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PRGX Global, Inc. (NASDAQ:PRGX)

Q4 2012 Earnings Call

February 26, 2013 8:30 AM ET

Executives

Romil Bahl -President and Chief Executive Officer

Robert Lee - Chief Financial Officer

Analysts

Alex Paris - Barrington Research

Kevin Liu - B. Riley

Tim McHugh - William Blair & Company

Patrick Wang - Robert W. Baird

Operator

Good day, ladies and gentlemen, and welcome to the PRGX Global Inc. fourth quarter and full year 2012 earnings conference call. (Operator Instructions) I would now turn the call over to your host, Romil Bahl, please go ahead.

Romil Bahl

Good morning, good afternoon and good evening to each of you around the world, and thank you for joining PRGX Global, Inc.'s fourth quarter and full year 2012 earnings call. We thank you all for the time that you are taking to be with us today.

Our Chief Financial Office Bob Lee is with me here on our Atlanta headquarters, and after my introductory comments he will review our financial results for the quarter and for the fiscal year 2012. I will then update you on our operations and the ongoing execution of our growth strategy. Once we conclude our remarks, we will open the call for your questions.

Just as the old cliché goes, time really does fly, when you're having fun. It's hard for me to believe that I have just completed my fourth year with the company. More importantly, it is now three years since we unveiled a new company name PRGX Global and our new brand promise, which is to be the Profit Discovery firm.

As we have worked hard everyday to live up to this promise to our clients, we have been transforming ourselves from an accounts payable recovery audit company to an analytics-enabled information services company. Our growth strategy, which added two new growth services to go with our core business, included a financial goal of doubling our adjusted EBITDA from 2010 to 2014.

As many of you have already seen, last evening, we delivered financial results that are in line with this financial goal and the full year results for 2012 showcase how our journey is gaining momentum. After we grew adjusted EBITDA, approximately 13% from 2010 to 2011, we grew it almost 30% from 2011 to 2012. We have grown adjusted EBITDA from $21.6 million in 2010 to over $31.4 million in 2012, which means that we are more than halfway to our goal of being north of $40 million in 2014.

Those of you, who have followed our story over the last few years, know that to accomplish this goal we committed ourselves to several initiatives: number one, that we would improve service levels in our core Recovery Audit business and do a much better job of retaining our clients: number two, that even as we were improving our service levels and strengthening our client relationships, we would drive cost out of our service delivery model and thereby improve gross margins; and number three, that we would launch new services in both Healthcare Recovery Audit and analytics-enabled Profit Optimization Services.

And further, that after investing in these services over the first two years of 2010 and 2011, we would breakeven on a adjusted EBITDA basis for these new services in 2012. To simply put, our financial results demonstrate that the PRGX Global team is meeting its commitments across the board.

The fourth quarter of 2012 represents the fourth consecutive quarter we have achieved sequential revenue growth, as well as the 12 time in the last 13 quarter that we have delivered year-over-year revenue growth. While we crossed the $53 million mark in revenue this past quarter, we know that we have to work harder at growing our topline.

During our recent global leadership meeting here in Atlanta, we spent a lot of time discussing our growth priorities. When we host our first quarter call in a few weeks, I will provide additional inputs on Q1 events, but suffice it to say, our team is increasingly focused on what we need to do to drive PRGX's topline.

Within our core business of accounts payable recovery audit, we believe that we can manage the best-in-class revenue growth, which as I have stated on previous calls is in the low-single digits. So we have worked diligently to reduce our cost to serve, which has resulted in significantly improved gross margins, from 35% in 2010 to nearly 40% in 2012.

Going forward, we expect that our core business profitability will continue to grow at a much faster rate than revenue. And while I am pleased that we have proven our ability to reduce our delivery cost, we are not done yet.

Our EBITDA growth goals are clear. We must continue to reduce delivery costs and add clients to our global delivery model in recovery audit. And of course, our New Services segment needs to be a more positive contributor to EBITDA going forward.

But if we are to become a double-digit topline growth company to go with our double-digit bottomline growth, we need our new service areas to be the key growth levers. We have done very well in launching these new services over the last few years and have built businesses that delivered over $33 million in revenue in 2012, including growth of 29% in 2012 over 2011, but we need to sustain these growth rates. And to do so, we must build and/or acquire the capabilities that will allow us to compete more comprehensively in our target markets.

We must also manage the client concentration we have in the segments, specifically in healthcare, where we have focused our efforts around the Medicare Recovery Audit Contractor or RAC program. This is a five-year contract that started in February 2009, so we expect an RFP process to be conducted in the coming months, and winning a piece of this national contract would clearly be a key step for the continued growth of our healthcare practice.

Of course, we must also continue our push to diversify our client base, including targeting the private sector. And so after Bob goes through his financial report, I will spend some time reviewing how we view our key priorities in healthcare and indeed in each of our service lines for the year ahead.

