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Executives

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

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

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

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

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

Michael Cherny - ISI Group Inc., Research Division

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

Sean Dodge - Jefferies LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Jeffrey Garro - William Blair & Company L.L.C., Research Division

David Larsen - Leerink Swann LLC, Research Division

MedAssets (MDAS) Q2 2013 Earnings Call July 31, 2013 5:00 PM ET

Operator

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

Robert P. Borchert

Thanks, Robert, and good afternoon, everyone. Sorry for the delay, we had some brief technical difficulties with the webcast. 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 webcast is posted in the Investor Relations section of medassets.com, under Events and Presentations. We will be making forward-looking statements on today's conference call regarding our 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 also discuss certain non-GAAP financial measures. For more information, please refer to the reconciliation schedules and footnotes in today's earnings press release, which is posted in the Investor Relations section of medassets.com and included in today's presentation materials. [Operator Instructions]

Thank you. Now let me turn the call over to John Bardis.

John A. Bardis

Thank you, Robert, and good afternoon, everyone. Today, I will summarize our second quarter financial performance and share some perspective on current industry trends. Mike will provide an operational sales and innovation update, and then Chuck will review our second quarter financial results and updated outlook for the remainder of 2013.

We delivered another solid quarter performance in the second quarter across our business. Total net revenue grew 4.7% over last year's second quarter to $170.7 million, and grew 6.9% if you exclude performance-related fees in both periods. Adjusted EBITDA rose 7.2% to $52.5 million and adjusted earnings reached $0.30 per share in the second quarter, while our year-to-date earnings of $0.71 per share increased 39% over 2012. Year-to-date, free cash flow was $43.4 million, up more than 25% over last year. And we continued to generate financial leverage through voluntary debt prepayment, lowering our outstanding indebtedness by more than $40 million in this period alone.

This financial performance is a result of the steady operational execution that we have delivered over the last several quarters. We continue to enhance our operational framework to further support our long-term growth trajectory in the midst of this evolving health care market environment. Many health care providers are coping with the additional negative financial pressure from sequestration since going into effect of March of 2013, while, at the same time, preparing for the looming impact and potential consequences of the Affordable Care Act. There remains much uncertainty surrounding health care reform, which is further compounded by other industry trends putting financial and operating pressure on hospitals and other providers.

For example, baby boomers are now retiring and migrating from private pay to Medicare at a rate of 5,000 to 10,000 individuals per day. This alone means we will see hospital reimbursement rates per individual or payment per unit of service continue to decrease. Cost per unit has to decline at least at the same rate just to break even. Reimbursement to hospitals as part of commercial insurer contracts with the state exchanges may initially fall somewhere between private pay rates and Medicare, depending upon how narrow the provider networks are. In addition to that, the introduction of the consumer to the exchange marketplace will likely provide additional pricing comparison and, ultimately, pressure.

Health care organizations are scrambling to address the need for population health management and some form of an ACO or care coordination partnership. And the Department of Health and Human Services confirmed it will go forward with the October 2014 deadline for the ICD-10 compliance requirements, adding significant coding complexity and higher costs to upgrade systems and train staff.

These industry dynamics are a risky proposition for providers. Incentives of the current fee-for-service system will be turned upside down in a value-based system that will reward better care coordination, a reduction in practice variation and higher quality of care. While some of these changes will happen over time, moving too slowly in the evolution to value-based purchasing will leave health care organizations somewhat vulnerable.

To address these risks, health care providers are beginning to combine traditional revenue and cost management tactics with new and broader process-improvement strategies, while remaining focused on excellent delivery of patient care. Many of our clients are taking a much broader, strategic approach to total performance management, to drive operational and clinical process improvement as relative pricing and reimbursement become more complex for care delivered. MedAssets is uniquely positioned to help address providers' financial and operational challenges in a number of key ways.

First, we take a consultative approach to begin with an assessment of a client's health care operations. Second, we advise the C-suite and operating leaders on a tailored action plan. Third, we implement best practices for financial, operational and clinical performance improvements. And, fourth, we sustain these improvements for the long-term success with our technology tools, and expand organizational alignment with our Lean process and workforce-consulting expertise. So regardless of the exact timing of many of the industry reforms and initiatives, the reality is that providers' operating costs are rising and overall payment and reimbursement rates are declining. Health care organizations need to implement strategies to gain enhanced productivity, optimal resource utilization and more efficient delivery of care while reducing necessary procedures and readmissions and lower overall costs of care well ahead of the cost and payment change curve.

On a separate note, I'd like to provide a bit of background on the advisory opinion MedAssets received July 16 from the Department of Health and Human Services, Office of the Inspector General. We requested this opinion after we learned that a competitor may have been offering equity to clients in exchange for extended long-term agreements. MedAssets evaluated whether offering stock to our current and prospective clients would make business sense and provide value to MedAssets' clients and stockholders. We decided that the responsible course of action was to first find out whether offering stock in exchange for a long-term contract would violate the federal Anti-Kickback Statute. So on February 2013, we requested an opinion from the OIG, which has the responsibility for interpreting and applying the Anti-Kickback Statute and other fraud and abuse laws. The advisory opinion we received July 16 ultimately concluded that MedAssets could face sanctions by the OIG if we were to go forward with such a proposed arrangement. Therefore, we will not offer clients an option of equity interest in MedAssets in exchange for long-term contracts, and we have ended any further explorations of this approach.

