operating performance in 2012, as well as our priorities for 2013. Then Chuck will review our fourth quarter and full year 2012 financial results and outline our financial guidance for 2013. We will be providing further details next Thursday, February 28, when we host our Investor Day in New York City.

We kept up an outstanding 2012 with solid fourth quarter results that again demonstrate our improving operating performance. We achieved total net revenue growth of 4.5% versus 2011's very strong fourth quarter, which included over $15 million of performance-related revenue compared to $4.5 million in the fourth quarter of 2012. Adjusted EBITDA reached $55 million and adjusted earnings came in at $0.27 per share, which was at the high end of our guidance.

For the full year, total net revenue increased 9.5% over 2011 to $640 million. Adjusted EBITDA was up almost 13% to $207 million and earnings grew 14% to $1.13 per share. Free cash flow was $91 million or about 44% of adjusted EBITDA, enabling us to produce financial leverage through debt prepayment. We also refinanced our bank debt to take advantage of lower interest rates and reduce our future interest expense. So overall, excellent operational financial results across our enterprise.

Over the course of 2012, we continued to further improve our business operations and build upon the foundation we put in place in 2011 around more stringent operating discipline, measurement and accountability. So solid performance overall from our team. At the same time, MedAssets has continued to gain market share.

In 2012 alone, we signed nearly 30 group purchasing agreements with leading healthcare organizations, and more than 300 customers also purchased at least one new Revenue Cycle product or service from MedAssets. In addition, we signed a number of key renewals, most recently extending our group purchasing agreement with The Resource Group, a subsidiary of Ascension of Alliance. We've also strengthened our management team. Our extensive search for the President of our Spend and Clinical Resource Management segment found the right leader in Keith Thurgood. Keith will provide strategic direction and operational leadership for our SCM segment and is a seasoned professional who will contribute his valuable experience and insights as a member of our executive committee. As Robert mentioned, Keith joined us last month and brings a breadth of relevant leadership experience to MedAssets, following a highly distinguished business and military career. He most recently served as deputy commanding general and chief of staff for the United States Army Reserve, and has previously held senior operating and supply chain roles with Sam's Club, PepsiCo and Frito Lay. In 2006 and 2007, Keith served our country in the United States Army as commanding general of the 143rd Logistics/Forward Command and deputy commanding general of the 377th Theater Support Command supporting logistics operations in Iraq, Kuwait, Afghanistan and the Horn of Africa. It's my pleasure to introduce Keith Thurgood, our SCM segment President. Keith, would you like to say a few words?

Keith Lee Thurgood

Thank you, John. It's a pleasure to be on the MedAssets team. I've been impressed with the company's culture and the caliber of talent, and I'm really excited to have joined this team in this period of unprecedented change in our nation's healthcare industry. MedAssets is well positioned to help healthcare organizations achieve both their mission and their major goals, while at the same time navigating through this very complex and challenging environment we find ourselves in. Our approach to managing cost and process and clinical resource utilization to drive to work performance improvements and higher quality outcomes and at the same time lowering cost, I believe, is second to none. And it's anchored by the most innovative and progressive healthcare GPO in the industry. I'm fortunate to have an outstanding team of great leaders and managers and teammates here in our SCM segment. And I look forward to building on the MedAssets foundation of excellence to enhance the quality and the efficiency of our country's healthcare delivery system. It's a great team and I'm excited to be here.

John A. Bardis

Thank you, Keith. It's our unique position in the healthcare marketplace that I believe should enable MedAssets to achieve both higher and more consistent revenue growth and operating leverage over the next several years. Thus, we are targeting 10% revenue growth and 15% earnings growth by 2016. To be clear, this is not specific guidance nor is it our 2014 guidance, but we wanted to share our targets with you. While we continue to execute on our operational improvement activities, we are also increasingly focusing the company on innovation. If we are successful, we would expect to see our gradual -- see a gradual expansion of the top line growth towards 10% and the resulting leverage as a result of the way our P&L functions. Coming off a strong 2012, where we realized the number of upside revenue gains on top of the operational improvements achieved by our Revenue Cycle Management segment led by Greg Strobel, we should naturally expect a slightly lower rate of growth year-over-year into 2013. However, we think longer term about our business prospects and I believe, together, we need to push ourselves to drive more consistent and a higher rate of revenue growth through innovative ideas and strategy to capture a greater share of opportunities within this evolving healthcare marketplace that MedAssets is well positioned in today. I, along with Keith, Mike and Greg Strobel, will continue to be responsible for implementing operational improvements, while also defining and implementing our innovation and growth initiatives.

The steps for delivering long-term growth are easy to write on a slide, but success comes from the ability to deliver consistent results within our core businesses and then executing on the innovation opportunities for future growth. Our ability to maintain consistent performance and the strong market positions held by our Revenue Cycle and Spend and Clinical Resource Management segments will only improve our ability to innovate and take advantage of the right growth opportunities. Today, MedAssets has a comprehensive set of cost and revenue management capabilities that are highly relevant in the current fee-for-service environment. We're also working to aggressively extend our market reach, help health organizations transition to a fee-for-value environment. We can do this by connecting the points to help providers better manage costs, process and payment by reducing clinical variation, thereby helping improve patient outcomes and satisfaction. Whether a provider is involved with a traditional fee-for-service or a fee-for-value payment model, reducing cost first and leveraging overall clinical resources is a winning value proposition in any event.

