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Executives

Robert Borchert - Vice President of Investor Relations.

John A. Bardis - Chief Executive Officer

Laurence Neil Hunn - Chief Financial Officer

Analysts

Michael Cherney - Deutsche Bank

Larry Marsh - Barclays Capital

Charles Boorady - Citi

Glenn Garmont - Think Equity

Greg Bolin - Wells Fargo

Corey Tobin - William Blair and Company

Donald Hooker - UBS Securities

Eric Coldwell – Robert W. Baird

Constantine Davides - JMP

Dan Hambrian for Richard Close - Jefferies & Company

Charles Rhyee - Oppenheimer & Company

MedAssets, Inc. (MDAS) Q3 2009 Earnings Call October 28, 2009 5:00 PM ET

Operator

Good afternoon my name is Katrina and I will be your conference operator today. At this time, I would like to welcome everyone to the MedAssets third quarter conference call. (Operator Instructions). I would now like to introduce Mr. Robert Borchert, Vice President and Investor Relations. Mr. Borchet, you may begin your conference.

Robert Borchert

Thank you Katrina.

Good afternoon and welcome to the MedAssets conference call to discuss our financial and operating results for the third quarter ended September 30th, 2009. With me today are John Bardis, our Chairman, President, and CEO, and Neil Hunn, our Chief Financial Officer.

Before we begin, I would like to remind everyone that we will be making forward-looking statements on this call regarding our Company’s expected financial and operating performance. These forward-looking statements may be affected by important risk factors known to us that are described in detail in MedAssets’ periodic filings with the Securities Exchange Commission. Additionally, please note that risk not presently known to us or which we considered to be immaterial may also adversely impact our business.

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.

We will also discuss certain non-GAAP financial measures in today’s call. Please refer to today’s earnings release which is posted in the Investor Relations section of our corporate website www.medassests.com for more information on these non-GAAP measures.

Following our prepared remarks, we request that you ask only one question and as needed one-follow-up, so everyone will have an opportunity to pose a question within our 60 minutes time limit. Thank you.

Now, I would like to turn the call over to our CEO, John Bardis.

John Bardis

Thank you, Robert, and good afternoon everyone. For the third quarter just ended, MedAssets posted total revenue at $82.4 million. Adjusted EBITDA of $28.5 million in cash EPS of $0.22. This performance was inline with our expectation and another positive quarter for the Company.

As usual Neil will run through our financial results and outlook in a few minutes. But I would like to first address a few topics that we have been asked about over the last couple of months then I will highlight a number of recent successes and discuss our sales momentum in the midst of this very challenging environment for hospitals and health systems.

Let me start by providing our view of the current state healthcare reform and how it will likely impact our customers and our business. We got to look for the final structure of healthcare reform legislation. We continue to expect the hospital operating environment to undergo fundamental changes most of which were either overall reimbursement or make reimbursement more complex.

Increased and likely more complex insurance coverage will absolutely benefit our business given that more patients will seek primary at elective care. This may drive the supply consumption and reimbursement claim volume. Given the current economic condition, hospitals census remained flat to down for the first 9 months of this year with supply utilization reflecting the same while overall cost continue to rise at the rate faster than the level of growth.

Earlier this week, President Obama declares the Swine Flu outbreak a national emergency. Essentially, allowing hospitals to set-up alternate sites to handle any surge and the treatment of Swine Flu patients and still be reimbursed for care.

Full activity is now widespread in 46 states and the government official estimate that H1N1 has now hospitalized over 20,000 Americans. The early trends point to a prolonged and potentially severe flu season. Therefore, hospitals will likely see increasing medical patient volumes in the fourth quarter which will drive greater basic supplies utilization.

On a separate note, we can continue to expect that MedAssets will not be a direct beneficiary of the stimulus dollars into under the recovery act. However, we do believe that the increased EMR activity and connectivity demand will drive utilization of fast paced tools like ours which will be used to rationalize and standardize patient critical data for efficient and accurate as well as payments.

Given this market dynamics and the specific MedAssets’ client demand we can continue to feel great about our strategic and competitive position and most importantly, our value proposition. We identified very specific, measurable, and sustainable margin in cash flow improvement programs for customers or prospects and this is supported by an evidence- based and data driven approach.

This business attributes will continue to deliver increasing value to our customers even as hospitals become more financially stable on a relative basis. This strategy is key to building our sales pipeline as many hospitals focused on critically EMR project utilizations, we continue to see sales momentum for both our revenue cycle and expand management solutions.

As Neil will in highlight in a few minutes, our contracted revenue estimate net increased 19.5% over the last year and more than 7% sequentially. Nearly 80% of our new contracts have come from existing MedAssets clients. Delivering on our value proposition and seeking to build a long lasting partnership with our customers are key to our future success.

In addition, we are aggressively worked to test and develop new growth drivers. For example, at the end of September we announced the General Availability and Service Line Analytics, our newest supply analytic solution. This fast pace of web based offering broadcast our technology and clinical utilization expertise and help hospitals to understand the interconnections between reimbursements, supply cost, and supply utilization as well as clinical factors and other resource utilization track.

Service Line Analytics helps to define true supply chain performance and savings opportunities by connecting data to the service line physician or patient level to best understand the organization’s spend related to patient outcomes.