Importantly, this does not impede our go-to-market strategy or value proposition since it was only in the discussion phase, and MedAssets already offers a highly competitive, comprehensive set of costs, revenue and process improvement capabilities that can drive significant financial and operating success for health care organizations.

Given the measurable and sustainable value that MedAssets has consistently delivered to our clients, our enterprise performance improvement capabilities are gaining increased awareness and driving new and expanded client engagements. This, in combination with our operational execution and innovation initiatives, should deliver financial and performance improvement for our clients, and continuing growth for MedAssets and its shareholders.

Now let me ask Mike Nolte, our Chief Operating Officer, to comment on our focus on operations, sales and innovation. Mike?

Michael Patrick Nolte

Thank you, John. We continue to make progress delivering consistent, measurable performance, and we remain focused on building great teams, ensuring client success, driving profitable market growth and innovating with high quality as the foundation of that performance. From a team perspective, we made several critical investments over the last quarter. We strengthened the leadership of our commercial team with the addition of a new leader over our supply chain management sales team. We also added to our enterprise sales capability to ensure we are driving expanded mind share with health care organizations. We also improved our enterprise operations with a new team focused on delivering more consistent commercial and client processes across the company. A critical initial objective for this new organization is to help increase the capacity of our sales and client management teams so that they can spend more time in the field with clients.

As we continue building a more consistent, more differentiated client experience, we also added to our Revenue Cycle Technology leadership in the last 12 months. Reshaping that organization has strengthened our training and development processes, enhanced our product certification programs and raised awareness of crucial service delivery metrics. In addition, our Revenue Cycle implementation team excelled in the delivery of their go-live product schedule through the first half of the year. Overall, this work led to improved client satisfaction, shorter turnaround times and decreased implementation cycles.

In the SCM segment, we remain concentrated on same-store growth. We are nearly complete with our GPO contract portfolio integration and expect to finish the remaining contracts over the next 12 months. Our administrative fee rate through the renewals and integration period has generally trended up, while we routinely deliver measurable, new savings to our expanding client base. We will remain focused on negotiating the best terms with suppliers on behalf of our clients, and achieving the most appropriate administrative fee rate relative to the expected market share gains for each supplier.

Our enterprise sales team is building measurable client momentum and a strengthening pipeline around the full range of our performance improvement capabilities, leading with a compelling set of advisory solutions offerings. Refining our go-to-market strategy and ensuring the market understands the breadth of our capabilities is critical to address client needs, while we never lose sight of the foundational supply chain contracting we perform on behalf of our clients.

While looking at driving continued profitable growth in the future, recent surveys and analysis have highlighted relatively weak health care utilization trends among a number of providers. This is likely influenced by increased high-deductible insurance plans and related patient behavior due to their greater responsibility for medical costs. We believe our focus on contract compliance, coverage and penetration should offset this impact on GPO volume growth. And in addition, the expectation of more than 25 million newly-insured individuals beginning to actively utilize the health care system over the next 3 to 5 years should be a long-term tailwind for our business.

Our ability to drive costs lower for health care organizations with a broad set of offerings positions us well for the fundamental and unchanging need for more affordable, more efficient health care in the future. Credit rating agency, Fitch, recently noted that the continued evolution in the health care industry will require hospitals to implement a bottom-up plan to preserve profitability, and management will need to be aggressive in managing the discrete costs of an episode of care. We believe MedAssets will be a vital partner with health care providers in this evolution.

To wrap up the profitable growth discussion, I'd like to review our contracted revenue estimates and some of the factors driving this metric. Our rolling 12-month total contracted revenue estimate at June 30 of 2013, was $616.8 million, a 2.2% increase from the second quarter of 2012. On a sequential basis, total contracted revenue increased 2.5% when compared to the first quarter of 2013. In the SCM segment, our contracted revenue increased 1.4% year-over-year. Our same-store growth strategy continues to show gains in contract compliance.

Additionally, we continued to add coverage, one recent win included broad expansion of our cardiology portfolio, as a host of more commodity items begin to lend themselves better to GPO contracting.

In the coming weeks, we also expect to announce a number of new wins and significant renewals that are reflected in our June 30 SCM contracted revenue. We noted last quarter that we're implementing steps to improve our commercial success. Bookings in our RCM segment have improved versus last quarter, which resulted in a higher contracted revenue outlook. Our RCM contracted revenue estimate increased 3.5% year-over-year and 4.7% sequentially from the first quarter of 2013, as we are benefiting from consistent RCM Technology bookings and an uptick in RCM Services bookings. A breakdown of RCM highlights this further. Contracted revenue in RCM Technology rose 2.7% sequentially from the first quarter of 2013, while our RCM Services contracted revenue increased 10.7% in that same timeframe.