I'd like to share a recent customer example on how we are using our Lean process improvement capabilities led by physicians. The health system was able to reduce the length of stay of implantable hip and knee patients by almost a full day to under 3.5 days with much lower clinical variation. This also drove substantial cost savings and a more protocol-driven environment, which should position the health system well for bundled payments since the costs are lower and much more predictable. I just want to point out that as you look at our Revenue Cycle products, and in particularly our SaaS-based tools, fee-for-value and fee-for-service variation will continue, and having realtime data interacting with those operating systems to make sure that revenue management works better will continue to be a front and center issue for these institutions. As the market continues to evolve, I believe clinical coordination and integrated performance improvements are critical to the future provider success of U.S. hospitals. Reimbursement is headed lower and we will be more tied to quality outcomes. So healthcare organizations need to focus on optimizing resource and product utilization, as well as reducing lengths of stay. MedAssets has the expertise, and addressing these clinical delivery issues can help drive better customer margins today, as well as positioning them to achieve optimal revenue capture long term. But there are still many questions about the pace of change coming from healthcare reform. We know the potential changes and challenges are beginning to affect decision-making by healthcare organizations as we speak. We believe this is creating opportunities for MedAssets given the comprehensive solutions and value proposition we offer. And we will continue to focus on an innovation agenda to further extend those capabilities. Now let me ask Mike Nolte to comment on our 2012 accomplishments, as well as our 2013 operating priorities. Mike?

Michael Patrick Nolte

Thank you, John. Improved execution and accountability across both of our business segments drove our financial success in 2012. Some of that success had onetime benefits, but much of the work laid the foundation for more predictable, more sustainable performance. In our Spend and Clinical Resource Management segment, our operating success included a big step forward in integrating our group purchasing contract portfolio, which is now more than 75% complete. Additionally, our unique Pre-Commitment Program is a triple win for healthcare providers, vendors and MedAssets. The contracted awards delivered more than 17% average savings to our customers, vendors gained guaranteed purchase volume and market share growth, and MedAssets earned higher administrative fees as a result.

In 2012, we also improved SCM operations and client delivery with a Lean focus on reducing process time on contract availability and in our responses to customers. We also launched MedAssets' advisory solutions, which is our integrated consulting, analytics and process improvement offering. Our solution takes our existing powerful capabilities and aligns them to deliver a C-suite approach. It includes offerings that support efficient Lean operations, reengineered care processes and alignment to optimize reimbursement with the evolving payment methodologies. We'll talk more about this next week at our Investor Day.

Within our RCM segment in 2012, we continued to address our revenue issues. We improved results through fewer customer credits, lowered attrition and enforced value capture of CPI increases. We also fully implemented a small number of sizable Revenue Cycle Services customers to a peak revenue run rate. In addition, we further aligned incentive plans across sales, client management and operations with our expectations and improved collaboration. Finally, we added experienced leaders to the Revenue Cycle service and support organizations, and launched a series of investments and new operational improvement initiatives to support an enterprise-class service, support and delivery organization. We also began a multiyear investment in infrastructure and application deployment, and this will continue through 2013 to ensure that we have the right platform to take full advantage of our market opportunities for the next decade of growth.

MedAssets, as John mentioned, is well positioned in a growing market, and we will continue to invest aggressively in new and existing customer relationships to upsell and cross sell our differentiated solutions. One high-value opportunity remains increasing GPO contract utilization, while we add contract coverage for existing and future customers. We also see opportunity to expand our reach through our workforce management offerings. Labor comprises about 50% of the health system's total expense, and we have the tools to help manage internal and external clinical labor to reduce workforce costs, while maintaining required staffing levels and improving productivity.

In 2013, we will also continue to improve commercial execution across the company. This includes driving deeper partnerships that leverage the full breadth of MedAssets, as well as ensuring that we grow individual products and services with an eye towards reaching full customer potential. As we look to extend our existing solutions, we plan to take advantage of a number of products and service adjacencies or add-on capabilities that could drive greater sales momentum. For example, there's a significant customer need for procurement capabilities, including everything from transaction management to staffing, to full outsourcing and accountability for our procurement function. Historically, when we take more control of these activities, it leads to lower cost for our customers and significantly higher compliance to our GPO vendor contracts. We also continue to see increased market traction around new reimbursement technologies for bundled payments, as well as our consulting expertise as customers transition to more complex reimbursement models.

Finally, our advisory solutions offerings will increasingly touch core critical operations in healthcare systems, including everything from emergency departments to operating rooms to new facility design and construction. As we move forward on a stronger foundation, we see several opportunities to develop new solutions that address emerging market needs through internal development or in partnership. One example is integrated analytics where we will bring existing solutions together to model scenarios and other predictive data as our customers take on increased quality cost and reimbursement risk in the future.

In summary, we believe we are uniquely positioned to enable our customers to navigate successfully in an increasingly complex industry.

With that, I'll pass the call to Chuck to provide some details of our financial results and our future outlook.

Charles O. Garner

Thanks, Mike. As with past quarters, I'd like to refer you to our financial and other non-GAAP reconciliation schedules in today's press release and on our website for additional details on comparative year-over-year performance. Please note that full year 2011 included approximately $6.2 million in acquisition-related purchase accounting revenue adjustments.

