The Advisory Board Management Discusses Q4 2013 Results - Earnings Call Transcript

May. 9.13 | About: The Advisory (ABCO)

The Advisory Board (NASDAQ:ABCO)

Q4 2013 Earnings Call

May 09, 2013 5:30 pm ET

Executives

Robert W. Musslewhite - Chairman and Chief Executive Officer

Michael T. Kirshbaum - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

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

Sean W. Wieland - Piper Jaffray Companies, Research Division

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

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Matthew J. Kempler - Sidoti & Company, LLC

Ato Garrett - Deutsche Bank AG, Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

William Sutherland - Northland Capital Markets, Research Division

Operator

Welcome to the Advisory Board Company's Fourth Quarter Earnings Conference Call. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Robert Musslewhite, Chief Executive Officer of The Advisory Board Company. This call will be archived and available from 8:00 p.m. this evening until 11:00 p.m. on May 16 via webcast on the company’s website in the section entitled Investor Relations.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding The Advisory Board Company’s expected quarterly and annual financial performance for the calendar 2013. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the, foregoing discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors among others set forth in The Advisory Board Company’s filings with the Securities and Exchange Commission and its fourth fiscal quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. For additional information on the company’s results and outlook, please refer to its fourth fiscal quarter news release. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, I will turn the call over to the company’s Chief Executive Officer, Mr. Robert Musslewhite.

Robert W. Musslewhite

Thank you, and good evening. I’m Robert Musslewhite, Chief Executive Officer of The Advisory Board Company, and I’m joined this evening by Michael Kirshbaum, our Chief Financial Officer.

We have a 3-part agenda for today's call: first, I will open with a summary of our performance for the quarter and for our fiscal year covering our financial results and the drivers of our business performance; I will then turn it over to Michael to take us through a more detailed review of the financials; and finally, I will close with an update on our key priorities for the remainder of the calendar year. As always, we'll be happy to take questions at the end of the call.

Let me start with an overview of our financial results. Revenue for the quarter ended March 31, 2013, increased 19% to $119.7 million from $100.5 million in the comparable quarter of the prior year. For the quarter ended March 31, 2013, non-GAAP earnings per diluted share and adjusted EBITDA were $0.33 per diluted share and $22.7 million, respectively, compared with $0.31 per diluted share and $19.8 million for the quarter ended March 31, 2012. For the fiscal year ended March 31, 2013, revenue increased 22% to $450.8 million from $370.3 million for the year ended March 31, 2012. Non-GAAP earnings per diluted share and adjusted EBITDA were $1.23 per diluted share and $83.0 million, respectively, compared with $1.13 per diluted share and $70.3 million for the year ended March 31, 2012.

We closed the quarter and the fiscal year with strong performance, with 19% revenue growth for the quarter and 17% contract value growth over last year at this time to a March 31, 2013, contract value of $466.3 million. Our membership base grew 10% to 4,114 institutions as of the close of the fiscal year, yielding an average contract value per member of approximately $113,000, up from approximately $107,000 last year. We also closed the fiscal year with an overall member renewal rate of 90%. This important fiscal year-end metric reflects both product quality and member satisfaction and is a critical factor in establishing our platform for future growth. Our consistently high member renewal rate provides visibility and predictability in the business.

Looking at our strong performance across all of the key metrics that gauge the health of the business, revenue growth, contract value growth, membership base expansion and renewal rate, it is clear that our business model remains strong and that our members derive measurable impact from their work with us. In turn, this tangible value means that members want to continue to work with us in deeper and more comprehensive partnerships, driving ongoing company growth and expansion of our footprint and impact.

One factor driving a deep and ongoing need for our products and services is the continued complexity in the markets we serve. Both hospitals and universities are facing the challenges posed by demographic shifts, revenue pressure, a new value orientation and business model transformations. These challenges mean that members need our help more than ever as they seek to both operate in the current environment and prepare for the big changes to come. One of our constituents feeling the complexity particularly intensely right now is the hospital and health system CFO. The big market changes in health care acutely impact this role. New reimbursement methodologies, such as value-based purchasing and bundled payments, require new financial and operational strategies. As hospitals seek to build a network to deliver more integrated care, financial relationships with physicians and other care providers change. As the population ages and a greater proportion of patients are covered by Medicare, CFOs must find a way to drive sustainable margins, a task made all the harder as reimbursements from government and commercial payers alike are becoming tighter overall.

Our research distilled the many competing priorities for CFOs down to 3 key imperatives: excelling at risk-based contracting, expanding operating margins and maximizing revenue capture. We have a range of research, tools, performance technologies and services to help CFO manage the institution toward these imperatives, and I thought it might be helpful to share a few examples. First, excelling at risk-based contracting. As market forces shift from volume-based reimbursement structures to value-based incentives, hospitals and health systems will increasingly need to take on risk. In addition to the significant implications from a care delivery perspective, this shift also has financial implications. And through our Research and Insights programs, we offer numerous resources to help CFOs navigate this change. For example, our population health playbook for avoidable costs has been tremendously popular. Facing the growing prospect of managing risk-based contracts, health care leaders must develop effective strategies for managing the total cost of care for particular populations. Further complicating this challenge is the fact that most organizations have mixed risk portfolios and lack clear reimbursement incentives to guide their care transformation priorities. Our playbook offers avoidable cost benchmarks that provide insight into important spending differences by payer, health care service and diagnosis. These data allow CFOs to assess health system capabilities and economic realities to shape a strategy for thriving under evolving accountability incentives.

Another tool that our Research and Insights team developed for CFOs is our value-based purchasing impact assessment. The tool provides CFOs with a facility-specific estimate of incentive payments that the facility would receive under Medicare's hospital inpatient value-based purchasing program. It also ranks the incentive payment relative to other facilities to allow CFOs to benchmark their performance. Finally, the tool helps identify underlying quality measures driving suboptimal performance to provide CFOs a blueprint for working with their teams to take the steps required to improve. This tool has been extremely popular with more than 700 institutions using it to prepare for new reimbursement models. Of course, it is not just government payers moving towards risk-based contracting, and our CFOs have also been very interested in our commercial bundled payment tracker. Across the country, dozens of providers have already inked bundled payment contracts with commercial insurers and employers, and CFOs are hungry for information about those institutions that have already taken this step. Our tool provides a comprehensive, one-stop shop for information about these types of contracts with descriptions of these private payer and direct-to-employer bundling initiatives. More than just a compilation, the tool allows CFOs to filter the contacts by service line to see where bundled contracts are getting the most traction and to learn more about the service lines most important to their own bundled payment strategies. We are constantly updating this tool as news of new bundled contracts surfaces. With more than 4,000 users of the tool, it is clear that in a market that is this dynamic, having a single, reliable, usable source for this information is invaluable to our members.