We are lowering the high end of our RCM revenue guidance due to the timing of bookings and associated revenue recognition, as well as the 2 RCM Services clients that began the ramp down last quarter. However, due to our updated revenue mix forecast, we do not expect this to negatively impact our consolidated adjusted EBITDA.

Long term, our RCM growth will be supported by new bookings such as the agreement we recently signed with Alameda Health System. Alameda is now using MedAssets to increase visibility into their accounts receivable processes and sustain the health system's revenue capture and cash collection as it undergoes a Patient Accounting System Conversion. This agreement followed the more than $8.6 million in documented savings we delivered as part of a multi-year Advisory Solutions agreement with Alameda, to reduce their total cost of care delivery and enhance patient and physician satisfaction for this 6-facility health system with more than 500 physicians.

We also recently signed a significant Revenue Cycle Technology agreement with a sizable multistate health system. While we are not yet at liberty to name the client, we will be implementing several of our solutions over the course of the next year. Since this was signed in early July, the associated revenue will be included in our contracted revenue estimate, beginning next quarter, to the appropriate implementation and revenue recognition schedule.

Transitioning to innovation, we are beginning to get an increasing number of questions from analysts and investors about the market opportunity and our product preparedness, as with the deadline for hospitals to be compliant with ICD-10 is now only 14 months away. MedAssets prepared for the ICD-10 transition by forming a program management office in 2011 to provide structure and governance, consult with product groups on compliance and testing, identify gaps for mitigation and instill best practices. Approximately 25 MedAssets technologists require updates to become ICD-10 enabled. At this point, we have completed nearly all of our ICD-10 product updates and testing to the extent that, that can be done prior to the client payer testing that has to go on.

We are also helping health care organizations with this transition. We offer clinical documentation improvement capabilities that combine our proprietary technology with comprehensive training and education for physicians, clinicians and coding staff, to support complete and accurate patient documentation and optimize reimbursement. This is crucial, as documentation requirements will continue to increase in complexity with ever-changing rules and regulations, new reimbursement methods and the transition to ICD-10 itself. We also deliver operational assessment services to assist providers in their transition to ICD-10.

Finally, MedAssets' implementation and consulting services can address the process redesign and the change management needs identified by those assessments. Longer term, as health care organizations look for continued insights into reducing the overall cost of care, we believe our ability to assess clinical performance and costs across the patient episode will be critical for making care improvement decisions to improve overall performance management. Our internally-developed risk-based Reimbursement and Bundled Payment Solution helps unlock new reimbursement models requiring collaboration and transparency amongst physicians, providers and payers. We already work with a number of health care organizations through a combination of our Software-as-a-Service technology and industry-leading consultants that have helped design approximately 60 episodic bundles, to arm providers and payers with the tools expertise they need to succeed in a reform environment.

We also partner with industry leaders to expand our market reach and solution sets. In mid-June, we announced an expanded collaboration with Cerner to include the embedding of MedAssets' best practice claims processing rules and logic-driven technology into Cerner's Patient Accounting System. It will leverage the integration of MedAssets' clearinghouse and Cerner's workflow for seamless and efficient claims submission and payer responses. This expanded agreement is representative of MedAssets' strategy to offer flexible Revenue Cycle applications that are interoperable with installed clinical and financial enterprise solutions and require, at the same time, low upfront investment, combined with high delivery of value.

Finally, last quarter, we discussed our multi-year strategic partnership with Ariba as a natural e-commerce extension of MedAssets' industry-leading supply chain management and outsource procurement capabilities. In just a few months, we have already made progress on technology integration and have a strong pipeline to support our joint market objectives.

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' capabilities, while investing in our products, services and internal infrastructure to help clients reach their 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 second quarter total net revenue increased 4.7% to $170.7 million, when compared to the second quarter of 2012. As John noted at the beginning of this call, this was another great quarter of solid performance across our business.

We generated total adjusted EBITDA of $52.5 million or a margin of 30.8%, a 7.2% increase over second quarter of 2012 adjusted EBITDA. This 71-basis-point margin expansion was driven by GPO administrative fee growth, higher RCM segment margin and relatively flat corporate expenses despite lower performance-related fees year-over-year.

In the second quarter, we incurred $1.4 million in costs, as we completed all material acquisition and integration expenses related to the consolidation of offices in Plano, Texas, inclusive of systems migration and standardization. We reported adjusted earnings of $0.30 per share, which was above our expectations for the quarter, due to increased net revenue and adjusted EBITDA margin from our RCM segment, as well as a $0.015 benefit from lower interest expense, taxes and depreciation.

For comparison purposes, please note that the second quarter last year included a discrete tax benefit of approximately $0.02 per share.

Turning now to our revenue detail, which breaks out our performance-related fees. Net revenue in the Spend and Clinical Resource Management segment increased 3.1% versus the second quarter of 2012. Excluding performance-related fees from both periods, our SCM segment net revenue grew 6.3% over the second quarter of 2012. In our Revenue Cycle Management segment, net revenue increased 7.5% over Q2 last year, due to solid subscription fee growth in our RCT offerings, or our Revenue Cycle Technology offerings, increased volume for Revenue Cycle Services clients, as well as slower-than-expected ramp down of 2 RCM Services clients that we referenced last year.

