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MedAssets (NASDAQ:MDAS)

Q1 2013 Earnings Call

May 01, 2013 5:00 pm ET

Executives

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

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

Michael Patrick Nolte - Chief Operating Officer and Executive Vice President

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

Analysts

Charles Rhyee - Cowen and Company, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

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

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

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

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

George Hill - Citigroup Inc, Research Division

David Larsen - Leerink Swann LLC, Research Division

Operator

Ladies and gentlemen, hello and welcome to today's MedAssets' First Quarter 2013 Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to Robert Borchert so we may begin. Please go ahead.

Robert P. Borchert

Thank you, Larissa, and good afternoon, everyone. 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.

A slide presentation that accompanies our formal comments and the webcast is posted in the Investor Relations section of medassets.com under Events and Presentations. As usual, we will be making 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'll discuss certain non-GAAP financial measures. For more information, please refer to the 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] So now I'd like to hand the call over to John Bardis. John?

John A. Bardis

Thank you, Robert, and good afternoon, everyone. Today, I'll summarize our first quarter 2013 financial performance, as well as share some perspective on our market position, industry trends and one of our innovation initiatives. Mike will provide an operational update, then Chuck will review our first quarter financial results, as well as our outlook.

We kicked off 2013 with strong first quarter performance across our business. Total net revenue grew 15.3% over last year's first quarter to $172.8 million, which included $11.2 million of performance-related fees, a portion of which was achieved ahead of schedule. Adjusted EBITDA rose 32.8% to $61.6 million, while adjusted earnings reached a record $0.41 per share. Free cash flow was up almost 90% to $8.5 million for the quarter, and we continue to generate financial leverage through debt prepayment. Overall, another strong quarter of operational and financial results.

During the first week in April, we held our 2013 Healthcare Business Summit. We set a record with over 4,400 attendees at this year's event. More than 1,700 prospects and client representatives attended over 70 educational sessions that covered Healthcare Reform; population health; accountable care organizations; ICD-10; Lean process improvement for optimal, clinical, and operational efficiency; value analysis strategy; and revenue cycle best practices to navigate the complex reimbursement environment. They also attended our 2-day collaboration event, an exhibit fair hosted by over 1,500 health care supply representatives.

There is much discussion about an industry shift to pay for performance or reimbursements tied to patient satisfaction and outcomes. However, in many of these sessions, as well as in numerous private client meetings, the fact was highlighted that the current fee for service reimbursement environment will remain for some time. Regardless of the payment models, the reality is that overall reimbursement rates per unit are declining. This will make it more imperative for healthcare organizations to implement strategies to move forward to optimal resource utilization and more efficient delivery of care. Taking the most appropriate steps to enhance productivity should enable reduction in unnecessary procedures and readmissions and lower overall cost of care.

We have seen these beneficial activities in action through the implementation of our MedAssets Advisory Solutions with Lean-led process redesign that reduces overall cost of supplies and achieve its best practice clinical resource utilization.

On our last conference call, I mentioned that clinical coordination and integrated performance improvement will be critical to future provider's success. The attendees at our Healthcare Business Summit provided me with an even greater conviction in this belief.

MedAssets has the expertise to help drive better client performance today, and our technology-enabled services offer one of the industry's best value propositions to bridge the gap between existing and optimal performance for healthcare providers. In early April, we also announced a strategic partnership with Ariba, a global leader in e-commerce solutions. This multi-year agreement creates a total transaction management solution for health care organizations and is a natural extension of MedAssets' industry-leading supply chain management and outsource procurement capabilities. Health care providers will be able to perform fully automated e-commerce with nearly 1 million companies connected to the Ariba Network through the MedAssets eCommerce Exchange. We'll use our strength as the nation's largest health care shared services procurement organization with over $5 billion being transacted annually to our national procurement center in combination with our world-class analytics to accelerate savings initiatives for health care providers. This true end-to-end procure-to-pay solution suite offers the most comprehensive coverage and management of all of the providers' nonlabor spend, including purchased services.

The smart invoicing applications will help providers eliminate paper invoices and also capture our higher percentage of early paid supplier discounts. There are still much work to do to deliver another successful year, but I believe we are continuing to create and identify opportunities for MedAssets to have a positive impact on each health care organization we work with, both today and in the months and years ahead.

Now let me ask Mike Nolte to comment on our operational focus.

Michael Patrick Nolte

Thank you, John. As we've discussed in the past, the foundation to driving more predictable, sustainable long-term performance is our ability to build great teams and to focus on solid execution and accountability. Over the last few months, we have added a number of high-quality senior leaders to our organization, including segment operations and technology leadership, critical customer service leaders, as well as product management, client management and enterprise sales roles.

Throughout the organization, we are continuing to use Lean as both the process improvement and a leadership framework, enabling our employees to drive change in critical client-facing areas like GPO contract management, as well as in Revenue Cycle implementations and product development. Our Lean team is helping to lead this process improvement efforts and this translates to better client service and more scalable growth for MedAssets, as well as the flexibility to deploy resources to the highest value opportunities.