I'd like to make a key point before turning the call over to Bob. Over time, we expect the mix of our revenue to change, where the ratio is now 84% core RA Services and 16% New Services, we are working towards 70-30, and then 60-40, and 50-50. With this migration, our topline growth rate as a company should increase, why? It's simple. Our newer services target larger and faster growing markets and are hence inherently faster growing service areas.

While the growth and development of these services will not be linear, we are determined to continue to build on our early success. So for investors, many of whom who've come into our story recently via our follow-on public offering late last year, the PRGX shareholder value creation story over the coming three to four years should be at least as good as it has been the last three to four years, if not better.

Finally, as is perhaps clear from my earlier comments, we are actively working through our acquisition pipeline and will certainly target an acquisition in 2013. With that, I will turn the call over to Bob for a detailed review of our fourth quarter and full year 2012 financial results.

Robert Lee

Thank you, Romil, and good day to everyone. I will be reviewing our financial results for the three months and year ended December 31, 2012.

Let me note at the outset that certain statements in this conference call maybe considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These statements include statements relating to management's views with respect to future events and financial performance that are based on management's current expectations and believes and are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements.

For additional information on these factors, please refer to PRGX Global, Inc.'s filings with the Securities and Exchange Commission including but not limited to its reports on Forms 10-K and 10-Q. PRGX undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This presentation also contains references to certain non-GAAP financial measures such as EBIT, EBITDA and adjusted EBITDA, metrics that we use internally to measure our operating performance. A reconciliation between these non-GAAP measures and net earnings to most directly comparable GAAP measure is available under the Investor Relations portion of our website at www.prgx.com.

Now, to begin the review of our financial results for the three months ended December 31, 2012. Our revenue was $53.1 million compared to prior year's fourth quarter revenue of $49.9 million, an increase of 6.3%. On a constant dollar basis, adjusted for changes in foreign currency exchange rates, 2012 fourth quarter revenue increased 6.1% compared to the same period in 2011.

Recovery Audit Services Americas revenue was $30 million compared to prior year's fourth quarter revenue of $27.8 million, an increase of 7.9%. On a constant dollar basis, adjusted for changes in foreign exchange rates, Recovery Audit Services Americas fourth quarter revenue increased 8% compared to the same period in 2011.

Recovery Audit Services Europe/Asia-Pacific revenue was $14.7 million compared to prior year's fourth quarter revenue of $16.5 million, a decrease of 11.4%. On a constant dollar basis, adjusted for changes in foreign exchange rates, Recovery Audit Services Europe/Asia-Pacific fourth quarter revenue decreased by 12.2% compared to the same period in 2011.

New Services revenues was $8.5 million compared to prior year's fourth quarter revenue of $5.6 million, an increase of 51.4%. Our New Services segment is comprised of our Healthcare Claims Recovery Audit business as well as our Profit Optimization services. The New Services segment fourth quarter 2012 revenue represented 15.9% of total revenue compared to 11.2% in Q4 2011.

Our cost of revenue was $34.4 million in the fourth quarter of 2012 compared to $34.2 million in last year's fourth quarter, which was 64.8% of revenue in 2012 and 68.6% of revenue for the same quarter in 2011. Total SG&A in the 2012 fourth quarter was $14 million compared to $12 million in last year's fourth quarter or approximately 26.3% and 23.9% of revenue in each period respectively.

Depreciation expense increased $0.7 million and amortization expense increased $0.5 million compared to the fourth quarter of 2011. The increase in depreciation is due to the depreciation relating to software development projects placed into service in 2012. The increase in amortization is due to our December 2011 BSI acquisition and to two associated migrations we completed in January and June of 2012 within the Recovery Audit Services Europe/Asia-Pacific segment.

For the three months ended December 31, 2012, net earnings were $1.5 million or $0.06 per basic and diluted share compared to net earnings of $1.3 million or $0.05 per basic and diluted share for the same period in 2011. The 2012 fourth quarter included a $1.2 million credit resulting from the release of a portion of the reserves held for uncertain tax positions.

Approximately $0.8 million of this release related to accrued interest on these reserves and is included as a credit to interest expense. Note that the 2011 fourth quarter also included a $1.2 million tax benefit, which was primarily attributable to a reduction in our deferred tax asset valuation allowance.

Our adjusted EBITDA for the fourth quarter of 2012 was $8.2 million compared to $6.4 million of adjusted EBITDA for the same period in 2011, an increase of 27.6% on a revenue increase of 6.3%. 2012 adjusted EBITDA excludes $1.8 million charge related to stock-based compensation, $0.1 million of acquisition obligations classified as compensation, $1.1 million of transformation severance and related expenses, $0.4 million of wage claim cost, and $0.2 million of foreign currency gains on short-term intercompany balances.

The comparable adjusted EBITDA in the fourth quarter of 2011 excludes $1.4 million charge related to stock-based compensation, $0.5 million for acquisition transaction costs and acquisition obligations classified as compensation, $0.8 million of transformation severance and related expenses, and $0.2 million of foreign currency losses on short-term intercompany balances.