Consolidated net revenue included a total of $2.0 million of performance-related fees, compared to $5.2 million in the second quarter of 2012. Approximately 85% of the performance-related fees were in our SCM segment. Excluding these fees from both periods, total net revenue grew 6.9% over the second quarter of 2012.

As we look at our segment-level financial results, our SCM segment adjusted EBITDA margin decreased 286 basis points from Q2 of 2012 to 40.8%, due primarily to the expected year -- lower year-over-year performance-related fees, as well as higher expenses from our annual Healthcare Business Summit and increased compensation expense.

Revenue Cycle Technology comprised approximately 69% of second quarter RCM segment revenue and grew 6.5% year-over-year. Services revenue increased 9.7% from the second quarter of 2012. Second quarter adjusted EBITDA margin in our RCM segment was 26.0%, a 618-basis-point improvement from 2012, due primarily to operating leverage from growth of RCM Technology subscription fees and increased volume from RCM Services clients.

Free cash flow in the first half of 2013 was up 25.4% over last year to $43.4 million, due to an increase in net income and decrease in capital expenditures versus the prior year. Our adjusted EBITDA conversion of free cash flow in the second quarter was 66.4% and 38.0% year-to-date. We continue to expect our free cash flow conversion to be approximately 35% to 40% of adjusted EBITDA for full year 2013.

On June 30, our balance sheet reflected $821.5 million in total bank and bond debt net of cash. During the second quarter, we prepaid an additional $40 million of our Term Loan B, along with our scheduled principal payments. Net debt outstanding was approximately 3.6x 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 updating our 2013 guidance, as summarized on Slide 15 of our presentation. We are raising the midpoint of our consolidated net revenue and adjusted EBITDA guidance by $1 million each, and increasing the midpoint of our adjusted EPS guidance by $0.02 per share. Given our current expectation of the revenue mix favoring our higher-margin business lines, we're also raising our adjusted EBITDA margin range. Our other assumptions for 2013 full year guidance are listed on Slide 16, and reflect 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 includes approximately $15 million to $25 million in cash taxes. We continue to make investments in product development, which is highlighted in the increase in associated depreciation expense, as new and upgraded software solutions are put into service.

Performance-related fees were 1.2% of second quarter total net revenue, and we still expect these fees to be between $18 million and $22 million this year or approximately 3% of total net revenue in 2013. We expect third quarter 2013 net revenue in our Spend and Clinical Resource Management segment to increase 2% to 5% from net revenue of $99.1 million in the third quarter of 2012, which included $7.3 million of performance-related fees in last year's quarter.

In our Revenue Cycle Management segment, we expect third quarter revenue to be down 3% to up 1% when compared to third quarter 2012 revenue of $64.3 million. The third quarter of 2012 included approximately $2 million in onetime or non-recurring RCM revenue. On a sequential basis, the expected decline is largely due to the ramp down of 2 RCM Services clients, which we discussed last quarter.

Consolidated net revenue is expected to grow 0.5% to 3.0% over the $163.4 million reported in the third quarter of 2012. We expect third quarter total adjusted EBITDA margin to be in the 30.6% to 33.0% range. This will be down 190 to 430 basis points from the third quarter a year ago, as we expect to recognize fewer performance-related fees and also incur expenses related to IT, infrastructure and other related investments.

We expect GAAP EPS to be in the range of $0.08 to $0.10 per share compared with $0.09 a year ago. And finally, our adjusted EPS is expected to be down 6% to 12% from third quarter 2012 adjusted EPS of $0.32 per share.

For the fourth quarter of 2013, we expect total net revenue to be flat to up 5% from the $163.8 million reported in Q4 of 2012, and consolidated adjusted EBITDA margin to be down 60 to 260 basis points from 2012 fourth quarter margin of 33.6%. We expect performance-related fees in this year's fourth quarter to be less than the $4.5 million in fees recognized in last year's comparable quarter.

In summary, we delivered another solid quarter of performance. And as John and Mike have both mentioned, we remain focused on improving our execution, delivering on our innovation agenda and de-levering our balance sheet.

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

Question-and-Answer Session

Operator

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

Charles Rhyee - Cowen and Company, LLC, Research Division

Clearly it looks like, on the RCM side, you're having more sustained success here. And obviously, the performance in the second quarter better than we were expecting. Maybe just a couple questions around that. First, is there any way you can give us a sense on 2 items. One is, I think, the magnitude of this new multistate health plan -- health system that you're -- you signed up that will kind of roll on starting next quarter. And also, maybe a sense on how -- the magnitude of the 2 RCM service contracts that are rolling off, so that maybe we can get a better sense on what maybe some of the underlying growth is, given that it kind of implies 3Q revenue and RCM will be down sequentially.