While we reported higher-than-expected revenue in the first quarter, expenses were also below our initial internal forecast due to delayed timing of technology service and other investments. This includes the timing of major data center migrations, as well as IT enhancements to improve scalability and performance and to maintain long-term sustainability of our solutions for client and company success. These expenses will be incurred throughout the remainder of 2013 and well into 2014 as we've discussed previously.

From a profitable market growth perspective, I can't say enough about the superb performance of the professional services and client management teams in our Spend and Clinical Resource Management segment led by Keith Thurgood. Their hard work and commitment delivered a stellar quarter as we recognized approximately $6 million of performance-related fees ahead of plan. I also want to note that our focus on the client-led committed sourcing strategy continues to be a differentiator for MedAssets. One supplier recently described the pre-commitment event as having "really changed the market" after they were not awarded the contract. We continue to demonstrate that we can routinely deliver 10% to 20% savings to our provider clients and drive significant market share to our suppliers in the process.

For example, following 2 days of live contract negotiations with suppliers in a recent pre-commitment event, MedAssets saved approximately 25% for the more than the 80 clients who pre-committed their purchasing volume. Even for those clients who did not pre-commit, we created an average savings opportunity of 10% to 20%. We've also had a positive market response from MedAssets Advisory Solutions following the formal launch of this integrated consulting, analytics and profits improvement offering earlier this year. This has been supported by our ability to target our enterprise solution to the hospital C-suite whether broad and measurable value proposition of significant financial and performance improvement. Our Advisory Solutions capabilities are grounded in our expertise at implementing best practice processes assembled in deep partnership with clients. Our senior consultants can optimize cost and resource utilization, align care delivery to eliminate unnecessary or repeated procedures and leverage analytics and services to elevate revenue capture. This capability is increasingly relevant as health care organizations transition to fee-for-value longer term.

John also mentioned our strategic partnership with Ariba as one example of our innovation initiatives, and we continue to invest in high-quality product development. At our Health Care Business Summit in early April, we showcased several other solutions including our Service Line Analytics tool. SLA is an on-demand business intelligence solution that gathers, interprets and reports clinical, financial and supply cost data by service line, providing a clear direction for achievable cost savings and change management. The newest version includes an improved user experience, powerful dashboard analytics, as well as stronger trending and physician-level insights to allow deeper understanding of clinical practice over time.

At the Healthcare Business Summit, we also highlighted the Revenue Cycle analytics capabilities currently in development. The first of a suite of analytics solution that we will bring to market over the next 18 months, our intent is to ensure that clients have tools that enable them to assess performance across their revenue cycle, identify areas of opportunities and collaborate with MedAssets to improve performance. These solutions are also built as a component of a broader strategy to align with clients as they take on new risks. While the pace and the path are uncertain, a common theme among nearly all of our clients is the need to better understand the intersection of reimbursement data, cost data and clinical performance data.

We are also continuing to build upon our enterprise planning and performance management process. This year, we have launched our most vigorous effort to date to develop detailed product level plans as we gain even better visibility from our product management, development and sales and marketing teams on market trends and growth opportunities.

To wrap up our operational discussion, I want to focus for a moment on our contracted revenue estimates. Our rolling 12 months total contracted revenue estimate at March 31, 2013, was $601.7 million, a 3.9% increase from the first quarter of 2012. On a sequential basis, total contracted revenue increased 0.2% when compared to the fourth quarter of 2012 as growth from our recurring revenue streams was offset by the recognition of performance-related fees, including approximately $6 million that was recognized earlier than expected and rolled out of contracted revenue as a result.

In the Spend and Clinical Resource Management segment, our contracted revenue increased 4.9% year-over-year. In the Revenue Cycle Management segment, our contracted revenue estimate increased 2.2% year-over-year but decreased 3.5% sequentially from the fourth quarter of 2012 due partly to the reduction of fees from 2 Revenue Cycle clients -- Revenue Cycle Services clients that are winding down.

A further breakdown of Revenue Cycle highlights this further. Contracted revenue in Revenue Cycle Management technology increased 6.2% year-over-year, while our Revenue Cycle Services contracted revenue declined 8.1%. As we look to drive profitable market growth in 2013, bookings from our SCM segment are on track to achieve our revenue guidance. At the same time, while our Revenue Cycle Management pipeline is growing, we have experienced some short-term softness in bookings, specifically in Revenue Cycle services and related consulting. As was always implemented steps to improve our commercial success, and we will manage that actively throughout the year.

While a high return on invested capital business, our Revenue Cycle Services business has the lowest margin contribution to the segment. As a result, we have the flexibility to adjust the business cycles and we can actively manage the variable costs as the volume of our outsourcing work in particular changes over time. We are well positioned in today's changing health care market, and we will continue to work to deepen our client relationships to leverage the full breadth of MedAssets while investing in our products, services and internal infrastructure to reach our clients, as well as our own full potential.