Now to begin the review of our financial results for the year ended December 31, 2012. Revenue was $208.5 million for the year ended December 31, 2012, compared to the prior year revenue of $203.1 million, an increase of 2.7%. On a constant dollar basis, adjusted for changes in foreign exchange rates, 2012 revenue increased 4.2% compared to 2011.

Recovery Audit Services Americas revenue was $121.6 million compared to the prior year revenue of $115.8 million, an increase of 5%. On a constant dollar basis, adjusted for changes in foreign exchange rates, Recovery Audit Services Americas revenue increased 6.4% compared to 2011.

Recovery Audit Services Europe/Asia-Pacific revenue was $53.8 million compared to $61.6 million in the prior year, a decrease of 12.6%. On a constant dollar basis, adjusted for changes in foreign exchange rates, Recovery Audit Services Europe/Asia-Pacific revenue for the year ended December 31, 2012, decreased by 10% compared to 2011.

New Services revenues was $33.1 million compared to the prior year revenue of $25.7 million, an increase of 28.5%. The New Services segment revenue for the year ended December 31, 2012, represented 15.9% of total revenue compared to 12.7% for the prior year.

For the year ended December 31, 2012, cost of revenue was $134.4 million or 64.5% of revenue compared to $137.5 million or 67.7% of revenue for 2011. The margin improvements were most notable in our Recovery Audit Services Americas segment, which improved the gross margin from 43.9% in 2011 to 47.2% in 2012. Total SG&A for the year ended December 31, 2012, was $52.5 million compared to $49.1 million in the prior year or approximately 25.2% and 24.2% of revenue in each period respectively.

Depreciation expense increased $1.7 million and amortization increased $2.2 million compared to the year ended December 31, 2011. The increase in depreciation is due to the increased level of capital expenditures we had in 2011 and 2012 compared to the prior years as well as depreciation relating to software development projects placed in service in 2012. The increase in amortization is due to our December 2011 BSI acquisition and two associate migrations we completed in January and June 2012 within our Recovery Audit Services Europe/Asia-Pacific segment.

For the year ended December 31, 2012, net earnings were $5.4 million or $0.21 per basic and diluted share, compared to net earnings of $2.8 million or $0.11 per basic and diluted share for the same period in 2011. Both years, of course, included the fourth quarter of tax credits previously discussed.

Our adjusted EBITDA for the year ended December 31, 2012 was $31.4 million compared to $24.5 million of adjusted EBITDA for 2011, an adjusted EBITDA increase of 28.3% on a revenue increase of 2.7%. 2012 adjusted EBITDA excludes a $6.3 million charge related to stock-based compensation, $0.4 million for acquisition obligations classified as compensation, $2.1 million of transformation severance and related expenses, $1 million of wage claim costs and $0.4 million of foreign currency gains on short-term intercompany balances.

The comparable adjusted EBITDA amount for the year ended December 31, 2011, excludes a $5.1 million charge related to stock-based compensation, $0.8 million for acquisition transaction costs and acquisition obligations classifieds as compensation, $2 million of transformation severance and related expenses and $0.4 million of foreign currency losses on short-term intercompany balances.

I would now like to highlight certain 2012 balance sheet and cash flow information. As of December 31, 2012, we had unrestricted cash and cash equivalents of $37.8 million and had no borrowings against our revolving credit facility. Bank debt outstanding was $6 million, representing the outstanding balance on a variable rate term loan due in quarterly installments through 2014.

At December 31, 2012, current assets exceeded current liabilities by $37.4 million. Net cash provided by operating activities for the year ended December 31, 2012 amounted to $18.8 million compared to $19.3 million in the prior year. Before working capital changes, cash provided by operating activities amounted to $25.4 million in 2012 compared to $16.8 million in 2011, an increase of $8.7 million.

Capital expenditures on property and equipment for the three months ended December 31, 2012, were $2.1 million and were $7.9 million for the full year. Net cash provided by financing activities for the year ended December 31, 2012, amounted to $7.8 million compared to a $5.4 million net use of cash in the prior year. This change is due to the $14.7 million of net proceeds received from our follow-on public offering in December.

With that summary of the financial results, I will now turn it back over to Rom.

Romil Bahl

Thank you, Bob. Let's dive straight into our strategic direction and operational priorities update for our three service areas. Turning first to our core business of accounts payable Recovery Audit or Profit Recovery our Americas RA business had another strong quarter in Q4 and for 2012 showcased the growth rate of 5% on the topline.

Our Americas team will be challenged to repeat this kind of growth in 2013, but I am sure they will give it their best shot. They will certainly continue to drive more volume through our lower costs shared service centers, which should allow us to continue to improve our gross margins and drive EBITDA growth.