Charles O. Garner

Yes, sure, Charles, this is Chuck. Let me try to address those 2 points. So with regard to specifically quantifying the additional recently-signed contracts, we don't provide that customer-level detail. But as we mentioned in the one instance, for example, on the Revenue Cycle side, it was a sizable multihospital health system that we recently signed. That will be reflected now in our third quarter contracted revenue, as it signed early in July. With regard to the broader impact of what the performance in Q2, related to also the items we've talked about last quarter, there were 2 specific accounts that began to wind down. We forecasted the impact of those on Q2 and the rest of the year. In the second quarter, it turned out that they wound down or began to ramp down at a little bit slower rate than we had anticipated, so that drove part of the benefit in the second quarter, which we recognized. And I think we've talked about last quarter that the impact was about an $8 million total contracted revenue impact, largely related to those 2 accounts winding down. And that would be over the course, of course, of the next 4 quarters post Q1, when we announced that last quarter.

Charles Rhyee - Cowen and Company, LLC, Research Division

Okay, that's helpful. And then in terms of incentive payments, you kind of said -- did I hear you correctly? You're saying that in the fourth quarter, incentive payments will be less than the $4 million that you had a year ago. And if I look at what you've recognized so far versus your guide, you've got $5 million to $9 million left in the second half, so we should be assuming most of that will be in the third quarter?

Charles O. Garner

Yes, I think it's still within that range. If you assume the low end of the range, that could imply most of it in the fourth quarter. If you assume the high end of the range, I think you'll find it would be about split. And so, obviously, a lot of this depends on the timing of performance, client sign-off. But we don't expect to have substantially large performance fees recognized in the fourth quarter that would exceed last year's $4.5 million total.

Operator

Our next question comes from Jamie Stockton from Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess, maybe just a quick follow-up on the RCM backlog. Should we be expecting most of that $8 million, Chuck, to come out over the next few quarters from the 12-month contracted backlog number as well?

Charles O. Garner

Yes. So certainly, there is a couple things happening. As it relates to the 2 specific accounts that will be ramping down, they would ramp down over that -- that approximately $8 million would ramp down over 4 quarters following the end of Q1. Obviously, we're one quarter into that already. But at the same time, we continue to sign new business, have had some updated volume activity, and so that's a little bit of an offset. That's why you also see, specifically in the second quarter, the contracted revenue grew pretty well across the Revenue Cycle segment, broadly, but also specifically within Revenue Cycle Services.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay. Just, the -- I guess the stub that it left to come out of contracted backlog is less than $8 million, it sounds like, but there's still something there.

Charles O. Garner

Yes, that's certainly the case. Certainly we're one quarter out of 4 quarters into that, so the $8 million was our estimate at the end of March. And that included the second quarter, third quarter, fourth quarter of this year and the first quarter.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay. And then just as a follow-up, I guess. It sounds like the real strength, sequentially, in the June quarter for Revenue Cycle was more service-oriented. Could you guys just talk about those engagements? I assume that they're recurring revenue engagements, but if there's any color on exactly what you're doing for those providers or how sustainable that growth is, that would be great.

Michael Patrick Nolte

Jaime, from a performance standpoint, it's actually a good mix of Technology and Services. And I think it's absolutely going to be, I would say, a consistent recurring revenue stream. So we're not talking about a short-term bump like consulting engagement or something that's going to disappear from the backlog. I think the other nice piece is we continue to see momentum from a bookings and a contracted revenue perspective that I think is a couple things. One is helping to account for some of the RCS shortfall that we mentioned, but also has a better mix from a technology perspective, which tends to be higher margin and driving more profit.

Operator

Our next question comes from Greg Bolan from Sterne Agee.

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

So just a quick question on Revenue Cycle adjusted EBITDA, Chuck. I mean given the fact that, going back to Jaime's question, Services were a bit stronger in the quarter, I guess, a little surprised by how strong the adjusted EBITDA margin was. Can you maybe delve a little bit deeper into what drove that strength?

Charles O. Garner

Sure. I mean, it was a combination of things. Part of the strength had to do with some volumes and some pent-up, basically, backlog of claims volumes and things that we're processing through, so that tended to come through a little bit of higher margin, I'd say, in general, relative to our overall weighted average margin for the Rev Cycle Services business. That was largely based on some existing accounts and some newer accounts we signed up and had a pretty good backlog of claims and accounts to process there. So that largely explains the reason for the higher adjusted EBITDA margin than probably what would be expected for just an overall average increase of Rev Cycle Services in the quarter.

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

Okay, that's helpful. And then, John, just kind of an interesting question with regards to the advisory opinion issued by the OIG. If you could maybe -- obviously, your purchasing scale is larger than this competitor. And just wondering if you were to kind of put yourself versus this competitor or another or another, how would you say you are positioned from the standpoint of savings to the client? Because it would seem to me that the whole idea by this competitor was to offer an equity sweetener to maybe make their, I guess, dollar savings or yield to that client on par with yours. And so if you take that equity sweetener away, theoretically, then your savings to hospital clients would be higher than this competitor. Am I thinking about this correctly?