On a consolidated basis, our fourth quarter total net revenue increased 4.5% to $163.8 million when compared to the fourth quarter of 2011. This was driven by solid results across our enterprise, consistent with the performance we experienced throughout 2012. We exceeded our revenue guidance primarily from growth in our revenue single services and technology offerings, as well as SCM consulting and service solutions. We generated total adjusted EBITDA of $55 million or a margin of 33.6%, a 2.4% increase over the fourth quarter of 2011 despite significantly lower performance fees in Q4 of 2012, as expected.

We incurred debt extinguishment charges in the fourth quarter of 2012 to write off $28.2 million of deferred financing costs and original issue discount, as well as a swap termination expense concurrent with entering into our new debt arrangement. This was a primary driver of our GAAP net loss in the period, which also lowered our effective tax rate and thus, lowered our tax benefit. The net of tax of our refinancing was approximately a $0.03 per share dilution to Q4 given the tax rate impact from the refinancing.

We reported adjusted earnings of $0.27 per share, which was at the high end of our guidance range versus $0.32 per share in 2011 fourth quarter. As a result of our GAAP net loss in the fourth quarter, our basic and fully diluted share counts were the same, resulting in a $0.01 per share benefit.

Turning now to our revenue detail, which breaks out our performance-related fees, net revenue in the Spend and Clinical Resource Management segment declined 3.9% versus 2011's fourth quarter as expected, but came in near the high end of our guidance. In our Revenue Cycle Management segment, net revenue increased 20.6% over the fourth quarter 2011 driven by growth from services customers, as well as growth in technology subscription revenue from new and expanding customer relationships.

Consolidated net revenue included a total of $4.5 million of performance-related fees versus $15.1 million in the fourth quarter of 2011. Approximately 95% of the performance fees were in the SCM segment. Excluding performance-related fees, total net revenue grew 12.4% over the fourth quarter of 2011.

Turning to our second-level financial results, our SCM segment adjusted EBITDA margin declined 367 basis points from 2011 to 44.5% due to the lower year-over-year performance-related fees, as we've mentioned previously. Revenue Cycle Technology comprised about 69% of fourth quarter RCM segment revenue and grew 10.6%. Services revenue increased 50.8% from the fourth quarter of 2011, as we implemented a small number of large customers and also benefited from consulting services revenue.

Fourth quarter adjusted EBITDA margin in our RCM segment improved 164 basis points from 2011 to 27.7% due to operating leverage from Revenue Cycle Services. For full year 2012, our consolidated total net revenue increased 9.5% to $640.1 million driven by solid results across our enterprise. Total adjusted EBITDA increased 12.6% over 2011 to $207.3 million. The adjusted EBITDA margin of 32.4% expanded 89 basis points over 2011.

We reported a GAAP net loss of $6.9 million related to the debt extinguishment mentioned earlier. Our full year 2012 adjusted earnings were $1.13 per share or a 14.1% increase over last year.

Looking at our full year revenue detail in our Spend and Clinical Resource Management segment, net revenue grew 6.3% versus 2011. Excluding performance-related fees of $20.5 million in 2012, our SCM segment net revenue grew 7.7%. In RCM segment, net revenue increased 15.1% over 2011, driven by growth in services, consulting and technology subscription revenue. Importantly, we benefited from the diligent efforts of our revenue single operations, sales and client management teams that in 2012, resulted in fewer customer credits, discounts from early renewals and attrition, as well as CPI increases. The combination of these onetime improvements, as well as those in forecasted services and consulting revenue, we estimate accounted for approximately 4% to 5% of our RCM revenue growth over 2011. We recognize the total of $22.9 million of performance-related fees in 2012 that comprised 3.6% of total net revenue, of which approximately 90% was in our SCM segment. Excluding performance-related fees from both years, our total net revenue grew 11.4% over 2011. On a segment basis, our SCM segment adjusted EBITDA increased by $11.2 million or 6.8% over 2011. Margin increased 20 basis points due primarily to the change in the allocation of indirect corporate expense, which we've discussed previously.

Revenue Cycle Technology comprised about 69% of full year RCM segment revenue and grew 12.3%. Revenue Cycle Services revenue increased 21.6% over 2011 results and included about $2.4 million of performance-related fees. Full year adjusted EBITDA margin in our RCM segment improved 95 basis points to 24.1% as we benefited from operating leverage from services fees and technology subscription revenue, as well as the onetime operating improvements discussed earlier.

At December 31, balance sheet reflects $871.3 million in total bank and bond debt net of cash, and during the fourth quarter, we entered into a new debt agreement. Assuming LIBOR remains constant, we expect the results will be approximately $6 million in annual cash interest savings as the new term loans have a blended interest rate of approximately 3.6% per annum compared to 4.9% previously. Net debt outstanding at year-end was approximately 4.2x our trailing 12-month adjusted EBITDA. And this compares to our current maximum leverage ratio covenant of 5 3/4x, which steps down to 5 1/4x on March 31 of 2014.

For full year 2012, free cash flow was $91.4 million or 44.1% of adjusted EBITDA. This was stronger than previously expected due to a lower cash tax impact and lower networking capital requirements. And we will continue to use our free cash flow primarily to pay down debt.

Turning now to our financial outlook, today, we're initiating our 2013 financial guidance. We expect SCM net revenue to be in the range of $414 million to $422 million, which will be an increase of 6.2% over 2012 at our guidance midpoint. Net revenue growth in our RCM segment is expected to grow 5.1% at the midpoint to a range of $255 million to $263 million as we benefited from a number of onetime items that adds approximately 4% to 5% to our 2012 revenue growth rate.