On the second imperative of expanding operating margins, our CFOs take advantage of our wide array of performance technologies aimed at cost reduction. From our nursing operations performance program, which helped an academic medical center in the Midwest improve productivity and reduce premium labor for $5 million in annualized savings, to our surgery performance program which helped a 2-hospital system in the South reduce surgery supply costs by over $500,000 through standardization and manufacturer rebates. These memberships help CFOs work across the organization to inflect performance in areas beyond their finance scope and are a great complement to our Medicare breakeven initiative, which I spoke about in depth in our November 2012 call. Because finance must continually engage department and service line leaders and clinicians to jointly drive margin management initiatives, our research program for CFOs recently released a resource called The Financially Accountable Health System. This research provides strategies for equipping staff with the knowledge and tools necessary to control costs and coaches CFOs on how to effectively provide physicians with actionable data that contributes directly to care redesign. With a special focus on using lean techniques to drive waste out of operational and clinical activities, the research helps CFOs with the difficult task of embedding financial discipline in the line.

As hospitals increasingly purchase physician practices to prepare for new care and reimbursement models, the economics of owned physician practices are another place that CFOs must focus their margin efforts. Many hospitals experience significant losses in their physician practices. A variety of factors, including a lack of shared governments, misaligned incentives, inadequate IT infrastructure and subpar physician leadership can contribute, and it is often hard for CFOs to diagnose the issues and inflect performance. To meet these needs, we provide unparalleled practice management and consulting services through our Southwind division to improve, in fact, in many cases turn around, practice economics. Southwind takes a multidisciplinary approach to these problems with our team of foremost experts on professional fee revenue cycle, information technology, coding and compliance, physician compensation, financial reporting and patient and provider satisfaction. Engagements range from assessments to interim and long-term management, and the results are consistently outstanding. For example, we've been working over the last 3 years to turn around a hospital-owned, 130-provider, multi-specialty group practice. Our team led a focused improvement effort that included professional fee revenue cycle redesign, IT optimization, physician compensation redesign and governance and management restructuring. Through this work, there was a $5.5 million improvement in practice economics in the first year alone, with nearly $20 million of improvement across the 3-year engagement.

What we are seeing is that the physician practice economics improvement opportunities are so sizable that we can engage in earnest and still provide significant returns to members. 3:1 ROI for our members is typical and it is often more. Our work in this area is particularly critical given today's market dynamics, and we are proud to offer this outstanding set of services.

On the third imperative of maximizing revenue capture, I wanted to first share a story from our payer integrity performance program. One member, a 3-hospital system in the Southeast, lacked the internal processes and personnel to undertake the time-intensive task of identifying underpayments and correcting them through communication with payers. Through participation in our payer integrity performance program, the system's managed care office and central business office were able to work together to identify payment discrepancies in a Medicaid and Medicare HMO contract and follow-up with the payer to collect the additional amount due. They collected $4.7 million in underpayments from that one contract alone. Further, they are using our program to both monitor payer performance and negotiate contract terms on an ongoing basis.

Of course, no discussion of maximizing revenue capture would be complete today without a discussion of the impending transition to ICD-10 coding. On October 1, 2014, the entire system for coding, reporting and billing medical diagnoses and inpatient procedures will change from the current system, ICD-9, to the new, radically more complex ICD-10 code sets. Required for everyone covered by HIPAA, so essentially all providers of inpatient medical care, this is a daunting prospect. ICD-10 has the potential to substantially impact revenue of hospitals than don't prepare effectively. Our analysis indicates that for a 400-bed hospital, the gap between minimal preparation and top performance can run up to $15 million. Key to strong performance is educating physicians on increased documentation requirements and also appropriately mapping diagnoses to the new DRGs, which function as billing codes. To help members successfully plan for and navigate this transition, we offer our CFOs a variety of technology, tools and services.

First, our research program for CFOs has built an in-depth ICD-10 readiness diagnostic. This web-based tool helps members evaluate their organization's degree of preparation for the ICD-10 transition across 6 areas: general organization, information technology, coding and clinical documentation improvement, physician education and awareness, revenue cycle and managed-care contracts. The tool provides graphical summaries highlighting the strengths and improvement opportunities in specific areas of ICD-10 preparation, as well as guidance for the preparation areas determined to be opportunities for improvement. In addition, for those institutions needing more support in this area, our revenue cycle consulting group has developed ICD-10 consulting engagements that cover a wide range of areas critical for the transition, including clinical documentation improvement process redesign, assistance with systems implementation, EMR template building and full scale on-site project management support. Our work here is having a very tangible impact. One member said of our services, "The Advisory Board has really helped us look at our resources and figure out how to stage the work and how to get the best out of the people we have, but also how to be as efficient and effective as possible. The Advisory Board helped us plan in place and figure out where to start and then to know where we're going as well."

I'm also pleased to announce today the launch of our ICD-10 Performance Program. Through our partnership with MedeAnalytics, the program provides members a software tool that uses hospital's individual patient accounting and claims data and a proprietary risk algorithm to provide a comprehensive picture of the ICD-10 inflection points for an individual hospital. This helps identify by code, physician and service line the areas of focus for education and process change. The tool is complemented by an extensive best practice library, which provides step-by-step instructions on training physicians and coders on the new documentation concepts and dashboards to monitor ongoing performance. The program enables members to prioritize their ICD-10 preparations and provides analytics and best practices to drive a wide range of training efforts and process improvements across the hospital. With its robust analytical backbone, the program is supporting members in their efforts to prepare for this massive change in the coding and billing of care provided in hospitals. Early into our work on this program, we are already generating tangible results. One alpha development partner leveraged our resources to identify critical diagnoses where there was opportunity to improve physician documentation and then used our best practices to improve education efforts, garnering improvements of over $50,000 in the first month alone. With encouraging results such as these, the initiative is off to a strong start, and we are confident in the value that it will provide to members.

The ICD-10 transition is an enormous undertaking, and it is gratifying to be able to offer members support in this critical area.

With that, let me now turn things over to Michael to review our financials in more detail.

Michael T. Kirshbaum

Thanks, Robert. I've organized today's financial review around 5 categories: income statement, balance sheet, cash flow, contract value and outlook for calendar year 2013.

First, the income statement. A quick reminder that we're on a March 31 fiscal year end, which means we just finished the fourth quarter of fiscal year 2013. Please also note that all prior period's earnings per share numbers have been adjusted to reflect our 2:1 stock split that was effective on June 18, 2012. For the quarter just ended, our revenue increased 19.1% to $119.7 million, up from $105 million in the same period the prior year. Adjusted EBITDA for the quarter ending March 31, 2013, was $22.7 million, up from $19.8 million in the same period of the prior year. Adjusted net income was $12.2 million compared to $11.1 million last year, and non-GAAP earnings per diluted share was $0.33 compared to $0.31 last year. These adjusted numbers for the quarters ended March 31, 2013 and '12 exclude transaction-related cost and amortization, gains and losses on the investment income and stock warrants, equity loss of unconsolidated entity, gain on sale and operations -- discontinued operations, as well as share-based compensation expense. Reconciliation of GAAP to adjusted non-GAAP results can be found in our press release.