John A. Bardis

Well, I think you're thinking about it just precisely like the OIG did. And the OIG's opinion was that Medicare has to receive the benefit of those procurement volume purchase cost reductions. And that those value improvements can't go in the form of equity to someone else that Medicare doesn't benefit from. So you're right in the sense of there being an offsetting value creator as opposed to price. And the question is who is getting it. So we've documented hardcore $3 billion worth of performance improvement over the years, and this particular competitor has been part of -- their former clients and the supply chain has been -- have been part of that. So in the end, I feel that when you think about contract pricing and integrated performance improvement, to include how you use data and process improvement to reduce the total cost of care, that we remain in the front of the pack. GPO contracting is certainly a big part of that. But even as we go forward, how product is used and where it is used is becoming just as important, if that makes sense.

Operator

Our next question comes from Michael Cherny from ISI Group.

Michael Cherny - ISI Group Inc., Research Division

So I want to stay in the same theme of Greg's question regarding the OIG opinion. Obviously, this was done part of almost like a reactionary-type impact based on what your competitor was doing. In terms of the conversations you've had with your customers regarding -- as you are going through the OIG review, do you see any disruption in your customer base? And then on the same side, with OIG making its opinion the way it did, what do you view this going forward in terms of your competitive positioning just relative to the way they've been potentially pursuing customers? And has that created any opportunities for you, given some of these metrics that they may have been pursuing?

John A. Bardis

Well, first, as far as feedback we've received, Michael, from our clients, they're very grateful, largely because it has clarified a situation that has been brought to their attention by this competitor on a number of occasions. And it makes the lines, at least insofar as our business idea, very, very clear. How that relates specifically to our competitor, I really can't tell you. But let me draw some financial examples of how this might have been thought about as it related to us. So today, we have approximately, for round numbers, Michael, a couple of hundred million dollars in share back. And if we were able to straight out use equity to buy that share back on a direct value of time, and say we bought it for 5 years, you'd presume that we'd pay about $1 billion for 5 years worth of $200 million of share back. On a pretax basis, it's about $200 million and you can do the math at our multiple, or even a discounted multiple. The value creation for our shareholders and our stakeholders -- in this case, would probably be both, right -- is pretty dramatic, financially. So having said that, the OIG was very, very clear that any benefit whatsoever that's being created for an exchange of value that Medicare doesn't receive, because they're the one who's depending upon the discounts to be credited to the Medicare program, fall outside of not only the Safe Harbor, but the Anti-Kickback Statute. So I hope that answers the question. Now this has not, in any way, affected or stopped our approach to the marketplace, which has been pretty consistent and, at the same time, evolutionary. We continue forward with new ways of doing things. So, for example, when you put in a total hip, how do you process that patient, both pre-op and post-op, to reduce the total number of resources that are utilized in that care? Those are the kinds of things,, over and above price of the unit, that we're dealing with today. It goes on from there, but having the data and the -- bracketing the process with data is a very important thing.

Operator

Our next question comes from Bret Jones from Oppenheimer.

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

I wanted to circle back to one of Chuck's answers, just to stay on the contracted revenue. I was little confused by what you said in terms of the 2 customers that would be rolling off. If I remember correctly, the $8 million was already accounted in the first quarter because they were winding down, minus whatever you were expecting to occur -- to recognize in revenue in second. Can you tell us, now that that's winding down a little bit slower, did some of that revenue get added back into contracted revenue? Or did you take it all out and now you're just letting it flow?

Charles O. Garner

Yes. Sorry and let me just clarify another point because there may be a little confusion or perhaps I didn't fully answer the question earlier. Because I -- the question is both around contracted revenue and what's in that number. So at the first quarter last year, when we saw that there would be 2 accounts winding down, we adjusted our contracted revenue estimate to reflect that wind down on the schedule that we understood to be the case. As the second quarter occurred, we realized that the wind down was not happening quite as quickly, so there's some additional revenue recognized in the second quarter. That has not materially impacted the contracted revenue estimate that's related to the 2 specific accounts. That's still, of course, a forward-leading metric for the next 12 months. But I did want to just highlight that there is some revenue that has come in that hit the revenue line, not our contracted revenue estimate, from those accounts. And hopefully, that provides a little more clarity. Then on top of that, we have, of course, continued to sign business in the second quarter, which is why the contracted revenue is continuing to ramp up and more than offset that decline from the first quarter.

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

Okay, great. No, that clears it up. And just sort of a follow-up. I wanted to ask you about the same-store sales growth you're seeing within the SCM business. You're presentation is referencing the strong same-store sales growth is offsetting weak utilization. I'm wondering, can you disclose how same-store sales is growing? And for John, are you seeing customers finally putting pressure on their organizations to buy on contract, something you've talked about for a long time?

John A. Bardis

Brad, we don't break down those statistics, although we are -- or at least for public consumption, but we are very, very acutely focused on them. In fact, both Chuck, Rand Ballard and Mike Nolte sort of talk about them virtually every day. But you raised a great point, the industry is looking ahead of the change curve and focused, in particular, right now on costs. And we have systems that are in the, say, the $3 billion, $2.5 billion range that are pulling out or have an objective of pulling out $250 million to $300 million of actual costs. That is -- those are the kinds of numbers that we're seeing across the board in anticipation of the payment per unit change, as well as the location and census change, depending on where the incentive to provide care [ph] is. So contract compliance is turning out to be a meaningful portion of their supply chain strategy insofar as the broader cost reduction process is concerned. So, yes, we're seeing compliance focus better than ever. In fact, because of that, I think it was last week in our Spend Management council, a very important and very well-known product category saw a price reduction for an enormous amount of volume commitment of 26%. And this is not an area that we would normally have expected this kind of cost reduction. But it's all in line with what you had pointed out on the compliance requirements now being driven as a key benchmark for hospitals to reduce costs.