It then measure progress in their dashboard that illustrated achievement of targets, their answers and changes in [Inaudible] indicators. Health systems comprising of more than 30 facilities including a line account for Baptist Health System of Birmingham, and a growing clinic assisted and prized development through beta testing.

We greatly appreciate their support in the launch of Service Line Analytics and to look forward to continue to indentify and deliver financial improvements to the health systems and other major systems as well. We continue to gain traction with our rack tools. MedAssets has now more than 100 facilities to find out and develop and execute comprehensive strategies to improve revenue integrity and retention. In addition, we recently gained a number of important trade credential that will help drive our sales and marketing efforts at this market niche continues to evolve.

On our customer new business front, Saint Vincent Health of Indianapolis has made major improvements to optimize its revenue cycle performance over the last year. We recently announced that they expanded the relationship with MedAssets by adding our claims management and charge capture solutions to further improve the health system’s financial performance through better contract management, charge capture and recovery, and claims management processes.

Based in Indianapolis and part of the [Atlantic] Health System, Saint Vincent Health operates 80 health facilities and care for more than 2.1 million patients in fiscal year 2009. Providers like Saint Vincent Health are looking for solutions that are non-capital expense based, quick to implement and will reach the targeted ROI while making the revenue cycle performance more effective by ensuring that proper payments are received from payers and patients in a timely manner.

Our solutions are designed healthcare provider like Saint Vincent Health to identify financial improvement opportunity so they can continue to support their mission of providing high quality healthcare to the communities they serve.

We also renewed and extended our expense management agreement earlier this month Scripps Health, an award winning integrated delivery network based in San Diego. Scripps have saved more than $40 million with us over 8 years by leveraging the taxes of our GPO, supply chain analytics, and physician preference item consulting services for the medical advices.

In fact, Scripps supply costs as a percentage of net revenue had continuously decreased for the last 5 years. Scripps also utilized our revenue cycle management solutions for over 7 years. Scripps Health under the leadership of Chris Van Gorder has had an amazing turnaround story in its pursuit for operational and financial excellence. We will look forward to providing continuous margin enhancement strategies as they implement their growth and expansion plans.

Let me conclude by remarks by saying I am very pleased with the progress we have made this year. We have had our best new business bookings in our Company’s history. New and on time products and services introductions and an industry leading focus on client delivery and customer’s satisfaction. Suffice it to say, that over the course of the last year our integration of the Acura acquisition has not gone well. It has gone terrific.

I am most proud of the results from our recent employees’ survey which indicated an increase in our employees’ engagement scores. Our entire management team works tirelessly to communicate with and empower each person to serve our customer’s needs and we take great pride in the culture we have built and have demonstrated [power] to create value for clients and shareholders.

I continue to remain personally motivated and optimistic both in terms of our strategy and our financial outlook.

With that, I will turn the call over Neil Hunn, our Chief Financial Officer.

Laurence Neil Hunn

Thanks John and good afternoon everyone. This past quarter, in a clean comparison over the last year’s third quarter. So, this will be the first time I will describe our quarter result without any acquisition affected explanations.

As John mentioned, our third quarter financial report were generally in-line with our expectation with the exception of cash EPS which was fairly better than forecast. Our revenue structure management segment generated net revenue of $51.6 million or up 12.8% when considered as net revenue of 45.89% for the third quarter of 2008.

This growth is consistent with all prior quarters and was driven primarily by our claims and the new management solutions, charge master and contract management tools as well the revenue cycle services and physician support capabilities.

We continue to see strength in our sales pipeline for many of our staff solutions. As to relate to our larger transformational implementations, St Barnabas and Ochsner are both in the midst of the early stages of the implementation. With regard with to St. Barnabas both our client and our onsite team are excited by the opportunity to drive the sustainable and meaningful cash improvements.

We have mutually agreed to a December start for the implementation of the staffing component of our relationship in order to help insure its mid staff transition of minimal to no impact on the health system processes. This change in implementation had about $1 million impact on our third quarter results as certainly non-staffing components been delayed by a couple of months.

In the initial implementation stage of our Ochsner transformational relationship will be an opportunity for a long term financial improvement and high [Inaudible] implementation are on track and consistent with our expectations.

Adjusted EBITDA margin in our RCM segment which is 34.8% for the third quarter, a substantial increase when compared to adjusted EBITDA margin of 30.6% in the third quarter a year ago notwithstanding the investments we made in the St. Barnabas relationship during this most recent quarter. This margin increase is a result of disciplined expense management and lower performance based cash compensation.

Turning to our spend management business. This segment reported net revenue of $30.8 million or up 1.9% over the third quarter of 2008. Which is also consistent with our expectation as the GPO continues to be impacted by industry wide lower patient volumes and supply utilization during the first half of this year. As you know, our GPO recognizes as vendors report volumes and fees to us of which a large portion are one quarter in arrears from the date of the hospital purchases.

We are monitoring health care purchasing and utilization trends closely. As we stated in the last quarter, our account management teams continued to work to identify opportunities for increased GPO contract compliance with our clients which we expected to be realized during the remainder of this year and end of 2010.