Now I'll pass the call to Chuck to provide details of our financial results and outlook.

Charles O. Garner

Thank you, Mike. As with past quarters, please refer 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.

On a consolidated basis, our first quarter total net revenue increased 15.3% to $172.8 million when compared to the first quarter of 2012. This was driven by solid results across our business, as well as an increase in performance-related fees versus Q1 last year. We generated total adjusted EBITDA of $61.6 million or a margin of 35.7%, which was a 32.8% increase over the first quarter of 2012's adjusted EBITDA. This better-than-expected performance was primarily due to the timing of both performance-related fees and IT and other general and administrative expenditures that Mike mentioned earlier.

We reported adjusted earnings of $0.41 per share, which was above our expectations for the quarter, versus $0.24 per share in 2012 's first quarter.

Turning now to our revenue detail, which makes out our performance-related fees. Net revenue in the Spend and Clinical Resource Management segment increased 17.4% versus 2012's first quarter. In our Revenue Cycle Management segment, net revenue increased 11.8% over the first quarter 2012 with a solid subscription fee growth in our Revenue Cycle Technology offerings, as well as fees from fully ramped RCM services clients.

Consolidated net revenue included a total of $11.2 million of performance-related fees, as we benefited from the early achievement of approximately $6 million of these fees in the period. This compares with a total of $5.1 million of performance-related fees recognized in the first quarter of 2012. Approximately 92% of these performance-related fees were in our SCM segment. Excluding these fees from both periods, total net revenue grew 11.6% over the first quarter of 2012.

Turning now to our segment level financial results. Our SCM segment adjusted EBITDA margin increased 407 basis points from Q1 of 2012 to 49%, due primarily to the higher year-over-year performance-related fees. Excluding these fees, adjusted EBITDA margin in the SCM segment still improved approximately 130 basis points as we continue to experience core GPO net administrative fee growth and operating leverage.

Revenue Cycle Technology comprised approximately 69% of first quarter RCM segment revenue and grew 8.2% year-over-year. Services revenue increased 20.8% from the first quarter of 2012. The first quarter adjusted EBITDA margin in our RCM segment improved 268 basis points from 2012 to 23.2%, due primarily to operating leverage from fully ramped RCM services clients.

Free cash flow in the quarter was up 89.7% over Q1 last year to $8.5 million due to lower capital expenditures versus the prior year's first quarter. We anticipate our adjusted EBITDA conversion to free cash flow to increase in the second quarter, and we continue to expect our free cash flow conversion to be approximately 35% to 40% of adjusted EBITDA for full year 2013.

At March 31, balance sheet reflects $857.6 million in total bank and bond debt net of cash. During the first quarter, we prepaid $15 million of our Term Loan B, along with the scheduled principal payments. Net debt outstanding was approximately 3.9x our trailing 12-month adjusted EBITDA, and we will continue to use free cash flow primarily to pay down debt.

Turning now to our financial outlook. Today, we are confirming our 2013 financial guidance as summarized on Slide 16 of our presentation. As Mike discussed earlier, our anticipated IT and operational investments are part of our long-term plan to improve performance and to support future growth. Given this investment focus and depending on our revenue mix between higher margin, GPO and software service revenue and lower margin consulting and services revenue, we expect our adjusted EBITDA margin to be either up or down less than 100 basis points when compared to full year 2012.

Our other assumptions for 2013 full year guidance are listed on Slide 17 and reflect only minor tweaks to our estimated interest expense, depreciation expense and fully diluted share count. Importantly, we continue to expect to generate free cash flow of between $80 million and $90 million this year, which should include approximately $15 million to $25 million of cash taxes. While performance-related fees were 6.5% of first quarter total net revenue, we still expect these fees to be between $18 million and $22 million this year or approximately 3% of total net revenue in 2013 and more evenly distributed through the remainder of the year.

We expect second quarter 2013 net revenue in our Spend and Clinical Resource Management segment to be up 2% to 5% from net revenue of $102.1 million in the second quarter of 2012, which included $4.7 million of performance-related fees in last year's quarter.

In our Revenue Cycle Management segment, we expect second quarter revenue to range from a 3% to a 2% -- excuse me, a 3% increase to a 2% decrease when compared to the second quarter 2012 revenue of $60.9 million. This year-over-year growth rate is expected to be impacted by the fully ramped RCM services clients, as well as one-time deferred revenue benefit in the second quarter last year.

Consolidated net revenue was expected to grow 1.5% to 3.5% over the $163 million reported in the second quarter of 2012. We expect second quarter total adjusted EBITDA margin to be in the 28% to 30.5% range. This will be up 40 to down 210 basis points from the second quarter a year ago and below the first quarter of 2013 on a sequential basis, as we expect to recognize fewer performance-related fees and also expect to incur expenses related to IT infrastructure and other investments.