Our 2013 consolidated net revenue is expected to be in the range of $670 million to $684 million, or an increase of 5.8% over 2012 at the midpoint of our guidance. Our adjusted EBITDA guidance rate -- range is $215 million to $225 million, which implies a margin of 31.8% to 33.2%. As we mentioned last quarter, we are making investments in operational and technology infrastructure as part of our long-term plan to improve performance and to support their future growth. We will continue to make prudent trade-offs between investments and infrastructure innovation in order to both sustain and differentiate MedAssets in the future.

Given this investment focus and depending on our revenue mix between a higher margin GPO and software revenue and lower margin consulting and services revenue, we expect our adjusted EBITDA margin to be in the range of a 63 basis point decrease to an 84 basis point increase. We expect adjusted earnings per share in the range of $1.22 to $1.32, or an increase of 12.4% at $1.27 midpoint. We expect to generate free cash flow of $80 million to $90 million, which would be a 35% to 40% adjusted EBITDA conversion rate and should include approximately $15 million to $25 million of cash taxes. Our effective tax rate for 2013 is estimated to be an average of 40%.

Interest expense is expected to be substantially lower this year due to our new debt agreement and our continued focus on paying down debt. Depreciation expense is increasing about $11 million over 2012 to approximately $43 million as developed software is put in service. And capital expenditures are expected to be in the range of $55 million to $65 million.

Performance-related fees are expected to decline as a percentage of total net revenue and should be approximately 3% of total net revenue in 2013. And our performance-related fees are expected to be more evenly distributed in 2013 than in prior years. Our rolling 12-month total contracted revenue estimate at December 31 of 2012 was $600.7 million or a 5.6% increase from 2011, consistent with our guidance of 5.8% revenue growth in 2013.

Total contracted revenue declined 0.4% when compared to the third quarter of 2012 as growth from our recurring revenue streams were offset by non-recurring performance-related fees that were recognized in Q4 and rolled off for the contracted revenue estimates. In the Spend and Clinical Resource Management segment, our contracted revenue estimate increased 4.1% year-over-year. In the Revenue Cycle Management segment, our contracted revenue estimate increased 8.1% year-over-year as our technology bookings and services revenue offset non-recurring revenue that rolled off the estimate.

Our contracted revenue coverage ratio of 88.7% over the midpoint of our 2013 revenue guidance is consistent with 2012 actual results and is the basis of how we formulate our financial guidance for the year. We expect first quarter 2013 net revenue in our Spend and Clinical Resource Management segment to be up 11% to 14% from net revenue of $93.3 million in the first quarter of 2012. A key driver of this growth is the $3 million to $5 million of performance-related fees we noted last quarter that will be recognized in the first quarter of 2013.

In our Revenue Cycle Management segment, we expect first quarter revenue to increase 3% to 9% when compared to the first quarter 2012 revenue of $56.6 million. This RCM guidance is a sequential decrease from our fourth quarter due to the timing of revenue recognition, later transaction volumes, collectability and deferred revenue of certain customer agreements. We expect this will generate total net revenue growth of 9% to 11% over the $149.9 million reported in the first quarter of 2012. We expect first quarter total adjusted EBITDA margin to be in the 29.5% to 32.0% range. This will be down 150 to up 100 basis points from the first quarter a year ago due primarily to revenue mix, as well as the level of investment in our business.

We expect GAAP EPS to be in the range of a loss of $0.01 to earnings of $0.01 per share compared with breakeven a year ago. During the first quarter, we expect to incur up to $10 million in acquisition integrated expenses as we consolidate multiple facilities, representing approximately 1,000 employees to a single facility in Plano, Texas, as well as related systems migration and standardization.

Finally, our adjusted EPS is expected to be up 15% to 25% from first quarter 2012 adjusted EPS of $0.24 per share. We anticipate a lower-than-average tax rate in this year's first quarter due to the enactment of the R&D tax credit, which we believe will provide a $0.01 per share benefit in the quarter. Our tax rate is then expected to increase through the year to a full year average rate of 40%.

For the second quarter of 2013, we expect total net revenue to be up 5% to 8% from the $163.0 million reported in Q2 of 2012, and consolidated adjusted EBITDA margin to increase 90 to 190 basis points from 2012 second quarter margin of 30.1% due to operating leverage, as well as higher onetime expenses last year.

In conclusion, we delivered strong results in 2012 and we will continue to invest in our business for sustainability and future growth, while at the same time, paying down debt with our free cash flow. We have generated adjusted EPS growth at a compounded rate of approximately 15% over the last few years, but we need to drive a higher and more consistent rate of revenue growth to achieve the targets John outlined earlier. We look forward to providing more details of our business, operating activities and growth plans during our Investor Day to be held at NASDAQ MarketSite next Thursday morning, February 28.

And with that, we'd now like to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is Michael Cherny with ISI Group.

Michael Cherny - ISI Group Inc., Research Division

So just one quick housekeeping question. In terms of the depreciation step-up next year, what are the key drivers behind that?

Charles O. Garner

Yes, largely 2 factors. Sure, it's largely 2 factors. One is just the fact that we've been making investments in our software -- our customer-facing software, as well as some internal solutions, and so that's resulted in a higher capitalization of that software. And we've increasingly, over the last several quarters, as we project through the next year, we'll be putting more of that software into service. And that will result in a higher depreciation expense from capitalized software.