Including these transaction-related costs and amortization, gains and losses on investment in common stock warrants, equity and income of unconsolidated entities, the gain on sale of operations -- discontinued operations and share-based compensation expense, GAAP net income attributable to common stockholders and earnings per diluted share for the quarter ended March 31, 2013, were $6.4 million and $0.18, respectively.

Cost of services, excluding depreciation and amortization, increased to $61.6 million or 51.4% of revenue in the quarter ended March 31, 2013, compared to $53.7 million or 53.4% of revenue in the same quarter of the prior year. The increases in cost of services are due to increased expense for new and growing programs inclusive of our acquisitions of ActiveStrategy and 360Fresh during the prior quarter.

Member relations and marketing expense was $22.8 million or 19.1% of revenue in the quarter ended March 31, 2013, compared to $19.1 million or 19% of revenue for the same period of the prior year. We currently have 182 sales teams in place, up 17% from 155 sales teams in place in the quarter ended March 31, 2012. G&A expense increased to $16.5 million or 13.8% of revenue in the quarter ended March 31, 2013, compared to $12.8 million or 12.7% of revenue in the same quarter the prior year due primarily to an increase in personnel cost and infrastructure investment in our IT, legal and finance functions to support our growing employee base, as well as increased investment in our new product development group.

Depreciation and amortization expense in the quarter was $6.1 million or 5.1% of revenue compared to $4 million or 4% of revenue in the same quarter of the prior year. This increase is due to capital investments in our growing technology programs, the ActiveStrategy and 360Fresh acquisitions last quarter, as well as additional depreciation from leasehold improvements relating to expansion space in our Austin, San Francisco and Washington, D.C. offices. Other income net in the quarter was $602,000 compared to $164,000 in the same quarter the prior year. This quarter's other income consists of interest income of $782,000 and a loss of $251,000 from changes in foreign currency exchange rates affecting our receivables from international members, as well as $139,000 of fees relating to our credit facility and a $210,000 fair gain on our investment in common stock warrants. During the quarter ended March 31, 2012, we had interest income of $698,000, a gain of $116,000 for changes in foreign currency exchange rates and a $650,000 fair value loss on our investment in common stock warrants.

Now moving on to our fiscal year income statement results. For the fiscal year ending March 31, 2013, revenue increased 21.7% to $450.8 million, up from $370.3 million last year. GAAP net income attributable to common stockholders and earnings per diluted share for the fiscal year ending March 31 were $22.2 million and $0.61, respectively. Adjusted EBITDA, adjusted income and non-GAAP earnings per diluted share were $83 million, $44.8 million and $1.23, respectively, for fiscal year 2013 compared to $70.3 million, $39.4 million and $1.13, respectively, for fiscal year 2012.

Now turning to the balance sheet. Our membership fees receivable, which excludes long-term receivables, increased to $351.6 million as of March 31, 2013, compared to $281.6 million as of March 31, 2012. Excluding the effects of progress payments, DSOs unbilled AR 59 days as of March 31, 2013, compared to 56 days as of March 31, 2012.

Total deferred revenue, net of amounts that we billed up to 12 months, increased to $484.3 million as of March 31, 2013, up from $392.5 million as of March 31, 2012. Excluding long-term deferred, the current portion of deferred revenue balance as of March 31, 2013, were $386.7 million, up 23% over the prior year.

Looking at cash flow, during the 3 months ended March 31, 2013, our cash generated from operating activity was $7.9 million compared to $25.7 million in the same quarter last year. For the fiscal year ending March 31, 2013, cash flow generated from operations was $81.1 million compared to $92.7 million in the same -- in the prior fiscal year. The decrease in cash flows from operations for the quarter ended March 31, 2013, is primarily timing related as we finished the fiscal year with cash flow from operations of 1.8x adjusted net income, which is within our historical range of 1.5x to 2x.

Capital expenditures for 3 months ending March 31, 2013, were approximately $11 million compared to $7.4 million for the 3 months ended March 31, 2012. For the 3 months ended March 31, 2013, we repurchased $5 million of stock or approximately 98,000 shares. This brings our total share repurchase since the inception of the program in 2004 to $341 million or 15.6 million shares. We remain committed to returning capital to shareholders, and our Board of Directors has recently authorized an additional $100 million of the share repurchase plan bringing the remaining authorized share repurchase amount to $109 million. As of March 31, 2013, our cash, cash equivalents and marketable securities balances were approximately $214.7 million, representing approximately $5.88 per diluted share.

At the contract value, contract value increased 17.1% to $466.3 million as of March 31, 2013, up from $398.3 million as of March 31, 2012. We define contract value as the aggregate annualized revenue attributable to all agreements in effect at any given point in time without regard to the initial term or remaining duration of any such agreements. The contracts of more than 12-month duration, we include only 12 months of contract value.

With respect to the outlook for the remainder of calendar year 2013, the following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call and are based on preliminary assumptions, which are subject to change over time. For calendar 2013, we continue to expect revenue to be in the range of approximately $495 million to $505 million, adjusted EBITDA to be in the range of approximately $90 million to $95 million and non-GAAP earnings per diluted share to be in the range of approximately $1.18 to $1.28. For calendar '13 -- 2013, we continue to expect share-based compensation expense to be approximately $17.5 million and expect amortization from acquisition-related intangibles to be approximately $7 million. We expect our effective tax rate for fiscal year 2014 to be in the range of approximately 38% to 39%. As a reminder, this guidance includes the dilutive effects of the previously announced acquisitions of ActiveStrategy and 360Fresh of approximately $6 million to $8 million in adjusted EBITDA and $0.11 to $0.16 in non-GAAP EPS.

This concludes the financial summary. I'll now turn things back over to Robert.

Robert W. Musslewhite

Thanks, Michael. I would like to conclude with a few comments about our priorities for the year and then we will take any questions you have. As I mentioned in our last call, we have 4 key priorities this year to ensure that we are making smart investments, executing at a high standard and continuing to deliver world-class programs that drive significant returns for our members. Our focus in these areas is especially important right now in the second calendar quarter because each year we expect to do a high volume of business during, and especially at the end of, this quarter. And strong performance this quarter is important in setting up of our financial performance for the remainder of the calendar year. These areas of focus include, first, ensuring outstanding member value. We continue to find new ways to enhance the research, software, service and impact we provide to members of all of our programs. One recent example that you may have read about is the work we are doing with the state of Rhode Island. We are tremendously excited to be helping Rhode Island develop a new state-based, multi-payer health care delivery and payment system transformation model as part of a $300 million national effort by CMS. While still very early, this healthy Rhode Island project puts The Advisory Board at the forefront of care transformation at the state level and opens up opportunity for us to have an even greater impact on health care across the country. This and our many other relationships show that, with the enormously complex challenges facing health care and higher education, our members needed support at every level. And last year, over 4,100 institutions turned to us as the preeminent solution provider for their up at night issues.