The fact that we were successful in 100% of the client renewals that came up in 2012, shows just how far we have come with our Americas business. This was the weakest performing region of the company in 2009 and the year is leading up to it, and client retention was a huge issue.

In fact, one of the reasons we started our service delivery model transformation effort in the Americas, was because we saw the clear need to change or risk going out business. And I'm delighted to say, the Americas team has completed an impressive turnaround and is now a stable, profitable business.

The go-forward priorities for the Americas core business are clear. One, keep client retention in the 95% range or better; two, add new clients at a steady pace by taking market share in the retail sector and by increasing our penetration of the commercial market; three, keep up the pace of moving work to our low cost service centers; and four, innovate new audit categories and expand our contract compliance capabilities and client footprint.

On our last call, I outlined how we were taking a series of actions to address the slowdown in our Europe/Asia-Pacific or EAP business. In the fourth quarter, we experienced a real bounce back in our EAP results and while we are not out of the woods, the team is focused on insuring 2013 is a growth year over 2012. This will be challenging because of both the continued weakness in the economies in that region, and because several of our clients in Europe have entered administration, which is comparable to declaring bankruptcy.

So in order to grow, we not only have to overcome competitive pricing pressures, but also make-up for a few lost clients as well. That said, two of our three big EAP wins over the last 18 months are now showing real promise and the team is optimistic that we can continue our recovery in the region.

For our EAP business, in addition to the common priorities with the Americas in terms of client retention, client count growth and audit innovation, the top priorities include: one, deploy our industry-leading service delivery model across the region to insure we drive consistent best practices in auditing and hence increase recoveries; two, initiate the migration of certain categories of audit to our shared service center model, initially leveraging our shared service centers in the U.K., India and Canada; and three, continue to integrate the people added to our team from their prior associate companies and rollout our talent management program.

Moving on to our New Services segment, our Healthcare Claims Recovery Audit Service, which is our entry into what is known as healthcare payment integrity services had a good year in 2012. We believe 2013 will be even better.

Our new leadership team in healthcare has now been in place for a year. We have invested in a significant number of senior leaders with deep experience in this space, and we have continued to improve our capabilities. Going forward, we have to execute with excellence in the Medicare RAC Program and the team must optimize claims selection, so that our financial performance continues to improve.

Execution excellence is even more important in this space, because not only do we have the normal issues of a contingency-based Recovery Audit business, which is inherently lumpy, we also have to adjust the change in government processes and priorities. For example, currently in the first quarter along with all the other RACs, we are facing a challenge in submitting claims because of certain changes to Medicare claims processing systems.

In addition to execution, our other top priority is in business development. Winning a few private pair of clients and winning a share of the next Medicare RAC contract. As I mentioned, we expect to rebate process for the Medicare RAC Program in the near future and we are preparing for the same. As we look forward to competing in the rebate, we believe that we have a good chance of winning a region, based on our delivery record and experience in three of the four current regions, and with five of the nine Medicare administrative contractors or max.

If we win one of the current RAC regions or have a successful outcome in the rebate that configures the nations Medicare spend differently from how it is done today, we are likely to have a larger volume of spend to audit. If we don't win anything, the impact on our profitability would be very limited. So regardless of the outcome and given the momentum in our other service areas, we expect to deliver to our commitment of $40 million to $45 million in adjusted EBITDA in 2014.

Let's move to PRGX's third growth lever, our forward-looking Profit Optimization services. These services, as you know, went through a period of weakness in late 2011 and early 2012, but had stabilized and improved to the point where we are confident they can grow in 2013.

Our Spend and the Merchandize Optimization Services are better positioned given both improved analytics capabilities and an improved understanding of specific areas and actionable insights with which we can add real value to our clients. We remain optimistic about our ability to grow the number of services we deliver to our existing clients and continue to fine tune approach to market.

Another example of how we are adjusting our approach based on recent inputs from our clients is in the data transformation space. We have already executed some encouraging engagements in this area and our clients are telling us that while their companies have made significant investments in data cleansing and transformation efforts over the years, these efforts have been skewed towards customer and sales data to support marketing efforts.

This imbalance is only increasing as companies turn towards integrating social media data in their marketing efforts, and so some of our CFO clients and their teams are feeling a bit short changed on the data front relative to their Chief Marketing Officer counterparts.

Most of our CFO clients believe there are untapped opportunities to leverage cleaner, better integrated procure-to-pay and other operations data to drive actionable insights and meaningful value. And as you know, this is where PRGX excels. We have spent 40 years developing and perfecting capabilities to gather clean, integrate and enrich massive volumes of otherwise dirty and poorly integrated data, which span these untapped areas of opportunity.

Currently, we use this cleansed, integrated data to generate Recovery Audit claims as well as to enable new services like Spend Optimization and Merchandize Optimization, but we have not really focused on providing our client direct access to cleansed data for broader analytics and operations purposes.

While these services take us towards the more technical set of capabilities, we believe it is a worthwhile direction, given our growing analytics and information technology capabilities including those delivered by our India shared service center and given the sheer volume of services dollars that our clients are spending on data and IT services.