David Larsen - Leerink Swann LLC, Research Division

Okay. And then, John, you started off with talking about some of the key client wins throughout the year, I think you had mentioned 30 new GPO customers. As you think about the competitive landscape, and I hope I'm not taking too much away from next week's presentation, when you think about the contracts you're able to do, the same fee [ph] you'll be able to generate, what specifically is driving some of these customers to you guys? I know we talked about this in the past, but that's a significant amount of customer wins that you've taken over, particularly from guys that in a lot of cases are kind of owners of the GPOs they're leaving. So maybe just give a little color in terms of the competitive landscape and why you guys have been so successful there.

John A. Bardis

Well, first of all, I think our GPO competitors are getting stronger and stronger, and trying to follow a pathway innovation themselves. I think contracting capabilities are being paid attention to and addressed by our competitors more effectively. But at the same time, Michael, we've continued to innovate and take advantage of some of our core strengths, for example, around physician preference implant products, but more importantly, the clinical integration work that is done around that, which yields not only lower cost in terms of pricing on product, but meaningful lower cost when it comes to service delivery and the use of those products. We've also been successful under the leadership of the Spend Management team and specifically the contracting team led by Les Popiolek, and really expanding the strength of our portfolio. And then lastly, transaction management continues to grow nicely. And what I mean by that is what we've learned from several very large health systems that you would recognize as large and sophisticated, that as much as 60% of their nonlabor spend is actually not being deployed against the contract price. In other words, the kind of leakage that falls out of a system that manages through traditional ERP methodologies, pricing and contracts makes room for our integration -- our integrated transaction management approach. And I think that business, Michael, over time, is going to continue to grow more aggressively for us, while we take overall the transaction management for our clients. And as an example, a Tenet [ph] Healthcare has a contract compliance level across what is a large health network of over 94%. And a big part of that is working together with them, but we manage the transactions.

Operator

Our next question is from Ryan Daniels with William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Given that we only have one, let me ask some of the big picture one. I'm curious given your leadership position if you have early adopters or entries into the ACO or risk-sharing model. And then if so, I'm curious what you've seen among them in their purchasing patterns. John, you just talked about contract utilization, I would assume an ACO type model where they can share with the physician, that tends to go up a little bit. So any color you can talk about there and what you might see on same-store growth as more and more of your leading customers enter into those models.

John A. Bardis

Ryan, I think what we're seeing in general is a more overriding need to reduce and manage cost. So I think the cost initiatives at virtually every system that we are interfacing with are driving contract utilization compliance and price reduction. Where we see the leading edge organizations engage with ACO, efforts, I would tell you, it's a bit too early to report a lot about that, right? So there's been real effort made to integrate those physicians, real effort made to begin managing elements of the population, but the early results are less clear to me and each of these markets remain a little bit different on how they're structured. We have one very large client in the Midwest who has 3,000 physicians under roof and they've been doing this for about 10 years. But they have an interesting balance that they have to deal with it as it relates to Blue Cross, right? So how much of the risk and working collaboratively with Blue Cross are they willing to take and how deeply integrated can they get their physicians to become and managing populations out. So for example, many -- some of their primary care physicians that are trying to leave 40% of their calendar open so that they can see people on a walk-up basis or in that particular MSA. So again, we don't have enough information yet to be able to tell you. We certainly know who they are that are in the ACO pool. We don't have enough information to be able to tell you yet whether success in any form is really being achieved.

Ryan Daniels - William Blair & Company L.L.C., Research Division

But what about for you guys specifically, is it driving more purchases of your product or higher contract utilization when these entities enter those programs? Just trying to get a feel for how that megatrend will impact you specifically.

John A. Bardis

Yes. And it's because physicians then become a much more integrated part of the entire process of product acquisition. In fact, we have systems today, Ryan, that are putting physicians in charge of clinical value analysis committees. And in doing so, say, for example, orthopedics, the physicians are then making the decisions preemptively about which products pass muster, and therefore, are successful in engaging with one another about which products will be adhered to. So we have one very large provider in this country right now that has actually used physician-like clinical value analysis to drive to literally 1 orthopedic manufacturer, not 2, but 1. And again, that's more of an integration focused on cost reduction.

Operator

Our next question is from Greg Bolan with Sterne Agee.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

[Audio Gap]

revenue growth expected in calendar '13. I understand 4% to 5% exogenous benefits there over '11, but is there an underlying assumption around customer attrition due to acute accounting system replacements onto some of the large integrated IT vendors? And don't kill me, Robert, but how was the -- also, how was the Cerner RCM partnership performing?

John A. Bardis

I think we -- can I just -- I want to turn this over to Mike, but let me just ask you a question. Greg, I think we missed the very early part of your question. So if you could possibly give us the context again, please.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Yes, sure. So the step-down in RCM revenue growth expected in calendar '13, I mean, I understand the 4% to 5% exogenous benefits over '11, but is there an underlying assumption around customer attrition due to acute accounting system replacements onto some of the large integrated IT vendors?

Charles O. Garner

Yes, so I think just to reiterate as you said, there were some items in 2012 that drove a higher growth rate. We estimate the impact of that was about 4% to 5% in terms of the growth rate impact. So we're growing off of that as we provide the outlook to '13. And then I'll let Mike and John talk about any specific market factors.