Second, continuing a relentless focus on growth. With our clear vision of future market and member needs based on our extensive knowledge base and relationships across the industry, we continue to rapidly come to market with the right products at the right time in order to continue our growth formula. In addition to organic growth through cross-selling and internal new program development, we have a track record of strong acquisitions that bolster key capabilities and add value. Our 2 most recent acquisitions are both good examples of this. Most recently, our acquisition of 360Fresh provides capabilities that will prove increasingly critical as value-based payment structures drive a need for dynamic clinical intelligence that predicts the future impact of today's care decisions. While it is still early days here, we are excited about the ways in which this new technology will help us expand our Crimson work in a new direction.

Our acquisition of ActiveStrategy late last year provides a new platform to impact the patient experience through the combination of mobile collection of behavioral and observational data with real-time, point-of-care service recovery capabilities. The first program launched off this platform, the patient experience program, is seeing strong attachment in the market and we continue to be excited about both the near-term opportunity and also about the broader opportunity this platform affords us in the quality, operations and patient experience space.

Third, continuing to evolve our go-to-market model. This year, we are focused on migrating to even deeper and more powerful commercial relationships across our portfolio, and we have undertaken some new initiatives to further align our internal sales and account management organizations to serve members more effectively. Although these initiatives require some short-term operational and member service transitions, we are very confident that these investments will be impactful in ensuring that we are both providing gold standard service and maximizing our ability to deepen and expand member relationships.

Finally, we're constantly focused on attracting, cultivating, engaging and retaining world-class talent. Talent is our most important asset and it's always a top priority of mine and of the entire executive team. We have a truly outstanding workforce and I was pleased to see an email recently that shows how well regarded our team is from outside the company, as well as within. A VP of Finance from a 4-hospital system in the South wrote the following, "If I haven't mentioned this lately, please know I think you have an absolutely fantastic team. It is a true pleasure working with so many talented and wonderful people. You must have one of the best human resource departments in the country because you seem to hire only the very best. It gives me hope for the future of health care when I see so many talented people leading the way." Tremendous praise indeed and earned each and every day through the hard work of our exceptional 2,400 employees working in our 9 offices around the globe. On that note, we are proud that The Advisory Board Company once again was named as one of Modern Healthcare's Best Places to Work, reaffirming our position as a fantastic destination for top talent.

Thank you for participating in tonight's call, and we will now open up the line for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from or Ryan Daniels of William Blair.

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

Let me start with some housekeeping, and I apologize, I jumped on a little late from another call. But did you talk -- or if not, could you talk a little bit about some of the growth metrics if we break out the higher ed business? I know last year you talked a little bit about the CV per member breaking out that division. I know that noisy's it a little bit.

Michael T. Kirshbaum

Yes, Ryan, it's a great question. In general, we saw a lot of member growth across all aspects of the business, so about half of the increase in new members came from our core U.S. provider market and about half of it came from our other markets, which is higher ed, international and our non-provider. So we now have over 2,700 U.S. hospitals. In terms of contract value per member growth, you're right in that the newer areas do create a little bit of noise in that number, so growth in higher ed and international generally comes at lower contract value per member, so that depresses the number to some degree, because they're almost exclusively research programs with lower price points. So the health care contract by member per growth was higher. Now at the same time with health care since our denominator grew so much, mostly through penetrating some systems that we historically had not penetrated by having more success in selling system deals, the growth in the denominator there did reduce the growth in the contract value per member in health care as well. So in general, health care contract value per member was higher than what the firm averages, but only by a little bit and the other groups were a little bit lower.

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

Okay. That's helpful. And then do you have any color on the, one, the tools business kind of at year-end, a portion of total revenues? And number two, any color on the utilization kind of average number of tools in the market being used by customer, maybe average per customer?

Michael T. Kirshbaum

Sure. So over our 4,100 total organizations, we have about 1,700 of them that buy technology from us and that's up about 25% from the 1,300 last year and up from the 1,100 that was the year before. Those 1,700 organizations have roughly 1.7 programs each, so we have 2,900 total software memberships, which is up from the 2,200 last year and 1,700 the year before. As a whole, the software business is just north of 50% of our business and obviously, continues to grow very quickly.

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

Okay. Very helpful. And then maybe one bigger picture question. A lot of noise at the end of the quarter with hospital volumes declining and then we got the 2% Medicare rate cuts and other vendors have indicated that they're seeing some weakness in sales and I know, Robert, you mentioned this is a pretty important selling season for the organization. So any color? Did you see any kind of downtick towards the end of the quarter in sales trends or more hesitation among clients? Or is it really all systems go from your purview?

Robert W. Musslewhite

Well, I think if you listen to our members, you'll hear really a couple of things. One is a reasonable amount of apprehension, and given the changes that are going on in the current market forces and how to manage them. And so they really need help for understanding that. They're looking at a world that is largely fee for service today but very soon, and in some cases now, moving to a world that's focused on value and quality and not volume. So those forces are creating apprehension and creating a need for people to get help in selecting investments across there. Second, there is a focus on reimbursement, especially Medicare and Medicaid. Each hospital has a higher percentage of patients in these programs every year, and in those programs, there's definitely decreasing pricing and they are seeking now how to take steps today to get to a cost structure over the longer term under which they can earn profits under those public payment programs and really across all payers. The way it manifests with us is it still all pushing them to want to engage more with us to help manage against these issues. So I do think there are some challenges and complexity out there, but in general, the challenges and complexity tend to push members to come to us for help.

Operator

Our next question comes from Sean Wieland at Piper Jaffray.

Sean W. Wieland - Piper Jaffray Companies, Research Division

You seem pretty excited about the opportunities that the ICD-10 conversion is going to bring. My question is, of the 6 areas that you mentioned, what do you think are the areas that hospitals are struggling with the most as they get ready for the ICD-10 conversion?

Robert W. Musslewhite

What we've seen is that most members are in some sort of process of preparation. I think most hospitals now are beyond doing nothing. So they have ICD-10 steering committees, coder training programs, IT migration plans, things like that. If you look at the most progressive organizations, they're really trying to find, look for, identify, execute upon their areas of greatest risk and opportunity, making sure that they prioritize where they target education efforts with, especially, physicians. So for example, if you're going to go talk to your physicians and train them on new codes and documentation gaps, the fastest way to alienate them is try to do it on everything. The ones that we see are doing this well are prioritizing the areas of highest impact and areas where inaccurate translation can hide, overstate or, otherwise, misrepresent pretty large impact. And so, I'd say the benefits of the work that we're doing and the critical piece that we bring and that I think it's stimulating a high demand beyond just being a very strong tool to help prioritize and identify areas of opportunity is the fact that we can translate that into where you focus your physician education efforts and other clinician education efforts. Because that's the big challenge out there, which is you're moving from a world of around 18,000 codes to a world of around 150,000 codes, something like that. The numbers might be a little bit off but, in general, that's the case. And so this issue of getting physicians to focus on the places where it matters the most and will drive the most value back to the hospital, I think, is the critical piece and the piece that's probably not very well understood out there in the market today. Obviously, people can put in training programs and migration plans for IT, but if they don't really know which places are likely to move the needle the most on reimbursement gaps, they're likely to spread their energy across stuff that doesn't matter as much rather than focus on the places that matter the most.