We expect our GAAP EPS to be in the range of $0.02 to $0.04 per share compared with $0.04 a year ago. We had forecasted up to $10 million in acquisition and integration expenses for the first quarter as we consolidated our employees into a single facility in Plano, Texas and continued systems migration and standardization efforts. During the quarter, we incurred $8 million in acquisition integration expenses and expect the balance of the remaining $2 million to be incurred in Q2.

Finally, our adjusted EPS is expected to be down 8% to 15% from second quarter 2012, adjusted EPS of $0.28 per share. For the third quarter of 2013, we expect total net revenue to be flat to up 3% from the $163.4 million reported in Q3 of 2012 and consolidated adjusted EBITDA margin to decrease between 240 to 390 basis points from 2012 third quarter margin of 34.9%. We expect performance-related fees in this year's third quarter to be less than half of the $8.1 million in fees recognized in last year's comparable quarter.

I would also note that the third quarter of 2012 included approximately $2 million in one-time or non-recurring revenue in our Revenue Cycle Management segment.

In summary, we delivered solid results in the first quarter of 2013 and achieved more than half of our performance-related fees for the entire year. As John and Mike mentioned, there is still more work to do to deliver another successful year, and as such, we remain focused on improving our execution, delivering on our innovation agenda and delevering our balance sheet.

With that, we would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Charles Rhyee from Cowen & Company.

Charles Rhyee - Cowen and Company, LLC, Research Division

First question on the reported sales. Obviously, the earnings benefited from the earlier-than-expected performance fees, but it also sounds like it's -- how much though on the deferred sort of call it the IT costs, how much was -- how much had you expected to spend in the first quarter that got pushed out until later quarters?

Charles O. Garner

Yes. So, Charles, this is Chuck. We obviously achieved about $6 million of performance-related fees ahead of schedule. There were several million dollars of G&A and IT-related expenses that we had anticipated incurring in the first quarter of 2013, which we now expect will be incurred in the remaining second, third quarter and possibly as far as the fourth quarter of '13.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. And then maybe a question on the second quarter guidance. Yes, I'm looking on the last presentation, and you were -- if I'm not mistaken, you're looking at sort of 5% to 8% top line growth. It's fair to think that this is partly -- is that mostly to be pulled forward by the performance fees going out when you look at the margins, you're looking for a 90 to 190-basis-point improvement versus last year. Now we're kind of looking at a little bit flat to down a bit. What I'm trying to do is getting down to the $0.24 to $0.26 earnings. What else is happening? Because I would think that as you adjust your EBITDA margins, it seems like there's something else to get you down there. Is there something in sort of the non-cash lines? Is there a lower add back on amortization that we're seeing when we get back and we kind of work our way back up to cash EPS?

Charles O. Garner

Yes. No, Charles, I think you hit on the key points, right? It's largely timing given the great work that the Spend and Clinical Resource Management team had done, the ability to earn, recognize and achieve sign-off of these performance-related fees was ahead of schedule. There's about $6 million that we recognized in the first quarter, so it will be on our expectations for the quarter. That obviously comes to the higher contribution margin that obviously has a meaningful impact on margins. And then, of course, the expenses, as far as the timing related. The fact that we had initially early in the year planned to incur some expenses in the first quarter that some of these are, as I said, being pushed to the second, third, and a little bit to the fourth quarter. That timing-impacted expenses obviously have a 100% drop-through to the margin. That really explains the grand majority of the variances from our prior guidance as we look to both the first quarter previously and now as we're providing updated guidance for the second and third quarter.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay. But nothing sort of in the noncash item that we add back that you report here?

John A. Bardis

No.

Operator

The next question comes from Robert Willoughby from Bank of America Merrill Lynch.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Chuck, is it possible to break out kind of how much in the way of revenues you generated from services that might be new or different this year relative to last? Is that -- can that be meaningful?

Charles O. Garner

It's -- we don't break that out currently. And so I'd say we're seeing, as Mike alluded to earlier, I think some good traction and some early strength and I'll maybe let Mike talk a little bit of what he's seeing from a market perspective related to the services opportunities.

Michael Patrick Nolte

The question on Revenue Cycle Service? Sorry, I just want to make sure I'm clear on the...

Robert M. Willoughby - BofA Merrill Lynch, Research Division

With your overall revenues quarter-to-quarter, what was new? Is it 2%, 3% of revenues are there today that weren't there last year from new services?

Michael Patrick Nolte

In terms of new offerings?

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Yes.

Michael Patrick Nolte

Yes, I mean I -- we don't break it out, as chuck said. But I think we're seeing good traction particularly around our advisory business. And some early indicators, particularly on the technology side as it relates to both RCM and SCM. There's some real strength, I think, both in a -- from a pipeline perspective, as well as revenue growth coming from.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Okay. Maybe a question for John. Our device guy noted a new no touch sales model for hip and knee implants in the orthopedic arena. I mean, does this play into your world? Is that something you can take advantage of now more aggressively, whereas in the past maybe that category was closed to you?