In summary, our business transformation and strong financial performance in 2012 keeps us on tract towards our goals. There remains work to be done, but we are focused on our opportunities and continue to be optimistic about our future. That's the end of my planned update for today. We look forward to answering your questions.

Now, I will turn it back over to operator to help facilitate the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Alex Paris from Barrington Research.

Alex Paris - Barrington Research

I have a couple of questions, maybe I'll start with this hoping to disaggregate a little bit of the line items. In New Services, which topped $33 million this year, I know you've not historically broken out, but could you give us some sort of idea on what proportion is healthcare and what proportion is a Profit Optimization services?

Romil Bahl

Alex, we're going to resist the temptation to go there. I mean one of these days we're going to have to go there, certainly when anyone of them gets to kind of 10%, and that right there is about the guidance I will give you is that neither of them is there yet. So they really have been neck-and-neck since they started. And again, because these things don't grow in any kind of linear predictable fashion, we just think it's better to keep them bundled in New Services for now.

Alex Paris - Barrington Research

Then let me ask this. Wherever Medicare RAC finished for the year, are we at full run rate now? Should we expect it to grow significantly in 2013 versus 2012 without the next RFP or without the rollout of Medicaid?

Romil Bahl

We think there is a bit more sort of juice in that lemon yet to squeeze, Alex. I mean we interestingly not sort of performed better in the first quarter, first half of the year, and so we think we can get back to those sort of levels and maybe even keep it consistent all year. And if we do that, we can do better this year.

Alex Paris - Barrington Research

And then you referred to some difficulty in processing claims due to Medicare procedural changes in the first quarter here?

Romil Bahl

Yes, America is just a specific issue with a system called FISS, it's the Fiscal Intermediary Standard System, happens to be part of the infrastructure that all Medicare contractors have to work through and they were some updates to that process. The good news is, after a couple of weeks of kind of heart palpitations claims are rolling through there again. And we're hopeful that the backlog will get caught up here in what's left of February and March and it won't impact Q1 too much, but for a while there is real touch and go.

Alex Paris - Barrington Research

And then with regard to the Medicaid rollouts, now with the elections behind us, and the fiscal cliff behind us and we have the sequester still to deal with. But what is your visibility into rolling out those projects, number one. And number two, you have three, how many out there are you engaged in on the left on the RFP process? I think last time we talked it was around 10 left and you were working on a couple.

Romil Bahl

There's less than 10 left I think, but it's in that range in neighborhood anyway, and we will certainly compete in two or three of those. Again, I'd like you to remember how picky we have been in terms of just making sure that we can get after a DRG-based state and really make money at it. And there are terms in that that make for kind of the leading front-end of the contract like frankly the Medicare contract was. So that's where we are.

Interestingly enough, some of the states that already had Recovery Audit contracts, even when the law was passed and some of the early movers are going to be coming for recompete here in a couple of years. So that's when we will really ramp up our government sales efforts again, because those states will have sort of, if you will, figured out how to run these programs and their suppliers, their current providers, will have help mature the situation in terms of profitability for us.

Alex Paris - Barrington Research

And then I guess the last question on this subject and I'll get back in the queue. With regard to the Medicare RFP, given that we're coming to the end of the five-year contract, do you have any specific intelligence on how they might do it? Will it be four jurisdictions or any intelligence on to when it may begin, other than intuition that tells us it should begin sometime soon?

Robert Lee

No, really, we don't. I mean we don't have a whole lot of specificity. It's an area that's sort of as you can imagine gets a lot of attention, perhaps more than it necessarily deserves. Certainly an area we're preparing for, but we don't have much specificity. Regardless of whether this comes out in a regional model or in a jurisdiction model or some other way of slicing and dicing the pie, we intend to be ready.

Alex Paris - Barrington Research

You said even if you don't win one, and I think it's important to talk about the alternative, so it doesn't become a binary situation. You said it's not going to make much of a difference to profits either way. Does that suggest that current Medicare RAC based on the cost structure is not particularly profitable?

Romil Bahl

So again without getting into the specifics of sub-segment business lines, I guess all I would point to as directional is, if you look in Schedule 5 of our earnings report last year, which I'm sure you've done, Alex. And you look at kind of what the New Services segment overall EBITDA is, it's not that much, right. And this isn't really one of those crazy situations, where one is huge and the other is hugely negative and counteracting each other. And so my point is just to look at that and sort of say, it's not that bigger part of EBITDA this year. So to your point, it's absolutely not the end all and be all.

Alex Paris - Barrington Research

However, a win would put a lot more revenue on top of that cost structure, which could be and it would be a nice contribution.

Romil Bahl

Absolutely. There is a lot of upside and not much downside was kind of my point.

Operator

Our next question comes from Kevin Liu from B. Riley.