We continue to see strength in our supply chain consulting and analytics businesses which is 13.5% in the quarter and the new GPO wins we booked this year will provide a solid base of revenue growth as we move into the next year. Third quarter adjusted EBITDA margin in the spend management segment was 51.1% compared to 50.4% margin in the third quarter of 2008. This 70 basis point expansion were driven by disciplined expense measuring controls put in place during the second quarter of this year and also highlight the operating leveraging inherent in our GPO services equipments.

On the consolidated basis, our third quarter revenue was $82.4 million and grew 8.5% when compared to the third quarter a year ago due to the fact as we described during each of discussion that have been in these segments. Our consolidated third quarter adjusted EBITDA was $28.5 million or 34.6% margin versus adjusted EBITDA of $25.2 million or 33.2% margin in last year’s third quarter.

Our effective income tax rate for the period was 38% and the third quarter net income increased 60% over the last year’s $5.9 million. We reported GAAP EPS of $0.10 per diluted share and cash earnings of $0.22. Our cash flow from operation for the 9-month period was $40 million a 28.4% increase over the same period of 2008. Free cash flow came in $8.5 million. As a reminder, our scheduled revenue through obligations in certain hospital and health system customers are paid primarily in the first and third quarter of each calendar year so, we anticipate our full-year free cash flow to be approximate 40% of the adjusted EBITDA consistent with prior communications.

Our September 30th balance sheet reflects $230.8 million in total bank debt with leverage approximately 2.2 times trailing adjusted EBITDA as we repaid $10.6 million in bank debt during the quarter.

At the end of the third quarter, our Days Sales Outstanding was 61 days which was flat on the sequential basis from the end of the second quarter. Our bad debt expense was approximately 2.3% of total service fee revenue in the first 9 months of this year, compared to 1% for the same period in 2008.

This increase was a result of the higher percentage of our total revenue coming from revenue management business as well our continued efforts to review all asset customer contracts and doing [Inaudible]

Now, let us turn to our financial outlook. Our rolling 12-month contracted revenue estimate increased 19.5% over the last the last year to $356 million at September 30, 2009 which was 7.1% increase when compared to $332.4 million reported at the end of the second quarter of 2009.

This growth is driven by a 27.1% year-over-year increase in contracted revenue in our RCM segment with the addition of St. Barnabas and other new business bookings. This management contracted revenue estimate increased 8.6% from September 30th last year.

As we think about the fourth quarter trends, we expect that our contracted revenue estimates to increase 15% to 17% year-over-year but declined sequentially by 1% to 2% given the guaranteed sign-offs planned during the fourth quarter. Today, we are refining our guidance for our full-year 2009. Specifically, we expect consolidated net revenue of $341 million to $345 million which is lower than our previously communicated guidance range. Our full year revenue cycle management segment revenue guidance is now $206 million to $209 million and our expense management expense segment revenue outlook for 2009 is $133 million to $136 million based on my prior comments regarding this segment.

Our consolidated adjusted EBITDA is expected to be in the range of $110 million to $114 million with our full-year 2009 cash EPS guidance now at $0.78 to $0.84 per diluted share. Each of this is consistent with our EBITDA and earnings guidance provided at the time of the St. Barnabas announcement.

Let me provide you some color on the changes to our 2009 revenue outlook. I will start by saying that the momentum in our business continues to be strong as indicated by our third straight quarterly increase and contracted revenues of 5% or greater and continued traction in our late stage sale pipeline. Our expanding implementation and operational teams are working harder than ever to implement and service the new business that has been onboard over the past three to four quarters.

However, we revised our 2009 revenue guidance for two reasons. First, the change in implementation timing of our Saint Barnabas relationship has an approximate $2 million impact on our fourth quarter. This is the primary driver of our lower revenue cycle outlook for the remainder of the year and importantly has no impact for outlook for 2010.

Second, given lower than expected hospital spending volumes, our group purchasing business may experience slower growth, but we do believe this trend is changing given patient volumes related to the flu season.

As I mentioned in our last call, we expect to provide our detailed 2010 revenue, EBITDA and earnings guidance in early to mid December, once our annual planning process has been completed. With that in mind, I do want to provide some high-level thoughts regarding our revenue outlook for 2010.

While I continue to convert competitive business, the recession and lower expenses levels are temporarily impacting our GPO business. However, our other spend management service and technology solutions continue to outpace our GPO growth. We also continued to see the same positive trend in a revenue cycle segment. We will remain disciplined in our expectations for implementation timing and related revenue recognition given the tremendous amount of new business that has been signed and is expected to be signed over the course of the remainder of this year and in the next year.

Notwithstanding the industry issues described, we are highly confident that our 2010 revenue growth will be consistent with our 15% long range organic growth models. Importantly, when excluding the financial impact of our Canadian decision support relationship entering the maintenance phase of the contract in early 2010 and expected single digit growth in the core of our decision support business, our revenue growth through the remainder of our business in 2010 would be north to 17% with expanding margins over during the year.

A number of positive fundamentals remained impact for a business.

First, the market for our product services is strong and remained strong as evidenced by our contracted revenues growing 19.5% on a year-over-year basis. Next, we continue to have success in accepting the nearly $5 billion cross-selling opportunity that currently exists in our customer base as evidenced by the fact that over 80% of our new business bookings have originated from our current customer base. In addition, our spend-management services and technology solutions continue to experience tremendous growth and are becoming a larger percentage of this segment’s revenue.