John A. Bardis

Yes, I think so. I mean I think the market is definitely moving towards the commoditization of what had historically been high cost physician preference items. And as those move more toward commoditization, as they have the large clients of ours who we work with where places become much more narrow between the number, for example, of knees that the system chooses to use. That, that movement toward commoditization gives us great opportunity for expansion of contract. The majority of the cost of those Class III medical devices, as you know, is really in SG&A. So as sales representatives become less valuable for the selling effort inside the operating room and cath lab to doctors. Those costs can be removed and it's -- and effectively moved to price reductions. So we're seeing real movement in that space.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Is there something tangible, John, we can point to at this point? Or is it just the ideology is there and moving in the right direction?

John A. Bardis

Well, one of our performance-related pull forwards involve a very large client where that kind of work has not only been done but continues to be done. And so, it -- for us, it tends to reflect either an ongoing contract volume revenue improvement through our SCM and GPO business or through performance fees that were earn as a result of driving those costs down. And so in both cases, we had tangible material effect on the quarter.

Operator

The next question comes from Steve Halper from Lazard Capital Markets.

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

Could you just talk to the dramatic reduction that we saw in the capital expenditure line in the quarter? Does that go back to some of your statements around planned investments being lower than anticipated? And what's the CapEx outlook for the remainder of the year?

John A. Bardis

Yes, so I think 2 things I would add there. So one is, if you look back in the fourth quarter, CapEx was higher a little bit from a trend perspective. Some of it is purely just timing of when some investments were made. But the second piece I would add, and Mike can maybe just add some additional commentary to that as well, is I think there's a much greater level of operational discipline now around investments, whether it be OpEx or CapEx. And so that also drives a little bit of the delay in some of our investments where we're taking, I think, a much finer-tooth comb to investments where we can be very thoughtful about that in the way we maybe having from time to time in the past. But I wouldn't read too much into the unusually low quarter in the first quarter of CapEx. It's a little bit just coincidental timing variability coupled with some more discipline around it.

John A. Bardis

Yes, and I think we started last year and we're continuing -- I think I mentioned in the remarks as well, to really follow through on a commitment to product-by-product and service-by-service investment rationalization, just making sure that we're disciplined about where we're -- we put cash dollar regardless of whether it translates to OpEx or CapEx. And so from time to time, we'll see changes in the profile of that as the investments play out depending on what we're trying to accomplish from an R&D perspective or around other infrastructure investments that we're making.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Right. And, Chuck, what level of CapEx do you expect for the rest of the year?

Charles O. Garner

So we're still forecasting for the full year $55 million to $65 million in CapEx. Of course, that's PP&E, but the majority of that is capitalized software.

Operator

Richard Close from Avondale Partners is online with a question.

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

If we can hit on the contracted revenue, please, for the Revenue Cycle Services, maybe a little bit more detail on -- I think you mentioned 2 clients that were winding down, and then also softness in bookings in that line item, if any more details could be provided?

John A. Bardis

Yes, I'd give you -- so the couple of clients, it's -- it happens from time to time, a combination of acquisition and financial distress is what really is translated in the short run to the impact. It's not a competitive loss per se, just the nature, in some cases, of Revenue Cycle Services clients as they've -- you bump into that from time to time. In terms of the pipeline, it's largely a timing issue. Actually, the pipeline looks pretty good just in terms of how that is translated into contracted revenue. And so the timing -- make sure we fill up back in part what we've taken out from -- for performance-related fees as led to just a little bit of softness quarter-to-quarter.

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

Okay. With respect to the acquisition integration expenses that you called out, I guess, $8 million versus the $10 million, can you talk about that line item going forward? Did -- do we just get the benefit of that $2 million or does that flow through? And is that the same thing as the lower IT spend? I just want to be clear there.

Charles O. Garner

Yes. No, the $10 million we had forecast initially in the first quarter related to acquisition integration-related expenses, we had initially expected that, that would all be incurred and they're suspended through to May in the first quarter. $8 million of the $10 million actually were incurred, and there's about $2 million that we anticipate incurring in the second quarter of 2013. And at that point, I think, we will have concluded any acquisition integration-related expenses. I mean, keep in mind, these are largely related to some final technology integration and also some facilities consolidation we discussed, which is the last phase of the integration efforts related to our Broadlane acquisition.

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

But the lower IT spend in the quarter, that -- was that G&A or am I to expect that in the second, third and fourth?

Charles O. Garner

Yes. So most of the -- those other items, the lower spend and they are 2 different items. Those items will not be something that we would show as an adjustment in our adjusted EPS and EBITDA. Those are normal course business, investments, some to support customer-facing solutions and some for infrastructure. But those would just be normal operating expenses that would show up for the most part in G&A, and those are just timing-related. We still anticipate to extend those -- incur those expenses in 2013. But a portion of those will be incurred in the second, third and fourth quarter. Those will be called out as an adjustment to the EPS.

Operator

Ryan Daniels from William Blair is online with a question.