Kevin Liu - B. Riley

Just looking at the strength in Europe, could you help characterize whether that was from the ramp of those two or three programs you talked about previously or did you just see some of your existing clients or a bunch of large claims than existing clients?

Romil Bahl

It was really more existing clients than the new ones. The new ones are looking set to ramp here in 2013 and contribute to 2013. It was really more some delays coming through and existing clients responding. So it was very good to see that, Kevin.

Kevin Liu - B. Riley

And along those lines you did mentioned that you had perhaps a few retail customers in Europe that had entered administration. So when you factor that against the clients set to ramp, are you anticipating any sort of growth in the European business this year?

Robert Lee

Again, as a whole, the business in Europe/Asia-Pacific, we are optimistic will grow. We did have some of those administration issues, those are smaller clients of ours. So while they certainly hurt and we certainly hope they come out of administration in healthy shape. They're not going to impact us, but certainly, let me say it this way, we have not dug as deep a hole that we can't dig out of it with better performance from our big wins.

Kevin Liu - B. Riley

And on the New Services side, I saw that EBITDA was slightly negative in the quarter. Was that just related to needing to bring in some more external resources to help out on existing engagements or were you guys ramping ahead of some growth anticipated this year?

Romil Bahl

There was a little bit of the ramp and hiring going into the year. There was a little bit of lower utilization type levels that happened with the heavy holiday season that happens in November, December, certainly for the PO business. So a couple of those things impacted the quarter.

Kevin Liu - B. Riley

And then just last one for me, with the three Medicaid RAC contracts that you've won, any sense for how those or when those begin to ramp in terms of revenue production?

Romil Bahl

We certainly expect to see revenue from really all three of those caid programs this year. Again compared to the magnitude of Medicare for us, obviously these are smaller contracts, right. So it's not necessarily going to make a big splash. Kevin, I just want to kind of set expectations around that. And yet, it's very important for us to prove to ourselves that we can be effective partners to the states. And as I was saying earlier to Alex's question, there is going to be 51 state caid programs rotating on a regular set of RFPs going forward into the future maybe for the next 50 years. So we think this is a long-term important build for us.

Operator

Our next question comes from Tim McHugh from William Blair & Company.

Tim McHugh - William Blair & Company

First I want to ask about the Profit Optimization that was stronger in the fourth quarter. Were those kind of one-time projects or some of them more kind of installed type of solutions that you sell as well?

Romil Bahl

Tim, I don't know that I said that PO was stronger in the fourth quarter. It certainly, overall the New Services segment did have a strong quarter, no doubt about that. But to get to the heart of your question, which is I think what you're asking is sort of how is that installed base or sort of annuity set of revenues doing versus the stuff you got to sell every 60 or 90 days, right. And we're doing much better on that. The sold backlog going into 2013 in PO is up significantly from what it was back in 2011, 2012, and I think we were directionally treating it as more of an advisory-oriented business. So we're successfully starting to move that dial.

It's still nowhere near our Recovery Audit businesses, neither our core, nor our healthcare businesses, where in effect everything that you're going to make, you've already sold. I think it's really just a matter of when the claims come through, and new clients won't ramp within that year necessarily and that they sold early in the year. So it's still vastly different from the Recovery Audit space, but we're getting much better with the annuity characteristics of that revenue.

Tim McHugh - William Blair & Company

And then on Europe you talked a little bit about kind of accelerating the roll out of the new delivery model next year. Can you talk about, is there a goal you have in terms of kind of the percentage of the work that's going to flow through your offshore operations? I know you've talked about that before on the U.S. Is there something you're targeting for Europe for the next year or two?

Robert Lee

So our current belief is that we can get up to about 50% of revenue identified and partially processed in low-cost centers around the world, right. Obviously, we'd like to put as much of that in our lowest cost centers as possible, but around the world we can put about 50% of that work effort into low cost centers.

Our goal last year was to get Americas to sort of a 15% to 20% area at least by the end of the year and we got that. We'd like to get to sort of 30% by the end of this year, maybe even a smidge over that in the Americas. And so Europe, where we're just starting should follow a trajectory like that over the next two year.

I'm not ready to, however, talk about numbers like 15 and 30, only because it's a much more complex set of offshoring efforts and outsourcing or data going outside the country that efforts, because of lots of individual country laws and so forth across the region that make it difficult. So expect a ramp, much like what the Americas has ramped, and yet a lower overall curve, if you will.

Tim McHugh - William Blair & Company

And is it fair to assume that to the extent we see more restructuring or kind of transformation expenses this next year and it's going to be primarily focused on kind of implementing that in Europe?

Romil Bahl

I think really as we continue to restructure operations, you will see severances. There certainly should be some in Europe absolutely, but I wouldn't suggest that we're at the end of what we're going to do in Americas either. And we're certainly approaching the end, because a lot of people that we have left now to our sort of talent management, performance management processes are very good and we would love to leverage them. And that's what we're doing. We're actually moving a number of people globally to their big clients to really extract the value we can. So I think at the end of all of that, I would say it's fair for you to assume that maybe more of the transformation related severance action will be in the EAP region.