Michael Patrick Nolte

Yes, I mean I can give you a sense of sort of what we're seeing from a patient accounting standpoint. I think largely, it's all positive. I think the complexity that started to be introduced into the revenue cycle space just means that the kind of tools and services that we provide are that much more valuable, because we provide some last dollar kinds of solutions and services that are really helping shape success for a lot of our customers. I think as you've mentioned Cerner in particular, I think that partnership is actually starting to move toward something that is beginning to be a little bit more material than it has been historically even. So, if anything, it's stronger than it ever has been in terms of our relationship there and our investment in it on both sides.

Operator

Our next question is from Jamie Stockton with Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Maybe just to follow up on Greg's a little bit, the moderation of growth if you adjust for kind of the unusually high rate in 2012 due to onetime-ish stuff, I mean is there also a component that the services component of RCM was just so strong in 2012 that it's creating a difficult compare and that's driving part of the moderation in 2013?

Charles O. Garner

Certainly, to your point, in 2012, we did experience very strong growth in Revenue Cycle Services business, and so that is a piece we have to lap as we go forward next year. As I said, we tend to look at our contracted revenue at the end of December 31 of '12, and use that as a basis for forecasting our growth rate into '13. And based on looking at that contracted revenue and our assumptions around our pipeline and so forth, we've concluded that the guidance we provided is what we think is both realistic and achievable. And I don't know unless it's what Mike and John said that there's any other sort of externalities beyond that, but I think it's as we continue to build in this business, it's a recurring revenue business, so we're continuing and working to accelerate to achieve the targets that John outlined earlier by 2016.

Operator

Next question is from Steven Halper with Lazard.

Steven P. Halper - Lazard Capital Markets LLC, Research Division

In terms of the $10 million for facility consolidation, did I hear it right that, that's all in the first quarter?

Charles O. Garner

Our expectation is that, that will be in the first quarter of 2013, correct. And it's -- I will just also clarify the entire $10 million isn't completely for facility consolidation. The total amount related to the integration expense is inclusive of that, and that obviously, is a substantial portion of the $10 million.

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Okay. And I'm assuming that is backed out of the adjusted earnings guidance that you gave us of up 15% to 25%?

Charles O. Garner

Correct.

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Okay, great. And lastly, could you just walk us through again on the tax rate dilution on the adjusted earnings number for the quarter?

Charles O. Garner

Yes, sure. Let me try to do my best to simplify it because there's a lot of moving pieces. So here's the way I would think about it. If you look at our Q4 results relative to our guidance on adjusted EBITDA, we came out about $3 million ahead on adjusted EBITDA. $1 million of EBITDA tends to flow through at about a $0.01 per share for us because we have about 60 million shares outstanding. So had we not done a refinancing in Q4, we would have actually had higher Q4 earnings per share, we would not have this GAAP net loss position. Because we did do a refinancing in Q4, which also resulted in a GAAP net loss, we used basic shares, which is consistent with our policy. Anytime we have a GAAP loss, we use basic shares to be consistent. But also, there was impacts of the refinancing on our tax rates and the tax benefit we got. So there were a few pieces that moved around, but ultimately, all of this is a result of the refinance we did in the fourth quarter. So if you strip all that out, the refinancing, there's essentially about almost a $0.03 benefit we would have gotten from higher EBITDA relative the high end of our adjusted EBITDA guidance in Q4. But the effect of using basic versus fully diluted share count was about a $0.01 benefit in the fourth quarter. So hopefully, that makes it clear.

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Okay. And the $0.03 benefit is related to tax?

Charles O. Garner

Just to clarify, the $0.03 benefit would have been had we not done the refinancing, and we came about $3 million ahead of our adjusted EBITDA. Had that flowed through straight to adjusted EPS, would have been about $0.03 benefit. The drag from the tax impact more than offset that, plus the $0.01 pickup. There was, call it, close to a $0.04 to $0.05 drag related to the tax impact once [ph] you do the refinancing.

Operator

Next question is from Richard Close with Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

With respect to the investments that you're talking about on a go-forward basis, how should we think about those in terms of any type of benefits that you will be reaping from those investments? Obviously, you had the 4% to 5% on the Revenue Cycle in this year from some of the operational improvements. I'm just trying to gauge how much opportunity is still left for these operational improvements.

John A. Bardis

Richard, as part of our analysis internally, what we determined this last quarter was these investments, we believe in the intermediate and longer term, will yield an accelerated growth rate for us. One of the things we wanted to really understand was the relative strength of these products and their combination in our marketplace, and how we stack up versus competitors. And [indiscernible] came back and indicated that there remained considerable greenfield, but that improving the internal execution and deliverability of those products was a key factor in ensuring our growth rate. So my personal belief is that as we continue to execute on that, that we will build our growth rates, meaning that the opportunity is there, it's really much about execution and product delivery.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay. So is it fair to say that 4% to 5% on the Revenue Cycle, that of the low-hanging fruit on stuff like the credits and things along those lines, that, that's all been harvested and there's no further opportunity going forward or...

John A. Bardis

It's marginal, it's pretty marginal. We've gotten most of that taken care of. And certainly on a year-over-year basis, there's not much on a big comparative upside.

Charles O. Garner

Yes, and I would just add, I think there are some pieces, as John said. It's largely marginal, but that's already contemplated in our guidance for 2013.

Operator

Our next question is from Frank Sparacino with First Analysis.

Frank Sparacino - First Analysis Securities Corporation, Research Division

[Audio Gap]

made the comment around the RCM business in terms of number of new clients added in 2013 or adding at least one RCM application, just wondering if you can give some additional color in terms of how many net new clients or applications that are being purchased. Is there any 1 or 2 products you would call out? And then as it relates to the RCM outlook, you would seem, I know you don't break it out between services and technology in terms of the outlook, but it would seem double-digit growth on the technology side would be a fairly easy hurdle.