Finally, our transformational relationships include Ochsner and Saint Barnabas continued to demonstrate a new long-term and large growth opportunity for our business. More importantly, these client expectations for project execution and revenue improvements are being exceeded the key metric by which our management team measures our performance.

In summary, our products and services continue to be market-leading, our sales team is having a success communicating and selling our value proposition and our operational teams are expanding and becoming more streamlined in their properties to allow for faster implementation. When combined, this presents a solid opportunity for our business to gain share, delight customers, and deliver on our financial commitment. With that, John and I would like to thank you for your time this afternoon and now I would like ask Katrina to open to call up for questions.

Question and Answer

Operator

(Operator instructions) Your first question comes from Michael Cherney with Deutsche Bank; please go ahead with your question.

Michael Cherney – Deutsche Bank

With regards to the rolling on backlog, obviously you got to show tremendous growth here with this quarter being compared to the last couple, obviously St. Barnabas is one aspect of this that really kind of help supplement the growth, but outside of that, could you talk a little bit about the trends you are seeing, going back to John’s original comment about health care reform? With the guys who are signing up contracts, is there any specific tools they are looking for to prepare themselves in anticipation of healthcare reforms come sooner, rather than later?

Robert Borchert

So Michael, I will start to tell you honestly by letting you know, give you a little more color on what in the last couple of quarters, our revenue cycles that had been the specific tools that got a lot of traction, as we alluded in the call, certainly our claims management and contract management tools are charge master tools, certainly our revenue cycle services, on the spend side, it has certainly been our technology and medical device consulting and once we had Sutter from about six quarters ago implemented and now becomes operational we only use that in our sales force to gain contraction there, so it had some early success there.

Operator

Your next question comes from Larry Marsh with Barclays Capital; please go ahead with your question.

Larry Marsh – Barclays Capital

Thanks and good afternoon, just a couple of things and it seems like the real message for this year has been the kind of the expansion of your target market, with more transformational deals, more to broader base relationships. You have also communicated that some of that does not neatly show up in revenues and earnings as you talked about St. Barnabas. So I guess questions around that, can you elaborate a little bit on the St. Barnabas relationship, the decision to push back the implementation, is just kind of being safe and sort of thinking about how you are going to start that relationship, or is there anything else specific to the situation there that would have pushed you back a little bit?

It sounds like you are as confident as you been certainly a couple of months ago, in terms of how that can impact your business? So let me ask you that first and I will follow up.

John Bardis

Sure, hey Larry, this is John. The Saint Barnabas transformation not only involves the use of all of our technical products but what it really focuses on is the reworking of the entire business office, so being specific, we are going from what will be about 250 employees to as many as 100 left and so the key here being, that we are doing complete lean work force analysis and reassignment of work and training.

So, we thought and in concert with the senior management team at Saint Barnabas, that the best thing to do here was to first, do the right work to identify the correct people before we actually took over the operations of the SPO. So, in other words, as opposed to taking the majority of the effort and time early on, just to on-board 250 people that we would actually reverse the process and get the lean process identified and the reassignment of workflow to the right people and the training of the people to occur.

So for example, I was there on Monday and our war room there is a very complex lean driven, workflow station that basically takes into account every employee and what their role is today and for those who are going to remain, what they are going to be doing in the future and then what the workflow training process is for them.

We fully expect to be able to implement those changes in the middle of November, so that in fact, we hit the ground running December 1, when we fundamentally are now in full charge of the shots. So what we did is we reverse the workflow order in order to, I guess get the planning done correctly, the training done correctly as opposed to us on the finances just simply taking it all over and then doing that work. So it was just the change of order and by tomorrow, the Chief Executive of Saint Barnabas and myself, as well as its senior team and our senior team thought that that was the best to go.

It also got us a lot closer to the employees earlier as opposed to putting them into the fold and then working through those issues.

Larry Marsh – Barclays Capital

I see, so it was, your decision is to make sure you do it right as opposed to any, to sort of find the way and starting it sounds like.

John Bardis

Absolutely and I will tell you that it is so important to us because we believe Larry, that this template is applicable to every transformational transaction we will do throughout the United States. So this is a lean reengineering process, remember, not only are we going to dramatically improve just general revenues because of the workflow process, but we are really going to improve productivity dramatically.

So when you can look at a multibillion dollar system and you can take half a point off operating cost just in an SPO, you are talking about lean workflow that is completely different than what has been used and seen before in these environments.

Larry Marsh – Barclays Capital

Okay, great and then second question along with that, so we sort to talk about revenue cycle. It seems like everybody sort of popping up and sort of and sort of talking about their own revenue cycle solutions and some fair and fair horizon and such and yet, obviously you have been very successful in the marketplace. You remind us the key to really driving results in that kind of suite of product solutions in your marketplace, when everybody in the world says they have got the same thing.

John Bardis

Yes, well my mother and sister have also forced me to sign a non-disclosure informing me that they are not in the revenue cycle businesses. Yes, everybody says that it is fascinating. Larry, you have been through your shares of life cycles in healthcare, you know how this goes.