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

John, maybe a big picture question for you, and I'll ask it two-fold. You mentioned your hospital clients continue to bear more risk and are facing more margin pressure, so can you talk about one maybe some of the novel offerings you have, like advisory services I think you referenced that are gaining the most traction in the market. And then a follow-up, there would be any areas you're really focused on in development, perhaps more workforce management or clinical alignment solutions, things of that nature, that can help address these issues and serve as a continued differentiator for you guys?

John A. Bardis

I mean you characterized actually the main issues with both questions. The environment we're facing and hospitals are facing is the emergence of the exchanges later this year. We believe exchanges pricing for hospitals will come somewhere in between private pay rates and Medicare, probably on the further end of that. However, as more of the private sector migrates patients or individuals from private pay to Medicare, and I think it's $10,000 a day, what we're seeing is rates per individual and then ultimately payment per unit of measure in this industry or unit of service is going to come down dramatically. So what that means is cost per unit has to come down. So we think our solutions on the clinical -- spend in clinical management front did very nicely. That ranges literally from the actual direct price of the widget to the utilization of that widget to the process of how care is delivered to ensuring that only necessary care at the most efficient cost is delivered. So when you think about everything we do from the pricing of a product all the way to the leaning out of clinical processes to shorten length of stay and reduce resource managed in that case, we're seeing demand as being pretty high in all fronts. So those are the drivers of growth for us. So we're seeing solid GPO growth, but we're also seeing solid growth in our proposal pipeline for these Advisory Solutions and then the technology that's in data systems that bracket those services.

Operator

The next question comes from Jamie Stockton from Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess maybe the first one, Chuck or Mike, with the 2 Revenue Cycle Service engagements that are winding down, are there going to be any lingering cost from the -- that we should be keeping in mind in the second quarter that might not be covered up with the stepdown that you're taking in Revenue Cycle Service revenue?

John A. Bardis

No, there's nothing out of the ordinary. In fact, the winddown will actually occur over a couple of quarters. It just doesn't match the expected revenue for the year. And this is a business as an outsourcing business, as -- there's a combination I think, as you know, of relatively low contribution margin to the business, as well as pretty high variable cost content. So we can manage the profitability piece of the business fairly aggressively. It's not really an issue from a contribution perspective. It's more top line revenue.

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

Okay. And then, Chuck, the COGS during the quarter and the G&A looked like there was a shift that occurred. It seems like it's happened at previous quarters as well where costs seem to be flowing through. Could you talk about that and what we should expect going forward for the rest of the year?

Charles O. Garner

Yes, there tends to be from time-to-time in certain quarters some variability between those 2 line items and depending on what specific part you're looking at. For example, we had a little bit lower capitalized software rate in the first quarter. That has a little bit impact on the mix. Also, as we talked about some of the investments that both Mike and I alluded to earlier, the timing of those can skew things a little bit as well. And then on top of it, early in the year, things like payroll taxes, things of that sort can have a little bit of an impact. So depending on what period you're comparing against, those are largely the anomalies you tend to see somewhat -- generally in the first quarter but also specifically in this first quarter.

Operator

The next question comes from Bret Jones from Oppenheimer.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

I want to go to the performance fees and the $6 million outperformance in that line. Obviously, if we adjust it, we would have reported $5 million excluding the outperformance, so I'm just wondering, did you recognize the $3 million to $5 million that slipped out of 2012 in the first quarter?

Charles O. Garner

Yes, that's correct.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

So excluding that, performance fees would have essentially been 0 for the quarter?

Charles O. Garner

So there were some portion of performance fees. Again, we said there was about $3 million to $5 million. We didn't provide specific guidance, so I think it's fair to say it will be somewhere between $0 million to $2 million on top of that. And then in addition, there were $6 million that we had earned ahead of schedule relative to our plans for the year of performance fees for a total of $11 million -- a little over $11 million out of roughly $18 million to $22 million we anticipate for the year.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay, great. And then I just wanted to follow up on an earlier question, asked you to quantify the costs that slipped, and you quantified it to several million. If I look at the beat, it looks like about half of that came from the performance, the outperformance on the performance fees side. And I'm just wondering was the balance of the rest -- remaining upside all from deferred cost or was there some actual upside in the quarter?

Charles O. Garner

Yes, so it's a couple of pieces. So one, as you said there was a revenue timing fees related to performance fees. There was also a little bit of a revenue mix shift in that quarter, if you look at obviously the strength that we're spending in Clinical Resource Management segment, say, relative to the Revenue Cycle Management segment and some of the services fees within there. There's obviously different contribution margin components to those pieces of business where we tend to have higher contribution from our group purchasing and our software to service business lines. And then certainly, there was some delays as related to our initial expectations for expenses we'd incur and investments. Some, technology-related; some were operational improvements we're working to make. And that does explain another meaningful piece, several million dollars of the variance relative to our initial guidance range versus our actuals.

Operator

The next question comes from Sandy Draper from Raymond James.