John A. Bardis

Yes. So sorry -- the last part of the -- the second part of the question, you broke up a little bit there. Can you just repeat it, sorry?

Frank Sparacino - First Analysis Securities Corporation, Research Division

Yes, just as it relates to 2013 outlook, it would seem hitting double-digit growth on the RCM technology side would be a fairly easy hurdle. I just want to make sure I'm looking at the 2 segments in the same way that you are next year.

John A. Bardis

Yes, so let me start with that one and I'll go back to the question around sort of specific product penetration. I think, look, it's -- we're trying to balance growth across the whole Revenue Cycle portfolio. I think we're -- I don't want to argue whether it's easy or difficult to get to double-digit growth. We certainly look at that as a long-term target for how we grow that part of the business. In terms of the specific products that -- hey, look, I think we've seen good traction across the portfolio. I think if you spend time digging under the covers of where we have particular strengths, it's certainly around areas within contract management and claims activity that tends to be where we lean on most heavily. So just because of the scale of the existing portfolio and where the growth comes from, in aggregate, you see more growth there. But I think we increasingly see really good balanced traction across the whole technology portfolio.

Operator

Our next question is from George Hill with Citigroup.

George Hill - Citigroup Inc, Research Division

John, maybe just a big picture question. If we think about the spread between the 2013 guidance on the top line and kind of the longer-term guidance, I guess, can you help us bridge the gap with how the company gets there sustainably? Maybe if we think about the buckets of like underlying volumes, gain of market share, increasing client share of wallet and trade-up and mix, I guess, can you tell us how the company targets each of those opportunities to move kind of from the sub-10% growth, kind of profile that we're on right now to the north 10% growth?

John A. Bardis

Yes, George, we're going to get a chance to sort of discuss that in a little more detail next week, but let me give you some of the characteristics that we're focused on. One is let me talk about the Spend business. When it comes to penetration of actual contracts being used versus contracts being signed, and you add to that, a whole host of professional services and smaller contracts that are being purchased off of at a local hospital level, we think the market opportunity inside U.S. hospitals could be as high as a couple of hundred billion dollars of current leakage. So the opportunity we have to create a transaction integration, transaction system integration like what we do with our e-commerce work at say, Tenet, CHRISTUS and large institutions and systems, say, that we do the transaction processing for, continues to cause us to believe that there remains meaningful opportunity in the group purchasing and contracting business for real growth. But that footprint needs to expand its depth and its breadth in terms of what it covers, and then we need to manage the transactions. The other side is, is that we still have the average of our clients using something, I'm looking at Mike here, but I think something right around 3 or less of our Revenue Cycle Technology products. And we think as the marketplace continues to get more complex on payment, meaning a hybrid of fee-for-value and fee-for-service, it's not going to all transition at once, as you know. And when we think about the complexity of the exchanges and the new contracting methodologies that will come into place from those, that our tools which normalize the data to respond to a variety of different contracting options such as our contract modeling solutions, et cetera. We think those continue to drive better growth for us, providing we can deliver them and execute them well. So in some respects historically, George, we've been our own worst enemy in that regard in terms of just being able to execute in a timely way.

Operator

Our next question is from David Larsen with Leerink Swann.

David Larsen - Leerink Swann LLC, Research Division

I know you don't really want to talk about 2014, but when we think about the performance fees, can you just sort of ballpark what percentage of that -- or of those are coming from Spend Management? And can we look for like maybe another $20 million in '14? Is that a reasonable number to use or what are your thoughts there?

Charles O. Garner

Yes, I think it's too early to tell, but in terms of the mix, historically, it's been somewhere around 80% to 90% that is Spend versus Revenue Cycle in terms of the mix of our performance fees. We've also included a chart with a little bit more detail in the accompanying slides, which has some more information there of the breakdown. You'll also see over the last couple of years, the percentage of -- as performance fees are a percentage of our total revenues has come down a little bit, which I think also highlights the fact that given the strong track record of the company, we become less reliant on using performance fees in a number of areas. But 3% is the percentage of total revenues, what we're expecting for 2013, which is right around $20 million.

Operator

[Operator Instructions] Our next question is from Charles Rhyee with Cowen and Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

[Audio Gap]

back to sort of the -- this 2016 target and obviously, you're trying to get the 10% top line growth. And forgive me if I missed it, but can you talk about where you think -- should the growth be similar across both Spend Management and RCM? Do you envision one being a little bit of a faster growth? I think historically, in the old days, you kind of talked about RCM being a bit faster to the average growth and Spend Management being a little bit slower. Given the shift into the mix of revenues today, does that still hold? And how do we -- how should we think about that as we get out into the outer years?

John A. Bardis

Charlie, I think when you look at our Spend Management business, when we move that business to the high single digits or low double-digit growth rate, the leverage off of that tends to be very good on the P&L. When we think about our better -- our larger growth opportunity, just given the speed at which products can be implemented, it's our belief that both services, Rev Cycle Tech and Rev Services, so when I think of Spend Management services and we think of Rev Cycle Services and then Rev Cycle Technology products, tend to produce a business model that is -- you're able to grow faster because of the way we recognize revenue. So we place our Revenue Cycle product, we tend to get the value of that contract and the value of that product recognized by revenue very quickly. So I still would expect over time that on the top line, the Revenue Management business properly executed will be a more rapid-growing business. But we'd also expect over the same period of time that by improving our performance and growth rates in the Spend Management, that we get greater operating leverage and faster earnings growth through the Spend business.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. And then when we think about the split in performance fees, I think more historically, it's been a little bit more weighted towards Spend Management. Is that sort of the right way to continue to think about that sort of in the long term as well?