The reality of this is that, in everything that we do as you know, we have got industry-leading class number one and number two products and having said that, when we went to either acquire or build these products, our focal point was return, meaning that these products had to deliver an identifiable return to the client that was easy to quantify, it was not just work.

So today, whether with selling an individual--client and individual tool or whether we are selling a large integrated delivery network and systems, a suite of tools, or the suite of tools with personnel and transformational workflow changes within and where we manage the people, every single dollars spent in the form of revenue coming in that asset has a return analysis associated with it for improvement in that revenue cycle year, we are reducing the cost or we are actually improving in the velocity of the revenue.

So I think, what differentiates us, is the quantifiable commitments that we make and the targets that we have achieved and I will tell you thus far, in our history of the Company, whether it is a non-supply expend management or whether it is on revenue cycle, every single commitment guarantee are targets that we have set out to achieve we have hit.

We have never missed one history of the Company and I believe we are past 400 of them today. So I do believe the actual performance is the driver and then the last point I will make is that the integration and the interoperability and unification of the software operating off the same data set will ultimately lead with 36 different software tools to a substantial competitive advantage relative to other tools that are out there that will not be able to talk to one another and privately do that.

Larry Marsh – Barclays Capital

Okay, great. Thanks and just a quick follow-up and Robert is going to kick me for asking too many questions but on the guidance Neil, for this year, is there any chance, looks like there are some changes in your estimated depreciation for the year and then can you address sort of the selling and marketing and G&A expenses for this quarter and Q4 as we think in 2010?

John Bardis

Yes, so under depreciation it was, we are just been running a little bit actually each quarter slightly less than the guided amount and so we just, we decided now is the time, so let us get that range tight, relevant to really G&A that has to do with market expense control as we talked about, as well as incentive compensation that will be expected to be paid at a lower level this year versus last.

Operator

Your next question comes from Charles Boorady with Citi; please go ahead with your question.

Charles Boorady - Citi

Thanks and good afternoon, the first question, just G&A sequential improvement in the quarter and then on the previous quarter was slightly higher than the quarter before that. Can you help with spiking out any unusual things that may have improved the G&A this quarter and just remind to us why it was higher in the previous quarter.

Neil Hunn

Charles, this is Neil. So there are two things that are going on here, one is I just mentioned with Larry, which is the expense control that we talked about as well as lower incentive-based compensation booked in the quarter but then also a material factor was a re-class of certain expenses from G&A up in the cost revenue as we completed the transition of the accrual accounting into our accounting system, our Solomon system, and now we have clean classification going forward.

Charles Boorady - Citi

Okay and how do we think about this seasonality of your G&A going forward?

Neil Hunn

Well so the G&A, I think that the seasonality is really a result of the [Ixxtrial] acquisition and now that we are really on the backside of that, that there should not be a tremendous amount of seasonality and the G&A you should see this consistent leverage in that line as we grow over the top of it.

Charles Boorady - Citi

Got it, next question on revenues, can you talk a little bit about 2010, last year this time, you gave us guidance for 2009, there is something about the environment this year or the acquisition or the new customer sign ups that is making you want to take a little bit more time before providing the guidance and is there any read through that we should not further in terms of any visibility you have on next year?

Neil Hunn

So now, do not read anything it in fact, in the second quarter call last quarter, we actually said we are planning on giving our 2010 detailed guidance in the first and second week of December, simply because, last year, as a first time reporter, we recorded late, very, very late in the Q process. Basically right on top of the Q, but you gave us another three weeks. We reported about 2-1/2 weeks later last year than this year. Those 2-1/2 or 3 weeks are critical on our planning process and our board governance process that sort of get, sign off and approve on budget et cetera.

So that is why it is just simply a little bit after Thanksgiving, it is purely administrative.

Charles Boorady - Citi

Okay, great thanks for clarifying that and then we talked about a 17% revenue growth figure for next year, should we include the St. Barnabas and Ochsner what is that 17% number?

Neil Hunn

Yes, so let me be clear and I apologize if that is confusing. So, for next year, our current expectations are to be consistent with our 15% long range outlook, so that is the number. When you take out the impact of the Ministry of Interior deal as well as single digit growing, core support business, the rest of the business, the rest of revenue cycles and the rest of spend management combined, will be growing north of 17% with margins expanding.

Charles Boorady – Citi

Yes and that includes, obviously the big [new.]

Neil Hunn

Yes.

Charles Boorady - Citi

As far as, yes.

Neil Hunn

That is correct.

Charles Boorady - Citi

Okay, the final question is about a little bit of a knit, but you talked about the higher bad debt expense of 2.3% versus 1% last year and at the same time, the allowance for doubtful accounts is lower this quarter than it was at the end of 2008 and I am wondering if you can just give us more color around collections, other specific customers that you are finding it hard to collect from or collections pretty much in-line with your expectations and it is 2.3%, a reasonable go-forward estimate for the bad debt expense.

John Bardis

This is John, let me just make one comment, I will tell you that Scott Gressett and Neil have some very specific objectives which they have over achieved as we draw the business, you probably see that we are still at very consistent 51 days DSO that we are doing, very, very well and in fact, we will adjust the 2.3% in a moment but we are actually doing better than expected, I am not sure of this related collection.