Operator

Our next question comes from Sean Dodge from Jefferies.

Sean Dodge - Jefferies LLC, Research Division

Chuck, on the SCM side, after normalizing for the performance fees, it looks like the adjusted EBITDA margin was down about 100 basis points year-over-year. I would have thought that with the GPO being the faster or the[ph] -- that would have helped push margins there higher. Can you talk a little bit about what drove the deterioration?

Charles O. Garner

Yes, there's a couple items to highlight. One is we've actually continued making investments, not just in the Rev Cycle business, but also in our Spend and Clinical Resource Management business. As you'll note, the compensation expense was up a little bit, that was part of the explanation. As well, in the period, in the second -- typically it's in the second quarter, based on the timing of our Annual Healthcare Business Summit, we also had some higher expenses versus prior year related to that event. That largely explained the grand majority of the variance, why you weren't seeing more of a pickup of margin in the second quarter versus the year ago.

Sean Dodge - Jefferies LLC, Research Division

Okay. And then in the first quarter you mentioned some delayed investments. I think they were around Technology and Service. With G&A being down sequentially and kind of roughly flat year-over-year, were those investments delayed again? Or are they being offset, maybe, by some savings from the Lean initiatives?

Charles O. Garner

Yes. The answer is yes and yes. There is some investments we're continuing to make that we did make in the second quarter that initially we planned in the first quarter. A little bit of that, I think, as we talked last quarter, some of these delays or pushes will occur not just in the second quarter, but get pushed out a little bit in the third and fourth quarter, so you'll see a little bit of that effect. But then also, obviously, a lot of what Mike and the team are working on is around these Lean operational performance improvements, where we're driving greater productivity across the business. So that's also helping to have an impact on getting more scalability from our cost structure.

Operator

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

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Just a quick one. Chuck, what was the actual interest -- blended interest rate for the quarter and what did that compare to 2001? And what exposure do you have to the rising rates?

Charles O. Garner

For 2001?

Robert M. Willoughby - BofA Merrill Lynch, Research Division

I'm sorry, first quarter, I'm sorry. 2001, if you have it, but first quarter probably.

Charles O. Garner

Sorry, I may have misunderstood. I don't have 2001.

John A. Bardis

I can speak to 2001, Robert. I just want to say we were broke.

Charles O. Garner

Yes. So there were a couple onetime items, largely around the relation of capitalization of some interest expense related to software development, et cetera, that we noted in our first quarter call, which kind of artificially created a little bit of a unique interest expense in the first quarter. But overall, our combined interest expense was about 5% and then 8%, maybe a little -- between 5.1% about 5.2% when you add in our Term Loan A, B revolver, and 8% notes for the second quarter.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And that's the second quarter? So the first, if you adjusted for those onetime items, was it meaningfully lower or was it close?

Charles O. Garner

It was pretty close to the ballpark. I mean, for the most part, the exposure we have right now, today, our notes are at 8%, they're fixed. We have a Term Loan B with a floor, which is well above LIBOR. So really, the only major movement from a rate perspective tends to be where LIBOR has moved on our Term Loan A or our revolver. And that's only about 1/4 to 1/3 of our capital structure right now.

Robert M. Willoughby - BofA Merrill Lynch, Research Division

And would you be looking to fix any of this now, any of the Term A or Term B, or you're just going to continue to pay that down?

Charles O. Garner

Yes, we're continuing to look at how to best manage interest rate, both exposure and as well as to minimize interest rate expense. And there is a series of alternatives we're looking at, including interest rate hedging. We also have some flexibility, as we go into, certainly, the market today or into 2014, of things we could do to buyback bonds, shares, et cetera, although we don't have a share repurchase plan in place. But we do have flexibility with the credit agreement we've put in place in December of 2012. So we're looking at, obviously, a wide variety of options right now but in the meantime, the focus will continue to be using free cash flow to pay down debt. We'll opportunistically consider what amount of hedging, if any, to put in place going forward.

Operator

Our next question comes from Jeff Garro from William Blair & Company.

Jeffrey Garro - William Blair & Company L.L.C., Research Division

So we've heard you discuss several times how, with your Revenue Cycle Technology and Services, you can help provide a smooth electronic health or Patient Accounting transition. So I wanted to see if you guys had any commentary, whether you see that as something that's cyclical over the next couple of years, or whether that's a kind of sustainable business opportunity for you over a longer time period.

John A. Bardis

Jeff, this is John. The -- what we're seeing, perhaps as a meaningful driver right now, is the movement in the Revenue Cycle processing arena to being able to do 2 things at the same time. One, continue to be effective in managing those agreements that are traditionally fee-for-service. And at the same time, prepare the revenue process to deal with both fee-for-value and episodic care. Those are sort of the technical revenue and contract kinds of things. Having said that, we've also had to build the kind of capabilities to integrate our tools into the Patient Accounting Systems that are out there. And I'm going to lateral that to Mike, because he and his team have been pretty aggressively working on making those tools more useful in those environments.