Tim McHugh - William Blair & Company

And then last question from me, just from an M&A perspective. How are you approaching, and it seems the two large core areas will be healthcare and kind of Profit Optimization. But given the uncertainty around the Medicare RAC contract, how do you think about the healthcare space until you have better clarity in terms of that? And again if not, does that mean that Profit Optimization would be the more logical starting point?

Romil Bahl

Certainly, the way we think about acquisition is just sort of somewhat binary. Meaning, they're either strategically important to us and will be willing to pay up in terms of valuations to it being strategically important to us. And also just the prices of those businesses, analytics businesses, Profit Optimization businesses and certainly healthcare businesses are pretty frothy up there right now.

And then we think about more opportunistic M&A opportunities, whether they be in our core space or in a more advisory type oriented space, those sorts of things. We certainly won't turn our nose up at those. We will look at all of them. We are looking at all of them. In fact, since our successful follow-on offering late last year and putting the cash on the balance sheets, we've been working to rejuvenate our pipeline and talking to a number of companies out there. So certainly we would love do something in the, again, PO or healthcare space. Of course, we'd have to get comfortable with the valuations there.

On your question specifically within healthcare, I don't necessarily think we put as much weight on this CMS rebate as perhaps others do, right. I mean I think for us it's a very important piece of business. We will compete very hard in it. It doesn't necessarily change our stance on healthcare.

And the big space outside of government is the trillion dollars, the private payers, private health insurance companies spend in this space and we have to get there. And we think an important strategy should we be able to again find a reasonably valued company, is to look at both filling capabilities out and getting client references and client calls through potential inorganic activity.

Operator

Our next question comes from Dan Leben from Robert W. Baird.

Patrick Wang - Robert W. Baird

This is Patrick Wang for Dan Leben this morning. Most of my questions have been answered already, but back on the inorganic activity topic. Could you give us any sort of guidance on as we're considering growth initiatives including inorganic initiatives, do you have some sort of debt leverage or target ratio that you're targeting or any constraints around that area?

Romil Bahl

We are very cautious M&A guys, right. As you will see from our last couple of deals, we take evaluation very seriously. I was talking about our sort of binary view of strategic acquisitions versus sort of opportunistic acquisitions and certainly on the opportunistic side of that coin, we would be keen to make that accretive if not immediately very, very quickly, because that by definition for us it would be for example, binary recovery audit company and adding that volume to our global delivery model, right, by adding it to our scale and really driving margin out of it from a synergy plan standpoint.

So we would be very aggressive in the sort of time to accretion, again, if not immediate with any acquisitions on the opportunistic space. On the strategic space, we're open to sort of working our way there over a 12 to 18 month's time period.

Patrick Wang - Robert W. Baird

And then congrats with the 100% client retention, quick question there. Do you have a similar figure for the Recovery Audit Europe/Asia-Pacific as well?

Romil Bahl

Yes, we do. And it's not a 100%, which is why I wasn't pounding my chest about it, right. But I just want to remind that of the few clients we lost in the Europe/Asia-Pacific region, half of those were because of administration type issues or bankruptcy type issues. So it's certainly not panic mode.

What we're focused on is really on cementing our strategy, our business strategy with our clients, which is effectively to prove that we are the best recovery auditors and we won't be beat on price. And we do more with their data. When we implement both sides of that strategy, we are absolutely unstoppable in the Recovery Audit industry right now. And I'm very confident we will keep our retention rates high.

Patrick Wang - Robert W. Baird

And then one final question, more of a housekeeping issue. During the last quarterly earnings call, you mentioned that some of the third quarter revenues were actually pushed back into the fourth quarter, can you comment at all on if these revenues were realized as expected or if there is any other timing issues we should be aware of?

Romil Bahl

I'm sorry. I couldn't really hear that.

Patrick Wang - Robert W. Baird

On the third quarter call, you mentioned that some revenues were pushed back into the fourth quarter, could you comment on whether those revenues were realized as expected in the fourth quarter or if there are any other timing issues we should be aware of?

Romil Bahl

I mean, there are sort of always timing issues in Recovery Audit and lumpiness as you understand well. There were some specific ones, for example in the EAP region, because of the economy there. And that certainly as I was saying earlier has contributed to a bounce back Q4. Right now, we're dealing with similar kinds of issues.

Europe is not going to get healthy tomorrow. I mean, given what just happened in Italy yesterday and what that did to our markets, I think we all understand it's a long road to hold there. So we will continue to see some of that. And I've already talked about some of the lumpiness not just in Recovery Audit and healthcare in general, but also just given some of the issues in the processes and system.

So we will always deal with those issues. But I would just urge us to continue to look at us as a 12-month kind of story. Across our portfolio and across 12 months, we are actually remarkably predictable. It's just when you get down to a three-month or one-month type period that it wants my hair to turn gray.