Neil Hunn

On the bad debt expense, Charles, this year, basically we have been turning up in this little over 2% of service revenue as bad debt expense. There is nothing new there, it really is, now that we are majorly a revenue cycle business with payments coming from hospitals versus vendors, well there is no bad debt expense because we book the revenue as we collect the cash. It is really simply that trend and rolled up to your question on the allowance versus the gross, gross of net AR, we, Scott Gressett, our chief accounting officer, myself just fundamentally do not view that as a metric or the evaluation because as something, as soon as it deemed, truly uncollectible write it off.

So our true measure for the Book of business is how steady and how can we manage this bad debt expense running to the PNL and the DSO.

Operator

Your next question comes from Glenn Garmont with ThinkEquity; please go ahead with your question.

Glenn Garmont - Think Equity

Yes, good afternoon, two quick questions. I guess, first on the spend management side, I can appreciate that there is some economic head win there but what sort of offsetting that, is not there an opportunity or has been any opportunity to boost the purchase, the compliance rate in that business and then secondarily Neil, if you can just remind us, with respect to the Ontario contract, when that rolls off and what the impact is there and what is it’s worth in terms of revenues, thanks.

John Bardis

Yes, hey Glenn, this is John, your first point on compliance, the answer is yes. We have ongoing aggressive programs, the fact we have our field organization in right now. I just sat through a good part of the day on what we just talked about which is compliance and contract utilization for greater financial performance for the institutions that we are presently doing business with and the upside opportunity for us and our clients is very substantial.

This is in multimillion of dollars, in terms of improved revenues for us from existing clients by increasing contract utilization and I will tell you that progress looks very solid. We probably have more specifics to say to this in this part of next year, but this is an ongoing initiative inside the Company. The other thing that I want to add this is that, because of the backlog associated with capital, Glenn, where you have got a lot of hospitals that have put capital projects on hold, we are now beginning to see, those in fact, do have access to capital being sorted out from those who do not and the backlog of major construction projects also is opening up a new vista of business line opportunity and capital construction.

Neil Hunn

Then rolling to your question on Ministry of Interior, the licensed portion of the contract goes to the end of the first quarter of next year and then the impact in 2010 going from the licensed portion to the maintenance portion a, longer term maintenance portion is about a $6 million stepped out of revenue.

Glenn Garmont - Think Equity

That is $6 million for the full-year?

Neil Hunn

For the full-year, the 2010 impact, about $2 million a quarter.

Operator

Your next question comes from Greg Bolin with Wells Fargo; please go ahead with your question.

Greg Bolin – Wells Fargo

As you look to expand a number of transformational revenue cycle deals, I know you have discussed your ability to address both small and large health systems at our hospitals, but are you targeting more and more than the other? It would just seem to me that economically it makes more sense going after tier one health systems, your hospitals with large net patient revenue strains. Any comment on that will be helpful.

John Bardis

Yes Greg, I would say that it really depends on the recognition that the client has with their own situation. So I think you are actually right, just because of lever point and large transactions where you might have a couple of billion dollar integrated delivery network, but the reality of it is, the market is, for the most part driven, by recognizing the need of the provider. So that does not label itself, or sequester itself to larger or smaller, it just depends.

So we have today, a pipeline of medium, small and large hospitals and hospital systems that fall into the attainable category, including as you may remember a 99-bed hospital in Wyoming that was relatively whirl, that is a couple of million dollars in revenue, that is a very high levels of profit for us. Those are deals and transactions that we would take every day.

Operator

Your next question comes from Corey Tobin with William Blair and Company, please go ahead and say your question.

Corey Tobin – William Blair and Company

You have stated in your guidance the freebie increase and the supply revenue item, I know you get some explanation for that, but I guess the question is the trends and the volume numbers that you are hearing about so far from customer supportive of a type of ramp that you are projecting for the fourth quarter?

John Bardis

Okay, Corey, it is me, so you are asking about the fourth quarter, yes. So it is the same story that we have been talking about for the last two or three quarters which is there is $14 million, $16 million step up in the fourth quarter on the spend side, a little bit less than half of that is based on guarantee file, from a portfolio account and that is the majority on spend side and there is about, in terms of total business, the other half or so, is based on implementing account, where St. Barnabas and Ochsner represent more than 2/3 of that implementing base.

Corey Tobin – William Blair and Company

Okay, great, then, as we look 2010 on the spend side for a second here, in your comments for 15% total growth, can we assume at least a 10% growth on the spend business in 2010?

Neil Hunn

Corey, I am not going to touch the guidance yet. We are just talking about the highest level on consolidated revenue, so in the first or second week, we will give you a more detailed color on what is going to happen.

Corey Tobin – William Blair and Company

Got it, great, last one the margins if I could, given the shift around, as you mentioned from some of the expense categories, certainly expense is in a different, broader category. Should we expect this level of gross profit that you have reported this quarter to be sort of a new baseline and we move up from there, or will that number be relatively volatile again in the short term?

Neil Hunn

Corey, I think it is going to still have a bit of fluctuation, as we truly transition in the St. Barnabas revenue, a lot of that cost structure is going to come across the revenue, which have a pretty meaningful impact on a consolidated basis. So we have got a few more quarters before we get into a more steady state structure on the per category expense line.