Sean W. Wieland - Piper Jaffray Companies, Research Division

That's great. And could you give us an update on the strategic sourcing initiative?

Robert W. Musslewhite

Yes. The update is that it continues to go very, very well. As you remember from this, Sean, I think you know this, it's really focused around a best-of-breed e-sourcing technology. And if you combine that with our IP around supply chain management and the work we've done over the years in the category, I think it provides members with a lot of angles to reduce physician preference items -- spend on physician preference items by finding ways to standardize, finding ways to engage the enterprise in negotiating better contracts and having suppliers bid for more attractive prices across their spend. So it's been a nice way of coming to market that I think is well differentiated. We're going to have to continue to evolve there. There are a lot of players out there that serve supply chain needs. So it's a place where, like I said earlier, hospitals are going to have to focus on cost reduction and looking at margins going forward. And this is the place they are going to want to focus. So that benefits us now, but we'll continue to need to evolve in the space to continue to expand across greater categories of spend and bring new ways of managing that spend to members to drive costs down. We're happy with the progress today.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Okay. Can you update us on how many hospitals maybe you signed up for?

Robert W. Musslewhite

I don't have an exact number. I think sales progress has been good, so it's trending as a typical launch.

Operator

Our next question comes from Richard Close at Avondale Partners.

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

Well, first of all, with respect to follow-up on Sean's, what is the trending for a typical launch, if you could refresh us on that?

Michael T. Kirshbaum

Well, generally, the launch starts in the alpha phase. We have 1 or 2 sales teams on it, getting a handful of members we work with across the first several months, probably 6 months or so. Then beyond that, we put a full sales team on it, which is probably 6 to 8 people, depending on the territory. So in the first year, we're probably building between 50 to 100 members across the first 12 to 18 months. Beyond that, the larger -- some -- the typical programs scale up to a couple of hundred members across the first couple of years and then some of the larger programs go beyond that, our largest program being Crimson, which has close to 700 members. But it's a pretty wide range, depending on how we staff it and the topic area.

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

Okay. With respect to contract value, is there any way you guys can help us out with 360Fresh and ActiveStrategy in terms of maybe what they contributed to contract value in the quarter?

Michael T. Kirshbaum

Yes. It's about a point of contract value, almost all from ActiveStrategy. There's very little of 360Fresh contract value, similar to last quarter.

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

And are you guys pleased with ActiveStrategy so far? I guess it's -- has it been 6 months or 4 months or something like that?

Robert W. Musslewhite

Yes, we're pleased. Last quarter, we announced the product launch off of it. And we've been taking that out to market. I think what we're seeing is very good demand among clinical executives and our members. We closed out several sales that were within the ActiveStrategy pipeline. And then all members we inherited have been staying on board and are happy with the products and the service that we've added to it. So right now, we're still on the stage where we're investing to create scale and allow us to bring it out to more and more members. We're also finding ways to engage, not just clinician leaders, but hospital operational leaders in the benefits of working on our program. And that's a sales discovery technique that were ongoing today to appeal to a broader audience, so we can continue to improve the sales trajectory. But in general, we're very happy with the early days of the launch as well.

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

Okay. And I guess a follow-up to Ryan's questions with respect to maybe discretionary spending or reimbursement cuts, the 2% from sequestration and how do you view, I guess, the current situation? Do you -- are you seeing an increase in demand associated with the reimbursement cuts? Anything definitive that you can point to with respect to that, and maybe that your product is not necessarily discretionary? I know you moved from 1 year contracts previously to -- I think, you're averaging 2 or more on the research side. And just trying to get a feel of, as you sit here today, do you feel like you're in a better position, considering everything that's going on in health care with your customers or at some risk at all?

Robert W. Musslewhite

Well, look, I think if you had a choice between urgency and complexity along with a member base that didn't have reimbursement cuts coming onto it and complexity and urgency and a member base that does have reimbursement cuts coming, you'd pick the former. But I would say that, in many ways, having the urgency is -- the urgency out there today is driven in part by the fact that margin management is becoming a big topic. So I wouldn't say the market is the best health care market we've seen over the past 10 years. I think there's some challenges out there, and I do think that we've made -- done a nice job of creating a portfolio of products that brings capabilities that members need to succeed in the coming environment. So the playbook today, as opposed to kind of 2008, 2009, today it's not drastic cost-cutting. It's about making necessary investments to acquire capabilities to make sustainable bottom line improvements. So as an example, members can't really cost-cut their way out of -- can't cost-cut their way to better population risk management or care management. They have to make investments to get there. And pulling back on investments is not going to help them improve their physician practice performance. Yet that's a huge lever to improving margins. So those are the types of things where we feel like if we continue to bring member solutions that at the bottom line, drive significant return, prove that we can do it, get lots of good member references, that we'll continue to do fine in this environment. But obviously, as the government continues to look at ways to bring down pricing, it's putting members under an outlook where their reimbursement level is lower and lower and they're going to have to find ways to cope under that. Now they move -- the other factor I'd say as they move to value-based contracts, there are some very good scenarios out there for hospitals. They get very good at managing utilization and improving care management strategies. So there is a very real path here by investing in capabilities to manage against the margins that they're going to have. So that's the positive, which is -- I think we can bring them a very clear path to managing against this.

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

Great. And I guess final question would be, your services or value-added tools are pretty, I guess, from a price perspective, attractive versus maybe larger consulting agreements. Are you able to effectively sell against consulting organizations, considering the cost pressures overall on hospitals as an advisory board being an attractive alternative?

Robert W. Musslewhite

Well, it's hard to answer the question against consultants. I'd say most of our products we're not necessarily selling against a consulting sell. We're pretty unique and differentiated with the products that we bring to market and they tend to be targeted around very discrete, specific value areas that have high return for members if they pursue the programs. That's different generally than a consulting sell, which is to come in and do whatever it takes to fix whatever problem a member has. So we're a little different. I will say that I think that we tend to be priced low relative to the value a member will get from working with us. And we've gotten much better at being sure that members understand the tangible value of working with us. Even on the research side, we tend to be very focused on helping members understand, if you implement just one best practice from something you're doing with us, that's going to drive several hundred thousand dollars in return. So it obviously makes sense for you to join the program and really engage around these things. On the tools side, the software business, what's needed you can show members through the tool the improvements that they're making through that program. So you can come back to a member later on and say, "Look, how much improvement you've got and it's worth way more than what you're paying for it. So you should continue on." And to circle back to the first part of your question, we really have not -- we've seen very consistent strong renewals, even members coming out of 3-year contracts and then renewing again. So it's not just a factor of the multi-year contracts. I think we've seen very strong decision rates when members have had decisions come up. So again, I don't -- to go back to the question, clarify if you want, I don't really see it as we sell better against consulting firms. I think we bring a very differentiated and valuable offering to members that is perceived to be at a fair price relative to the value that members can get.