Operator

Our next question comes from (David Levine), a Private Investor.

Unidentified Analyst

Two quick questions. On the last call you talked about the network initiatives, CSI, can you expand a little more about CSI and layout your progress to-date?

Romil Bahl

I'll be happy to, David. The CSI just as a quick reminder for everybody is the CIPS sustainability index and it's really focused not narrowly in sustainability as most people think of it is as sort of green, but really comprises an entire set of sustainability profile data for a vendor across the economic, social and environmental profiles. And typically, this is a very painfully manual process where the information has to be gathered by questionnaire, assessed by the buyer.

Vendors like us have to respond in hundreds and maybe thousands of proposals every year and just an expensive costly process. And while most of our large company type client's focus 90% to 95% of their effort on the top 5% or 10% suppliers as they should, there is just a solution begging to happen that automates this process for the rest of their suppliers and vendors.

And so yes, we talked about it in the last quarter call. We're making a really good progress. Our key partner is the Chartered Institute of Purchasing and Supply or CIPS. It's really going to be our first such kind of network or online business model where we're excited about the kind of platform we've built here at PRGX, which allows us to launch these sorts of businesses. This won't be the last that we will launch. And so we've now cut a deal with CIPS. They had almost 90,000 members, companies globally.

We've formerly signed a 10 year partnership CIPS. And we are looking to launch by Q2. We're well on track with our sort of online platform, our questioning scoring methodology, our back office evaluator team. So things are progressing very well and we're optimistically looking forward to kind of the second half of the year, when we should start to see some early client signings and revenue start to happen, very small but we should we signs.

Unidentified Analyst

Earlier on the call, you had mentioned that you've hit I guess your four year anniversary and I believe your contract has a four-year term and in essence all of your equity invested. So what's your real commitment to the company, both short and long-term?

Romil Bahl

It's a question that interestingly enough has come up a few times, the last few months, certainly, from team members and so forth and also some from the outside. In fact, it's kind of funny when Bob and I were out during our Roadshow in late November and early December, one of the sure signs we felt, like an investor was really liking our story, and liking our future was when they start asking questions about, a, is that's committed are you going to stay around, with board supportive, you've got everything you need to execute all this, those sorts of question.

So I take that as a supportive question, but I sort of feel the need just to make sure that there is of mass hysteria out there about the two things you've talked about, which is kind of the contract timeline and the equity piece. And then let's talk about the commitment, which I think is the important part of your question.

I mean, yet, from a timeline perspective, the first phase of the contract was four years, but it sounds like you've reviewed the contract. So it's just rolls automatically for every year. So it's an evergreen contract. And I wouldn't focus too much energy on the first four year timeframe, and actually interestingly enough, the equity piece kind of links to that.

I mean obviously, when you kind of attract a senior executive or CEO to a company, you put out an inducement grant and divesture with that contract. So yes, there is that issue. But again, we have mechanisms to retain and reward all our people through annual equity grants, which vest over three years. So there is certainly mechanisms in place to address that issue and I am coming to work every day, because I'm under contract with PRGX.

So let's talk now, I think about the commitment piece, right. If the passion in my voice isn't coming out across the phone, we're just going to have to meet in person and talk about what I think we can do here at PRGX, right and frankly what we're already doing. I mean, in any three-month, six-month, 12-month period, I look at that thing and I go, look, we have not done as much as I wanted to do. We should have done more, right.

But you look at 24 and 36 months, and we're making a lot of progress, right. I mean, from $21 million in adjusted EBITDA in 2010 to $31.4 million in 2012 and that's not quite 50%, but its well into the 40% kind of growth. And I have been sent data recently by one of our recent sell-side analyst that compares us favorably to the entire Russell 3,000 to our comparable set who has only done about 7% or 8% type of EBITDA growth over those two years. And we're doing 45%. So we're delivering and we're building just a terrific platform.

And let me tell you, I'm as passionate about that platform as I was in '09. In fact, maybe more so of that, because in '09 we sat in conference rooms like this and we ran after the flipchart, and we talked about our strategy ideas and we talked about what we wanted to do. But it was all PowerPoint slides. We didn't know exactly that we were in the right spaces. And here we are three years later and we are in the hottest spaces there are in the market, analytics, healthcare, it just doesn't get any hotter than this. And so we just need to keep executing and this is a very exciting place for many years to come.

Operator

I will now turn the call back over to management for any closing remarks.

Romil Bahl

So back and others in the queue, sorry, sorry we couldn't get to your questions, it looks like time is out. I will try and keep my answers briefer in the future and get to more questions. But certainly, we'll catch up outside of this forum. So thank you, operator, and thank you all for your interesting questions. I appreciate your attendance. Look forward to speaking to you at the next one.

Operator

Thank you, ladies and gentleman. That does conclude today's conference. You may all disconnect. And have a wonderful day.

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