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Most of the questions have been asked and answered, but maybe just to follow up on the Revenue Cycle Technology, which obviously showed with the breakout you guys gave, nice growth in the backlog, up 6%. There are some studies that are coming out now that are saying we're about to go into a replacement cycle or there's maybe a better opportunity for replacement cycle, the core financial systems. In conversations with your customers, and this has come up on and off, are you seeing any indication that that's posing a risk to any of your systems? Any additional opportunities in those upgrade cycles? Or do you think it's just still sort of the same level of business? Because obviously, it hasn't impacted yet, just trying to think about the next 12 to 18 months.

John A. Bardis

Yes, I mean I think it's -- I would say I would characterize it as about the same. I don't think we see any increased risk as a result of a replacement cycle. I've seen the same studies that suggest that, in particular as the wave of clinical execution in IT had sort of calmed down a bit that people are focused in particular on Revenue Cycle applications. I think as people understand the complexity of what it's going to take, for example, the transition to ICD-10, what's going to take to transition to different reimbursement environment. I think, if anything, we're seeing a little bit of tailwinds around solutions that we provide to enable as customers go through major IT investments, as they go through major IT transitions to make sure that they have the ability to get reimbursed for every last dollar that's owed to them. And we compete, at the end of the day, around those marginal dollar.

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. So maybe just a different way to ask this, comment or question about what you just said. Have you -- the recent quarter versus maybe a year ago, any significant shift in terms of what products, whether there's demand for more product? Is it in certain areas, there are fairly similar mix of business or is anything changing in terms of mix or demand mix in RCT business?

John A. Bardis

Yes, nothing in the core that is substantially different. Certainly, a lot of interest and growth around some of the things we're doing, for example, around bundled payment technology. And that has a direct connection to our contract management application. So there's some increased demand there, but that's probably the only area where I'd say there's something I would say as a material difference in terms of demand for particular technology solutions.

Operator

The next question comes from George Hill from Citigroup.

George Hill - Citigroup Inc, Research Division

I don't know if this was covered earlier, but with the decline in the implied new business bookings in the RCM segment this quarter, I guess can you talk about how you expect the bookings in the segment or the new business signed -- implied that new business signed in the segment to trend? And I guess my point would be to say do you need pretty strong growth in the next 3 quarters to get to an up period year-over-year we're not showing meaningful deceleration over the last year? So I guess, can you just talk to us about how you're thinking about that, with the roll off of the 2 customers, the kind of the weak quarter that we've had here, how we're thinking about the rest of the year?

Charles O. Garner

Yes, from a bookings perspective, I think -- first of all, I want to isolate the bookings challenge we're talking about to really our Revenue Cycle Services business, which is one very specific part of one segment. We continue to see strong growth from a technology booking perspective. Pipeline looks terrific, and I think from a contracted revenue perspective even, we feel pretty comfortable. On the services side, actually the pipeline looks pretty strong. And so what I'd say is we expect it to be consistent with the guidance that we've given for the year. And we feel, although there's obviously a lag in translating booking to revenue, that we'll be able to replace the revenue that we described around the 2 customers that impacted contracted revenue.

George Hill - Citigroup Inc, Research Division

Okay. And then maybe a quick follow-up either for John or for Mike, we feel like we're at the early stages you see in this population health management trend take off. We know it's something that a lot of big provider organizations are worried about. I guess can you talk about what specific tools is MedAssets going to market with that is generating demand? You talked about some of the work that you guys are doing in value attribution and kind of risk-modeling utilization. I guess, can you kind of brand these tools for us and tell us what are you showing clients and show them -- and got them going, "Wow, we need to bring this onboard"?

John A. Bardis

Yes, I mean, I think I'd highlight one thing before I dive in these specific tools. One and the first thing to highlight is that, at the end of the day, the consistent theme around the change, the value and population health and the challenges that our customers face is that they still have the need to continue to control costs and to drive reimbursement success just as they have traditionally. And that no matter what model they face, those couple of things are going to remain true. If you're focused on specific tools that we help deliver as it relates to population health, the things that get people excited are our ability to translate some of the work that we've done historically and the relationship that we've had with clients to be able to manage risk in a different way. And so, as I mentioned, the analytics investments that we're making, at the end of the day, that's really bringing together cost data, reimbursement data and clinical practice data as a means to help clients understand where they sit, whether it's in relationship to a negotiation with a payer or with the actual practice day to day so that they understand as that risk from a population health standpoint shifts from what's traditionally been the payer world to providers, they have insight into what that really means for them from both a financial and a clinical perspective. We're also, I think that you're aware, pretty actively engaged in some high-value services around population management as well. And that specifically relates to services work that we do around readmissions through something we call patient engagement advisors. That's a relationship that we built over time with a number of customers, and that also is something that has a pretty immediate return on investment and gets customers pretty interested.

Operator

The next question comes from David Larsen from Leerink Swann.