Operator

Our next question comes from Shlomo Rosenbaum at Stifel, Nicolaus.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Robert, can you talk a little bit more about the go-to-market, where you talked about new initiatives that are going to require short-term operational member transitions? Can you just talk to us exactly what you mean by that?

Robert W. Musslewhite

Yes. So basically, the concept that I was discussing is an initiative underway this year where we've been identifying the institutions likely to drive the most growth for us going forward. And we're really doing 2 things with them: first, we're focusing more of our sales, account management, service and delivery resources against those institutions; and second, we're doing our best to ensure that we operate in a coordinated fashion with those institutions. So from a member perspective, the way they would view us is they're getting a more senior person who spends more time engaging around their key priorities and needs. They get a more senior and coordinated service and delivery team that works with them across their products with us. And they get a lot more visibility into how we can serve them more deeply and comprehensively as we are able to target more of our services to their needs. So in our mind, it's really just upside. It's not going to slow the rapid introduction of new products, and it will help introduce more mature products at the time when members really need them. Obviously, what this meant was when we first started the transition is, in many cases, you had a account manager who is responsible for an institution, who now is not on that institution anymore. There's some reorganization of territories. So you do tend to have a quarter where one person is introducing another person as they transition and that -- that's always a little bit disruptive. As we look forward, we're pretty much through that, and I think members are largely, early reads, very satisfied with the new approach.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And is there -- I don't know how to phrase this. Are you adding resources to more potentially productive institutions? Or are you removing resources from other institutions? Can you just talk about that?

Robert W. Musslewhite

Yes, it's a good question. I'd say that every year our sales costs grow roughly in line with revenue. Normally, in the past, that has been adding -- almost always just adding feet on the street. I think as we've talked about over the past couple of years, we've made some other investments in marketing and salesforce.com and other ways to be sure that we're coordinated to members. I think of it this year as those coordination dollars went to investing in a higher level of seniority and allocation of staff to the accounts likely to drive most growth in the future. We're not really pulling staff away from other accounts to do so. So it's really where some of the extra investment has gone, is probably the right way to think of it.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Since the incremental investment is being directed towards the higher-potential clients -- institutions.

Robert W. Musslewhite

That's the idea.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And Michael, why is deferred revenue down a decent amount sequentially? Was it a tough comp from the fourth quarter, or how should I think of that?

Michael T. Kirshbaum

I think it has to do with the relative size of the December bookings and the March bookings. I think if you go back, historically, it's not atypical for us to have a sequential decline from December to March. I don't think we had one last year. But the year before and the year before, we did, and it's something that does show up a lot.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So there's nothing unusual about that? You still have -- the bookings were in line with what you guys were expecting?

Michael T. Kirshbaum

Yes. If you look at AR and deferred, both have -- they have very nice growth, and that shows up in the bookings. I think you've seen the rate of growth decelerate there, still above the rate the business is growing. And that has to do with the maturing of multi-year contracts. If you go back, remember the last couple of years, we had a really outside AR and deferred revenue growth as we migrated aggressively to multi-year contracts and we moved the terms of the multi-year contracts out. We're still doing that today, but we have much higher compliance. So the benchmark for multi-year contracts, the last -- the previous year number is already pretty high. So while we do make incremental improvements, the rate of improvement isn't as fast, so the rate of AR and deferred revenue growth will not be as much in excess of the contract value growth as we've seen last couple of years. So you're seeing that a little bit. Does that make sense?

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then, what is the -- given the mix of your business, can you talk about the quarterly pattern of bookings right now through the year?

Michael T. Kirshbaum

Yes. So similar to how it always has been, which is the December quarter is our biggest quarter for bookings, about 40% of our sales and, by definition, renewals in subsequent years happen in the December quarter. June is our second largest quarter, which is about 25%. And March and September are small quarters, which is the remaining difference. Now I think with multi-year contracts, I think what we've seen is just fewer of those are up every year. The patterns of decisions is still the same, but fewer contracts are up for decision every -- in the year.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So did that improve your sales effectiveness? Are you seeing that, that you have less people focusing on renewals? I mean, have you noticed that over the last few years?

Robert W. Musslewhite

We -- there's 2 ways to answer that. One is we haven't taken, if you will, the risk of really downsizing that group to reallocate. We have focused them very much on service, on booking ahead. So closing contracts early, looking ahead at contract closes coming up, so a lot more close going into each quarter than we were in the past. And really working with members to ensure that they are in a mindset to renew over time. So I'd say the job has shifted a little more versus pulling down people out of that group. The second is if you look at the bulk of our sales and account management spend, it's always been heavily weighted on sales. So even if you were to take 10% out of that group and reallocate it, it wouldn't show up very much in our costs because it's just -- most of the costs go towards -- historically towards the front-end sales.

Operator

Our next question comes from Matthew Kempler at Sidoti.

Matthew J. Kempler - Sidoti & Company, LLC

So in the prepared remarks, you hit on the complexities in the market and the multiple ways that Advisory Board is assisting members. I'm wondering if you could just put in perspective from the programs that are ramping today in growth mode versus 2 years ago, has that mix increased versus a couple of years ago? Do we have more programs ramping up today versus stable and maturing or has it been pretty static from where we were?

Robert W. Musslewhite

Well, each year we tend to launch 4 to 5 new programs. And the typical pattern is, you'd have a program that will grow rapidly for 2 to 3 years. And then the new sales performance will taper off a bit, and we'll tend to then put that product along with other products and the salespersons bag versus keep the one-to-one sales model with that product. That's a typical pattern. We've seen some products that have maintained very rapid sales growth for a couple of years beyond that. We've seen some that have tapered off a little bit sooner. But in general, that tends to be the typical pattern. And so if you follow that pattern out in any given year, you're going to have 8 to 10 programs that are still in early launch, very rapid growth mode. And then you'll have the rest of the programs out there still in growth mode but probably at a more mature level of growth mode. Now with the technology programs, we've been fortunate to have had some very good launches that are very large. So we still see strong Crimson growth. We still see strong Crimson Market Advantage growth. Those have maintained growth for disproportionately longer, so your weight of programs that are still growing very rapidly is probably a little higher now than it is on a historical average. But in general, that gives you a good flavor of how many programs at any given time will be on that rapid growth curve.