Operator

Your next questions comes from Donald Hooker with UBS Securities, please go ahead with your question.

Donald Hooker – UBS Securities

So just a follow up on that last comment on the margin, so is the third quarter breach of a higher than normal margin I guess? As you kind of start incurring expenses around St. Barnabas and Ochsner some of those other names.

John Bardis

So going back to what we have been talking about through the whole year, it is consistent with last year as well which is we have this margin structure that increases over the course of the year because we have been deferring a lot of revenue for guarantees with an implementing a lot of revenue at the higher, in front of the implementation, now the revenue is starting to get recognized. Our cost go as up as much, second half way to earnings and margins that are higher than the first half.

So hopefully that is not a surprise to anyone. This quarter was even that much higher because of some of the expense management stuff we put in place in the first and second quarter. So that is the commentary on third quarter margins.

Operator

Your next question comes from Eric Coldwell with Baird; please go ahead with your question.

Eric Coldwell – Robert W. Baird

Thank you very much. It sounds like several of the questioners are kind of trying to get to this theme on where is the management growth is going and I know you are not going to really to touch that in terms of your guidance for 2010, but let me ask the question a little differently. If the TPI business, the service point analytics, the consulting unit, if those units are growing faster than of course, GPO, does that alter the mix profile of the management in 2010, all else constant, and if so, to what extent should we be thinking about that directionally?

John Bardis

That is a sneaky question Eric; it is a very sneaky question. So again, I do not think we want to address that the one thing I will point you to though, is look at the year-over-year growth in our contracted revenue by segment. Okay, so that is a good estimation with the forward, next 12 months of revenue are going to be.

As we talk about 27% revenue cycle and 8.5% spend and right now, I will just let you look at those facts the way they do and we will talk to you in a month and a half or so on this specific guidance.

Eric Coldwell – Robert W. Baird

Okay, quick follow up, shifting gears, the comment on the lower compensation accruals, I may have missed some of the details but it may sound odd, but I would rather see compensation accruals going up, that is typically a good sign of things ahead. Is there a specific reason why the compensation accruals are down?

John Bardis

It is simply based on the fact that we have internal targets in terms of EBITDA which are incentive compensation are paid and we have made some decisions based on specific business unit performance inside the Company that less than 100% of that is going to be paid and so, that is what we are talking about here.

Eric Coldwell – Robert W. Baird

Would you care to offer which division or segments achieve the lower compensation accruals?

John Bardis

No.

Operator

Your next question comes from Constantine Davides with JMP; please go ahead with your question.

Constantine Davides – JMP

Neil thanks for the comment from the 2010 outlook and I know you have also talked about squeezing, 50 basis points and margin expansion annually over the next few years and maybe this is unfair given your response to some of the other questions but I am just wondering, is that a high-level, given that you have got St. Barnabas coming on and given that it looks like some of the spend growth is maybe a little bit more tampered, is there still an opportunity to expand margins and maybe what other leverage that we think about?

John Bardis

Phil fairly talked about the model conceptually but I am not going to give specifics about 2010 because literally where we set in our 2010 planning process right now is making the investment decisions about where we are going to invest in our business in 2010 and at the management team and at board we have work still to do there before we conclude on what we are going to do specifically to our 2010 operating plan.

But generally speaking what we have said as our model holding the mix of business constant between technology and service deals is that we do expect to be a 20- to 50-basis points mentioned on average over the course of a five-year horizon. But if large transformational deals start to become a bigger percentage of the mix, then you might actually see slight pressure on the EBITDA margin line. And so we will see how that all gets put together in the mix and the guidance model here in the next six to eight weeks.

Constantine Davides – JMP

Okay and then maybe one follow up on expand, given the utilization patterns you have seen this year, and can you just maybe talk about what is big in the 12-month contracted revenue buildup. Obviously you have got pretty good visibility in a one quarter out, but are you anticipating you get some softness and, I guess I am just trying to figure out how you derived that number?

John Bardis

Look Constantine I will give you a very high level explanation now if you like to talk about it in detail offline, we are happy to do that. So what we assume for the spend business is basically the current growth we are experiencing at [strap way] than going out. So it is, that is the assumption and as soon as we get line of sight that the growth is actually faster then we ahead and slightly increase the growth in our force, but if see it slower then we decrease it. So it does not make an assumption for something that we are not seeing today.

Operator

Your next question comes from Frank Sparacino with First Analysis. Please go ahead with your question.

Frank Sparacino - First Analysis

John Bardis

Let us get back in the queue and move to the next one if he comes again, give him a shot at the end.

Operator

Your next question comes from Richard Close with Jefferies & Company. Please go ahead with your question.

Dan Hambrian for Richard Close — Jefferies & Company

Thank you this is actually Dan Hambrian for Richard Close and the question is on the Service Line Analytics, I know you talked about it pretty bullishly pre-launch last quarter, now that it has launched, could you talk a little bit just about the sales cycle and the implementation time and maybe when you expect to see some of revenue impacts from that. And I know you talked about at the, Investors’ Day earlier this year, but maybe with the market opportunity is there.