John A. Bardis

I'm looking at Rand Ballard here who really constructs the majority of those transactions, and he says yes.

Operator

Next question is from Robert Willoughby with Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Chuck or John, with the lower debt balance and some clarity on the lower interest expense line item, do we expect acquisitions to play part of the strategy any time soon?

John A. Bardis

No. I mean, we always keep our eyes and ears open, as you know, Robert. But right now, we do talk about this quite a bit as a team, but Mike believes, I think Chuck believes, Rand believes and our segment presidents believe that we have within our existing capabilities today the capacity to grow, but also develop product that creates greater value for our shareholders and our clients internally at a more rapid rate than that does what acquisitions would bring us. That isn't to say we may -- that we wouldn't see something out there that we would find interesting. But to be candid with you, the things that we're focused on, we tend to have solutions for today. And the majority of our best growth options going forward tend to be with internal investment.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

That's great. And, Chuck, just a quick one. It's not a big number, but I see your accounts receivable days outstanding have shrunk dramatically. What is driving that, the better receivables management?

Charles O. Garner

Yes, there's a couple of things, some of it is just better receivables management, some of it is just collections of some items that we had outstanding at the end of the quarter related to some of our Revenue Cycle Services clients. So there's a little bit of a onetime benefit we picked up there with a few accounts. Also, I think a little bit greater focus on that.

John A. Bardis

[indiscernible] We made a structural change last year that I think is reaping some benefit for us, and that is our sales and field services organizations last year. And I give a lot of credit to Greg Strobel and as well as Rand and the Spend Management team. Compensation plans were changed to reflect our clients paying their bills. So sales representatives were no longer incented strictly to sell stuff, but they were also incented to make sure that before they got commission checks, we were paid.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Is there much leverage? Do you see that improve further or have we kind of maxed out the opportunity there?

Charles O. Garner

I think for the most part, we've captured a lot of low-hanging fruit, so there's probably a little bit around the margins, but I wouldn't expect a meaningful increase as we look into 2013.

Operator

Our next question is from Eric Coldwell with Robert Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Two questions. GPO contract portfolios, 75% integrated. Simplistically, why not 100%? Are you just waiting on yet to renew contracts like the OMI [ph] deal coming up in a few months or is there something completely separate?

John A. Bardis

Well, 3-year cycles to get contracts to be changed, so for example -- yes, it's a great question. The -- so -- but let's say, for example, we're talking about a really big and important contract like JNJ, that's the kind of agreement, right? That contract cannot be integrated and renegotiated ahead of its calendar schedule. So it tends to be that we have to follow the calendar of when that contract's timing and terms are up before we can integrate that product category. In other cases, we've had receptivity by our customers to go to bid on certain kinds of products early. Example, contrast media, blood pressure cuffs. I think we just brought blood pressure cuffs down 46%. But for the most part, the question you're raising about which contracts remain available to us, it's more associated with the timing of their contract term.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Got it. Second question, maybe it's more of a comment. Your guidance range, if I've done the math right, it looks like your guidance range would actually be $0.03 to $0.13 above consensus tonight if it weren't for the incremental depreciation compared to what consensus was modeling for D&A. Obviously, the fundamentals here are better than, I think, the street model, but that's a big surprise I think to us and to the street in terms of the magnitude of the depreciation increase. I don't know really how to say this. Was there a surprise in terms of product rollout, a surprise in the cap rate, did you true up your budget? Did something change or were you kind of staring down the barrel of this all of the time and just not really willing to go out and kind of get the street on the right page until you gave the formal guidance? And I guess I'm thinking about it both for this year and how do we think about this in the future in terms of should we be thinking about depreciation growing at a much faster clip by say in '14 and beyond as well?

Charles O. Garner

So, Eric, good question. I guess I'm a little surprised that there would be that much variance, and I can't say that I will compare that to all of the analyst models to see definitely how far off it was, but it sounds like you certainly have done that work. And I think we've tried to be very explicit around our expectations in terms of investment of CapEx, capitalized software, depreciation schedules. I mean, if you look at over the last couple of years, we have been investing more both in terms of internal capabilities, and importantly, with customer-facing solutions. So I think some of that's been building as we're putting software in service. I think it's a pretty natural expectation that, that depreciation will increase. I don't know, perhaps to some folks, we have also not factored as much because we have depreciation increasing, but some of our amortization is decreasing by almost the exact same amount. So I don't know if folks maybe muddied those two together or not, but nonetheless, it wasn't a surprise to us and it's exactly as we had projected. But I appreciate you raising this point, maybe something Rob and I need to do a bit better job going forward to communicating that.

Operator

Thank you, ladies and gentlemen. This concludes today's call. Thank you, all, for joining.

John A. Bardis

Let me just say thank you to you all for being on the call with us today, and I think the company's made good progress, individuals have made good progress. I mean, after all, who would have thought in 2006 that up to now, that Robert Borchert will have the same number, exact same number of Tour De France titles as Lance Armstrong.

Robert P. Borchert

Thank you, John.

Operator

Thank you all, ladies and gentlemen for attending. You may now disconnect your lines.

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