Matthew J. Kempler - Sidoti & Company, LLC

Okay, great. And then the renewal rate, while still within your target range, came back down from that peak that we hit of 92% a year ago. I'm wondering, did the linearity on renewals change at all throughout the year? And just if you have any commentary on the move back down to the normalized range.

Michael T. Kirshbaum

Matt, it's Michael. Last year, obviously, was our historical high of 92% and this year 90%, still a pretty strong rate in the sort of upper end of historical band and mostly has to do with mix. In the last 2 years, we've seen tremendous member growth in some of our newer areas, such as higher ed, international and nonprovider, and those just generally renew at slightly lower rates. So if you broke that out, our core hospitals still renew at a low- to mid-90s rate. And the new areas tend to be more of a -- closer to a mid-80s rate, given that they're just newer programs and have a smaller portfolio of total products. So those -- as that group has become a larger portion, the denominator of that had a little bit of effect on the rate, pulling it down. But on a business by business basis, each of the rates are pretty consistent where they were last year.

Matthew J. Kempler - Sidoti & Company, LLC

Okay. And then last question is on the increased buyback authorization. Is the plan still largely to offset dilution from incentive compensation? Or do you plan to get any more meaning -- more aggressive with the buyback?

Michael T. Kirshbaum

Yes. We've always looked at the buyback separately than the dilution from the shares that are coming on the market. One is a compensation decision, what's the right way to -- and the most appropriate way to compensate the senior management team. And we benchmark that and are fairly careful with how we get to that with comp committee. And the other one is, what's the best use of cash? Sometimes it's great if they can line up and they can be even. But there are periods where we've been more aggressive with buyback than taking the share counts down. There have been periods where we've taken some of our cash and flowed it more towards acquisitions. The share count has gone up. So there's no one-to-one correlation there. I think, in general, we do like the practice of returning capital to shareholders. We've been fairly -- we've done -- we've dialed back our share repurchase the last couple of years. I think, obviously, with the cash on the balance sheet and access to more credit now and increasing the authorization is an opportunity for us to do more. But really, we look at what the acquisitions look like in the pipeline, what the balance sheet looks like and how much we want to return to shareholders. And I think that we do like that discipline of having an authorization and returning capital and we'll probably continue to do that maybe at slightly higher rates than we've done last year or so.

Operator

Our next question comes from Ato Garrett at Deutsche Bank.

Ato Garrett - Deutsche Bank AG, Research Division

So it sounds like the tools and software programs are becoming a greater portion of your revenue overall. And I was wondering if there's going to be any impact on the margins related to that kind of a mix shift that you're seeing.

Michael T. Kirshbaum

Yes. Ato, the tools business has been a pretty large part of our business last couple of years. Some of it growing faster so it will continue to become larger. In general, the economic characteristics are pretty similar. They're both scalable, renewable products. So as you add an incremental member on technology, it's very high incremental contribution. Research is probably slightly higher in terms of a margin basis but -- because with the software, you do have some variable costs to get the members up and running. But the price points are so much higher, so the incremental dollars are a lot greater. So as those grow, what we've seen over the several years has become -- it's gone from 0% of our business in 2004 up to over 50% today. We've seen pretty similar economic characteristics and the same for scalability and ability to expand more just as we grow.

Ato Garrett - Deutsche Bank AG, Research Division

Okay. And also, is there any difference in -- it sounds like the amount of investment required will be a little bit higher on some of the research projects as you're launching new products versus the software side, would that be accurate? Or is it about the same as you look into the...

Michael T. Kirshbaum

They're pretty similar. In fact, I think our technology teams, when we originally staffed them, the fixed cost of the program is slightly larger than total dollar amounts. Now again, the price points are so much higher that, as a percentage, the fixed cost of that business ends up being similar or smaller. But I think the dynamics are still the same, that you incur a large fixed cost in year 1, and you lose money in the program in the first year as you're building the revenue base for one member at a time. But then in out years, each member is very, very scalable and incrementally profitable. So that creates -- basically takes you from a loss position in year 1 to breakeven in year 2 to positive in year 3 and margin expansion in out years, and we continue to see that.

Operator

Our next question comes from Joe Foresi at Janney.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Just a quick housekeeping question, I'm sorry if I missed this. Did you provide the number of programs that you had offered as of the end of the quarter?

Michael T. Kirshbaum

And so we added one program. We're up to 57 total.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

And just on a -- last question is about tools. I just wanted -- and research. I just want to get, maybe check in on Southwind and maybe some of the demand that you're seeing for its services and kind of like the hiring that you've been doing within Southwinds.

Robert W. Musslewhite

Yes. Southwind's been a fantastic growth story since we've acquired it. Obviously, it was less than $10 million in revenue when it came on board. And it's now well above that and a pretty significant size within our company. I mean, you're looking at a business that's grown probably in the -- to the $50 million range, roughly. And I think what we've seen there is we've seen very strong attachment to the economic results they can deliver in managing a physician practice. I mean that's still the bread and butter of what Southwind does, which is come in and turn around physician practice performance; if needed, put a management team on site to direct that or a key staff member on site to do that over a period of time, sometimes a long period of time. And that's been a huge value to our members. The reputation is very good. Until recently, it really was a referral-only business, and we had more demand for it than we could fulfill. Fortunately, hiring has taken care of that to catch up. It also has expanded since it's come here to focus on a few other areas. So of course, on the accountable care side, we do some work there in helping members figure out their strategy under accountable care. We do some medical homework in helping members set up medical home projects. And then we have a large clinical integration business as well. So if you take non-owned physicians but clinical integrations efforts where the hospital wants to affiliate more closely with the physician group, they lead very strong clinical integration initiative programs in a similar fashion as we do on the owned practice management side. So it's a really important area for members. It's been a great model to supplement our work through Crimson and our other technology products. So we have a lot of relationships where we're working with members on physician utilization issues and in helping improve their practice performance. And sometimes they need the extra support, and it's great to have Southwind to bring into those situations. In terms of hiring, which I think was the second part of your question, it has been a different hiring model for us. Southwind does require -- the types of work that they do requires, a lot of times, very experienced practice managers, people who have a lot of in-market experience, people who are willing to go on site for periods of time to be a senior leader over a group of physicians and really help put in place incentives, compensation programs, processes, leadership structures, things like that. So you can't do that as a inexperienced person who just hasn't been through the cycle a few times on that. So the hiring model has been different, but I think it's brought a great deal of expertise and passion to the company in a great way. So we're thrilled with the work that Southwind is doing and hope they keep it up.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

So it's safe to assume that it's growing in line with corporate average or it seems like your percentage -- your breakup of tools and research and consulting is kind of consistent.