John Bardis

This is John; I will turn that question over to Rand Ballard our Chief Operating Officer and Chief Customer Officer.

Rand Ballard

We are very pleased with the announcement of Service Line Analytics and the pipeline is extremely strong. It is also the ability of the tool to accurately measure the cost by [MSDRG] and layer that cost with the clinical outcomes is something very unique in the industry. In fact, we have so many individual hospitals signed up to the Beta site. We actually have to put them in the queue to actually do the Beta site. We are still very good about the pipeline and it is a product that is implemented pretty quickly once the customer signs.

Dan Hambrian for Richard Close — Jefferies & Company

So one of the questions to ask Rand, how long when a client makes the decision to come aboard Service Line Analytics how long does it take for that to happen?

Rand Ballard

Yes, less than 6 weeks for us to build in and recognize revenue. It takes about 4 weeks from the time they provided the data to have it fully implemented.

Operator

Your next question comes from Charles Rhyee with Oppenheimer. Please go ahead with your question.

Charles Rhyee - Oppenheimer & Company

Maybe going back to one of the question regarding the competitive landscape and how are you going to kind of jumping with the RCM products and obviously you guys, you have a great collection of best industry solutions attacking different areas of the revenue cycle. You obviously have some new competitors coming into the market, can you ascertain different cover service offering more than end-to-end solutions and can you touch on what type of bills small as you think can work faster? What are your hospital customers cannot talk to you about and maybe relate that to St. Barnabas and Ochsner do those kinds of transformational deals suggest that you are also looking for deep partners here or it is really the sort of the modular point solution maybe still a very viable option as well?

John Bardis

Yes. I have three questions. We kind of look at the market for revenue cycle as we do with spend management and even clinical performance sort of a three tiers. So if you sort of looking at each silo and then tier it out, one would be a client that would choose to use either one or more point solution as fast-pace tools That solves a specific set of problems or a singular problem for them.

So these are augmented utilization for existing revenue cycle clients that are seeking our software point solution. Then two, with the client who wants an integrated, more comprehensive set of tools that interface with one another and solve multiple problems within the space of revenue cycle then and then lastly, and for lack of better description, we term that as transformational client who wants to go on board a full fleet of both tools and service activity to completely re-engineer how they operate their revenue cycle.

So it is been our choice to start with technology because the technology opportunity is, in our view a large Greenfield and majority of the institution do not have modernized software and service tool set out there today. So that Greenfield is pretty substantial for the tool.

However, health care reform lacks audit, the list goes on, is increasing the requirements for hospitals not only to be in compliant but the fact we have [trained] to be accurate. And then the last is, as pressures continued to mount on the cost of non-core and even core operations of the institution, institutions are looking for a better way to run their departments, particularly non-core although I do believe we are going to see tremendous opportunities for the hospitals and their clinical operations as they look to get more efficient.

Given the fact that reimbursement on a [rolling] bases even with healthcare reform is going to decline and so you can see the differences for example on the western part of the country where IPH and Manage Care and Covered Life activity has been more aggressive over the last decade. Their average lengths of stay are substantially lower than that east of the Mississippi.

Those kinds of efficiencies we think across the board clinical operationally will continue to be lean and in some cases fully outsource. So I would tell you that a full outsourced model for some is exactly what they want and I think there are those including us who will do that very well. And yet there are others who will be at a different level of progression relative to their perceived need and utilization of tools based on compliant and improve operation if they will not on board our fully outsourced model.

Charles Rhyee - Oppenheimer & Company

When you, just a follow up on that, when you look at that first tier of clients where it looks like they are looking for maybe a point solution to address one’s specific need, clearly they are probably coming with the idea that they do everything else fairly well. If you, to look at those clients yourselves, would you generally agree with their assessment or do you think they are just not realizing all the other things that they are missing out on?

John Bardis

Yes. I know, I think I like it as to the kid who lives in a neighborhood who thinks he is the fastest guy in the world because he beats everybody on the block. The reality of it is that healthcare operations relative to data are opaque. Nobody knows anything about anyone else. It is organizations like us that actually have an understanding of the data which reflects knowledge of that practice. And it is the transfer of that practice that we deploy in point solutions tool such as Charge Integrity, Rack Audit, the list goes on.

We take the best practice across the board and redeploy in a form of a repeatable web-based software solution and instituted it literally overnight inside of an institution. So as we get to know those institutions that make for fertile ground for us to introduce other solutions including services that can better perform in a changing environment that the hospital faces. Remember the hospital environment is dynamic, I mean what they are facing today in terms of different kinds of policies and coverage as well as not only demographics but the economic changes are also causing them to rethink their own mix.

As they do that and they compare that against that practice data that we provide them, then it enables them to make better and more frequent decisions around those changes. I guess that in the end of the day, the point solutions are a fabulous entry point for us to be a trusted advisor to an institution as they and we together comprehend their status as it relates to best practice.

Operator

At this time, there is no further question.

John Bardis

Okay everybody thanks again for joining our conference call this afternoon. We are looking forward to speaking to you in the coming weeks regarding our 2010 guidance and I hope you enjoy your evening.

Operator

Thank you for participating in today’s conference. You may now disconnect.

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Source: MedAssets, Inc. Q3 2009 Earnings Call Transcript
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