Michael Patrick Nolte

Yes. I mean, I'd say 3 things, and it's all related to kind of an overall theme of change is good, from the standpoint of how our Revenue Cycle Technology business is built. One is, as there's pressure, as you can imagine, on core Patient Accounting Systems and those transitions happen, I do think we're beginning to see an upswing in just being the glue that kind of holds everything together as one Revenue Cycle system gets wound down and another one gets wound up, regardless of what that transition is from or to. That's an interesting business that continues to be a pretty solid part of our portfolio. As a second, as John alluded to, the move to episodic care or to risk-based care is something that I think we're beginning to see a lot of traction around, starting probably largely with customers who have more of a health plan focus, but really beginning to be into deeper provider networks, where there's a real need to make sure that you both have the right technology to manage a different kind of reimbursement environment, but also to be thoughtful about how you move in parallel from the fee-for-service environment that you're coming from and make the choice to flip at the right economic moment. And so a combination of Services and Technology is beginning to gain a lot of traction there. And then third, I'd say, the business is fundamentally built around managing the more complex end of how Revenue Cycle happens. And so as more and more different models are tried, as we see, thematically different pilots and different ways of approaching how to manage through different Revenue Cycle models, we see lots of uptick in places like contract management and claims processing, just in some of the basic stuff that we do.

John A. Bardis

And one other comment I'll just make and that is revenue and pricing is getting more, not less, complex right now.

Jeffrey Garro - William Blair & Company L.L.C., Research Division

Great. Great. I think my question was -- I was thinking more about the "glue that holds everything together" aspect. But you guys are clearly talking about that kind of changes in overall reimbursement model. So I guess of the follow-up is, is there anything in the product development pipeline in the foreseeable future that's going to be disruptive in the market, that is going to help providers manage that transition, that's different than what other competitors are offering?

John A. Bardis

Yes, I think -- again, I don't want to speak for the industry, but our Bundled Payment tool, where we've built 60 bundles, is intriguing. And let me take a shot at explaining why. It's true that we're able to assess the performance and resource consumption of all the physicians that are admitters, and in doing so, help the institution understand its trajectory in relationship to risk on a Bundled Payment or an episodic approach. So what we're seeing today is that if hospitals either haven't acquired or tend to affiliate with their doctors, they -- and many have acquired them and many have affiliated, what they're looking for is a common way to measure physician performance. And as we talked a little bit earlier, the forward environment, based on where payment is headed, is about cost reduction. But if you don't know how to compare your admitters and how they resource consume, it's very, very hard to have a game plan to address at the clinical level. And so that, on the front end here, is, in my view, a meaningful opportunity for us, because it tends to point the arrows at the areas that we are pretty effective at managing, both on the cost and clinical integration, and then ultimately marrying how revenue is produced against that.

Jeffrey Garro - William Blair & Company L.L.C., Research Division

Great, then. I just have to ask, is this something that's generally available now? And if not, when will we expect it? And if it is, what kind of momentum does it have in the customer base?

Michael Patrick Nolte

Yes. We're seeing tremendous momentum. It is generally-available technology now. We obviously, like all of our software, continue to enhance what we deliver, but the capability is already marketed and sold today.

Operator

Our last question comes from David Larsen from Leerink Swann.

David Larsen - Leerink Swann LLC, Research Division

Just coming back to this $10 million increase in the RCM backlog, can you give any more color around like what the split is between Service and Technology? Or maybe like how much is existing customers versus new customers? And then I just wanted to confirm that like, let's say, under $1 million or under $500,000 of that is some sort of the slower deceleration in the runoff from those 2 clients you mentioned the last quarter?

Michael Patrick Nolte

Yes. The split, I think, we actually mentioned in the discussion earlier. The technology was about 2.7% sequentially from first quarter, increase in Services. Contracted revenue increased 10.7%. The -- maybe repeat the second part of your question around the runoff from the original Services stuff from first quarter.

David Larsen - Leerink Swann LLC, Research Division

I just wanted to confirm that there was very little, if any, contribution from those 2 clients that were going to -- that were mentioned last quarter that were going to roll off?

Michael Patrick Nolte

Yes. I mean, look, every bit of margin helps. Right? But relative to the rest of our revenue, that Services revenue is relatively low margin compared to, for example, Technology revenue.

David Larsen - Leerink Swann LLC, Research Division

Okay. And that's not in backlog, right? I think Chuck mentioned that, correct?

Michael Patrick Nolte

Right. It's out of the backlog at this point. We had a bit of a surprise in terms of revenue that ended up being in second quarter, that we anticipated not being there just because it ramped down slower than we expected.

Operator

And we have no further questions at this time.

Robert P. Borchert

Okay. Well, we'll conclude our -- the second quarter conference call. I want to thank everyone for their time, and we look forward to speaking with you at the end of our third quarter. Thank you.

Operator

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

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