Michael T. Kirshbaum

Yes. What we saw last year was the technology business growing faster than the company average; the research business growing fairly nicely but below company average, so more the 10%-plus range; and our services business growing in line with company average.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

And just a follow -- I guess a last question, if I could squeeze it in. Just -- Robert, I appreciate all the color on the 3 imperatives. Just wanted to see with the additional detail you gave around ICD-10, just so -- if you -- how you would see maybe the split-up of your contract value as you move forward with a focus on margins, revenue and contract -- value-based contracting, was that -- would you see a bigger piece of the pie going towards maximizing revenue, given that maybe there was a little bit of a lag in some of the testing and implementation side by hospitals?

Robert W. Musslewhite

It's a good question. I would say, if you take those 3 buckets specifically, my sense is that we're probably going to see growth in all of those. We have a portfolio that's very well suited to just the nuts and bolts of revenue capture and do a lot of very clear value-creating work along that dimension. So that feels like a place where we'll continue to be in growth mode. The risk-based contracting is a place where I'd say not every organization is running at that yet, but they're all looking at ways where they're going to need to do that in the future. And so I'd say it's a capability that you're kind of betting on the come. There's some organizations that are fast movers, who are being more aggressive there, but in general, the market is going to have to move this way. So that's a place I'd see, on the upswing, not as big for us today but likely to be a lot bigger in the future. And then of course, expanding operating margins, that's relevant on the revenue and the cost side. I mean that is a huge focus. And again, I go back to the realization there that it's not -- a lot of times when you hear that, you think cost-cutting and efficiency. And I'd say our member base realizes this time that it's not just slashing and burning. That's not going to lead to any sort of improvement, because that's not going to help you with managing more effectively in a risk-based model or surviving under a more performance-based Medicare program. So under there, a lot of our programs really do help with the key capabilities to be successful at that. That's a place where we have a lot of products today, and they'll continue to have a lot of growth. So it's hard for me to pick 1 of those 3 out for outsized growth. I'd say the second -- the expanding operating margins, maximum revenue capture have been places we've always been focused and will continue to do so, so continued growth and maybe excelling at risk-based contracting is on the upswing from a smaller amount to a bigger amount. So maybe the growth is a little faster there over the next several years. But I feel good about all of them.

Operator

Our next question comes from Bill Sutherland at Northland Capital Markets.

William Sutherland - Northland Capital Markets, Research Division

Let me just ask a couple really quick. I was thinking about the ICD-10 offering and just thinking about the timeline, given the October 14 deadline. I can't imagine it's going to follow your typical launch that I think Michael described as far as alpha and so forth. Any color there?

Robert W. Musslewhite

Well, it's a good question. Not all of our products are limited to a specific regulatory environment like this. I'd say it's in very high demand today and has been throughout the launch process, so it's been a very strong performing product as we've gone through the testing and alpha phases. So we have a lot of members on board already. As members look ahead to the mandated conversion date, I think what's interesting, if you think about beyond 2014, the issue of measuring and profiling physician documentation performance is going to continue to be a huge issue. So if you look at it today, it's a big issue today under a very -- a much more simple ICD-10 system. Again, you think of the number of codes -- sorry, ICD-9 system. You think of the number of codes in ICD-9 compared to the number under ICD-10, again, you're moving from 18,000 to 150,000. This physician documentation performance, how you measure it, how you help get physicians in line is going to be a huge issue. And it's not going to be solved by October 2014. It's going to go on for a while and -- like we've seen under ICD-9 it may go on for a long, long time. So we really feel like as the market gets through the actual date of conversion, you're then providing a service to help them manage effectively under the new regime, and there's huge value there still. And so we've set up the program to help do that. We've also created, like we do with a lot of our tools, but a replicable process for ongoing identification of risks and opportunities so members can continue to find areas of value. We also do, like we always do, peer-to-peer benchmarking analytics. We do transition base-lining so they can understand where they were before and where they are after the transition and how they're performing. And then we do, of course, training and ongoing support from our Dedicated Advisors along the way. So those types of services tend to have evergreen demand and aren't tied to the specific regulation. So we feel good about the ongoing process. And like any of our products, we do need to be sure that each year we are listening to the market, listening to our members, making improvements to the tool and responding so they continue to get a high degree of value from it. The only other thing I'd add is that, in general, you would worry about signing long-term contracts here if members felt like they only needed this up until 2014. And we're still seeing very strong penetration of multi-year contracts since we've sold these. So it's another indication that members see the ongoing benefit.

William Sutherland - Northland Capital Markets, Research Division

And there'll just be another version down the road, right, ICD-10 [indiscernible]? The member growth was much higher than I was thinking. I guess I didn't know if double digit was still possible. Was it pretty linear through the year, as far as you...

Michael T. Kirshbaum

Well, obviously, that has always -- or our booking pattern is a little bit more of it in the December quarter than what we normally do in sales.

William Sutherland - Northland Capital Markets, Research Division

And education members, roughly how many of those at the end of the quarter?

Michael T. Kirshbaum

We're up over 450.

William Sutherland - Northland Capital Markets, Research Division

Okay. And then last one for me, on the sales teams that -- actually, Michael, I didn't hear you. How many at 331?

Michael T. Kirshbaum

I think I said it was 182.

William Sutherland - Northland Capital Markets, Research Division

182, okay. Remind us of the productivity curve on these sales teams, because you've been bringing them on at faster pace last 2 quarters.

Robert W. Musslewhite

In general, what we do is someone comes on board, they get trained. You like to get them out starting to do visits in the 2- to 3-month time frame. You'd expect them to start having success in the 6- to 9-month time frame and have a pretty good idea of where they're likely to head in that time frame. Sometimes it can take a little bit longer for people to get wheels under them. But generally, we like to be knowing at the 6- to 9-month time frame, whether someone's going to be a long-term performer or whether someone's going to be someone who's not going to make it.

William Sutherland - Northland Capital Markets, Research Division

So they're definitely achieving quota in a year? Otherwise they're not going to be the -- that's kind of the...

Robert W. Musslewhite

Yes. By the second half of their year, you'd like to see them being a strong performer. Not as a performer of a 3-year, 4-year veteran, of course. But we have pretty good benchmarks of what a good first year looks like.

William Sutherland - Northland Capital Markets, Research Division

And do you think you'll keep adding teams at the same pace as you go into the next few quarters like you did the last 2 quarters?

Robert W. Musslewhite

Probably not. We tend to hire more at the beginning of the year to line up. We be also have a lot of -- as you know, we've launched products each quarter now for a while and there's some good programs in the pipeline that we're excited about staffing. So that tends to be a good thing that we're hiring sales people to put on those. I did mention that some of our new sales investment is going to go to adding essentially investment around some of our larger potential accounts. And so I think you'd see a little bit more moderate salesperson growth or sales team growth number over the next couple of quarters.

Operator

At this time, we show no further questions. And I would like to turn the conference back to management for any closing remarks.

Robert W. Musslewhite

Well, thank you all for participating. I know it's been a little bit longer call. We appreciate all the questions, and we look forward to catching up with most of you in the coming weeks. Take care, and have a good evening. Bye-bye.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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