David Larsen - Leerink Swann LLC, Research Division

As far as your interest expense goes, you came in a little bit better than what I was looking for. I think you'd guided $51.7 million for the year. If you do $11.3 million for each quarter for the rest of the year, you're talking about $45 million. So any change to that number for guidance for the year?

Charles O. Garner

Yes. There's a couple of small points in the first quarter related to some timing here versus our expectations of debt prepayment expectations around rates for the year, as well as the fact that we plan to put some hedging in place that we'll likely do in the second quarter as opposed to the first quarter. The other piece I would add, which is probably explaining most of the variance, and this is sort of a one-time Q1 phenomenon related to as we reviewed our policy for interest expense associated with capitalized software development based on feedback from our accountants and auditors, it was advised to us that we should be capitalizing some of that interest expense somewhere between $1 million to $2 million, I'd say a one-time catch-up in the first quarter. That probably is what you're seeing is a not insignificant variance versus probably what you were modeling and folks have been modeling around interest expense. We still think for the base of the year, we're about in line with where we had projected early in the year. But we, well, the second quarter along with any update with the contracted revenue, other items, obviously refresh and review our outlook. And to the extent that there's any changes to any items in our guidance, we'll, of course, make it then. But at this point, we think we're pretty much in the same ballpark as what we have planned, but that's probably the biggest difference you're seeing relative to your models.

David Larsen - Leerink Swann LLC, Research Division

Okay, Chuck. And I love how you seem to guide conservatively. The Rev Cycle revenue came in $63.3 million. It looks like it's like $2 million above the high end of your guidance for the quarter. And then the midpoint of your Q2 rev guidance looks like a $2 million sequential decline. What's making up that $2 million sequential decline? Is that the service engagements? Those 2 large clients? Or any more detail there?

Charles O. Garner

Yes. Most of the decline tends to, in that area of the business, be related to the services or more episodic engagements, more consulting engagements, which tend to come in and out of revenue, of course, over short periods of time and also can come in and out of contracted revenue over short periods of time as well. But you're exactly right on those items.

David Larsen - Leerink Swann LLC, Research Division

So it's really those 2 large service engagements that are making up that decline?

Charles O. Garner

That's the vast majority, correct.

David Larsen - Leerink Swann LLC, Research Division

Okay. And then I don't know if you've disclosed this, but I think St. Barnabas runs through -- halfway through fiscal '14 for Rev Cycle Services. Is that correct? Or -- and if you haven't disclosed it, that's fine. Just thinking that, that might be one of the 2 that you're talking about?

Charles O. Garner

Yes. We certainly don't disclose client-specific contract details. But that has been an area of concern for us, and that is an engagement I think we feel comfortable with. And I'll let John or Mike add any color around that, just the general relationship.

John A. Bardis

Yes, the relationship's great. The performance has been great, no issues.

David Larsen - Leerink Swann LLC, Research Division

Okay, great. And then just one last question. You mentioned that the term fully up and running Rev Cycle clients. And I'm sort of unclear on what that means, like you used that term a couple of times like fully ramped Rev Cycle client. What is that -- I'm not sure at what you're getting at there?

Charles O. Garner

Sure. Yes, it tends to be with Revenue Cycle Services engagements. If you think about those types of engagement, there's a period of essentially ramping up the activities. There's consulting activity, process reengineering, sometimes staff augmentation, et cetera. So both the level of effort, as well as the revenue and the volume of fees tends to ramp up to a somewhat of a steady-state over time. That can happen over several quarters. So part of what you saw in the first quarter was there were some accounts where we had risked a more fulsome ramp-up. And so by comparison to a year ago, they weren't at that same level of revenue because they were in the process of ramping up. So you get a year-over-year, more meaningful positive variance.

Operator

The last question comes from Steve Halper from Lazard Capital Markets.

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

Just a follow-up on one of the questions. Could you go through the explanation again for the softness in the bookings on the Revenue Cycle side that you saw in the quarter? And I think that you said that was in the services area?

John A. Bardis

Yes. Again, it's not bookings. It's in contracted revenue. And it's related to 2 customers who are winding down earlier than we anticipated, that our Revenue Cycle Services partly outsourcing agreements. And that combined with a little bit of softness, and it is a little bit in Revenue Cycle Services from a pipeline perspective.

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

Right. That's what I was getting at, the pipeline, calling out a little bit of a softness in the pipeline. So are you able to sort of get a little more granular on that?

John A. Bardis

Yes. I mean I'd like to tell you, it's largely timing related in terms of conversion to contracted revenues, right? When you boil it down, it deals we expected to close early year, that are going to close later in the year than we anticipated.

Michael Patrick Nolte

Steve, one other just small comment, and that is the Services business operates at about 10% EBITDA margin. And the Technology business is roughly 3x that, so this is just in the Services. So the contribution impact tends to be pretty de minimus.

Charles O. Garner

Okay. Well, I think we're at the end of our time and I think at the end of our questions. So we'd like to thank everyone for joining us today and look forward to speaking with you at the end of our second quarter.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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